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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: Ladies and gentlemen, thank you for standing by. Welcome to Best Buy's Third Quarter Fiscal '26 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 1:00 p.m. Eastern time today. [Operator Instructions] I will now turn the conference call over to Mollie O'Brien, Head of Investor Relations. Mollie O'Brien: Thank you, and good morning, everyone. Joining me on the call today are Corie Barry, our CEO; Matt Bilunas, our Chief Financial and Strategy Officer; and Jason Bonfig, our Chief Customer Product and Fulfillment Officer. During the call today, we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this morning's earnings release, which is available on our website, investors.bestbuy.com. Some of the statements we will make today are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may address the financial condition, business initiatives, growth plans, investments and expected performance of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current earnings release and our most recent Form 10-K and subsequent Form 10-Q for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of the call. And now I will turn the call over to Corie. Corie Barry: Good morning, everyone, and thank you for joining us. Today, we are very pleased to report strong results for the third quarter. On revenue of $9.7 billion, we delivered an adjusted operating income rate of 4% and increased our adjusted earnings per share 11% year-over-year to $1.40. We delivered better-than-expected comparable sales growth of 2.7%. Our better-than-expected profitability was due to the higher revenue and lower-than-expected SG&A expenses. We continue to drive strong sales performance across computing, gaming and mobile phones. We also saw growth in other categories, including wearables and headphones. This growth was partially offset by declines in the home theater, appliance and drone categories. In computing, we delivered our seventh consecutive quarter of positive comps with sales growth coming from across the assortment and price points. This is due to continued momentum driven by customers' need to replace and upgrade products, combined with our unique blend of broad assortment and expert advice, service and support. We were there for students and their families no matter their budget, and we're pleased with our back-to-school sales performance. We were also focused on helping customers get what they needed to transition to Windows 11 as Microsoft ended support for the Windows 10 operating system mid-October. This contributed to our comparable sales performance evidenced by strong Windows-based sales overall and almost 30% year-over-year growth in desktop computers. In gaming, we continue to see strong demand for the Nintendo Switch 2, as expected, the growth rate slowed from the more material Q2 launch time frame. We also continue to see healthy demand for handheld gaming and augmented reality glasses. In mobile phones, we leveraged our expanded partnerships and in-store operating model improvements with the largest carriers to drive strong sales growth across phones. Our Q3 Enterprise comparable sales were driven by growth across both our online assets and our stores. Online sales were up for the fourth consecutive quarter due to higher traffic and increased customer adoption of our highly rated app. We also drove our fastest shipping fulfillment speed ever, coupled with our highest on-time rate for a third quarter. According to our 5 Star surveys, our store customer experience ratings for product availability, store appearance and associate availability all improved year-over-year. We were also pleased to see continued year-over-year growth in our overall relationship Net Promoter Score, reflecting improved customer perception on all relationship attributes with the largest gain in meeting my tech needs for the second straight quarter. For the most part, customer shopping behavior in Q3 did not change materially from the commentary we have shared for the past several quarters. Customers remain resilient, but deal focused and attracted to more predictable sales moments including back-to-school sales events and our Techtober sales held in close proximity to the October Prime Day event. September, which was relatively quiet outside of the Labor Day sales event, has lowest growth of the quarter. Importantly, while customers continue to be thoughtful about big ticket purchases in the current environment, they are willing to spend on high price point products when they need to or when there is technology innovation. To summarize our Q3 performance, we are flexing the unique strength of our model as customers need to upgrade or replace their CE and new products are coming to market. I want to thank our amazing employees for their dedication to our customers and their strong execution in delivering these Q3 results and setting us up well for an exciting holiday quarter. I would like to provide a few updates on the progress we are making on our fiscal '26 strategy. As a reminder, our strategy is to continue to strengthen our position in retail as a leading omnichannel destination for technology, while at the same time, building and scaling new profit streams that we believe will drive returns in the future. Our first fiscal '26 strategic priority is to drive omnichannel experiences that resonate with our customers. Last quarter, we provided multiple examples of store refreshes and upgrades planned for the back half of the year, many of which were in partnership with our vendors. A few updates. We launched the latest AI glasses from Meta across all stores. In more than 50 locations, we now have immersive showcase areas staffed by Meta experts to help customers discover and try the technology hands on. The strong customer demand for in-person demos continues to outpace available appointments. We introduced new experiences with Breville and SharkNinja that feature expanded assortments for at-home baristas and chefs and innovative health and beauty solutions. Very early reads are positive and we are excited to monitor customer response during the holidays as many of these new experiences will be staffed with expert sales associates to bring this innovation to life for our customers. We expanded the merchandising areas featuring TVs from TCL, Hisense and LG, which are staffed by dedicated experts to address questions and help customers get what they need. These were not all live for the whole quarter, but very early reads are showing positive results. And earlier this month, we implemented most of the new IKEA pilots we announced last quarter. These 1,000 square foot areas are staffed by IKEA coworkers and showcase kitchen and laundry room settings from IKEA and appliances from Best Buy. While there are only 10 pilot locations, this is the first time IKEA products and services are available through another U.S. retailer, creating innovative ways for both of us to meet customer needs in a changing environment. We continue to drive the digital experience forward as well. Usage of our app is growing every quarter, which helps us recognize more customers as they shop with us and gives us the opportunity to provide better personalization and product recommendations. In addition to launching our marketplace, we continue to make online customer enhancements, a few specific examples. We improved the online TV shopping experience by both lowering the price for our delivery and installation services and improving the digital flow to make it even easier for customers to add the services to their online TV purchase. For shippable products across categories, customers in all our markets can now pick a 2-hour window for delivery up to 7 days out. This capability was only available in about 1/3 of our markets last year. This is a great option for customers, especially those who may want more security around their high price point purchases. As always, we have a relentless focus on the employee experience and being the best place to work, which is driving engagement, historically low turnover and healthy applicant pools. This, in turn, allows us to provide our customers the expert service that Best Buy is known for across stores, online and in homes. On top of that, our vendors have grown their investment in our specialized labor programs to augment our staff. We continue to expect vendor labor investment to be approximately 20% higher than last year in the second half of the year. Our second strategic priority for fiscal '26 is focused on incremental profitability streams. We are excited about our new Best Buy marketplace. We are about 3 months into the launch and have more than 1,000 sellers and 11x more SKUs available online for customers than we did before. Now we have more tech options than ever for our customers, both from big names like Samsung, Dell, HP and Intel and new vendors that help us level up our tech assortment across categories. We also have hundreds of new brands and new categories like licensed sporting goods, seasonal decor and much more. For our sellers, our marketplace provides an additional avenue to increase their reach and build their brands, leveraging our qualified traffic. I will share some early results and learnings. As expected and an important goal of Marketplace, we are seeing high unit sales in categories like accessories and small appliances. The 5 Star customer reviews for 3P experiences are similar to those we see for our first-party business. Customer return rates for marketplace items have been running lower than our first-party return rates. And for customers who do have a return, they are taking advantage of the convenient return to store option for more than 80% of product returns. Marketplace ramped through Q3 in terms of sellers, SKUs, traffic conversion rate and sales. We expect to continue to ramp through Q4. Our marketplace results had a positive impact on our Q3 gross profit rate, and we expect it to positively impact our Q4 gross profit rate as well, and it is already providing opportunities for Best Buy ads through new advertisers. Speaking of Best Buy ads during the quarter, we hosted our first-ever client showcase in September called We Got Next. It spotlighted our scale, performance and innovation to key decision-makers across agencies, brands, partners and press. We were encouraged by the reception. Advertisers are particularly excited about our new in-store takeover product, unique to Best Buy. This high-impact program features both large-format signage across the store and screens across the TV wall and computer monitors. It begins running in January with Meta and ESPN. We continue to invest in strengthening and advancing the technology platform we need to capitalize on the opportunity we see ahead. During the quarter, we launched our self-serve platform, My Ads, which is particularly important for our new marketplace sellers. We also enabled on-site programmatic buying, augmented our reporting capabilities and expanded our on-site ad supply. We are successfully expanding into new opportunity areas like agencies and demand-side platforms or DSPs. We are also gaining traction in non-endemic categories, with several partners testing the platform in differentiated ways. Financial services is emerging as a standout vertical with PayPal, Klarna and Capital One shopping, all activating campaigns. Other new non-endemic categories include quick-serve restaurants and sports entertainment. Our retail media network is already highly profitable and our Q3 growth in ad collections had a positive impact on our gross profit rate, and we expect it to positively impact our Q4 gross profit rate as well. We expect a neutral impact on this year's operating income rate compared to last year due to the investments we are making in technology and talent. This brings us to our third strategic priority for fiscal '26, which is a long-standing strategic imperative, driving efficiencies and identifying cost reductions are crucial to help fund investment capacity for new and existing initiatives and offset pressures in our business. There are many ways we realize these efficiencies, with technology and analytics, through ongoing vendor partnerships and vendor selections throughout the enterprise and by modifying existing processes or customer offerings. In our customer support capability, we are leveraging AI to streamline interactions and provide new experiences that empower customers with more self-serve content and options. As a result, we drove a 17% decline in the number of customer contacts in Q3 and improved our customer experience scores. By leveraging our new data-driven sourcing solution to choose the most efficient location to fulfill more than 70% of our online orders, we are seeing faster delivery times, better on-time delivery and lower costs. Going forward, we will continue to use AI augmented optimization across multiple areas of our business, from scan detection to customer support to personalized e-mail marketing. And we are increasingly using AI for product search, product recommendations and enriching product content as well as expanding into conversational AI and agentic commerce. We have officially kicked off the holiday season we feel well positioned with compelling deals on hot products, strong marketing and competitive fulfillment options. From a timing perspective, our promotional plans for the most part, line up with last year, doorbusters drop every Friday through the holiday and our Black Friday sales started the week before Thanksgiving. We have something for every budget with deals across a wide range of price points. Because of our unique position, we can also offer customers great prices for the latest innovation and premium products and assortment that not everyone has. This includes limited quantity hardware, games and toys that drive traffic and excitement to our stores and digital properties through invitation-only and other exciting launch events. We expect gaming to be a hot holiday gift category with products like the Nintendo Switch 2, the ASUS Rog Xbox Ally handheld gaming system, gaming laptops and gaming monitors. Other exciting gifts for holiday include AI glasses from Ray-Ban and Oakley, 3D printers, OLED TVs, the new Hyperboot by Nike, limited quantity Pokemon cards and LEGO toys and JBL PartyBox speakers. For those looking for gifts that can be used every day, we have great deals on the new remarkable Paper Pro and Copilot+ laptops, small appliances like Ninja SLUSHi machines and Breville Barista espresso machines, health products like the new Oura Ring 4 and much more. In stores, you can interact with our immersive experiences and demos and get advice from our blue shirts and vendor experts. And every year ahead of holiday, we, like many vendors, hired thousands of seasonal flex employees. This year, we tried something new and brought all the new associates together for a full weekend earlier this month. The event was a resounding success, not only in training the new employees on products, tools and transacting, but immersing new team members in the values, energy and collaboration that define Best Buy's culture. Of course, all the in-store products and more are available for customers who prefer to shop from home. We have our holiday gift ideas page with curated gift list based on interest and a personalized discover page designed to help customers discover new technology. In addition to great price points, we have our comprehensive trade-in program that we will highlight throughout the holiday to help customers more easily get new technology. For example, customers can save up to $1,200 by trading in their tablets or up to $1,100 trading in their phones. We also have great no-interest programs available on the credit card in addition to buy now pay later options to help customers complete their holiday shopping list. We are excited about our holiday marketing campaign that meets people where they already are across sports, streaming and social. We're teaming up with more than 200 influencers and Best Buy creators as they highlight the tech that's topping their gift list. And this year, we are going even deeper with sports. We continue to be the official home entertainment retailer of the NFL, and our holiday campaign will have an increased in-game presence across NBC, Peacock, CBS, Fox and Netflix. We will also have presence on cbssports.com and across streaming sports content on ESPN. In summary, we are pleased with our Q3 financial results and execution, which included improved share positions. We expect to deliver sales growth for the year. The high end of our Q4 outlook assumes growth in computing, gaming and mobile. It also reflects trend improvements in TVs driven by a blend of sharp pricing, increased marketing, specialty labor and improved delivery and install offerings. Our results demonstrate an important aspect of our thesis. Our model really shines when there is innovation. This is because we are the trusted source for the latest and greatest new technology. We have a broad range of assortments and price points for every budget in addition to unique in-store and digital experiences. We also have Geek Squad services to help our customers, and we are a true partner to our vendors, working with them from early in the product development cycle, all the way to launching products on our sales. And now I would like to turn the call over to Matt for more details on our Q3 performance and Q4 outlook. Matthew Bilunas: Good morning. Let me start with an overview of how the third quarter performed versus expectations we shared with you last quarter. Enterprise comparable sales growth of 2.7% exceeded our outlook of being similar to our second quarter growth of 1.6%. Our adjusted operating income rate of 4% was 30 basis points better than expected, which was largely driven by lower-than-planned SG&A expense. I will now talk about our third quarter results versus last year. Enterprise revenue of $9.7 billion increased 2.4% versus last year. Our adjusted operating income rate increased 30 basis points compared to last year, and our adjusted diluted earnings per share increased 11% to $1.40. By month, our Enterprise comparable sales were up approximately 3% in August, 1% in September and 5% in October. In our Domestic segment, revenue increased 2.1% to $8.9 billion, driven by comparable sales growth of 2.4%. Our online revenue of $2.8 billion increased 3.5% on a comparable basis and represented 31.8% of our domestic revenue. Our online comparable sales growth includes net commission revenue earned from our third-party marketplace sellers. From an organic standpoint, the blended average sales price of our products was approximately flat to last year, with the unit growth being the primary driver of our sales growth. International revenue of $794 million increased 6.1% versus last year. The revenue increase was primarily driven by comparable sales growth of 6.3% and revenue from Best Buy's Express locations that are not yet included in comparable sales. The previous items were partially offset by the negative impact from foreign exchange rates. From a category standpoint, the largest drivers of international comparable sales growth were computing and mobile phones. Our domestic gross profit rate decreased by 30 basis points to 23.3%. This was primarily due to lower product margin rates partially offset by rate improvement within the services category. The lower product margin rates were primarily driven by an unfavorable sales mix and increased personalized promotional offers. Our international gross profit rate increased 30 basis points to 22.8%. The higher gross profit rate was primarily due to favorable supply chain costs. Moving to SG&A, where our domestic adjusted SG&A decreased $4 million, which included lower Best Buy Health expenses that were largely offset by higher incentive compensation expense. During the third quarter, we recorded pretax noncash asset impairments of $192 million related to Best Buy Health, which were excluded from our adjusted results. The impairments were prompted by a change in Best Buy Health's customer base during the quarter and reflect downward revisions in our long-term projections in part due to pressures in the Medicaid and Medicare Advantage markets. Year-to-date, we have returned a total of $802 million to shareholders through dividends of $602 million and share repurchases of $200 million. For the year, we still expect to spend approximately $300 million on repurchases. Let me next share color on fourth quarter guidance. From a top line perspective, we expect our fourth quarter comparable sales to be in the range of down 1% to up 1%. In addition, our fourth quarter comparable sales outlook for Canada more closely aligns with our expectations for the domestic segment. On the profitability side, we expect our fourth quarter adjusted operating income rate of 4.8% to 4.9%, which compares to 4.9% last year. Moving to gross profit. We expect our fourth quarter gross profit rate to decline versus last year due to a lower product margin rate, which is primarily due to increased promotional investments. Other notable drivers that are expected to benefit our gross profit rate include growth from Best Buy ads, our recently launched online marketplace and improved profitability from our services category. Moving next to SG&A, where the most notable planned puts and takes are the following: increased SG&A in support of our Best Buy ads and marketplace initiatives, which include advertising, technology and employee compensation expense. Offsetting these items are lower Best Buy Health and incentive compensation expense. Lastly, the low end of our guidance reflects our plans to further reduce our variable expenses, including incentive compensation to align with sales trends. Let me provide more details on our updated full year fiscal '26 guidance, which incorporates the color I just shared on the fourth quarter and is the following: revenue in the range of $41.65 billion to $41.95 billion; comparable sales growth of 0.5% to 1.2%; adjusted operating income rate of approximately 4.2%; an adjusted effective income tax rate of approximately 25.4%; adjusted diluted earnings per share of $6.25 to $6.35 and capital expenditures of approximately $700 million. Our full year gross profit and SG&A working assumptions are still very similar to what we shared last quarter, and some of the key callouts are the following: we believe our fiscal '26 gross profit rate will now decline approximately 15 basis points compared to last year. The high end of our guidance continues to reflect incentive compensation that is approximately flat to last year. As I noted, we now expect our adjusted effective income tax rate to be approximately 25.4%, which compares to our prior guidance of 25%. I will now turn the call over to the operator for questions. Operator: [Operator Instructions] Your first question comes from Simeon Gutman with Morgan Stanley. Simeon Gutman: Nice third quarter. I wanted to ask about the puts and takes on Q4. It looks like the comp maybe be light from what we were expecting standing from the second quarter, meaning once you guided the prior quarter, but a little bit better on profit. So can you talk about -- I guess there's a lot of scenarios what could amount, but how you set up your fourth quarter guide? And any difference in thinking from when we talked about it 3 months ago? Matthew Bilunas: Yes. Overall, the high end of our Q4 guide from a sales perspective is pretty similar to what we guided the last time, maybe just a little bit lower. We did raise the bottom end of that sales guide from something that was implied to down 4% or maybe more to the number we talked about here today of down 1%. So feeling good about where sales are effectively similar to where we expect them to be on the August call. On the EBIT side, we actually slightly lower the EBIT expectations from what we would have implied last Q4 of closer to 5%. So most of that was on the low end. We did have a little bit more rate pressure on the low end because we have adjusted the revenue expectations, and therefore, the incentive compensation changed a little bit. So overall, at the high end, not a very big difference from what we would have implied in the guide on the August call. Simeon Gutman: Okay. And then the follow-up, based on the adoption of either Switch 2 or other things in entertainment as well as iPhone. What do the curves look like? Meaning, does it portend that you have another year's worth of good momentum? Like is a lot of demand pent-up? How do you think about it as you go into fourth quarter and into next year? Matthew Bilunas: Sure. I mean, I think for -- to support the fourth quarter guide, we are still expecting growth on the computing side and mobile phones. Computing is still going to be fueled by the need to replace and upgrade and plus all the ongoing innovation around AI. That will continue into Q4 and likely continue into next year as we still see that there are millions of people who have yet to upgrade the Win 10 device and there's further opportunities even on the Mac side of the business, who haven't upgraded to the newest chip technology. You think about mobile phones is expected to continue to grow as we get into Q4 likely as we get into next year as well. We are seeing continued benefit from the in-store improvements with the carriers. On the entertainment side, as again in Q4, we still expect to see Switch help us grow in Q4, but on the other console side, that will likely slow as you get into -- they're just later stages of the replacement cycle of those 2 other consoles, plus, there's been some pretty transparent price increases that are obviously probably having a little bit of an impact. As you get into next year, likely still a little opportunity before we lap the Switch 2 launch midway through the year. We are expecting to see improved trends on the TV side as we get into Q4. We have very competitive pricing. We've put more marketing into the business, and with additional labor and just some changes to the service offers, we feel like that's going to help us improve the trends on the TV side as well. We are seeing already some improvements on the unit -- actually saw units grow a little bit in Q3 on the TV. So that is helpful. And plus, we have a lot of other initiatives. We have the marketplace that's continuing to ramp and scale as we get into Q4. So we feel really great about that, especially as we get into marketplace next year and being able to scale even more along with the ads business. Operator: The next question comes from Peter Keith with Piper Sandler. Peter Keith: Nice quarter. I'd like to just follow up, Matt, on that last response on the Q4 outlook for comp because it does seem like you have quite a bit of momentum coming out of Q3 and some product momentum for the holiday. So what's driving the decel in the overall outlook vis-a-vis Q3? Matthew Bilunas: Yes. Let me just start at a high level for Q3. Like I said, we were expecting a pretty similar Q4 guide overall from a sales perspective. Q3, if I start back in Q3, it did come in a bit better than we expected. We saw a strong back-to-school period. We saw a strong October with Techtober in the early part of the year. So we are seeing a positive growth as we go into Q4, although the Q4 did see some growth last year versus Q3 that saw a little bit of more -- saw some sales pressure. So the comparisons get a little bit tougher as you get into Q4. Obviously, the holiday is never easy to predict. What we do believe is the -- we have a range of scenarios and the range we've provided gives us a great place to plan our business operationally. Some of the categories that changed a little bit in terms of sales growth momentum as you get in from Q3 to Q4. Gaming, we are expecting it to grow overall, but maybe not at the same pace that we saw in Q3 and Q4. Wearables will be another category. I would say probably aren't going to see the same type of growth that we had saw in Q3. Peter Keith: Okay. Helpful. And then maybe another question for Corie on marketplace. How is it going now that it's rolled out? Do you still expect it will have a positive impact on EBIT this year? It sounds like you've shared some helpful KPIs. Are there any challenges now that it's out live? Just kind of give some of the puts and takes that you're seeing on that launch? Corie Barry: Yes. I'm incredibly proud of the work the team has done to launch the marketplace in a very omni-channel way. We mentioned now more than 1,000 sellers that we onboarded in a quarter and 11x more SKUs. So right away, we can see customers looking for that broader assortment. We can see them leaning into some of the unit growth that we were looking for in places like accessories where you can have a much deeper assortment or small appliances where again, you have that ability to have more breadth across what we're doing. So we're really happy with that. We did hit a few of those points on the call where we're seeing that high unit sales in categories, we're seeing return rates be actually a little bit less than what we're seeing in first party and 80% of those returns coming back to stores. We really like the customer experience metrics we're seeing. And so in general, those kind of early indicators really feel healthy and good to us, but it still is really early in the ramp. And we want to make sure we give ourselves enough time to create the kind of scale that we're going to see throughout Q4. But we're excited with the progress that we're making and how quickly we've been able to broaden that assortment how much our customers are leaning into that broader assortment for us. Matthew Bilunas: Yes. Regarding the OI rate impact for the year, I think we had previously said we thought maybe it would be a little bit of a rate improvement for the enterprise for the year. We're now expecting that to be a bit more neutral. Nothing super material has changed in our outlook. There's been just a little bit of a different product mix and a little bit slower ramp than we would have had originally modeled. So again, we never really expected it to have a really huge impact to the rate this year, but more neutral this time at this quarter end. Corie Barry: The last thing I'd say, Peter, I think the great part about having this, especially as we head into Q4, is it just really extends the amount of giftable items that we have for our customers. And the teams are finding really interesting ways to highlight these new extended assortments. So as you look on our global homepage or as you look at search, we're finding new ways to kind of pull the depth of this assortment up. So people really realize there's a lot more out there that our customers can find to be the perfect gift giver. Operator: The next question comes from Joe Feldman with Telsey Advisory Group. Joseph Feldman: So I wanted to touch on the loyalty program a bit. And just if you could share some more details on how that's been performing. It seems like it's been a good driver for much of the year. I don't recall hearing too much this morning on it. So I was just curious if you could share some thoughts. Corie Barry: Yes. I mean, obviously, our membership program remains a really important part of our customer experience and the way in which we engage with our customers. We have more than 100 million members across our 3 tiers, obviously, the free -- my Best Buy membership is the one that has the greatest reach. But on the paid membership side, which is Best Buy Plus, Best Buy Total, we ended the year with nearly 8 million paid members, and that was up from 7 million the year before. And what our focus is right now is how can we continue to drive real value and unique offers for those members. And so one of the things that we have found to be really working well for us is the strategic use of some very personalized promotions. And it's where we can use the breadth of our data to really try to reengage maybe some of those customers who haven't been engaged with us. You can use this data we have about our customers plus the signals we're seeing from customers in the way that they're shopping and really target them carefully with offers, which we're finding is a very unique way for us to reengage those customers who maybe would have lapsed or wouldn't have been shopping with us this holiday season. And another piece that we tried and we have talked about is a deep discount on the NFL Sunday ticket for Plus and Total members, so more of that idea of because you're a member with us, are there other ancillary, especially services and subscriptions that might really resonate. And we're going to continue to test and try and build on those learnings across our membership. The goal no matter what is consistent. We want to drive engagement. We want to increase the share of wallet and we want to use this as another tool that helps us fuel our ads business. And so I think the evolutions that you'll continue to see from here will all be based in continuing to fulfill that goal for our customers. Joseph Feldman: That's great. And then just maybe shifting gears a little bit and may be early, but I did want to ask about how are you thinking about stores and store investment for the coming year? You've done a lot of things to keep tweaking the model and trying different things inside the stores. And I'm just curious how your initial thoughts for next year would look. Corie Barry: Yes, I'm going to start where I always start, which is our stores are incredibly crucial assets. They provide not only differentiated experiences, not only differentiated services but also amazing multichannel fulfillment options. We still are running at 46% in-store pickup no matter what all of the advancements that we made in terms of shipping speed are. So this is a really important asset base for us. And we've been very consistent, and this is true for this year and it will bleed into next year. Our focus right now is on great store look and feel. And so a lot of our capital investments this year have been about ensuring that we're really investing in that look and feel. We've listed a number of the ways we're doing that both ourselves and in partnership with our vendors. And that will continue as we think into next year as we continue to refresh and make sure that we feel like our store updates reflect those great immersive experience in places like AR and gaming and TVs, small appliances, many of the categories that we've talked about, including the experiences that we're driving in mobile in partnership with some of our vendors. We do have some cohort of stores where they're a little bit larger than what we need. And so we've been working on several different ways. And this, again, will move into next year, including relocations, resizing some of the existing formats, now we're looking at some of the new and more innovative ways where maybe we can consolidate the space and bring partners like the IKEA pilot is a great example of that. But you can imagine there's a multitude of partners who might be interested in having some of that shop-in-shop space. And then finally, we've talked about some of the smaller format stores. We now have 3 new small format stores open, testing kind of a couple of different concepts. One is somewhere like Bozeman, where maybe we can enter a market, we wouldn't otherwise enter in other areas, it's closing a larger store and opening a small one. We like what we're seeing in those small format stores, and I would expect us to lean into those a bit as we head into next year as well. So I think all in all, what we're really focused on is making sure that if someone makes the trip to the store. And here's the fascinating small data point. When we look at our demographics, interesting, our youngest cohort, Gen Z is really leaning into the store experience. We can see it in their visits, and we can see it in where they choose to interact, and we can see it in our ability to start to grow share with this cohort, and it's a cohort who is starting to see our brand as updated, refreshed and more relevant. So this -- I think this idea of leaning in here, both ourselves and with our vendor partners, augmenting maybe with the fewer smaller locations. I think that's what you're going to see us focus on as we head forward. Operator: The next question comes from Greg Melich with Evercore. Gregory Melich: Two questions. First, on tariffs. Could you just update us on how much of that do you think has actually flowed through to on the shelf AUR at this point? Is it all in the numbers now or the base? Matthew Bilunas: Yes. Overall, like we talked about in the prepared remarks, our ASP at an enterprise level is essentially pretty flat year-over-year. And most of the growth is coming from the unit side of the business. So that would infer that all of the tariff changes that we would have made on select portions of our assortment would be flowing through in the price. Again, that those -- any tariff increases we would have had were only on small portions of the assortment overall. The effective tariff rate is probably still in the mid-teens, if you will. But that is not what the actual price increases on those portions of assortment that the rate is they were close to that number. So all of that would be implied in the ASP generally being flat year-over-year. What's different about our industry in that is that it's a very -- as you know, very promotional industry. And so even though their tariffs we have to be competitively priced all the time to be competitive. And so that sometimes will mute the overall impact to ASPs. Also we have product at every part of someone's budget, whether you're in computing or TVs. And so any product mix changes, assortment changes can also have an impact on ASPs as well. So overall, they are included, but we're all seeing pretty competitively priced industry and our ASPs, like I said, are not necessarily the one that's not driving our business overall. It's more on the unit side. Corie Barry: I just want to lift up one thing that Matt said. Our #1 focus is on our customer and ensuring we have every price point and every budget available. And one of the interesting things when we looked at our price bands, you can imagine we're looking at how many SKUs we have in each price band in a couple of our largest categories year-over-year, very similar amount of SKUs by price band. And so I think the team is doing an amazing job staying focused on having that breadth of assortment regardless of, to Matt's point, whether or not we have a few small price adjustments coming through so that whatever the budget is, we're there for them, and that will be the goal through the holiday. Gregory Melich: Got it. Makes a lot of sense. I'd love to follow up on labor and working with vendors. Could you just level set us on how much of the store has some vendor support into labor? I think you said that you're adding TVs recently. And just -- I'd love to hear how that really helps engagement score with customers when you have vendors funding some of the labor in the store? Corie Barry: The amount of vendor labor is not a static answer. It flexes and kind of depends on both time of year and, of course, launches or innovation as different vendors choose to lean in and lead out at various points in time. I think one of the differences in our model when it comes to labor is we actually have a number of different ways in which we interact with customers from a labor perspective. We have everything from kind of that adviser who can flex over the whole store all the way into our own specialized category labor or something like an appliance pro who really understands appliances, all the way into vendor labor, which the team, again, I give them a lot of credit, has done a great job. That is a very close partnership between us and our vendors. And in most cases, that is our labor that we are training and deploying that is, of course, more trained against that particular vendor assortment, but is part of our broader umbrella of labor here at Best Buy. And then sometimes, we have a few examples where we also have just flat out vendor-provided labor that's in our stores. And what I think we've gotten good at is the operating model amongst all of those different types of labor. So you know when to hand off to a specialist who might have more experience in a certain product. And those specialists also understand when it's time to maybe hand back off to someone who might be more of a generalist because they want to go shop a different department. And so that when we concentrate on how does the operating model work at Best Buy, it is embracing that vendor partnership labor, but also ensuring it stays consistent with the culture, the values, the way that we think about serving the customer here at Best Buy. Operator: The next question comes from Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: Corie, you referenced Agentic Commerce. I was curious if you could expand there how you think about the top line and potential margin benefits from the prospects of something like instant checkout? And if you have any time line slated for integration, that would be great. Corie Barry: My time line is fast. How's that? But at the same time, joking aside, you really have to prioritize not just where is the incremental margin flow through, but what does the customer experience really look like, and particularly in a business like ours that often includes maybe scheduled delivery, maybe installation, maybe services or membership. You really need to think about in instant checkout. How do you want those experiences to translate for the customer. And that's just when we're talking about the actual transaction point. More broadly, we want to make sure we're thinking about how does our brand, how does our specific knowledge of our customers show up and how is it helpful to customers as they're using a variety at this point of agentic tools. So we're obviously working quickly to make sure that we are relevant and showing up in the right places. But most important for us is protecting the customer experience, so that, that stays consistent with how we would want them to experience our own digital assets. Jonathan Matuszewski: That's helpful. And then, Matt, how should we think about the magnitude of hiring and technology spend for retail media maybe next year versus what took place in 2025, trying to understand maybe how much of the neutral operating margin impact for this business is being constrained by elevated investments this year? Matthew Bilunas: Yes, thanks. We're not obviously going to guide next year, but I do think as it relates to how we're thinking about next year at a high level, we're clearly seeing some sales momentum this year, and we would hope to be able to continue to drive continued momentum on the sales side as we get into next year and obviously, higher sales helps from a rate leverage perspective. It is likely true that as we get into next year for some of our initiatives, we're going to need to continue to invest in those marketplace and the ads business, exactly how much and how much flows through still haven't completed the math on that quite yet. But that is something we want to do because over the long period of time, it's going to help us drive more rate and fuel our other parts of our business over the long term, and we think that it's a good trade-off. So exactly how much that looks next year, hard to say, but we do think it's an accretive thing for us over the 1- to 3- to 5-year period. Operator: The next question comes from Seth Sigman with Barclays. Seth Sigman: I wanted to ask about SG&A. You were able to manage that down quite a bit this quarter despite the best sales growth in more than 4 years. So just curious, was there anything unique this quarter you could unpack that, that would be helpful. And then I'm just curious, does SG&A need to come back more as you think about a scenario where comps remain positive, what does the normal operating leverage in the business look like? Matthew Bilunas: Yes. I mean, for Q3, I think we did see a rate favorability on the SG&A side. A lot of that came from the higher-than-expected sales expectation and higher sales year-over-year. We did see a combination of a few things coming better than we expected, like lower technology spend, a little bit lower labor spend in the quarter. Again, nothing -- we also had a few smaller settlements that also helped us in the quarter as well. Those things -- none of them were dramatic, but a lot of that SG&A favorability on the rate is just coming from the leverage we get on the sales in terms of our performance. So as we get into next year, again, not guiding, but there's places where we're obviously always have a little bit of inflation as we go year-to-year in terms of wages and whatnot, we'll factor those in. And there's some places where we feel like we're going to need to continue to invest to drive long-term growth. We just talked about a couple of marketplace in the ads business. So -- but that would be our goal to be able to drive sales over the long term and get rate leverage as we grow that sales exactly how much. We're still -- like I said, we're still doing the math on that next year. But we have been really good about finding operational efficiencies and cost reductions to kind of help offset the pressures that we have. We've been doing that for years. We would continue to expect to be able to do that. We've talked a lot about those places in the past where and we're using kind of new data-driven sourcing around our supply chain. We have a primary relationship with FedEx as a partial carrier. We've talked about the automated guided vehicles in our warehouses, which we continue to test and roll out. And then there's just a lot of efficiencies through technology and analytics that we can help with our partners, drive more efficiencies around customer supporting capabilities and just future AI opportunities as it relates to a lot of our business areas overall. So there are places for us to kind of offset some of those pressures that do come every year like we've been doing. And so we feel like over the long term, that would be our intent is to try to drive more profitability in our business as we grow the sales. Seth Sigman: Okay. That's helpful. And then, obviously, great to see comps positive, but I want to ask about the categories that are not performing as well, what needs to happen for the CE category and the appliance category to get back to growth? Matthew Bilunas: Thanks for the question. The appliance category is probably the most difficult one that we have in the market today, the vast majority of the appliance market is duress customers, meaning that they're replacing a product that is broken in some way. We're also seeing a very high amount of single unit purchases, meaning a washer breaks, they're not replacing the washer and dryer repair, they're just replacing the washer, which is just very different than what generally happens in the market, and that is a very high percentage in total, which means that promos are not as effective as they are in total because you're dealing with a fixed customer base. We also don't have a Pro business. And really, our sweet spot is primarily premium and packages in historic years. Really, what we have to do is shift our model a little bit. So we're looking at increasing our labor coverage in the department, also looking at focusing on delivery and speed of delivery in particular, which is critical in a duress market, and then also looking at even having opportunities in some of our stores for a customer to be able to take the product with them that day, which is also something that is emphasized more in the market that we're in. So looking to adjust our model until it flips back a little bit more towards our sweet spot, which is, again, that premium in packages, but we really need to meet the customer where they're at in a very duress market. And hopefully, as housing and different things change, then the market starts to swing back to something that might be a little bit more normal. Corie Barry: On the TV side, I would just make a couple of comments there. Our revenue performance did improve sequentially, even though it was still down year-over-year. What's interesting is that our unit performance really accelerated and moved to slight growth in the quarter. And so you can see some of the industry-wide ASP compression there, which we've talked about. Our share trends have improved materially on the unit side, and we believe that we're up slightly year-over-year on TV. And a lot of that is because we have invested in some of the things that we've been talking about, the sharp pricing, the increased marketing that expanded specialty labor and those expanded merchandising experiences in the stores with TCL and Hisense and LG and then augmenting that with the expanded services offerings and working on how that experience works digitally. All of that, I think the team is doing a great job putting together a more fulsome assortment and more -- even more price point options for our customers, which is at least moving that business in the right trajectory. Operator: The next question comes from Christopher Horvers with JPMorgan. Christopher Horvers: So my first question, I'm going to try to go at the marketplace and the ads margin and accretion a little bit differently. I know that others have asked. So can you talk about what you're seeing in terms of like the benefit of both businesses to the gross margin line in the second half? And then as you think about in 2026, one would expect the revenue growth there to accelerate, is it your expectation that as the business scales, the margin rate of those businesses also accelerate? I think on our side, we think about that as strong double-digit margin rates for both businesses. Matthew Bilunas: Yes. I'll break down a little bit for both the different parts of the P&L here. First, if I think about gross profit rate for both ads and marketplace, they have both helped the gross profit rate in the back half of this year. So obviously, on the marketplace side, we're scaling that business. If you think about the rate is helpful there. As we get into next year, we would continue to expect the marketplace to scale, we're clearly going to lap the launch in midway through next year, which might have an impact. But generally speaking, the more you grow it, the more GMV, the more net commissions should be helpful to the gross margin rate, not exactly not linear every quarter, depending on the scaling and when we lap. On the ad side, from a gross profit rate perspective, again, we're continuing to explore and expand into new parts of the ads business and to the extent that we are successful in driving incremental revenue and profitability from that, which we're planning to do. That would also be helpful to the gross profit rate into the future. Now again exactly how much and how it laps every quarter might not be exactly the same, but those would be the intent. On the OI rate side, I think it's going to come down to, as we talked a little bit earlier, like how much do we feel like we need to invest and what the opportunity for that investment in return looks like. And so as we get into next year, that's something we're still evaluating in terms of the technology, the people and other things that we might need to drive those 2 initiatives. We think those are the right decisions overall over time for us to drive more rate opportunities from those 2 initiatives, exactly how much flows through to OI, we're not quite ready to commit to at this point, but we do believe it's a good return for us. Corie Barry: And Chris, the last thing that I would add, and I know you know this, but I feel compelled. Our goal here is really to stay more relevant with the customer. And our goal is to drive more units to be there more often in consideration and to make sure that we are leveraging like partnerships. We mentioned a few on the call to stay relevant with that consumer who has so many choices. And so that part we're starting to see early green shoots on, and that becomes really the flywheel that we've been talking about that helps feed all parts of the business. And that's as much what we're focused on building and expanding next year as anything. Christopher Horvers: Got it. And then how are you planning the holiday? You mentioned a largely similar promotional calendar in an event-driven consumer, but November was tough last year, and you had a government shutdown to stop -- to start the month, as we look at monthly 2-year trends are all over the place, but the business is bending upwards. So can you talk about what you're seeing here in November, if there was any impact early in the month on the shutdown and how you're thinking about sort of the cadence over the quarter given the comparison dynamics last year? Matthew Bilunas: Yes. I mean as we start Q4, we are lapping strong sales last year. As we noted on the call last year, we were running at about 5% growth for the first 3 weeks of November. I'm not sure how much the government -- we haven't done the math on specifically the government shutdown probably doesn't help. Certain geographies, obviously, are more impacted than others. But we are comping a pretty larger amount of growth through the first 3 weeks of November. So the shape of the quarter is likely going to be a little bit different this year compared to last year. November was up 4% last year. December was down 2%. So as we get into December, the compares get a little easier, and we are seeing people gravitate towards those big events that, obviously, this week and as the weeks before Christmas are the biggest events in the holidays. So we do feel like there's an opportunity there for us. So still feel like there's an opportunity for us to grow our sales. The shape will look a little different, even though the timing is pretty similar to how we saw it last year. Operator: Your next question comes from Anthony Chukumba with Loop Capital Markets. Anthony Chukumba: I know this is always kind of tough because all the different product categories that you're in, but how do you feel just at a high level in terms of market share, I mean, particularly given the fact that your sales have accelerated and you did have the best comps in several years. So how do you think about that at a high level? Corie Barry: I appreciate where you started, Anthony, which is it is really difficult in this industry. There just isn't a single source of share information, and there are multiple cuts. That being said, when we try to pull and triangulate all the data sources, we believe we have improved our share position over the last 2 quarters. And in Q3, we estimate that our share was flattish to slightly up. Obviously, we've always said share is a long game conversation for us and all the initiatives that we're talking about are driving toward more of the sustainability to at the highest level, drive shares. And in that, you're going to constantly be making trade-offs, promotion decisions, trade-off pricing decisions. We feel like we're strong right now, particularly in computing and gaming. I talked about our TV unit share position, which now we feel like is erring on the positive side, and there's a lot of these kind of newer categories or the expanded assortment that we're seeing in marketplace that is bolstering our point of view about how we feel like we're sitting for share. So again, always a conversation, longer game, but feel like the trajectory is headed the direction that we want. Anthony Chukumba: Got it. That's helpful context. And then just real quickly on the Switch 2, obviously, that's been selling quite well and Nintendo just hiked their unit estimate for their fiscal year. How have you felt about your Switch 2 allocations relative to your initial expectations? I know you historically have over-indexed on Nintendo products, particularly relative to PlayStation and Xbox. But just love to hear your thoughts just in terms of how you feel you guys are doing from an allocation perspective. Jason Bonfig: Yes. Thank you for the question. We've actually been very happy with Switch 2 obviously, the launch was outstanding. It drove growth last quarter, and we do expect gaming to continue to grow as we lead into Q4. It's been highly publicized at the amount of Switch 2 units in the market is a lot higher than what Switch 1 was in the same time frame. So we have actually been happy with the ability to come closer to meeting customer demand. We do think demand over holiday will continue to still be very strong. And then in gaming, in general, it's not just Switch. There are other aspects of that business that are diving growth. We're just seeing a handheld in general, whether it be the new product from Asus that is a partnership with them in Xbox or other products from companies like Lenovo with their Legion Go. Just handheld gaming is a driver across the entire gaming segment. We're really excited that we think we have the best assortment there and can really meet customers' needs across anything they want to do, whether it be Switch all the way up to any aspect of handheld gaming in total. And that's really making up for some of the slowing sales that you see in just the traditional PS5 and Xbox as those get to the end of their life cycle. Corie Barry: And one of the things, Anthony, that's interesting about all the devices that Jason just talked about, these are pretty high price point devices. And especially considering their gaming, they tend toward kind of a younger cohort, so we really like our position here, and we're kind of doubling down both physically and digitally to make sure we offer the best possible experience. I give our teams a ton of credit as part of the reason that we're able to get the kind of allocations we can is because we can deliver these amazing experiences, especially at retail. So with that, I think that's our last question. Thanks, Anthony. Appreciate it. So I think that's our last question. Thank you all so much for joining us. We hope you all have a lovely holiday season, and we look forward to speaking with you all at the end of our year. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
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.]
Ahmed Moataz: Hello, everyone. This is Ahmed Moataz from EFG Hermes and welcome to IDH's Third Quarter of '25 Results Conference Call. I'm pleased to be joined with Dr. Hend El Sherbini, Chief Executive Officer; Sherif El Zeiny, Vice President and Group CFO; and Tarek Yehia, Director of Investor Relations. The company, as usual, will start with a brief presentation and then we'll open the floor for Q&A. IDH management, please go ahead. Tarek Yehia: Thank you, Ahmed. Good afternoon, ladies and gentlemen and thank you for joining us for our third quarter analyst call. My name is Tarek Yehia, I'm Head of Investor Relations. Joining me today, Dr. Hend El Sherbini, our CEO; Mr. Sherif El Zeiny, our CFO and VP. Dr. Hend will begin the call with a summary of latest period main highlights. After that, I will discuss in more details the main macroeconomics and geopolitical trends seen across our markets. Then after my presentation, Mr. Sherif will offer a deeper analysis of our financial performance. Then we will open for Q&A. Dr. Hend will start now. Thank you. Hend El Sherbini: Thank you, Tarek and good afternoon, everyone. I'm Dr. Hend El Sherbini, CEO of IDH. As we approach the end of what has been another very strong year for the group, I'm pleased to report a robust set of results for the first 9 months of 2025. The performance we are presenting today reflects not only healthy market dynamics but also the tangible results of the strategic initiatives we have been implementing over the past 2 years, particularly around network and geographic expansion, operational optimization, digitization and service diversification. Throughout the year, we have continued to strengthen our core business in Egypt and Jordan, while making pronounced progress in newer markets, namely Nigeria and Saudi Arabia. We are also very encouraged by the sustained improvements in our profitability metrics, which confirm the scalability of our model and our ability to translate revenue growth into margin enhancement. We are particularly pleased to see the continued strength and stability of operating conditions in our home market of Egypt, where macroeconomic sentiment has improved and demand for high-quality diagnostic services remain strong. Turning to our performance in more detail. During the first 9 months of the year, we continued to build on the strong momentum established earlier, delivering 41% revenue growth year-on-year, supported by growth across both volume and value metrics. Test volumes increased by 10% with all operation geographies contributing to this expansion, supported by stronger patient engagement, deeper penetration in walk-in and corporate channels and improved referral flows. At the same time, our average revenue per test rose 28%, reflecting a richer test mix, broader uptake of high-value radiology and specialized diagnostics and favorable price adjustments introduced earlier in the year. These trends also helped us further strengthen our average test per patient, which reached 4.6 tests per encounter, demonstrating the continued depth of patient relationships and our success in expanding cross-service utilization across our platform. In Egypt, momentum strengthened further through Q3, supported by solid growth in both volumes and value alongside strong brand equity and stable market conditions. Test volumes in Egypt continued to grow steadily, while average revenue per test saw a significant uplift, owing to favorable mix dynamics and strong -- with strong traction in radiology, specialized diagnostics and corporate channels. Egypt remains the core engine of group performance, contributing 84% of total revenues in the 9 months of 2025 and continued to demonstrate high scalability, resilience and operating efficiency. The ongoing expansion of our physical network in Egypt continues to be a key growth driver. Over the past 12 months, we have added 103 new branches in Egypt, bringing the total up to 670 locations nationally as of September. These new sites have helped deepen our presence, not only in Greater Cairo but also in fast-growing regional cities, allowing us to better serve both corporate and walk-in patients. Our household service remains a strategic differentiator, sustaining its strong contribution of around 20% of Egypt's revenue, continues to demonstrate the effectiveness of our post-pandemic strategy and reinforces our position as an early mover in home-based diagnostics in the region. Al Borg Scan continues to demonstrate strong momentum as a key component of our long-term strategy to build a fully integrated diagnostics platform. Year-to-date scan volumes and patient traffic recovered well following the Q1 of Ramadan slowdown with Q3 recording clear sequential volume growth. The integration of Cairo Ray for radiotherapy, which was consolidated this quarter, is progressing well. This acquisition provides us with direct access to radiotherapy service and strengthens our positioning in oncology diagnostics, a fast-growing and strategically important segment. We expect radiology to play an increasingly prominent role in our growth mix over the coming quarters, supported by continued network expansion, enhanced service capability and rising demand for specialized imaging. Over the past 2 years, a key strategic priority for IDH has been the successful launch and scale up of our Saudi operations. I'm pleased to share that our presence in the Kingdom continues to develop very encouragingly with strong momentum supported by growing demand, deep market visibility and sustained improvement in both volume and value metrics. Year-to-date, we have seen revenues more than quadruple compared to the same period last year, reflecting rising test volumes, improving mix and early network scale benefits. This growth continues to highlight the effectiveness of our ramp-up strategy in the market, which aims to accelerate revenue growth and establish Biolab KSA as a key player in the large but high fragmented Saudi diagnostics market. As part of this plan, we inaugurate our third branch in Riyadh during the third quarter and we remain on track to open 3 additional locations over the coming months. These new branches will help extend our footprint across high potential catchment areas. At the same time, we continue to advance our growth approach, which includes targeted marketing campaigns to build brand recognition, selective promotional initiatives to drive patient acquisition and ongoing discussions with the insurers and corporate health care providers to broaden our referral and partnership networks. While still in the early stages of development, Biolab KSA is demonstrating strong operation traction and reaffirming our belief in the long-term potential of Saudi Arabia as a key pillar in the group's regional growth strategy. As always, profitability remains a core focus for us and we are very pleased to see sustained improvements across all levels of the income statement. We continue to benefit from strong operational leverage, tighter cost controls and better resource allocation across our subsidiaries, including Nigeria, where Echo-Lab remained positive EBITDA throughout the 9-month period, marking a key milestone in its turnaround and confirming the potential of its high -- of this high-growth market. Overall, both COGS and SG&A and share of revenue continued to decline, supported by disciplined cost management and our growing digitization efforts. COGS to revenue fell to 57%, while SG&A declined to 15% from 17% last year, underscoring the success of our optimization initiatives. Consequently, our EBITDA margin expanded to 35% from 30% last year, while gross profit margin rose to 43% compared with 38% in the 9 months of 2024. These efforts, combined with strong top line growth and improved pricing dynamics have translated into meaningful margin expansion and greater earnings quality with adjusted net profit more than doubling year-on-year while excluding FX effects. Before handing the call over to Tarek, I would like to briefly reiterate our full year guidance in light of our year-to-date performance and the momentum we are seeing across all markets. Given the strong results delivered over the first 9 months, coupled with relatively stable operating conditions, continue to expect full year revenue growth to come in at more than 35% in the full year of 2025. On the profitability front, we remain confident in delivering an EBITDA margin more than 30%, supported by sustained cost discipline, stronger operating leverage and the continued improvement in our Nigerian operations. With that, I will hand the call back over to Tarek and Sherif, who will take you through key trends across our markets and a more detailed breakdown of our financial performance of the period. Thank you very much. Tarek Yehia: Thank you, Dr. Hend. This year, we have continued to operation in relatively stable conditions with supportive macro trends and constructive across all our key markets as we approach the end of 2025. In Egypt, we are continuing to see slower inflation compared to prior years with the latest trading of September coming at a multi-month low of 11.7%. [ Decreasing ] increasing inflation pressure have been supported by relative strengthening of EGP versus dollar as well as increased ForEx inflows into Egypt as investor confidence recovers and remittance continue to rise. In fact, in recent weeks, we have seen EGP continuing to appreciate, reaching a low of 47.3 to dollar in October and as low as 46.92 last week. Successful rate cuts throughout the year continued to reach 6.25 points have now brought the overnight deposits to 21%. This will undoubtedly help prop up local investments activity and drive further recovery in consumer spending. Similar to Egypt, Nigeria also has seen relative stability in 2025. Inflation has come down from last year highs and expected to support gradual recovery in consumer spending. Over in Jordan and Saudi, the economic situation remained largely stable despite increased regional uncertainty. While Saudi Arabia economic could be tested by the ongoing global trade tensions, we remain confident that the excellent work done by the Saudi government to build resilience in the economy will help safeguard the country. Turning quickly to our latest results. Egypt continued to deliver strong growth with revenue rising 44% year-on-year, supported by both volume expansion and significant increase in average revenue per test, particularly driven by radiology and high-volume diagnostics. Meanwhile, Jordan continued its solid performance, reporting revenue growth in both AP and local currency terms. Test volume increased by 21% year-on-year, supported by Biolab ongoing promotion campaign and digital outreach initiatives. In a market where volume-driven growth is critical for long-term sustainability, we are pleased to see Biolab's strategy continue to deliver strong volume momentum and patient retention through community engagement and service quality. In Nigeria, Echo-Lab has maintained its positive EBITDA momentum supported by successful implementation of our turnaround strategy launched last year. We are increasingly confident in long-term potential for our Nigerian subsidiary to expand its radiology and specialized testing capability and capture the significant upside of a growing market. In Saudi, the ramp-up progressed ahead of expectations with revenue more than quadrupling year-on-year and [ subscription ] growth supported by increasing brand visibility and network expansion. Finally, in Sudan, operation remains significantly constrained by the ongoing conflict with only one branch partially operating and no material updates to report at this stage. I will now handle the call to Mr. Sherif, who will provide a more detailed overview of our cost and profitability for the first 9 months. Sherif Mohamed El Zeiny: Good morning -- good afternoon, ladies and gentlemen and thank you for your time today. As Tarek mentioned, during my presentation, I will focus on costs, margins, profitability and our working capital position before opening up the floor to your questions. In line with our guidance, profitability for the first 9 months of the year has continued to improve, supported by our group-wide efforts to boost operational efficiency and keep spending at bay. A major focus area over the last 18 months has been digitalization, where we have continued integrating advanced data tools and analytics into our internal platforms, procurement systems and financial planning to enhance decision-making and improve cost discipline. These efforts, combined with a stronger operation leverage and better resource allocation helped drive meaningful improvements in efficiency with both COGS and SG&A as a share of revenue declining versus last year. In parallel, we also -- we are also keenly focused on keeping costs down. Our efforts here have translated in a 9 percentage point drop in our total cost to revenue ratio for that period compared to last year. More specifically, our COGS to revenue ratio improved to 57% in 9 months '25, down from 62% in the same period of last year, supported by disciplined inventory management and stronger purchasing processes. The most notable improvements came within raw materials, which decreased to 19.6% of revenue, down from 21.9% last year, reflecting our scale advantages and smarter procurement practices. At the same time, total wage and salaries as a share of revenue remained broadly stable, underscoring our balance between supporting our staff with appropriate salary adjustment while continuing to optimize headcount. As you can see in the bottom right chart, these efficiency gains translated directly into a stronger profitability with gross profit margin expanding to 43% from 38% last year and EBITDA margins rising to 35% from 30% in 9 months 2024. On the SG&A front, spending remains well contained with SG&A as a share of revenue declined to 15%. The main increase within SG&A was in advertising and marketing expenses, which continued to support the ramp-up in Saudi Arabia and targeted promotional initiatives in Egypt and Jordan. Moving to our bottom line. We reported a net profit of EGP 964 million in 9 months 2025, up 33% year-on-year. As highlighted earlier, last year's reported net profit, including substantial ForEx gains, which distort direct comparisons. When controlling for those ForEx gain, adjusted net profit increased more than 119% year-on-year with an associated adjusted net profit margin of 17% versus 11% last year. As always, we maintained a disciplined approach to working capital management as we supported rising demand while preserving strong liquidity. Similarly, we saw our cash conversion cycle improved further to reach 127 days in September 2025 versus 155 days at the end of '24. It is also important to mention that as expected, we saw a decline in days inventory outstanding, stronger sales momentum and more efficiency inventory turnover during the second and third quarters of the year following the seasonal Ramadan slowdown in March. Finally, as 30th of September 2025, our total cash reserves stood at EGP 1.8 billion with a net cash balance of EGP 271 million. Thank you for your attention. We now welcome any questions you may have. Thank you. Ahmed Moataz: [Operator Instructions] There is one question in the chat on whether you're at a position right now to disclose the planned price increases in Egypt that would start from January of 2026. Tarek Yehia: We're still in the process of preparing the budget, and it's too early to comment on this but of course, will be a price increase for next year. Ahmed Moataz: Understood. The second is on whether you can disclose a time line for the breakeven for Nigeria -- sorry, Saudi operations. And if you have a targeted revenue contribution over, let's say, 3, 5 or even longer than that as a percentage of total revenue. Tarek Yehia: For the EBITDA, we are expecting a breakeven by end of 2026. Ahmed Moataz: Understood. And is there something on the revenue contribution as well? Tarek Yehia: Revenue continued to grow year-over-year and contribution to the top line still less than 1% but by time, gradually will increase. Still Egypt represents 82% and Jordan represents 14%, 84% for Egypt and 14% for Jordan. Ahmed Moataz: All right. Two questions from [ Johannes ]. Can you talk us through the change of ownership of the Actis stake and what you expect from Elliott? That's one. The second is, what is your dividend policy at the moment? Hend El Sherbini: So I mean the Actis stake has been bought by Elliott as a part of a bigger deal. We don't really have any visibility on this right now. And regarding the dividends, as usual, any money that we have, which are not used for investments and for the work, we give it back as -- we give it back to investors as dividends, as long as it's -- we are able to do that. Ahmed Moataz: [Operator Instructions] We'll take questions from the line of [ Darren ]. Unknown Analyst: Dr. Hend, you just -- you commented that the Actis sale is part of a bigger deal. What does that mean exactly? Do you have any other color there you can share? Hend El Sherbini: I know that Actis have [ exited ] private equity and they sold their shares in IDH and other companies to Elliott. But I don't know exactly -- I don't have the exact details of this deal. Unknown Analyst: Okay. Understood. So you're saying there's other businesses that have been sold to Elliott. And you haven't had -- the management team hasn't had any correspondence with Elliott at all? They haven't reached out to you or you guys haven't reached out to them to get a sense of what their plans are? Hend El Sherbini: I've seen them when I was in London. I've met with them. And -- but this was like an introductory meeting, nothing -- no specifics. Unknown Analyst: And do you have a sense, is it their intention just to be passive shareholders? Is it a purely financial investment? Or is there something more strategic? My understanding is they have, I think, interest in another Egyptian diagnostics business, if that's correct? Hend El Sherbini: No, this I don't know. Which other diagnostic business? Unknown Analyst: I think it's a much smaller one but they were part of a transaction in last year, I believe. But I can't remember the name of the firm but anyways. Hend El Sherbini: I haven't heard -- and they didn't mention it, no. Ahmed Moataz: We received 2 questions in the chat. I'll take them one by one. First one is how much CapEx have you got planned for Saudi operations and expansions? Tarek Yehia: For Saudi, we have a plan for the next 5 years with a CapEx of $20 million. Ahmed Moataz: All right. This is 2025 included? Or when you say 5 years, this is 2026 and beyond? Tarek Yehia: This starts from 2026. Ahmed Moataz: Starts from 2026. Okay. Two more questions in the chat. The first one, [indiscernible]. Please, can you share your expectations on growth beyond this year in terms of volume and value? And can you also comment on market-specific growth expectations? Tarek Yehia: We're still in the process of preparing the budget but we are aiming to targeting growth across all the geographies we are working at -- operating in. Ahmed Moataz: Understood. [ Ali Masood ] is asking, how many Actis Board representatives are on IDH's Board? And any expectations on if and when those members will step down? Hend El Sherbini: So there's only one Board member from Actis and he's also representing -- I mean, he's not stepping down because he's -- I think he's going to be also Elliott's representative. Ahmed Moataz: Understood. Can you comment on your expectations for branch additions in Egypt in 2026? Will it be at a similar level to 2025, higher or low? Tarek Yehia: It is -- we're still also the same for the budget. We're still in the process but we will see growth in the number of branches as -- and our growing brand -- ongoing process of growth each year. Ahmed Moataz: Sure. [indiscernible] is asking, how will the growing contribution from Saudi impact group returns and margins when Saudi is in steady state? Tarek Yehia: After 5 years for the 5-year plan for Saudi to represent 7% from the group revenue. Ahmed Moataz: Okay. And the question was more on how do you expect this when it has a 7% revenue contribution to impact your overall returns and margins. I think the question is trying to assess whether Saudi operations by itself is margin accretive or not relative to what you're generating right now and at the same time, return accretive or not? Do you want me to repeat the question? Hend El Sherbini: We're expecting it in the 5 years to be in the vicinity of the 30%, if this is -- if this answers the question. Ahmed Moataz: [Operator Instructions] All right. We haven't received any -- no, we actually did one, sorry, 2 questions. What does the $20 million Saudi CapEx imply for the number of branches in Saudi 2030 Vision. Sorry, one second, I'll re-read the question. Actually, we'll skip this one and I'll go back to it. Are margins at 38% sustainable? Or do you think it's a function of the strong EGP FX taking place this year? Hend El Sherbini: I mean, as long as we have a stable currency, I think this is sustainable. We're getting back to our 40% margins. And the strong FX has nothing to do with our improvement in margin. However, the stabilization of the currency is, of course, is helping in maintaining our margins. Ahmed Moataz: All right. Back to [ Farooq's ] question. How does the $20 million Saudi CapEx imply for the number of branches by 2030? So by the end of the year plan, how many -- or by the end of the 5 years, how many total branches you have in Saudi? That's one. And the second is, is the Saudi strategy branch-focused more? I think he means corporate or wholesale contract focus because [ Farooq ], can you send a clarification on the second part of the question until they answer the branches part? Hend El Sherbini: So we're expecting 45 branches by the end of the 5 years. And this is where the CapEx is going together with, of course, the instruments and everything else. This in terms of CapEx. In terms of revenue, we're expecting a breakdown of 50% corporate and 50% walk-in. Ahmed Moataz: Understood. Could you also please talk us through the outlook on margins for Jordan? Tarek Yehia: Jordan margin for the current year, in the range of 30%. Ahmed Moataz: All right. [ Ali Naser ] is asking, can you please provide details on the Cairo Ray acquisition? What was the investment size? And what is the annualized P&L impact on the consolidated level? And lastly, how much did it impact third quarter results? Tarek Yehia: The total investment cost was around $400 million. sorry, EGP 400 million. Ahmed Moataz: And the rest of the question, please, what is the annualized P&L impact? And how much did it impact third quarter results? Tarek Yehia: For the quarter, it is minimal because we already consolidated for a small portion in Q3. The same will apply for Q4 and more contribution will be done in the full year next year. Ahmed Moataz: Understood. [indiscernible] is asking, what is a stable long-term level for COGS and SG&A as a percentage of revenue? How much more cutting or savings do you expect and the potential uplift to EBITDA margins? Tarek Yehia: For the COGS to revenue ratio, which already improved to 57% in the 9 months, coming down from 62%, we're expecting we can go down 1% or 2 more percent going forward. And also for the SG&A, it already went down from 21.9% to 19.6%. And going forward, we can see 1% or 2% more advantage from recruitment and a lot of cost optimization that we are in process improvement year-over-year. Ahmed Moataz: Understood. [ Marina ] is asking, how do you see the contract and walk-in dynamic play out in Egypt over time, let's say, for the next -- sorry, 3 to 5 years? Do you expect contract volumes to continue growing faster than walk-ins? And what does that mean for longer-term margins? Hend El Sherbini: So yes, we expect the contract contribution to grow. However, we're also seeing increase in the walk-in volumes. So both are increasing. And this -- I mean, this is not -- this is affecting -- this is not really affecting our margins directly because in the corporates, we are seeing increased volumes. So the test per patient in the corporate side is much higher than in the walk-in side. And as this is an economy of scale, we always want both things, the increase in volume as well as the increase in pricing. So this is -- I think this dynamic we have been seeing for a few years now and it hasn't affected our margins. Ahmed Moataz: Understood. [indiscernible] is asking, volume growth in Egypt was solid at 9%. Is this primarily driven by the 103 new branches opened over the last year? Or are you seeing same-store sales growth in the more mature branches? Hend El Sherbini: We are seeing volume growth in both the new and the existing branches on both sides, corporate and walk-ins. Ahmed Moataz: [indiscernible] has a question. Unknown Analyst: Just a follow-up on the question I asked about Cairo Ray. I don't think you answered that. Please again but I know you bought it for EGP 400 million but I wanted to ask about what is the revenue of this company? What's the EBITDA of this company? What's the net income of this company on a trailing 12-month basis or maybe '26 basis? Sherif Mohamed El Zeiny: Our full year estimates on the top line is around EGP 52 million and on the EBITDA level, around EGP 16 million. This translates to around 30% EBITDA margin. Ahmed Moataz: All right. I'll pass it back to you, Dr. Hend, Sherif or Tarek for any concluding remarks. Tarek Yehia: Thank you, everyone. If you have any more questions, you have our contact. We're happy to have a follow-up call, any -- respond to any e-mails. Thank you, everyone, for attending today and thank you, Ahmed, for hosting the call. Hend El Sherbini: Thank you. Thank you, everyone. Ahmed Moataz: Thank you, everyone, and to IDH's management as well. Have a good rest of the day, everyone. This concludes today's earnings call. Tarek Yehia: Thank you.
Operator: Good day, and thank you for standing by. Welcome to Fluence Energy's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Chris Shelton, VP of Investor Relations and Sustainability. Please go ahead. John Shelton: Good morning, and welcome to Fluence Energy's Fourth Quarter and Full Year 2025 Earnings Conference Call. Before we begin, I want to share my excitement as our new Investor Relations Officer. I look forward to engaging with our analysts and investor community. I would also like to recognize Lexington May, who has recently taken on a new role at Fluence. Lex has been instrumental in leading our Investor Relations program since our initial public offering and its contributions have greatly benefited our company and its shareholders. Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; and Ahmed Pasha, our Chief Financial Officer. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding our non-GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters related to our business and companies that are not historical facts. Such statements are based upon current expectations and certain assumptions that are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and more information regarding certain risks and uncertainties that could impact our future results. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP financial measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is available in our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Julian. Julian Jose Marquez: Thank you, Chris. I would like to send a warm welcome to our investors, analysts and employees who are participating in today's call. This morning, I will review the highlights of our fiscal '25 results, the accelerating demand for energy storage and how Fluence is positioned to lead in this growing market. I will also provide an update on our product road map, our domestic content strategy and progress towards all BBBA compliance. Ahmed will then cover our financial results and '26 outlook. Turning to Slide 4 and our financial performance. First, I am pleased to report that during the fourth quarter, we signed more than $1.4 billion of orders, which represents a record level. This brings our current backlog to $5.3 billion, setting us up for renewed growth in '26 and beyond. Second, full year revenue came in at approximately $2.3 billion, about $300 million below our expectations, mostly due to delays by our contract manufacturer in ramping up our newly commissioned Arizona enclosure manufacturing facility. We have implemented corrective actions. Production is improving, and we are confident in meeting delivery commitments and capturing the shortfall during fiscal '26. I will discuss these details further in a moment. Third, despite this revenue impact, we delivered a record of approximately 13.7% adjusted gross margin for the year and approximately $19.5 million of adjusted EBITDA, which was at the top end of our guidance range. These results were the product of good execution on projects and cost efficiencies. Fourth, in terms of annual recurring revenue or ARR, we ended fiscal '26 with $148 million, slightly above our original guidance of $145 million. And fifth and finally, we ended the quarter with approximately $1.3 billion in liquidity which puts us in a strong financial position to fund our plans for growth. Please turn to Slide 5 for details on our order intake and pipeline. Our record $1.4 billion of order intake during the fourth quarter included contributions across all our core markets. Approximately half were for projects located in Australia. For fiscal '26, we currently expect the U.S. market will be the largest contributor of order intake as reflected by our pipeline as of year-end. Looking ahead, demand for energy storage solution is accelerating worldwide, driven by both the rapid decline in capital cost of storage and surging demand for electricity for intermittent renewables, data centers and industrial complexes. We have seen a significant increase in larger deals in our pipeline that as of September 30, includes 38 deals of at least 1 gigawatt hour, more than double the number from last year and nearly 5x what we saw 2 years ago. Please turn to Slide 6. Earlier this month, we announced a landmark 4 gigawatt hour project with LEAG, representing the largest battery project in European history. These projects will use our new Smartstack product and play a key role in Germany's energy transformation. We are very pleased to welcome LEAG as a customer and look forward to supporting additional energy transformation projects across European markets. Please turn to Slide 7 for other emerging drivers supporting our pipeline growth. We have seen significant pickup in demand from data center customers. We are currently in discussions with data center projects representing over 30 gigawatt hours. 80% of these engagements have originated since the end of the quarter. Fluence is ready to lead in this emerging market segment with Smartstack industry-leading density, reliability and safety in addition to its lower cost of ownership. Another set of emerging opportunities is long-duration storage, which is driven by the need for 6- to 8-hour duration batteries in markets with significant renewable penetration, such as Europe and California. Specifically, in Europe, regulatory schemes are in place to procure this capacity. Today, we have line of sight into 60 gigawatt hours of long-duration storage tenders. Smartstack is well suited to compete in this segment due to its flexible architecture and a scalable design. Please turn to Slide 8 for an update on our team. To capture the opportunities I have just described, we have sharpened our focus on sales and flawless project execution. To that end, we are excited to welcome Jeff Monday as our new Chief Growth Officer. Jeff leads our global sales and marketing teams. He brings deep experience from Qualcomm, where he built their global enterprise and channel sales teams. Prior to that, Jeff spent 18 years leading sales teams at Apple. His expertise will help us expand the reach of Fluence's brand to new customers and industries, such as the tech sector. In addition, we have also expanded John Zahurancik's role as Chief Customer Success Officer. As one of our company's founders and an industry pioneer, John will leverage our record of successful execution to further differentiate Fluence from our competition. He will also maximize the value of our solutions for our customers with our digital and services offerings. We believe that these internal changes will streamline our customer experience and position us to win a larger portion of our pipeline. Please turn to Slide 9 as I discuss our new Smartstack product. We are pleased with the market reception of Smartstack. In addition to its role in winning our LEAG deal, this month, we are deploying the first Smartstack units in a project site in Taiwan. We designed Smartstack with the objective of reducing total cost of ownership for our customers. This means in addition to a lower sales price, Smartstack offers lower cost to install and maintain the system over its useful life with top-of-the-line operational metrics. Smartstack is the only product available today that offers battery density of 7.5 megawatt hour per unit, letting customers see over 500 megawatt hours of storage per acre. That means bigger projects, optimized sites and better economics, all else equal. Additionally, Smartstack maintains all elements of fire safety and cybersecurity that have been historically a salient element of our offering. Finally, Smartstack is developed with a flexible system architecture that can adapt to customers' specifications. We expect this will be a key selling point for data centers as technology to reduce system latency evolves and Smartstack kits can be upgraded with new equipment quickly on site. We are engaged with many customers interested in Smartstack and expect it will represent a majority of our orders for this fiscal year. Please turn to Slide 10 for an update on our domestic content strategy. Our domestic supply chain is a critical advantage for our business, particularly given that we see the majority of our growth coming from the U.S. market. We have contracted with 3 key production facilities located in Tennessee, Utah and Arizona. The Tennessee and Utah facilities produce our battery cells and modules, respectively, and they have successfully met production metrics in line with our expectations at the time of our last earnings call. The Arizona facility, which manufactures enclosures, has not met its production targets during this period. Without those enclosures, we were unable to deliver our completed products and recognize the corresponding revenue during the fourth quarter. The primary cause of the manufacturing delay has been the slower ramp in staffing the facility, especially for weekend shift. We have been working with our contract manufacturer to execute a plan to improve staffing levels and further optimize the workflow. As of today, the production rate has improved and staffing levels have in great measure been met, which give us confidence that the manufacturer will meet our desired target rate by the end of this calendar year. We expect to fulfill all of our customer delivery commitments over the course of '26 and book the associated '26 mix revenue. We will continue to work with our U.S. manufacturers to scale production and maintain our leadership position. We are committed to serving our U.S. customers with a competitive domestically manufactured solution. Please turn to Slide 11 for an update on our prohibited foreign entity or PFE compliance strategy. A quick refresh. The One Big Beautiful Bill or OBBBA included regulations designed to restrict tax credit availability for products manufactured in the U.S. but supported by companies deemed to be PFEs. To that end, our strategy aims to meet our growing volume demand for domestic content from a diverse set of qualified suppliers. I am pleased to report significant progress. More specifically, this month, we have secured a second supplier for domestic battery cells. This manufacturer is compliant with all OBBBA regulations and further derisk our future growth. Turning to our Tennessee facility. We continue to work actively with AESC to find a comprehensive solution to comply with PFE regulations. The 3 key pieces to achieve non-PFE status include transfer of ownership, IP and material assistance. Significant progress has been made in addressing all these 3 items. The option of Fluence purchasing the facility from AESC remains under consideration as a possible solution. We continue to view the incremental financing need of a potential transaction as being manageable within our available liquidity. Both parties are motivated, and we continue to expect a constructive resolution in advance of the effective dates specified by the law. I will now turn the call over to Ahmed to discuss our financial results and fiscal '26 guidance. Ahmed Pasha: Thank you, Julian, and good morning, everyone. Today, I will review full year 2025 financial results and our liquidity position, followed by a discussion of our fiscal year 2026 guidance. Starting with Slide 13, covering fiscal year 2025 performance. Over the course of the year, we generated revenue of around $2.3 billion. As Julian mentioned, this figure falls short of our expectations by $300 million, largely due to a slower-than-anticipated ramp-up at one of our contract manufacturing facilities in Arizona. While this shortfall was a challenge, I want to highlight that our disciplined execution and operational focus enabled us to deliver on our profitability and bottom line objectives. Regarding production, most of our U.S.-based contract manufacturing facilities have been operating at their targeted capacities, including both cell and module manufacturing. However, the newly commissioned enclosure facility in Arizona faced some challenges, primarily due to the longer lead time to attract and train the workforce necessary to drive productivity. This was the primary factor behind the lower-than-expected revenue in the quarter. Working in collaboration with our contractor, we have seen significant production improvement since September. The majority of personnel required to execute our plan have now been hired, and we are on track to achieve our targeted production levels. Our adjusted EBITDA for the year was $19.5 million, which came at the top end of our guidance range even as revenue fell short of expectations. This outcome underscores our operational excellence and strong execution. Turning to Slide 14. We achieved a record level of 13.7% adjusted gross margin for the year, above the top end of our expectations. In addition, our rolling 12-month adjusted gross margin is consistently at or above 13%. This reflects our strong focus on productivity and successfully leveraging our supply chain. Turning to Slide 15. We also finished the year with a record of approximately $1.3 billion in liquidity, up $300 million compared to the end of fiscal 2024. This includes more than $700 million in cash with the rest available through our credit facilities. This strong position gives us confidence to make investments that will grow our business and strengthens Fluence's reputation as a reliable partner. Looking ahead to fiscal 2026, we intend to invest about $200 million in our business. This includes approximately $100 million in our domestic supply chain and the rest in working capital to support 50% revenue growth. Turning to Slide 16. Today, we are introducing our guidance for fiscal year 2026. We expect revenue in the range of $3.2 billion to $3.6 billion. We began this year with 85% of our guidance midpoint already in our backlog. This strong coverage materially derisks our FY '26 revenue compared to the historical level of around 60%. We anticipate realizing 1/3 of this revenue in the first half of the year and the rest in the second half. We expect our adjusted gross margin to be between 11% and 13%. This range reflects a period of higher costs associated with the rollout of our Gridstack Pro product, which will make up 70% of our 2026 revenue. We anticipate margin will improve over time as we continue to leverage our disciplined execution and our growing scale. We expect operating expenses to grow at less than half of the pace of revenue, consistent with our guidance in prior years. This includes increased spending on sales, marketing and R&D to support future revenue growth. For adjusted EBITDA, our guidance of $40 million to $60 million reflects expected revenue, adjusted gross margin and higher operating costs from planned investments in sales and product initiatives. With respect to ARR, we are initiating guidance of approximately $180 million by the end of fiscal '26, representing over 20% year-over-year increase. In summary, with our strong liquidity, focused execution and robust order book, we are well positioned to deliver on our plan. With that, I would like to turn the call back to Julian for his closing remarks. Julian Jose Marquez: Thanks, Ahmed. Before we take your questions, I would like to conclude with the following 5 takeaways. Market leadership. Demand for energy storage is accelerating globally. Fluence is capitalizing on this environment with notable wins such as the 4 gigawatt hour LEAG project in Europe and a rapidly growing pipeline of data center customers and other large-scale deals. Product leadership. Smartstack is a key differentiator versus the competition. With increased density and a very competitive total cost of ownership, we expect Smartstack to drive a majority of future orders. Operational execution. We have made significant progress to strengthen our domestic supply chain advantage. We have addressed production issues at the Arizona facility, and all our domestic manufacturers are now on track to meet our expectations. Compliance and readiness. We have strengthened our ability to deliver PFE compliant products to customers with the addition of a second domestic battery cell supplier. We continue to make progress towards OBBA compliance with our Tennessee manufacturer and expect resolution ahead of regulatory deadlines. Looking forward, these achievements position us to maximize stakeholder value by consistently meeting our commitments to customers and shareholders, reinforcing our reputation as a trusted industry leader. Operator: [Operator Instructions] Our first question coming from the line of George Gianarikas with Canaccord. George Gianarikas: I'm just curious if you can share any thoughts on what you're seeing in the competitive environment? Any changes there in the U.S. and internationally? Julian Jose Marquez: Internationally, not real change. It's a very competitive market, and the Chinese players continue to drive the competition in a way. The U.S., the competitive market is changing with -- we see more and more customers that prefer to use U.S. or non-PFE manufacturers, even if they're not required to do it under the -- because the projects are safeguarded under the law or of that provision. So I would say that, but it's an evolving matter that we see coming. So that's kind of today where I see the market. George Gianarikas: And maybe as a follow-up, Ahmed, I think I heard when you were talking about gross margin or margin guidance for '26 that you expect margins to improve over time. Were you referring to gross margins moving beyond the 11% to 13% range you guided for next year, say, in '27, '28? Ahmed Pasha: Yes. George, yes, I think our goal is to continue to improve the chart that we have disclosed. I think our goal is to continue to show that chart going forward to show the trajectory and the difference we are making. Our guidance, as you recall, was 10% to 15% in the past. I mean, I think our -- we haven't changed that going forward. So our goal is to continue to improve that trend line. Operator: Our next question coming from the line of Brian Lee with Goldman Sachs. Brian Lee: Kudos on the quarter here. Just I appreciate all the color, Julian, on the data center sizing. It sounds like that opportunity is coming to fruition here pretty quickly given the time line you expressed. But can you maybe help us a little bit understand, first, the sizing of the market, I guess, if we take the 30 gigawatt hours of data center projects in the pipeline and leads, that's maybe if we estimate maybe $6 billion of the total $23 billion pipeline or in that neighborhood. Is that kind of the way to think about it? And what do you think the overall TAM is and what Fluence's market share could ultimately end up looking like? Julian Jose Marquez: Good question. Let's start with the TAM. Last quarter, we talked about a TAM of around $8 billion. So I think that it's clearly -- the reality is proving that the number is significantly higher. The market has still very, very different numbers. I said we have seen numbers of the 10 times the $8 billion or more than 10 times the $8 billion. It's still unclear. We have to, I think, a little bit more. But clearly, it's a market that is expanding. Of the 30 gigas that we talked about, as of September 30, only 20% of it, one small portion were in our pipeline. The rest were contracts that we started to -- with customers since then. And then today, if you ask me today this morning, roughly half of the 30 gig are in pipeline, the other half we're working on it. And what we're looking is -- will they happen in the next 2 years, where do we see our product is suitable to do what they want. And generally, I think we are fine. So what's a big change from telling you a quarter ago, this is an $8 billion market requiring this very, very complex capabilities to today. I think there's a big change in terms of what we can do for what our technology and Fluence in particular, can do for data centers. And I would say the way to think about it is that there are 3 needs. One is what we call interconnection flexibility, the ability to manage your -- the energy demand in a way that you can interconnect easier to the grid and you can manage and the distribution companies or the service provider can manage your demand to keep the -- so that is by itself, I would say, today, the biggest driver. People who want to connect quickly to the grid and want to ensure that the data center meets the availability of the grid and can give the assurances to the grid operator that they will not disrupt the grid. And we can do that today. That's what work. This is -- there's no -- we have no need to improvements in our technology stack to be able to do it. So great. The second one that is also in a rising need or rising need is backup power. Historically, we haven't played that game. But with our costs coming down as they are and our ability to -- our density improvements, we can now provide backup power and significantly reduce. I won't say eliminate, but significantly reduce the need for diesel generators. So that's the second need that we're seeing. We can accelerate interconnection to the grid, and we can reduce some of the cost of the diesel generators by providing backup power. The third one is the one we have talked about in our last call, this power quality, this idea that we can -- we will have to manage the variability of energy demand by AI data centers. That -- if you ask me today, that hasn't been -- the first thing is that there are other technologies that can address that. That's the first one. The second one is that it is a need that is not as big as we thought it was going to be. So it's probably around that $8 billion number. And it is something that data centers, when they look at what they're doing, their speed to power is a much more important element than this one because the other one they can manage in some other way. We are committed to delivering the 3 products. The interconnection flexibility to accelerate interconnection, the backup power capabilities. And these two that we can do today, and we're very well positioned to do. Smartstack is the densest project in the world. It is a project that because of the [indiscernible], the way we are designed provides very good safety, better than, I would say, very, very good. And then third, our cybersecurity, our total control on software, our ability to ensure that no one else can get it. So the power quality is something we're working on with our inverter manufacturers. We'll get it resolved quickly, but it's still a work in progress. But we thought that was going to be a gating item the backup power is going to be a gating item for us to serve this market. That's no longer the case. I would say it's a cherry on the top. If you can deliver the last 2 and this one is great, but it's not a gating item. So great market, multiples of what we told you in terms of what we do, and we don't need to do a major technology. And my last point, we can -- we don't have a clear view today. This is just starting on how much we can capture. What I will say, we are very well positioned to do safety, density. Some of our competitors are claiming density, which is 20% to 25% less than what we can do. So that tells you we can do very, very well, and we are -- we have -- we hired Jeff. Jeff comes with knowing how to serve this market. He's been one of the structure, go and get this done. And this is not only happening in the U.S. This is a global phenomenon. We have in our pipeline. It's mostly U.S. today, but we're starting to see pipeline coming both out of Australia and Europe. So sorry for the long answer, but that we're excited about this opportunity. Brian Lee: Yes. No, I can definitely sense that. I appreciate all the color. Maybe just one more question on that topic. From a P&L timing and impact perspective, can you give us a sense of the conversion time line for this data center pipeline? And is any of it embedded in your revenue guide for fiscal '26? And maybe just lastly, margins relative to core margins. Are these going to be higher margin just given the customer subset you're dealing with? Curious on the impact on margins as well. Julian Jose Marquez: I'll say that of the 30 gigas, half are '26 order intake, half of our '27, give or take, and most likely projects that will be -- will convert into order intake later in the year, not revenue for '26. We have to see how much revenue for '27 is unclear. In terms of margin, this is a new segment. I don't want to talk about it publicly. But what I will say is that we can provide a lot of value to our customers, a lot of value. We can deliver our product quickly, give them the confidence on our security, the best density. And we are -- and so we are very confident that we can create a lot of value to our customers. That's where we're concentrated. Operator: Our next question is coming from the line of Dylan Nassano with Wolfe Research. Dylan Nassano: Just want to go back to the Q4 kind of underperformance versus the guide. I know that in the previous quarter, manufacturing delays kind of came up, but it sounded like maybe those were resolved and you were operating on schedule again. So I just want to check what kind of changed between the last call and now? And like are these incremental kind of problems that popped up? And anything you can give us just to kind of boost confidence going into the quarter that these are kind of resolved at this point? Julian Jose Marquez: So we have -- thanks, Dylan, and clearly, we're disappointed with what happened. I mean, first thing, but I don't want to say sound apologetic in what I'm telling you. But -- so what do we have? We have our suppliers in the U.S., many, but I say the 3 main suppliers. Out of the 3 main suppliers, 2 are doing great. I would say even more, the 2 that have the more complex process are doing very well. So we're very happy, ahead of schedule, doing wonderful, no problem. We have a less complex process, which is enclosure manufacturing. When we met last quarter, we had a plan that was going to be able -- going to allow the delivery of our revenue for the year, but that it required a major staffing process that I think we underestimated the ability to staff that facility. I think that today, that we have done 2 things. We have clearly gone out and continue staffing and preparing people, and we're essentially done in terms of staffing. There's still some people, but it is essentially done. And we have made some changes in the way we are with our contract manufacturer to ensure that we meet our -- that we need to facilitate the manufacturing process. That's the right word. And I think the two combinations, having staffed the place, and we're talking about a significant number of people. This is roughly 500, 600 people that we needed for that facility to work with 3 shifts and all of that. We were fully -- essentially fully staffed. And with the changes in operations, we are meeting our numbers. I think we are -- we expect to do -- we were doing at the end of last quarter, 1.5 closures per day. We are already at 5, and we are ramping up, and I don't know that we will be able to meet our numbers very well. So we are very confident today. Unfortunately, we did not meet what we could not deliver on the revenue, and we are disappointed, but we learned very quickly. Our operation and manufacturing team is very, very good and they have put in place their corrective measures to this. Ahmed Pasha: Yes. Dylan, the only thing I would add is I think that from our perspective, as Julian said, yes, because of the labor shortage, we were roughly 1.5 containers per day. Fast forward, we added 500 people. We are now running at 5 containers per day and which is in line with our expectations for the quarter. So we feel pretty good where we are. But equally importantly, I think we pulled our levers to deliver on our profitability commitments. As you saw, the margin and the EBITDA, we are in line with our top end of our range. Dylan Nassano: Got it. I appreciate that. And then my follow-up, I just wanted to check on this new cell supplier. Can you just give us any more color around how much incremental capacity this may get you? Any -- are you prepaying for any sales like similar to what you did with AESC? And yes, so mostly just curious like does this get you net additional capacity to serve the U.S. market? Ahmed Pasha: Yes, I can take that question. Dylan, yes, I think this gives us enough capacity to serve our projected loads for the next couple of years. So we feel pretty good what we have signed. And in terms of the deposits, no, no material deposit commitments. I think it's just as we get the deliveries, we make those payments. Operator: Our next question coming from the line of Ameet Thakkar with BMO Capital Markets. Ameet Thakkar: I just wanted to kind of go back to kind of the implied EBITDA margin for this year versus last year. I mean it looks like the EBITDA margin is down, and I know the gross margin is also kind of down sequentially. But it looks like the implied ASPs in your bookings are actually up pretty significantly kind of quarter-over-quarter. I was just wondering if you could kind of walk us through why, I guess, the gross margin is lower year-over-year versus kind of the rolling 12 months. Ahmed Pasha: So I think the ASPs, your question is, yes, I think is down, but no surprise. I think ASPs are down roughly, I think, give or take, 10% or so. In terms of the gross margin, I think we basically are pretty much in line. I think the EBITDA margin as you ask, is obviously, there's an operating leverage because volume was less. Last year, our overall revenue was $2.7 billion. This is $2.3 billion. So yes, I think -- but the more important thing, frankly, from our perspective is as we grow the top line, we will benefit from the operating leverage and our goal is to continue to grow EBITDA. Obviously, that is what the shareholders care. At the end of the day, top line is great, but at the end of the day, that should translate into the bottom line. And that's what we, as a management team also are on the same page. So stay tuned. I think our goal is to continue to improve the top line and also the bottom line. Ameet Thakkar: And then I know you kind of talked about a couple of kind of uses of liquidity for next year. But just in terms of kind of like the kind of the free cash flow expectations relative to that $50 million kind of EBITDA guidance at the midpoint. Any kind of, I guess, guidepost there, please? Ahmed Pasha: So yes, I think the $50 million EBITDA, I talked about the working capital, roughly $100 million as our revenue is growing by from $2.3 billion to $3.4 billion. So $1 billion or so of additional -- as if you recall, we said in the past, working capital needs are roughly 10% of our growth in revenue. So about $100 million of working capital needs and then $100 million of investments in the domestic content, as I mentioned in my remarks. Beyond that, we don't have any material commitments. So I think next year, our goal is to be free cash flow positive as our revenue grows and our EBITDA grows. So I think that is the goal. But this year, $50 million is the EBITDA, but then we have working capital needs of $100 million. But I think more importantly or equally importantly is liquidity will remain very robust with this working capital use. So our goal is to continue to strengthen our balance sheet with growing cash and our credit facilities. So we feel pretty good where we're going to land at the end of the year. Operator: Our next question coming from the line of Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Nicely done this quarter. Just following up on a little bit about some of the margin commentary and just filtering that back in with AESC. Can you comment a little bit on how you think about margins being tethered to whatever happens with respect to your domestic supply, whether that's with AESC or incremental supply. Does that -- is that part of the commentary about margin improvement? And then related, can you just give a little bit more of a detailed update around AESC specifically? I know that you've sort of "procured a backup here, if you will. But how is that relationship evolving here? How would you frame out volumes from one side or the other side of that supply arrangement now at this point? Julian Jose Marquez: In terms of margins, in terms of AESC, I mean, any deal we do, we might do with AESC will be accretive. So that's the way you need to think about it. We -- when and if it happens, we'll communicate what it means in terms of margins. And I think that Ameet's point was more general. When you looked at our performance -- at least since I got here, we got a company with negative margins of 4%. We're now on a running average of 12 month average, we're now at 13.7%. So my point is we all here want to commit to continue showing a growing line. That's kind of what we're doing, and we're finding ways to do it today and continue to work on it. That was more of that coming in that direction. In terms of AESC, what I would say is that we are -- meeting the OB3, OBBA compliance is a complex process. We have been able to make a lot of progress. And generally, you can look at it from 3 areas. You need to meet the IP. And I think we have a solution that's done and we can -- the IP in that -- for that production facility meets the criteria of OBBBA3 -- OBBA or meet the criteria. Then we have the material systems, the need that the suppliers of the facility cannot come from PFP suppliers. We have a plan that will deliver that. And then we have the ownership. And the ownership is the one where we are still debating. We are making good progress. We're committed to resolve it, but we haven't -- have not reached a final deal. What we have always said, we're not the only option in town. So there are other ways that they can resolve this issue. And I don't want to -- we clearly believe that we are the best option from my point of view, but they can do something different. So -- and then on the new supplier, I mean, what it is, is we're generally diversified suppliers. That's a rule of life. So we're diversified suppliers. And the demand we see is very big. So we need to continue to meet the growing demand. So our philosophy of diversified suppliers and the growing demand call for the second supplier. So that's where we are. We are -- we see this as one of our competitive advantages. We are a first mover in this area, and we want to continue being the first mover. So that's the reason for our strategy. Julien Dumoulin-Smith: So just to clarify that real quickly, basically, your current plan and current margin expectations assume that you're served with AESC. And would it be improved or detrimental to shift the supply, if I heard you right or understand. Julian Jose Marquez: Yes. I mean I will say the following. The -- as I said, a potential deal with AESC will be accretive to the current numbers. That answer I can provide. Julien Dumoulin-Smith: All right. You're already here cutting it. Okay. Understood. Julian Jose Marquez: No, I'm not cutting that. Having done the deals yet. Julien Dumoulin-Smith: Okay. All right. Got it. No, that's why I asked. I appreciate it. Operator: Our next question coming from the line of David Arcaro with Morgan Stanley. David Arcaro: In terms of the data center pipeline, I was curious just to get your -- what you're currently seeing. Is this bringing larger project sizes versus your current backlog? Is it more U.S. heavy in terms of region where you're seeing that demand? And would be curious what kind of duration you might be exploring for those types of projects? Julian Jose Marquez: Yes. I'll say that generally, we talked during the call with one of the big drivers of the elasticity of demand where you can see the elasticity of demand for our technology as prices has come down has been how projects are getting bigger. And we have today 38 projects that are 1 gigawatt hour or more. I don't think that the data centers are bigger, naturally bigger, they are in line with what we have when you look at it, some are smaller, some are bigger, but generally in line. In terms of where geographically today, I will say the majority come from the U.S., and we have seen some -- the pipeline development in APAC and Europe is a little bit behind, but -- so that we see what we will see this as a global market. So that's kind of our view. In terms of duration, it depends on the use case, we see from 2 to long duration storage, both the whole -- nothing below 2, but that's where we are. David Arcaro: Okay. Got it. That's helpful. And then I was just curious about strong order intake in the quarter -- in this past quarter. I was wondering if you could talk to what the -- whether there's a common driver there that you're seeing. It doesn't seem to be data center growth just yet, if I'm interpreting that correctly. So what are you seeing in terms of what drove the strong rebound? Julian Jose Marquez: It was Australia the big driver of the strong quarter in '20, the strong order intake. We have these deals in Australia, as you know, that we were delayed in '25. We signed them all and they all -- most of them occur late in the year. So that's a big driver of it. But we see for '26, the U.S. being the big driver and a little bit of a change. And we'll see some -- I expect to see some data center stuff happening in '26 late in the year, most likely. Operator: Our next question coming from the line of Mark Strouse with JPMorgan. Mark W. Strouse: I just wanted to go back to the second domestic content supplier. Ahmed, I think you said that your needs are met for the next couple of years. But I just wanted to clarify, is that capacity available today? Or is there kind of a ramp period that we should be expecting? Ahmed Pasha: No. I think the capacity is available -- will be available in about next 10, 11 months. But I think the capacity that we need to serve our load, as we discussed during the call, we have about 85%, 90% of our revenue in our backlog, and we have already secured the capacity for that. So we don't need this capacity, but we are now locking in additional capacity to basically secure our future business. Mark W. Strouse: Okay. And then on the long duration side, is Smartstack the only go-to-market solution that you have there? Are you potentially looking to partner up maybe being a systems integrator for some of the more emerging technologies that are out there? Julian Jose Marquez: Smartstack will be our accelerator. What we're going to do, and we believe that very competitive. So it will be Smartstack. Operator: Our next question coming from the line of Christine Cho with Barclays. Christine Cho: With respect to the data centers, you mentioned the 3 different ways that you can serve data centers, the interconnection backup and power quality. Would you be able to sort of like break down the opportunity set here and maybe rank it? Like is half of the opportunity for power quality and backup is the smallest? And for duration, you mentioned 2 hours is the low end. I'm assuming that's for power quality. Is it similar for those who are interested in getting storage for interconnection purposes? Julian Jose Marquez: Yes. First point, that's what -- that I would like to highlight. So we have these 3 needs. What's wonderful about our technology and now talking about battery storage, not necessarily ourselves, is that we can stack up these 3 needs with the same technology solution. While the other technology solutions can do one or the other, but they cannot do what we do, which is facilitate interconnection, do backup power and do quality. And that makes the difference. And I think that's what makes our solution so attractive to our data centers. We can resolve 3 problems with one technology. So that's very, very good. In terms of the 2 hours, these are -- depends on the need of the customer. So I cannot really put out -- can tell you this is what drives it. But generally, you're right on the view that backup power and interconnection flexibility will tend to be longer duration, while power quality will tend to be shorter duration. Generally that's true. But I think you need to think about this differently. Is the ability to serve the 3 needs with the same infrastructure. That's what we are aiming for because that's where I think that will make our technology, the preferred technology solution to resolve to address these problems. Christine Cho: Okay. And then if you are able to vertically integrate with AESC, how should we think about what the mix will be between the AESC supply and the second supplier? And with this second supplier, is a contract for a set amount of time? And then lastly, for your international projects, are you also diversifying your cell suppliers there? Julian Jose Marquez: We are -- we've always been diversified internationally. We're just being diversified locally. My view on this is that it is -- we convert any battery into a great technology solution. That's what we do as a company. So who the battery supplier is not as relevant. It shouldn't be as relevant. My customers shouldn't care and my financial investors shouldn't care. What I -- the real value we bring is the ability to make any battery great, no matter what. So that was my answer to it. I don't know what the mix will be. But as I said, for my customers, it will be irrelevant from a product delivery and capabilities, what batteries are produced. Christine Cho: But for you, doesn't it matter in that if you are using AESC and you're vertically integrated, it's higher margin for you versus... Julian Jose Marquez: I care about my customers. That's what I lose. Yes we will figure out that part. But the important thing is the ability to [indiscernible] the route to success in meeting your customer needs. That's what drives the company. But you're right, we might be able to get a capture -- if we were to be vertically integrated, there will be more margin on one or the other, but my real -- the way to win is meet the customer needs. That's the way to win. Not -- if you try to optimize something else, you get -- you lose the side. Your customer needs and that drives profitability, that drives margin, that drives everything. Operator: Our next question coming from the line of Justin Clare with ROTH Capital. Justin Clare: So I just wanted to follow up on the second source of the cell supply here. So I think you mentioned it will be available in the next 10 to 11 months. So just at the beginning of the year, do you expect to depend on the source of cells from AESC for domestic U.S. projects until that second source is available? And then so I'm just trying to get at how important is it for you to resolve the challenges with the FIAC restrictions by early calendar 2026 in terms of thinking through the outlook for the year? Julian Jose Marquez: Very, very important. That's what I will say. We have a plan, and we've been working on it, and it's very, very important to do it. So that's what I can tell you. I mean, we will get it done. Justin Clare: Okay. Got it. Good to hear. And then just a follow-up on the data center opportunity. I was wondering, are you seeing -- or could you talk about the ability to kind of successfully accelerate interconnection with storage being added to data centers? Is this being done today? Or do you need the regulatory framework to change in order to support this use case? And then wondering what the timing of orders associated with that use case might be? Julian Jose Marquez: We haven't signed any of these contracts yet. So this is a work in progress, but we believe we can -- we have the ability to ensure that the data centers meet the interconnection restrictions that they have. So I would say yes. I don't think you need a major regulatory change. It's just ensure that you meet whatever the grid is offering. Operator: Ladies and gentlemen, that's all the time we have for our Q&A session. I will now turn it back to Chris for any closing comments. John Shelton: Thanks, Olivia, and thanks to everyone for participating on today's call. We look forward to speaking with you again by first quarter results, if not before then. And please do -- looking forward to meeting with everyone as your questions arise. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good day, everybody, and welcome to the Movado Group Third Quarter Fiscal twenty twenty six Earnings Call. As a reminder, today's call is being recorded and may not be reproduced in full or in part without permission from the company. At this time, I would like to turn the conference over to Alison Melkin of ICR. Please go ahead. Alison Melkin: Thank you. Good morning, everyone. With me on the call today are Efraim Grinberg, Chairman and Chief Executive Officer and Sally DeMarcellus, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind you of the company's Safe Harbor language. Which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties all of which are described in the company's filings with the SEC which includes today's press release. If any non GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure to this non GAAP financial measure will be provided as supplemental financial information in our press release. Now, I would like to turn the call over to Efraim Grinberg Chairman and Chief Executive Officer of Movado Group. Efraim Grinberg: Thank you, Allison. Good morning, and welcome to Movado Group's third quarter conference call. Joining me today is our Executive Vice President and CFO, Sally DeMarcellus. After I review the highlights of our quarterly results, and the progress we're making against our strategic initiatives, Sally will discuss our financial results for the quarter and year to date in greater detail. We'll then be glad to take your questions. We're pleased with our results for the third quarter. And more importantly with the progress we're making in building our brands and business in a sustainable way. In a globally challenging retail environment, we delivered revenue growth of 3.1% to $186,100,000 Excluding The Middle East, where we have rebuilt our team and are refining our strategy, growth was 5.9%. We plan to return to growth in that region next year. For the quarter, gross margin improved by 80 basis points to 54.3% compared to 53.5% last year. Despite a $4,500,000 and two thirty basis point impact from incremental U. S. Tariffs. After quarter end, The US and Switzerland announced a framework agreement that we expect will lower our overall US tariff rate on Swiss watches to 15%. Roughly one third of the rate we've paid since August. This positive development will allow us to plan effectively for next year and reduce the level of price based mitigation. Benefiting both American consumers and the company. Adjusted operating income grew more than 40% to $12,600,000 For the first nine months, we generated positive operating cash flow of $1,300,000 versus a use of cash of $40,600,000 last year. We ended the quarter with a strong balance sheet dollars 183,900,000.0 in cash and no debt. And our board has approved a quarterly dividend of 35¢ per share. This quarter reflects continued progress on our strategic priorities. Strengthening our brands driving innovation, delivering improving financial results. Our results are a direct reflection of our team's effort, dedication, and commitment. Despite ongoing global economic and political uncertainty, we're increasingly optimistic about the improving dynamics in the fashion and accessible luxury watch categories. Driven by innovation in new shapes, and sizes and growing interest from women and younger consumers. We're also seeing a strong momentum in fashion jewelry. Supported by the growing adoption of jewelry for men. Regionally, we're pleased that The United States returned to 6.9% growth, led by our fashion brand business and our direct to consumer business. 11.9% growth in Movado Company stores, and 12.4% growth on movado.com. Internationally, our business in Europe and Latin America continue to perform strongly partially offset by softer results in The Middle East. From a branding standpoint, we're very pleased with the progress we're making on the Movado brand. Our product innovation this year has resonated strongly. The museum collection performed well, particularly our new BANGL collection. And we're introducing a new style that would allow lab grown diamonds for the holiday season. This collection will be featured prominently in holiday marketing with Jessica Alba and Julianne Moore. For men, we launched the Automatic Museum Imperial, a new hero collection inspired by an iconic design from the late nineteen seventies. Holiday marketing will feature the collection in videos with star running back Christian McCaffrey. In bold, our limited edition collaboration with brand ambassador Ludacris celebrating the twenty fifth anniversary of his debut album, has been a standout. The MVP collection is already sold out. We're also seeing strong growth in Movado Heritage. Inspired by our rich archives. The new 1917 collection based on a square vintage design from that year has launched successfully. Supported by a digital campaign featuring basketball superstar Tyrese Halliburton who is an avid vintage watch collector. Sell through is strong across both men's and women's styles. Our holiday campaign is designed to deepen engagement between our products, ambassadors, and consumers while driving performance at the point of sale through enhanced displays, training, and retail partner support to ensure an elevated in store experience. The Movado brand helped drive double digit growth in both sales and contribution margin in our company stores. Overall, sales in Movado company stores grew 9.4% on a comparable store basis. With Movado brand sales up 17.7%. Over the past year, we've refreshed all Movato display displays and visuals in our stores. Improved assortments, leading to a strong strong results from these initiatives. Among our licensed brands, we saw strong performance in both jewelry and watches, delivering a 6.4% growth overall and a 2.9% on a constant currency basis. Leading the way to Gen Z consumers has been coached. Continues to drive double digit growth led by the SAMI collection. Inspired by Coach's iconic turn lock. We've expanded his hero family with SAMI stretch bracelets and a mini ring watch. Which is trending strongly. Other successes include the Caddie, Cass, and Reese families. All featuring shaped cases. Hugo Boss continues to perform well. Led by hero families such as Sky Traveler, the Grand Prix, and the Principal Tank Watch. We're also excited about the potential in Hugo Boss jewelry, particularly for men, led by the watch inspired candor bracelet. For Tommy Hilfiger, the new T. H. Oxford family, with a dial inspired by the classic Oxford shirt is gaining traction. With new case shapes rolling out this fall. On the women's side, we are increasing our penetration with our best selling Mia collection already sold out in many markets. Lacoste continues to set trends in jewelry, with the best selling Metropole collection and strong results in the rugged LC33 anti digi lie. Which is truly aligned with the Lacoste brand. The new black and gold version introduced this fall is expected to sell out over the holidays. In Calvin Klein, we're building leadership in women's watches, complemented by a strong jewelry offering. The Mini Pulse has quickly become a best seller and the new micro contemporary is performing very well. For Olivia Burton, we're seeing healthy growth in our two key markets. The US and The United Kingdom. Led by the Mini Grove Collection our Mini to the Max campaign, which will continue through the spring. We're very proud of our team's execution this year. Especially following a challenging fiscal twenty twenty five. We're making strong progress against our strategic initiatives and capturing opportunities across global markets. We're also encouraged by the renewed interest among younger consumers embracing analog watches for their design, innovation, quality, and value. With our strong portfolio of brands, we're well positioned to capture this momentum. At the same time, we've made meaningful strides in improving gross and controlling expenses as we return to sales growth. Looking ahead, our focus remains on driving improved profitability across every aspect of the business. We're looking forward to a strong holiday season and to building on this momentum as we plan for the next year. I'll now turn the call over to Sally. Sally DeMarcellus: Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the third quarter and year to date period of fiscal twenty twenty six. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the third quarter and first nine months of fiscal twenty twenty six and fiscal twenty twenty five in our press release issued earlier today. Which also includes a reconciliation table of GAAP and non GAAP measures. Turning to a review of the quarter. Overall, we were pleased with our performance for the 2026. Sales were $186,100,000 as compared to $180,500,000 last year. An increase of 3.1%. In constant dollars, the increase in net sales was 1.2%. Net sales increased across licensed brands and company stores, partially offset by a decrease in net sales in owned brands. By geography, US net sales increased nine I'm sorry, U. S. Net sales increased 6.9% as compared to the third quarter of last year. International net sales increased 0.6% with strong performances in certain markets such as Europe, and Latin America, offset by a weaker performance in The Middle East. Which is where we are making progress rebuilding this important market. On a constant currency basis, international net sales decreased 2.5%. Gross profit as a percent of sales was 54.3% compared to 53.5% in the third quarter of last year. The increase in gross margin rate as compared to the same period last year was primarily driven by favorable channel and product mix and the increased leverage driven by certain reduced costs and higher sales. This was partially offset by increased tariffs. Operating expenses were $88,500,000 as compared to $87,900,000 for the third quarter of last year. The $600,000 increase was driven by an increase in performance based compensation partially offset by a planned reduction in marketing expenses. The combination of higher revenue and gross profit more than offset a relatively small increase in operating expenses to deliver a 43.5% increase in operating income. To $12,600,000 This is a $3,800,000 improvement from the $8,800,000 spent in the 2025. We recorded approximately $1,200,000 of other nonoperating income in the 2026 as compared $1,400,000 in the same period of last year. Other nonoperating income is comprised of interest earned on our global cash position. We recorded income tax expense of $3,500,000 in the third quarter fiscal twenty twenty six as compared to $1,500,000 in the third quarter fiscal twenty twenty five. Net income in the third quarter was $10,200,000 or $0.45 per diluted share as compared to $8,500,000 or $0.37 per diluted share in the year ago period. Now turning to our year to date results. Sales for the nine month period ended 10/31/2025 were $479,700,000 as compared to $471,900,000 last year. Total net sales increased 1.7% as compared to the nine month period of fiscal two thousand twenty five. In constant dollars, the increase in net sales for the year to date period was point 6%. U. S. Net sales increased by 1.5% and international net sales increased 1.8%. Gross profit was $260,000,000 or 54.2% of sales. As compared to $254,800,000 or 54% of sales last year. The increase in the gross margin rate for the first nine months was primarily due to favorable channel and product mix partially offset by increased tariff costs, and the unfavorable foreign currency exchange. Operating expenses were $239,500,000 as compared to $241,300,000 for the same period of last year. The decrease was driven by a reduction in marketing expenses partially offset by an increase in performance based compensation. For the nine months ended 10/31/2025, operating income was $20,500,000 compared to $13,500,000 in fiscal twenty twenty five. We reported approximately $4,000,000 of other nonoperating income in the nine month period of fiscal two thousand twenty is primarily comprised of interest earned on our global cash position as compared to $5,200,000 in the same period of last year. Net income was $17,400,000 or $0.77 per diluted share as compared to $13,900,000 or $0.62 per diluted share in the year ago period. Now turning to our balance sheet. Cash at the end of the third quarter was $183,900,000 as compared to $181,500,000 in the same period of last year. Accounts receivable was $118,300,000 up $4,500,000 from the same period of last year, primarily due to foreign currency. Inventory at the end of the quarter was up $20,800,000 or 11.8% above the same period of last year. $5,400,000 of the increase was due to foreign currency. And $6,400,000 of IEPA reciprocal tariffs is included in the inventory on hand at the end of the third quarter. We are comfortable with the composition and balance of our inventory at quarter end. In the first nine months of fiscal twenty twenty six, capital expenditures were $3,500,000 and we repurchased approximately 100,000 shares under our share repurchase program. Of 10/31/2025, we had $48,400,000 remaining under our authorized share repurchase program. Subject to prevailing market conditions and the business environment, we plan to utilize our share repurchase program to offset dilution. As Efra mentioned, there has been a recent trade agreement impacting future Swiss tariff rates, we will adjust our mitigation strategy accordingly. Given the current economic uncertainty and the unpredictable impact of tariff developments, the company is not providing fiscal twenty twenty six outlook. I would now like to open the call up for questions. Thank you. The floor is now open for questions. Operator: Once again, that's star one if you'd like to register a question at this time. Our first question today is coming from Hamed Khorsand of BWS Financial. Please go ahead. Sally DeMarcellus: Hi. Good morning. So first, I just wanted to ask you, the success you're seeing with many of your watches and brands, is that coming from your, you know, influencers, your, you know, the spokespeople that you have, or is that because of the design and it's just trending well with with Gen z? Efraim Grinberg: Well, I think it's a combination of both, Amit. Thank you. A good question. And so what you're seeing is is an increased coverage of of these products on social media and obviously, the bulk of our campaigns are also on digital media, and and and so that resonates they're resonating, with with younger, consumers across the spectrum. I think it's also the combination of innovation of new shapes and sizes. And the embrace of younger consumers to the the watch category. And and that's occurring pretty much on a global basis. So it's it's nice to see. Hamed Khorsand: Okay. And then as far as the commentary you made about many of your brands being selling well or being sold out, Do you want the sold out conditions? I mean, would that that impair your sales? Efraim Grinberg: So, I think it's really on some select product families across, I think I mentioned Tommy Hilfiger in some markets and some of our other brands. And and and and I think that that that what you know, this is not a in some cases, we also in the case of the ludicrous watch and Movado, it was a limited edition. So it was planned to be sold out. We still have one model available. Which we expect to sell out in the next few weeks. So I think it's always good to have a balance of supply and demand, and we'll be able to replenish most of the styles into the first early first quarter or the end of the fourth quarter of this year. So I think it's a good balance to have. And part of it is as the category comes back and the innovation has has increased and consumers are drawn back into the category. Obviously, the levels of demand change. And that's also very good to see. Hamed Khorsand: And the success you're seeing in sales, does that change your commentary coming into the calendar year about you know, what your spending levels would be for the the fiscal year? Efraim Grinberg: I think it's really a balance. And our focus has been on improving profitability. And you saw that through the first nine months of this year and particularly in quarter. So it's really we will continue to invest in in in our brand building efforts. But at the same time, we have made it a goal and we're very serious about it. Of of driving improved profitability at the company. Hamed Khorsand: Okay. Thank you. Operator: Once again, that's star one if you'd like to register a question at this time. We're showing no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Grinberg for closing comments. Efraim Grinberg: Well, thank very much all for participating today. I'd like to wish everybody a great Thanksgiving holiday. And, of course, it's the really formal beginning of the holiday shopping period. We'll all be in stores looking to see how how businesses out there, and I'm sure many of you will be as well as, beginning your holiday shopping. So, again, enjoy the holiday, and and thank you very much for being here today. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines or lock off the webcast at this time, and enjoy the of your day.
Operator: Good day, and thank you for standing by. Welcome to the StoneX Group Inc. Q4 FY 2025 earnings conference call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Dunaway, CFO. Please go ahead, sir. William Dunaway: Good morning, and welcome to our earnings conference call for our quarter ended September 30, 2025, our fourth fiscal quarter. After the market closed yesterday, we issued a press release reporting our results for the fourth quarter and the full fiscal year. This release is available on our website at www.stonex.com as well as a slide presentation, which we will refer to during this call. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you and all participants should note that the following discussion should be considered in conjunction with the most recent financial statements and notes thereto as well as the Form 10-K to be filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties and which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied for the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll begin with the financial overview for the quarter and we'll be starting with Slide #4 in the slide deck. Fourth quarter net income came in at a record $85.7 million with diluted earnings per share of $1.57. This represented a 12% growth in net income. However, EPS grew at 1% rate due to the additional shares outstanding as compared to the prior year, primarily related to the issuance of approximately 3.1 million shares related to the acquisition of R.J. O'Brien. It is of note, the current quarter includes pretax acquisition-related charges of approximately $9.3 million, including $1.3 million of bridge loan financing charges and $8 million of investment banking fees which equates to approximately $0.13 per diluted share. Net income and diluted EPS were up 35% and 29%, respectively, versus our immediately preceding third quarter. This represented the 15.2% return on equity despite a 72% increase in book value over the last 2 years. We had operating revenues of just over $1.2 billion, up 31% versus the prior year and up 17% versus the immediately preceding quarter. As a reminder, our operating revenues include not only interest and fees earned on in our client balances, but also carried interest that is related to our fixed income trading activities. Net operating revenues, which nets off interest expense, including that which is associated with our fixed income trading activities as well as introducing broker commissions and clearing fees were up 29% versus a year ago and 20% versus the immediately preceding quarter. Fixed compensation and other expenses were up 24% versus the prior year quarter. This also represented a 14% or $36.3 million increase versus the immediately preceding quarter, with $32.4 million of this attributable to the acquisition of RJO and Benchmark during the quarter. Fixed compensation and related costs were up 23% versus a year ago and up 12% or $14.2 million versus the immediately preceding quarter. The increase versus the immediately preceding quarter was almost entirely as a result of the acquisitions I just noted. Professional fees increased $12.2 million versus the prior year, primarily as a result of the $8 million investment banking fee noted earlier. They were up $3 million versus the immediately preceding quarter with the investment bank fee just noted, partially offset by a $5.8 million decline in legal fees, primarily driven by an insurance recovery. The acquisitions of R.J. O'Brien and Benchmark contributed $22.1 million and $2.4 million in pretax net income, excluding acquired intangible amortization, respectively, for the quarter. Looking at it from a longer standpoint, our full fiscal year results show operating revenues up 20%. Net income was a record $305.9 million, up 17%, with earnings per share of $5.89 and a return on equity of 15.6% for the fiscal year, above our 15% target. We ended the fourth quarter of fiscal '25 with book value per share of $45.56 per share. Now turning to Slide #5 in the earnings deck, which compares quarterly operating revenues by product as well as key operating metrics versus a year ago. We experienced growth across all products with the exception of FX/CFDs. Transactional volumes were up across all of our product offerings with the exception of FX/CFDs and spread in rate capture increased in all products with the exception of payments down 4% and FX/CFDs, which declined 32%. Just touching on a few key highlights for the fourth quarter. We saw operating revenues drive from listed contracts increasing $89.4 million or 76% versus the prior year with the acquisition of RJO contributing $89.5 million. This also represented a 64% increase versus the immediately preceding quarter. Operating revenues drive from OTC derivatives increased 27% versus the prior year, however, declined 1% versus the immediately preceding quarter. Operating revenues drive from physical contracts increased 24% versus the prior year, primarily driven by a $19.5 million increase in physical, agricultural and energy revenues, which were partially offset by a $6.8 million decline in precious metals operating revenues. Operating revenues drive from physical contracts were up 18% versus the immediately preceding third quarter. Securities operating revenues were up 26% as volumes were up 25% and the rate per million increased 23% versus the prior year, with the improvement driven by strong growth in both equities and fixed income. Payments revenues were up 8% versus a year ago, but down 3% versus the immediately preceding quarter, primarily due to a decline in rate per million. FX CFD revenues were down 34% versus a year ago, resulting from a 7% decline in ADV and a 32% decline in rate per million, primarily driven by low volatility in FX markets. This also represents a 36% decline versus the immediately preceding quarter. Our interest and fee income earned on our aggregate client float, including both listed derivative client equity and money market FDIC sweep balances increased $52 million or 46% versus the prior year with the acquisition of RJO contributing $50 million. Average client equity and average money market FDIC sweep client balances increased 71% and 25%, respectively. For the current quarter, the average client equity includes the effect of an incremental $5.6 billion per month from RJO for the 2 months post acquisition or an incremental $3.8 billion increase to the quarterly average. Turning to Slide #6. This depicts a waterfall by product of net operating revenues from both the prior year quarter to the current one, as well as the same for the full fiscal year periods. Just a reminder, net operating revenues represents operating revenues less introducing broker commissions, clearing fees and interest expense. For the quarter, net operating revenues increased 29% and principally coming from securities and listed derivatives, up $48.7 million and $43.1 million, respectively. On a net basis, interest and fee income on client balances increased $28.8 million with RJO contributing $32.5 million, which was partially offset by a modest decline in legacy StoneX. As noted earlier, due to the lower FX volatility, we saw FX/CFD's net operating revenues decline $29.7 million versus the prior year. Looking at the bottom graph for the full fiscal year period. Once again, it is securities with the largest increase, up $126.1 million versus the prior year. driven by a 27% increase in ADV and a 9% increase in rate per million. In addition, listed derivatives and interest and fee income increased $46.3 million and $31.2 million, respectively, primarily as a result of the acquisition of R.J. O'Brien. Finally, physical contract net operating revenues added $34.7 million versus the prior fiscal year. Moving on to Slide #7. I'll do a quick review of our segment performance. Our Commercial segment net operating revenues increased 25% or $42.9 million, with $20 million of this being contributed by the RJO acquisition. Listed in OTC derivative contract volumes increased 32% and 27%, respectively. In addition, physical contracts increased 26%, while net interest and fee income increased 22%. The growth in listed derivatives and interest income were primarily driven by the acquisition of RJO. Segment income increased 25% versus the prior year. While on a sequential basis, net operating revenues were up 23% and segment income was up 35%. Our institutional segment saw record net operating revenues and segment income with growth of 67% and 73%, respectively. Versus the prior year, this represented growth of $117.5 million with the acquisition of RJO contributing $50.2 million. The growth in net operating revenues is principally driven by a $48.9 million increase in securities revenues. In addition, listed derivatives and interest and fee income increased $30.5 million and $20.7 million, respectively, primarily driven by the acquisition of RJO. On a sequential basis, net operating revenues and segment income were up 46% and 53%, respectively. In our self-directed retail segment, net operating revenues declined 35% and segment income was down 51%, primarily driven by a 4% decline in average daily volumes and FX/CFD contracts combined with a 31% decline in rate per million. On a sequential basis, net operating revenues were down 37% and segment income declined 62% in this segment. In our Payments segment, net operating revenues were up 7% and segment income increased 21%. ADV was up 13% versus the prior year, while rate per million was down 4%, versus the immediately preceding quarter payments and net operating revenues declined 2%, while segment income increased 7%. Now moving on to Slide #8. Looking at segment performance for the full fiscal year. We saw strong growth in our institutional segment with net operating revenues up 36% and segment income increasing 45%. In addition, our self-directed retail segment increased segment income 12%. Our Commercial and payments segment added 1% and 4% in segment income, respectively. Finally, moving on to Slide #9, which depicts our interest and fee income on client balances by quarter as well as the table showing the annualized interest rate sensitivity for a change in short-term interest rates. The interest and fee income, net of interest paid to clients and the effect of interest rate swaps increased $28.8 million to $112.2 million in the current period, and as noted, the acquisition of R.J. O'Brien contributed $32.5 million in the net interest in the current quarter. As noted in the table, with the addition of the $6.3 billion client assets from the RJO acquisition, we now estimate a 100 basis point change in short-term interest rates either up or down would result in a change to net income by $53.8 million or $1.02 per share on an annualized basis. With that, I will turn you to Sean O'Connor, our Executive Vice Chairman. Sean O'Connor: Thanks, Bill, and good morning, everyone. It is very gratifying to see that we've achieved yet another record financial result in what is a long string of record performances. We have managed to exceed our ROE targets despite our stockholders' equity increasing by 72% over the last 2 years. It is no easy feat to continuously compound at a high rate when you're reinvesting 100% of your capital. something we have managed to do for decades now. Turning to Slide 11 in the deck. As you are aware, over roughly the last 20 years, we've been active in the M&A market. especially following the financial crisis, having now completed over 30 acquisitions during this time. During the COVID pandemic and the years immediately following, our facility was notably limited on the M&A front. The prevailing market conditions at that time were characterized by bubble-like valuations based on peak earnings for most companies active in our space as well. We chose to focus on organic opportunities and to wait for valuation demands to become more rational. 2025 was our almost active year ever with us completing 6 transactions culminating in the acquisition of R.J. O'Brien, our largest ever and one we believe will be transformational for the organization. I thought it might be useful here to review our M&A approach, something that a lot of investors have asked me in calls over the last few years. We are very opportunistic around acquisitions. As an old M&A banker, I'm acutely aware that most transactions don't succeed for the simple reason that buyers are often desperate, maybe for a growth strategy, maybe a new strategy overall, new talent. And as a result, they tend to overpay. We pride ourselves on being very disciplined and we can afford to be disciplined because we have such a strong organic growth track ahead of us given the market dynamics we have spoken about previously with banks withdrawing and smaller firms being consolidated. When we evaluate a new opportunity, we always have to consider the risk and disruption that this may cause to our existing organic growth initiatives, and therefore, any opportunity needs to be compelling and accretive. We passed potential acquisitions through a number of screens. First, they need to be accretive to our ecosystem, adding either new products or capabilities or adding to our client footprints and increasing market share in existing or new markets. We then need to clearly understand how we drive value for our shareholders. Most often, that is by selling these new products and capabilities to our existing client base to drive incremental revenue. or in the case of client acquisitions, by leveraging our ecosystem of products into these new clients. Then of course, culture is all important. We are a client first business, and we seek to establish long-term embedded relationships with our clients. We also look at the requirement for resources and capital as well as cost structures and margins to make sure that these transactions can be quickly accretive to our bottom line and to our ROE. In many instances, we can achieve capital and cost synergies given our larger scale and global footprint. Then of course, we need to get to price. And given our desire to compound our capital, we tend to be on the conservative end of the value spectrum. We need to see how the acquisition can be accretive to our ROE and also quickly earn back any goodwill that may be incurred typically inside 36 months. I also strongly believe that we should take the leading role in due diligence rather than rely too heavily on bankers and advisers. This forces our team to roll up their sleeves and take ownership for the business we are acquiring and leads to quicker integration and synergies being achieved. Despite our strict criteria laid out above, we continue to find many good opportunities and I think our discipline and rigor on the front end have resulted in us having a very high success rate with acquisitions. Almost all have gone on to become multiples of the size they were at the time of acquisition. Turning to Slide 12. In the last several years, we get approached on around 85 to 100 opportunities per year, many of which are sourced internally by our own teams. We typically engage with around 70% of those at some level and getting to initial due diligence on around 50% and full due diligence on around 25% of those opportunities. That ends up with our submitting bids at around 15%. As you probably realize, this entails a fair amount of work and focus, and we are very lucky to have an extremely capable albeit small corporate development team who, of course, can leverage the internal expertise we have when needed. We are also likely to have an exceptional in-house legal team, which is involved in the process. We have received numerous complements over the years from our external bankers and lawyers on the exceptional corporate development and legal teams we have in-house here at StoneX. With that background, let's turn to Slide 13, and take a look at how we did in 2025 fiscal year. As a reminder for this year, we made 5 acquisitions, and we made one strategic investment. Starting with R.J. O'Brien, which we continue to believe will be a transformational acquisition for us, RJO was one of the oldest independent FCMs in the U.S., transacting with over 45,000 clients and over 200 IBs. This acquisition has made StoneX the largest nonbank FCM in the United States and a market leader in global derivatives, reinforcing our position as an integral part of the global financial market infrastructure. This acquisition has brought us new clients in the likes of regional banks, to whom RJO provides clearing and risk management and interest rate products, a large introducing broker network, which we believe we can leverage further, almost becoming an extension of our own sales team as well as an agency execution capability where we can offer block trading and futures options and customized solutions. It was an acquisition, which we also believe provides significant opportunities to improve our efficiency. As stated in our announcement, we expect there to be $50 million of expense savings and at least $50 million in capital synergies as we consolidate regulated entities. Abby Perkins from our executive team will be on this call and shortly provide an update on our integration progress with RJO. Coincidentally, we closed Benchmark on the same day as RJO. Benchmark is a midsized investment banking firm, offering a sales and trading platform, equity research and a highly experienced investment banking team. Benchmark brought us deep relationships in the hedge fund community, which were incremental to us as well as an investment banking capability. We are looking to leverage our broader trading and clearing capabilities into these new clients and, of course, offer investment banking capabilities to our StoneX clients. Additionally, Benchmark has been able to leverage our balance sheet to take larger roles in transactions than before. Lastly, on capital synergies by leveraging the existing larger StoneX broker-dealer balance sheet, which already supports our FCM and Securities businesses, Benchmark can reduce the capital requirement for its business. We acquired the assets of JBR, a leading U.K.-based silver recovery refiner at the beginning of our fiscal year, which allows us to produce our own silver London Good Delivery bars and further extended our physical capabilities in metals. This has proven to be -- to have been particularly valuable during the recent metals volatility and shortages experienced this year as we can now produce our own metal. It has also expanded our customer base by adding numerous industrial clients who see StoneX as a better capitalized counterparty and who can offer a range of storage, refining and hedging services. In September, we announced the acquisition of Right Corporation, a physical meat trading business in the U.S. RJO has a dominant position in the meat and livestock industry in the U.S. And with this acquisition, we now bring a downstream physical capability to our clients, much like the rationale behind the very successful acquisition of CDI back in 2022, which extended our cotton derivative experience into the physical. It adds a new relationship with meat suppliers and branches across beef, pork, poultry as well as buyers in the processor and distribution space. In February, we completed the acquisition of Octo Finance, a leading French fixed income broker, which provides credit research and expertise in the trading of European bonds and convertibles, we are now able to offer the European-based clients access to our broader product mix, enable Octo to participate in larger transactions and to add credit research and expertise in European bonds and convertibles to our suite of capabilities. We have begun to cross-sell clients of Octo new products and services as well as expanding their available credit products to include investment grade, high-yield and U.S. treasuries. Lastly, we made investments in Bamboo payments. which was accompanied with an option to acquire full ownership down the road. Bamboo brings deep expertise and a well-established in-country payment ecosystem in South America, which has extended our cross-border capabilities. Bamboo serves large regional marketplaces, ride-hailing services and HR platforms, which are new client types for StoneX to interact with. Turning now to Slide 14. Alongside our inorganic M&A growth, we continue to iteratively improve our product and services offered organically. This has included several enhancements to our business, which extends our ecosystem and addresses additional client needs with the intent of capturing more of their business. Some of these enhancements this year include the following: the build-out of our metals vault in New York, which now has more than $1 billion of assets under custody and is a CME designated depository and custodians. It has not only been a value-add to our wholesale precious metals business but also has attracted the global banks who would like to diversify their holdings away from other competing banks. It is highly complementary to our overall metal strategy of providing a full service offering in the market. And we are a unique industry participant in that we're both a regulated FCM and an exchange approved depository. Towards the end of the year, we entered into 2 agreements, bringing in the business of 2 LatAm focused wealth management firms, which have expanded our capability to service clients by providing brokerage and investment of revisery services. These 2 transactions bolstered our existing wealth management business further strengthens connection into Latin America and provide us with incremental clearing opportunities. Late last year, we were approved to provide digital asset services to institutional clients in Europe. This will allow us to provide execution and custody services alongside our existing suite of global prime brokerage services and other complementary offerings, including equities, ETFs, futures and fixed income. We have also been improving our digital offering, which provides automation of management, merchandising and origination of grain products. This is done through our proprietary platform called StoneX Hedge. This platform form integrates with existing grain elevators enterprise systems and back-office systems, to automate and proactively manage the industry -- inventory, sorry. We announced last year that this platform has surpassed total volume of over 1 billion bushels of grain, which is a significant milestone for us. Interestingly, RJO has a similar product offering, and we will be merging these 2 platforms to provide clients with the best of the 2 offerings. In prime brokerage, we offer a comprehensive custody and clearing platform across the globe aimed at financial institutions and funds. During the year, we have made several enhancements to our service offering which have included an expansion of our cap intra capabilities, improving consolidated reporting and margining for clients and addition of cross-currency products to the suite. These improvements have driven increased engagements particularly among large ETF issuers and mutual funds, resulting in strong momentum for this product in this business. Lastly, regarding our OTC and structured product capabilities. As we have mentioned in previous discussions, we see OTC as a tremendous growth opportunity to help our commercial clients run more complex and intricate scenarios, determining the best products for their needs and to get quotes instantly. In the year, we have further expanded our OTC products focus on agriculture, which includes shell [ A ] contracts and dairy derivatives. We believe we have one of the most comprehensive OTC platforms in the market today. These are just a few examples of our recent organic rollout of products and services, and we will continue to grow our ecosystem by launching adjacent products and services to better serve our clients. Moving back to RJO. We'd like to provide some time giving an update on the integration. As mentioned earlier, I would like to introduce a new one of our executives to you all, Abby Perkins who is a member of our Executive Committee. Earlier this year, we asked her to lead our M&A integration efforts, in particular, the RJO integration, given its importance and its financial impact to our company. She will be providing a more detailed update on our integration plans, actions taken and key milestones ahead. Abby, over to you. Abigail Perkins: Thank you, Sean. For those I haven't met, I'm Abbey Perkins. I've been with StoneX for 9 years and in finance for over 2 decades. For the past 5 years, I've served on the Executive Committee and until recently, I was the Chief Information Officer overseeing infrastructure, IT services, procurement and cybersecurity. As Sean mentioned, I stepped into a new role leading our M&A integration efforts with the primary focus on the R.J. O'Brien initiative. This is where I'm spending the majority of my time and energy today. So to get started, please turn to Slide 16. We remain very excited by the potential value creation for StoneX from the R.J. O'Brien transaction our most transformative acquisition of 2025 and the largest one we have done in terms of deal size. As we noted in the announcement, the acquisition rationale rests on 4 pillars. First is the transformational nature of the acquisition and the significant scale we have added as a result. With this combination, we are now the largest non-bank U.S. FCM by client assets and one of the largest FCMs globally. We are seeing a positive trend in growth in balances with RJO's average client equity increasing from $5.5 billion to $5.8 billion since close principally due to inflows from ID and institutional clients. This increase has helped drive our combined client equity balances to the highest ever at $13.7 billion at the end of September. In addition, during the trailing 12 months ended September 30, 2025, RJO cleared 156 million derivative contracts, which will now be consolidated on a single combined infrastructure, so truly achieving substantial scale. And ultimately, we know that the long-term transformative value will rest on the quality of the RJO clients and its people and both have exceeded StoneX leadership's expectations. Our second pillar was the strong opportunity to expand both our products and capabilities across the combined basis of both organizations and to reach new markets. We are seeing numerous opportunities to offer new products and services to the legacy RJO and StoneX clients alike. These include offering new OTC and physical products to existing listed derivative clients, interest rate derivatives and relative value trading strategies to fixed income clients and new hedging products and strategies to agricultural and other commercial clients. We are also quickly moving to leverage RJO's footprint in new markets with the regulated presence in the Dubai International Financial Center, becoming a key focus. StoneX has had a long-standing and successful presence in Dubai, offering precious metals trading in the Emirate metal zone, and operating a branch office to retail products in the Dubai mainland zone. The addition of RJO's business in the DISC, the Emirate Financial Institution Hub has provided a valuable complement to our efforts in this key growth market through the opportunity to compete with other financial brokerage firms by offering the full complement of StoneX products, which is an important enhancement to RJO's offering there. Lastly, we are able to achieve a combined and optimized technical ecosystem, taking the best from our world. The benefit of the StoneX complex of the combined technical offering will be significant. Our third pillar focused on the achievement of significant cost synergies. Our work since the closing of the transaction has strongly validated our cost synergy estimates, and we are working actively to achieve these cost savings. We've established a robust governance framework with a dedicated cross-functional team leading the numerous integration work streams. I will touch base more on the time lines of these cost synergies as well as an update on capital synergies on the next slide. But before we get there, on more pillar to cover. The fourth pillar is that the acquisition will be accretive to both EPS and ROE. I want to say that, first, across the board, our top priority is delivering a powerful combination that strengthens outcomes for our clients and supports both our internal and external brokers. And in line with that focus, the integration planning and progress we've achieved so far underscores our confidence that RJO will be accretive to both EPS and ROE over both the near and long term, creating lasting value for our shareholders. Moving to the next slide, we summarize our integration objectives and results. I'll be starting with our cost synergies. At the time of the transaction, we estimated $50 million of annual run rate and potential cost synergies. We now have a detailed plan with over 100 people involved in the process with over 50 defined work streams and are in full execution mode. We are first prioritizing the savings that are more readily achievable through the combination of the overlapping non-U.S. entities in U.K., Hong Kong, France and Singapore. This can be achieved relatively quickly as the RJO activities and business in these jurisdictions is well understood and more modest than StoneX's activities in these regions. We are also prioritizing combining our U.S. broker-dealer footprint as it is a relatively easy process as well as RJO's activities encapsulate just 1 pillar of the activities we have in our diverse U.S. broker-dealer offering. These 2 initiatives can happen relatively swiftly, and we anticipate completing them in Q2 of fiscal '26, accounting for roughly 25% of the aggregate synergy target. Our focus then turns to the integration of our 2 U.S. FCMs, the most complex of the entity combinations, which is currently being planned and will follow the non-U.S. integrations. Combination is set for around Q4 2026, while we both operate in the same system of record and the underlying products are identical, RJO has built customer tools with migration of which we need to make sure is as seamless as possible from a client perspective to ensure no revenues lost as a result. We will err on the side of caution here, and may delay we feel it's warranted. We estimate that the merging of the 2 U.S. FCMs will account for roughly 40% to 50% of the synergy target. The remaining 25% to 35% results from the runoff of contracts and space, and as such, may take a further 6 to 12 months to fully realize. Based on our work to date, we are confident that we will achieve our targets of $50 million in run rate cost synergies within 24 months of deal close. Indeed, just 4 months from the closing of the transaction, we have realized approximately $20 million in annualized cost savings. We believe that the remainder of the cost synergies are well defined and achievable. We will move on now to capital synergies. These synergies will be achieved as we collapse the operations that we set out before. We anticipate a $20 million to $30 million release of excess capital following the first set of business integrations of the U.K. business and the broker-dealer business, which is to be realized in approximately Q2 26. The remaining capital synergies will be realized from the merger of the U.S. FCMs in the approximate fourth quarter of 2026. We anticipate this to be north of $30 million. Lastly, and in addition to this, while technically not a capital synergy, we recently executed a $42 million dividend of excess cash from the RJO parent entity, providing additional liquidity to the StoneX Group of companies. In terms of brand revenue synergies, we did not disclose a specific target because these synergies are both hard to realize in the short term, it's very hard to track when they happen as revenue gets split between teams, et cetera. Despite this, we continue to have a high conviction around the revenue synergies opportunity over time. A first significant driver is that StoneX's equity and balance sheet is around 5x larger than RJO's, which should enable us to win more wallet share from the larger RJO clients. Alongside this is our position as a public company eases onboarding activities. Both of these were constraints experienced by RJO. To this end, we have already held and continue to hold numerous teach-ins and cross-desk meetings. On the fixed income side, we have seen extremely strong cross-group collaboration already resulting in the deepening of relationships and placement of new trays in from clients of both firms. On the IB side, where RJO has a major presence, we've introduced many of these [indiscernible]. Sean O'Connor: Operator. Did we lose Abbey operator? Operator: It looks like we lost her, but she still connected, sir. Sean O'Connor: Okay. Let's give it a second and see if he reconnects. Otherwise, I can finish up her comments. All right. Operator, I'll carry on. Okay. Operator: All right. Sir, go ahead. Sean O'Connor: Okay. So I think Abbey was talking about where we are with the IBs, so I will just follow on from there. So we've introduced many of our brokers and end clients, our OTC and physical capabilities. Many of them have asked for the necessary paperwork, are going through the paperwork and many of them have signed up with our swap dealer and our physical entity. So very encouraging signs there. People don't do the paperwork if they don't see an opportunity. On the metal side, we see clients expanding the business they have with us into new products. On the negative side, there was always a risk of some revenue attrition, either due to revenue producers leaving or due to the fact that there was client duplication. At the time of evaluating the deal. This was a key consideration for us. And our view was that the client overlap was limited and thus the risk of revenue attrition was not material. We're happy to report at this stage, the overall attrition is limited. So overall, we're tracking very well against all of the metrics related to the integration of RJO. In summary, we continue to believe as a management team that the RJO transaction will prove to be transformational for StoneX and this expanded group of clients as the integration of our collective client focus, the ability to leverage our combined scale and the complementary product expertise positions us as the leading franchise around the globe. We are highly encouraged by the early results and are pleased with and grateful to our teams affecting this work. We remain focused on executing with discipline and precision that have become the hallmarks of StoneX. In the end, the common thread across all our acquisitions is the exceptional collaboration between company leadership teams and the exceptional work being performed by a talented and dedicated employees. We are pleased with the value these transactions provide to StoneX and remain optimistic about our long-term growth. So with that, let's move to Slide 18, closing summary. This quarter was a record for us to close out what was, in fact, a record 2025. The quarter included 2 months of the RJO results as well as some of the one-off acquisition and related costs, which reduced diluted EPS by approximately $0.13 per share. The quarter saw strong results across most of our segments, especially equities, prime brokerage and fixed income and improved results in physical commodities. We recorded $85.7 million net earnings or $1.57 in EPS with an ROE of 15.2% on book value and just over an ROE of 20% on tangible book value. We achieved another record quarter for the year with operating revenues of just over $4 billion and net earnings of $305.9 million, giving us an EPS for the year of $5.89 and an ROE of 15.6% on book value and 17.9% on tangible book value. In addition, RJO and Benchmark and our other acquisitions should be strongly accretive. And together with strong organic growth should drive our results for 2026. There has been a notable growth in our client assets that we custody where the segregated funds on the exchange or through clearing and prime brokerage and storage of precious metals. This has significantly grown our recurring income stream providing a stable and predictable underpinning to our financial results. Our unique and best-in-class ecosystem underpinned by a fortress balance sheet, diverse offerings and exceptional client service enables us to deliver innovative solutions that provide clients with market access and create long-term value. I'm very proud of the StoneX team, who continued to propel us to new heights, and we'd like to thank them for the exceptional work during 2025. I would like to thank our bankers for their support and our Board for both their support and guidance and an amazing are around StoneX team. So with that, operator, let's see if we have any questions. Operator: [Operator Instructions]. Our first question from the line of Jeff Schmitt. Jeffrey Schmitt: How are early cross-selling efforts with RJO clients going? I know it's pretty early innings, but anything that's kind of standing out there -- and then when can we expect your estimate, I guess, on -- for revenue synergies overall. Sean O'Connor: So on the revenue synergies, I think it's going about as well as we expected. Obviously, this takes a lot of education. I think it takes time for people to understand the products. make sure that the products are suitable for their clients. They obviously -- people are always -- and we've gone through this 30 times. So we know how this works, right? So oftentimes, the relationship people are reluctant to open up a relationship to new people, to products, they're not certain of. So this just takes a lot of education. I think there's been a tremendous amount of interest from RJO in learning about all the new products we have. So they're being engaged. And I think in certain parts of RJO, there's been tremendous uptick. I mean we already have people -- on the fixed income side, going together to meetings, pitching products together, the actual transactions happening that are generating revenue. I think, as I said with IBs, we have a ton of IBs who asked for documentation. A bunch of them have signed the documentation. I think a couple of trades have happened. So all of those things are all very encouraging, and I think sort of validate our thought that this is going to provide us with a big boost. In terms of putting out a hard estimate, as Abbey said in her comments, it's really, really hard to do that because this stuff becomes really hard to track. If someone does more treasury business with us because they sort of like the fact we can do something with them on the RJO side. How do we measure that if they are really a customer, right? So it becomes pretty arbitrary to sort of measure this, so we can report back on the target. And that's our reticence in doing that is it just becomes very hard to audit and provide sort of a detailed feedback. The revenue often gets split between groups and it's hard to track that as well. So I'm not sure we are going to give you a target just because I don't think we can accurately report back on that. What I think we will see though is just a revenue uptick generally, and I think that's what we should be watching for. I don't know, Bill, if you think differently, but I think that's sort of where we stand on it. But I think our view is very happy about it. I think if anything, there's been sort of quicker uptick and better interest from any -- from everyone in sort of taking our new products. And as I said, we are already seeing tangible signs across various desks of new clients trading with us, existing clients doing more with us. And then the other thing with RJO is I do think the fact that all those clients know now, particularly they're sort of larger clients, we have a much bigger balance sheet. So if there was ever a sort of a constraint around RJO's size, maybe they really liked the RJO, but we're limiting what they did just because of the size of RJO. That's gone, right? Because we like 5 exercise, onboarding is very hard when you're a private company in the world today. You have to do all your KYC, you have to get verification of the owners of the company are. And it's just very hard. A lot of people just don't want to do it. But if you're a U.S. public company, it's the easiest possible route to onboard. So I think we've made things very easy. And I think that's going to just of itself is going to drive some additional revenue. So I'll stop there and see if there is anything to add. William Dunaway: I think you summarized it, Sean very well, and we'll -- I think we'll continue to just try to point out kind of the overall growth from RJO here over these next couple of quarters and we'll be able to demonstrate some of that growth that Sean is talking about. Jeffrey Schmitt: Yes. Okay. That makes sense. And then it looks like there was still some weakness in precious metals trading in the quarter. Did that improve after gold was officially exempted from tariffs in September? And maybe how did you see that trend in October and November? Sean O'Connor: Yes. So we had a lot of people -- well, the people we normally speak to shareholders and you guys asking us sort of last quarter, what happened on the commercial side because, obviously, it was a reasonably big delta. And it was really affected by 3 things, right you had just low volatility in the ag space generally, which has sort of continued into this quarter. Metals, notwithstanding. But if you look at the ag side, it's been pretty muted general tariffs have sort of disrupted the underlying commercial flows. So people don't know or I'm sure whether they should export what the prices should they hold on to their product. So those kind of disruptions just lead to sort of lack of hedging. And then on the margin, one of the biggest factors was our precious metals business because of the dislocation in the CME metals price, we started to impute a value for tariffs. Now obviously, everyone around the world, including us, used to use the CME derivative contract as the most liquid contract is the best way to hedge your precious metals. But if you were delivering precious metals to someone in Europe, you now had an ineffective hedge because the hedge was imputing a percentage of tariffs being imposed. And if you completed that transaction, you would have to close your hedge out at a loss. So that created a lot of dislocation in the market. Our way of handling that was to deliver our metal into the CME and in that way, we had an effective hedge effectively because you can deliver metal into a contract. But what it meant is a lot of additional costs for us because we had to hold on to that metal for a good number of days. We had to ship that metal, that cost money. And all of that significantly eroded the profitability of that business. Now it was better than what we would have taken as a loss on the hedge, so it was economic to do that. That has led to the precious metals business in Q3 being so close to breakeven, right, when it's generally a pretty profitable business for us. That carried on into this quarter. Obviously, the business sort of adjusted. So the impact was not as great as it was in Q3, and we are now not using the CME hedge. So we now have the flexibility. And in fact, it's now given us an opportunity to take advantage of those dislocations. So what was a negative is starting now to turn into a positive. So that's the story behind the metals. So it was sort of much worse in Q3. It was better in Q4 and I think you'll see in Q1 that it's actually turned into a pretty positive environment for us. So I think that's sort of gone full circle for us. Does that help? Jeffrey Schmitt: Yes. Perfect. And if I could just slip in 1 quick one on the institutional -- on the institutional business that the RPC for listed derivatives jumped quite a bit. I'm just curious what drove that or how sustainable that is. Sean O'Connor: Do you want to take that Bill? William Dunaway: Sure. I'll take that. That would be the introduction, Jeff, of the RJO business. So when they came in, there's they were incrementally higher than what we were doing. So that's really kind of what's driving it up. I think they were incrementally about $1 higher on average on their institutional rate per contract than we were, so the combination of the 2 drove that up. Sean O'Connor: Sure. So it's kind of a business mix issue, I guess, between us and RJO. William Dunaway: Correct. Operator: Our next question comes from the line of Dan Fannon with Jefferies. Daniel Fannon: Great. So I guess just sticking with the institutional business. So the other question is just on the security side. The rate per million also went up pretty significantly quarter-over-quarter. Just curious about the sustainability of that. Sean O'Connor: Bill, do you want to handle that? William Dunaway: Sure. I think we've seen -- Dan, I think we've kind of talked about this a bit last year, right, with some of the conditions that we saw in equity markets with some of the lower volatility and also kind of us expanding into more U.S. stocks that we kind of -- we expected to see a bit of a trough there and continue to increase from there. And we have seen that, right? The conditions have improved. And then the fixed income space as well, right, with that becoming a bit more volatile with the rates moving around, defend actions, I think we've started to see where last year, we kind of dipped as well when it came to the addition of more and more U.S. treasury activity. Now we're seeing spreads widen a bit in those markets. So we've seen a nice uptick both on the equity side as well as the fixed income and then also really nice contribution from our overall prime brokerage business on the security side contributing more and more revenue there, which is helpful. Sean O'Connor: I would say, Dan, one thing, and if you remember back over the last 2 years, we spoke about this a lot, as both the equities and the fixed income teams, and this started probably 3 years ago, expanded into sort of lower margin, but higher volume products. We saw a continual erosion of the rate per million, but an increase in revenue, right? Because we're doing lower margin business, a lot of it making money, but it was really affecting those numbers. And as that business ramped up, it continually sort of dragged down the higher margin that we saw previously. I think we've now got -- to I'm sort of -- I could be wrong here, but I think you've sort of got to a point where that business is now large enough that it sort of averaged out, so I think that sort of ongoing sort of slide as we built the business up, we've now sort of troughed out. And I think what's now going to affect it is sort of market conditions, right? So I think the sort of business mix argument as that adjusted over the last 3 years, I think, is sort of kind of close to the bottom and at the end now. And now, hopefully, that number reflects sort of a more keen view of the underlying market conditions available in the business. if that makes sense. Daniel Fannon: Yes. No, that's helpful. Just another question on the integration. I just want to make sure what I heard in the road map. So I think you said roughly $20 million has been realized in terms of the expense synergies and then, I guess, middle of Q2 of this year with the U.K., we should get I think another -- I just want to make sure what the next wave of and then you have the FCMs in the U.S. So can you just kind of walk through the amounts that kind of -- if you've already got $20 million, that maybe only $30 million left or you're raising the amount of synergies. Sean O'Connor: Yes, go ahead, Abby, you back with us. Abigail Perkins: I am -- thank you for your patience. The -- so we have achieved synergies from sort of natural movement and the ability to do some streamlining inside the organization. Right now, that annualized run rate is about $20 million going forward. We will then see the next uptick really in the spring time, a bit more that we expect from the U.K. combinations. We'll get capital synergies at that point as well. And then the dominance will come post the U.S. integrations, which are late Q4 2026. So you're talking sort of June, July, August time frame. Does that help, Dan? Daniel Fannon: Yes, but no change in the aggregate amount. Like I guess as you guys have gone in, do you think that $50 million is conservative? Do you think there will be more in the context of what you'll be able to save as a result of the combination? Unknown Executive: No, go ahead, Abby. Sorry. Abigail Perkins: We're pretty comfortable with the $50 million. We are very focused on ensuring that we do client support with added flow. There is a big chunk of the organization that is not impacted within StoneX on this. So we're pretty comfortable with the $50 million right now. Daniel Fannon: Okay. Cool. And then just a follow-up for you, Bill. Just looking at the balances now from an interest rate sensitivity perspective, they're higher. And as you look into next year, obviously, you've got some rate cuts. Any thoughts on the hedging strategy or other things to do to limit the impact or fluctuation from rates and the movements there? William Dunaway: Yes. I mean we'll continue to be active, Dan, like we have in the past, that's kind of looking out and trying to lock some of that in. We're taking a bit of a view right, that we may want to lock some in around that kind of 2-year window-ish. And this isn't anything new. We've kind of done this a couple of different times over the last 10 years. We've kind of viewed that 2-year 2-, 3-year window is kind of a good space for us. And so we will continue to kind of monitor that market and potentially go out on the curve a little bit with swaps, kind of almost like an insurance policy on this new group of assets that we've brought in, in order to kind of put a floor there. And then what we're excited about is just kind of bringing in the capabilities of RJO that's been more active on managing the portfolio and have seen to where they've been able to typically exceed kind of the 1-month treasury rate, which has kind of been our benchmark. So the combination of the 2 are trying to lock some in to keep a floor for us and incrementally increase kind of over that 1-month target, I think, is what we expect to do on a go-forward basis. We never will be hedging all of it or never be locking in all of it, but we will look to be active to try to put -- roll into some floors there that kind of protect us to the downside. Daniel Fannon: Got it. But you're not doing that currently that's the perspective? William Dunaway: That we've been -- look, we've been active in doing that since the integration, right? So there's -- we didn't have anything, any activity on it in the September quarter, but we have been starting to do some of that since then, modest amounts at this point. Just reflective in the sensitivity that we put out there. Sean O'Connor: I think they're not to be repetitive, but maybe just to sort of clarify Bill's comments, I guess, there are 2 ways to think about this, right? The one is all of our contractual arrangements with our clients in terms of how we pay interest are referenced off the 1 month or the 3-month T-bill rate. So that's the sort of benchmark rate. And typically, what we did is we invested that float in the one month or 3-month T-bill rate, right? What RJO was very good at and were sort of a market leader is they were more actively managing that money, and they were earning a spread to the 1 month and 3 months T-bill by going into floaters and things like that. So to the extent you can do that, 100% of that excess basis comes to us. So that can be quite impactful. Now that's not a huge amount of money. You're never going to make 75 basis points extra. But I think the target is somewhere around sort of 20 basis points potentially on some of that float. But on a $13 billion float, if we can add 15, 20 basis points on top of that base rate, which we get to keep 100% of, I mean, that can be quite meaningful. And then secondly is, do we try to protect ourselves by taking out swaps and taking some duration, protect ourselves against possible downside in the short-term rates. And when we took on RJO they had done that with -- I can't remember the amount, but it was sort of $1 billion or something of their float that had actually locked in to the 2-, 3-year range that we've taken that position on. And as Bill said, we are now starting to add to that position opportunistically when we see rates that we like. So I would like to think that at some point, if the world stayed where it is today, we would probably like to maybe sort of hedge out something like 30%, 40% of our underlying float to sort of the 2-year rate. But obviously, the world doesn't stay as it is and we still have to sort of keep looking at that as rates change. But that feels to be to sort of be prudent. Maybe you earn less because the negative yield curve environment, you're paying a bit of a price for that, but it does give you certainty over that period as to what that underlying revenue source is. And as I said in my comments, what's quite notable now at StoneX and something that over time, we would not probably try give you more clarity on is we are growing as a custodian of client assets in everywhere. Seg funds in OTC products, clients are leaving more money with us -- we are actually now a custodian for gold, and we charge just like we do on seg funds, we earn interest on the gold deposits we have. We have prime brokerage, we have equity clearing everywhere you look we are growing our underlying asset pool. And those assets kick off now a really large number, which gives us a fantastic underpinning to our business, right? So all the sort of transactional revenue, which is affected by sort of volatility and so on, is sort of the gravy on the top here for us. So if we can get to a point where as a custodian, we've sort of got the costs covered. We've got a stable underlying flow of revenue and then the sort of more volatile forms of revenue, which, again, we've diversified pretty broadly but those tend to be the incremental revenues. And I think we're getting to an interesting sort of situation where it's starting to look like that. So something to watch and something we're working hard to do. Does that help? Daniel Fannon: Great. That's very helpful. And just yes, it does. So lastly, just on the retail business, I know that volatility has been pretty subdued. But obviously, the fee per million or rate per million came in a lot. Anything else of note outside of just vol within that segment to think about on a kind of go-forward basis? Sean O'Connor: Well, I think this has come up a few times over the last maybe 2 years, I would say that we generally sort of budget and the way we look at the vol in this business, and I'm talking about the self-directed retail business is we look at a sort of a long-term average, right? Because the revenue capture number there can move around pretty materially. I mean, Bill, correct me if I'm wrong, but I think we are up at sort of $130 million in recent quarters as the high, right? William Dunaway: No, we actually have been as high as $185 million back in December, but that was December. Sean O'Connor: Oh my God. William Dunaway: That was an exceptional quarter. But if you go back a couple of years, we were $82.95 million range back in '23, '22. Sean O'Connor: So the long-term average range for us is sort of in the '80s, right? And I think over time, we've lifted that from, I think, in the game days, they were more like $75 million is what they use. And I think we've lifted that into the mid-80s, because of all the things we've chatted about, right? We're combining flow better, there's more internalization. All of that stuff is helping. But I don't think this is necessarily a bad revenue capture number. I think what's happening previously is we were outperforming a little bit on the revenue capture. So obviously, we'd like it to be a little bit higher than it is now, but this is sort of the long-term average. And so I don't think you should look at this and say, "Oh my god, what happened?" I think this is sort of the business as it sort of has performed over the long period. maybe slightly under trend. But I think we were significantly over trend when we were sort of reporting numbers $120 million and higher. I think that's sort of unsustainable. I don't know if that helps, but that's my thought on it. Any more questions? Operator: I'm showing no further questions, and I would like to hand the conference back over to Sean O'Connor for closing remarks. Sean O'Connor: All right. Well, thanks, everyone. Thanks for your time. We appreciate it. We're very happy with the results that we have managed to deliver to all of you in 2025. And as you gather, I think we're all pretty excited about what's coming in 2026. We've had a busy year, a lot of great acquisitions Obviously, RJO, very significant. I think Abbey and her team have really got their arms around that. We feel really good with the way that's tracking up, but benchmark is also doing great and some of these other acquisitions are all sort of kicking in. So we're very excited about the prospects for 2026. Looking forward to that. And with that, all I can say is to those who celebrate and are in the states happy Thanksgiving and happy holidays to everyone. I guess, next time we speak to you will be in the new year. So thanks again. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Benjamin Wilkinson: Good morning, everybody. Thanks for joining us for Molten Ventures interim results. This is the results for the 6 months to the end of September, and we'll take you through key movements in the portfolio. We've moved with the trading statement at the end of October and then now giving you the final numbers here. Today, you will be spoken to by myself, CEO, Ben Wilkinson; and also our CFO, Andrew Zimmermann, who will take you through the financial highlights. I'll just give a quick introduction, a reminder to Molten, and then we'll get into the numbers. So Molten Ventures is actually, next year, celebrating our 20th anniversary as a firm and has been listed since 2016. The benefit of that is obviously that we can get to show the model working over time. And I think here in these results, you'll see the breadth of the portfolio and the demonstration of that vintage creation that's been happening over these many years, 80-plus portfolio companies in the portfolio. And when we look at the PLC numbers here today, that's what we'll be talking to, but also we manage EIS and VCT funds alongside. So the capital pool is an important function and driver of our model and how we address the market. On the right-hand side, you can see the important factors. We've targeted 20% annual growth in the portfolio fair value, and that's -- we call that through the cycle because obviously, these things tend to be up and down somewhat, but actually delivered 26% when you take into account the 6 months growth. And then in realizations, the important factor is turning that value into cash, and we've delivered 14% versus our 10% target. And again, I think that's a differentiated point from us versus some other firms and something that we've been able to demonstrate through many years. So we'll touch on those returns. In aggregate, GBP 1.1 billion of capital deployed in those years as a public company and returning over GBP 700 million coming back, which is a really strong proof point of our model. A year ago, when I took over as CEO, we refocused our strategic priorities on these key areas, really focusing on our core investment strategy of Series A and Series B investing. Particularly at Series B, this is a part in the market in Europe where there's a gap to capital, somewhere where we have strong experience and it's where you see the commercial traction in those businesses coming through most strongly, but also requiring the venture capital skills that we can bring to bear to help grow those companies and manage their scaling journey. And so it's capital, but also active management that we bring to bear with these companies. Scaling our own portfolio and developing the co-investment pools of capital further continues to be a key priority for us. We'll touch on the progress in some of those areas, but having the public balance sheet, having the EIS and the VCT funds and then growing out our third-party capital on the private side is a key strategic priority for how we scale and grow within the market. And as part of that, thinking about our fund-to-fund program, which is the investment into funds at the earlier stage from when we invest directly, we've been going through that program and looking at a narrower cohort for the next iteration of investment. So the existing program is largely funded in good shape. It gives us quarterly reporting on 3,000 underlying companies, which is great for our deal funnel. But just thinking about the uses of our capital when capital is ultimately constrained, we want to put more of that into direct investing and thinking about the shape of our portfolio, how that evolves over time. Balance sheet strength, we're going to be able to touch on that today. It's clearly getting back to growth is an important factor within that, but also driving the liquidity from realizations and then thinking around the use of that capital as it comes back. And we always talk to this NAV accretive use of capital. And importantly, that can be buybacks of our shares when we're trading at big discounts, and we've demonstrated with GBP 50 million committed to buybacks, that's something we're willing to do, and we recognize the strength of doing that in terms of buying our portfolio at a discounted value, but also NAV accretive in terms of driving investment. A lot of the companies that we're going to talk about today, we invested in those businesses almost 8 years ago. And the growth that's come through over that time and management of those companies that's come through over that time, and that will drive the growth in the future by the investments we make now. Another part of our strategy is to invest in secondaries where we can acquire mature assets at discounts to their holding value by providing liquidity to an illiquid part of the market and giving ourselves and our shareholders access to those growth companies and that are known winners, if you like, in other people's portfolios is a very sensible way for us to use our capital. So when we talk about NAV accretive use of capital, we're thinking about it in a holistic way about what is the best use of that capital depending on the opportunity set. And clearly, driving a narrowing of our share price discount to NAV continues to be a focus. Some progress has been made on that, but a lot more to go. You'll see today that the NAV is growing, and therefore, the shares have to trade up even further as we drive value in the portfolio. And I will, therefore, hand over to Andy to take you through our financial highlights and demonstrate some of that. Andrew Zimmermann: That's great. Thank you very much, Ben. So I'm Andrew Zimmermann. I'm the CFO at Molten Ventures. About a year ago, I was interim CFO, presenting my first set of interim results. So it's nice to be here 1 year later as actual CFO. And we've got a really positive set of financial results to present. So without any further ado, we will get on to that. So very pleased to have -- talk about a 6% GPV uplift to NAV, GBP 135 million of uplifts offset by GBP 49 million of reductions. FX has added another GBP 11 million to that with the GBP euro being a tailwind, but GBP USD being a slight headwind. Market comps have helped sectors like AI and deep tech and hardware have obviously been stronger [Technical Difficulty] that's been offset a bit by consumer and SaaS. Core names like Revolut, people have read the news about yesterday and ISI have shown very strong commercial traction. Sorry, GPV and NAV are both up at GBP 1.4 billion GPV and NAV GBP 1.3 billion. Realizations have been slightly ahead of investments with some of that cash going to buybacks, again, as Ben referenced, recognizing the NAV accretive additive potential of those. Realizations were pleasing at GBP 62 million to the half year. There was also an additional GBP 23 million from another tranche of [Technical Difficulty] Revolut in October. So GBP 87 million so far year-to-date that we've done with some other little bits and pieces. Freetrade, Lyst and Revolut, the 2 partial Revolut-led secondaries are the drivers of that. So been at GBP 87 million already year-to-date after a very strong FY '25 of GBP 135 million. It's really pleasing to see that momentum continuing. From that cash, [Technical Difficulty] we've put GBP 33 million into the balance sheet, GBP 33 million. We'll come on to that in a bit more detail in terms of [Technical Difficulty] some of the things that we've done. Again, there's been more invested post period end with about GBP 25 million that's either been invested already or is about to be and will be announced. We've also done GBP 19 million of share buybacks. Again, that is NAV accretive to our NAV per share, that's added about 14p to our NAV per share. And we've just announced another GBP 10 million extension to that, which will take us up to GBP 50 million committed so far. OpEx, we've managed to reduce. We've been really disciplined. We've looked at technology and how we can drive some efficiencies from that. We've been able to, therefore, reduce our general admin costs from GBP 13.1 million to GBP 12.1 million year-on-year or half year-on-year, which is an 8% reduction, some reductions in headcount there are mainly on the operational side so that we can rebalance our investment and really drive that investment quality. So we're at 0.1% operating costs net of fee income, which is well below the 1% target of NAV. So that means we end the half year at NAV per share of 724p, which is 8% up on the year-end position, which is obviously a really strong, great position to be on, and then we'll be looking to build on that in the coming period. And our balance sheet at the 30th September had cash of GBP 77 million. We also have cash plus GBP 23 million from that Revolut tranche that came in, in October. And we also have funds available in EIS and VCT of about GBP 23 million available for investment. So we're in a really strong balance sheet position where we've managed to balance the investment with buybacks and cash available going forward. So this is a chart that you're used to seeing where we talk about our performance through the cycle. We have a target of 20%. Our average return through the cycle is now 26%. You can see from this chart, we -- obviously, there was strong growth with a real peak in FY '22. We were quick to take valuations down in FY '23. FY '24, things started to stabilize a bit. And then in FY '25, there's a smaller return to growth in FY '26. That first half, 6% for the half year is obviously a good start and obviously, not quite a hockey stick yet, but starting to turn up there in terms of the growth. So we'll be looking to see that continue in H2. I think with sensible marks for our portfolio and tailwinds behind a number of the core companies, there's good signs that, that will continue. Everybody has been reading a bit about a bit more activity in IPO markets and M&A. So with our diversified portfolio and our experience managing through the cycle, we're optimistic about this continuing. So the story on realizations is really similar -- similar shape. Our target is 10% through the cycle, and we've delivered 14% so far average return. Again, you can see that builds up towards FY '22, where it really peaked. Then obviously, it was a difficult market in FY '23 and FY '24, really slowed momentum for realizations. There's a positive return in FY '25, where we did work really hard to engineer different realizations for a number of the companies. And that's obviously pleasing to see that continue into FY '26, with a GBP 62 million to the half year 30 September and an additional GBP 25 million since then. We're obviously still working on other things. So we would hope to be able to generate more realizations before the end of the year. And obviously, our evergreen model then enables us to recycle that back into future investments, which are going to drive the future NAV growth as well as other NAV accretive opportunities like secondaries and buybacks when the discount is wider to the share price. So this is just a slide a little bit about our investment deployment. We've deployed GBP 33 million in the first half of the year. We've done more since then. So the cadence will pick up a bit in the second half of the year. I'll just call out a few deals. Ben will talk a bit more about the portfolio later in the presentation. But in new deals -- yes, GBP 6 million in new deals. One example in that is General Index, which is a data-driven energy pricing provider for the commodities market. In the follow-ons, we've done GBP 5 million, which is helping to scale and build our portfolio. For example, the one I'll call out is Manna, which those of you who know me know I like to talk about just like drones delivery food. But again, it's a good example of us investing in the ones that are going to be the future drivers of growth in the portfolio. In the secondaries, we did the secondary with Speedinvest for GBP 16 million in the continuation fund. These give us access to a portfolio of companies that we understand as venture managers that are later in life, so they've got a shorter exit window, and we can get them at a very attractive price. So it's another good option for us in terms of driving NAV. And then finally, we've put GBP 6 million into our fund of funds program. Obviously, we're trying to manage a tighter cohort going forward, but this helps us to scout the future winners that are going to feed through into the emerging and then the core in due course. We've also recently signed a GBP 12 million Series B with someone in the portfolio company, which we can't announce just yet, but we'll be working on that. So watch this space, you should see an announcement of that soon. But that's just a really good reaffirmation example of us backing our portfolio and backing the winners in our portfolio and getting back to more of this focus on Series A and Series B core investments. And then just on the chart here on the right, again, just to call out the shape of it, you can see FY '23, just before things started to go south, we deployed a more normal level of capital. FY '24 and '25, obviously, a bit more capital constrained, but we're now getting back more to a normal investment cadence with targeting somewhere around about GBP 100 million by the end of the year. So this slide just walks us through the fair value movement for the period in the portfolio. So you can see investments and realizations we've talked about, so slightly more realizations than investments, which are a net down in terms of the GPV. FX has worked in our favor. As a pan-European investor, we're obviously going to be exposed to movements in euro and dollar, but that's been a small net benefit for us this period. The real talking point, I think, is the movement in the core, GBP 92 million uplift, and we'll come on to talk about the specific drivers of that with the portfolio fund in due course. But that's like an 11% uplift, which is much more where we want to be and where we feel we should be. And so that's really pleasing to see. The fund performance contributed about GBP 7 million. That was offset by about GBP 30 million, a small write-down in the emerging portfolio, which I will actually now just come on to talk about. But overall, a really strong net 6% fair value increase for the first half of the year. So we've had a lot of feedback from people in terms of the emerging. We talk a lot about the core. That's obviously the biggest part of the portfolio by value, but the emerging are what's going to drive the future. So we're trying to talk about this a bit more and shed a bit more insight into it. Ben will talk about some of the specific companies, which I know people find really interesting and exciting. So that will add a bit more color. There's 68 companies in this emerging portfolio, so it doesn't lend itself to a big list, but this table gives you a sense of the diversity and range of across that cohort. So the average age of investment in this is about 5 years. And the average cost of investment is about GBP 4 billion. So you can see the average is obviously smaller. These are the earlier Stage 1s. There's obviously a broad range within that. And you can see from this doughnut here, about 3/4 of them are the smaller sub-$5 million positions. So these are the ones that are still proving themselves out. As they start to scale and grow, and we can spot the emerging winners and we have some conviction, then we can put more capital into them. And so the remaining 2 sections of the donut are as these companies start to grow and we can follow on and help them grow, we'll put a bit more money into them. And then eventually, these companies should grow, keep growing and some of them will get into the core as the future winners in the portfolio. In terms of the fair value movement in this segment, you can see that actually the majority or nearly the majority had an uplift in terms of the number of companies, a number flat and then about 1/3, there was a small reduction. Overall, although there were more uplifts in the portfolio, there was a small net reduction. There were 2 or 3 sort of larger write-downs just in specific companies in that emerging sector that meant it was a small net write-down of GBP 13 million. But overall, still positive momentum in that cohort of the portfolio. So this is the fan, which obviously you're familiar with seeing. Again, I would just call out the point that the scales are different, which is why it looks a little odd, but Revolut because it's so large by fair value had skewed the scale. So we've split the two halves slightly. The right-hand side are the smaller ones that are growing. The left-hand side are the more mature ones in the core. So just to call out some specific ones where there's been the more significant movements. So SimScale, which is cloud-native simulation. It's doing really well in terms of starting to add logos, starting to really grow revenue. It's got good ARR retention. So that one is starting to move up the fan. And obviously, we have a strong belief in that one going further. ISAR Aerospace is one that you may have seen like the rocket launch. It's a German space rocket company, hopefully, a European SpaceX. They got their first rocket away off the platform earlier in the year. It didn't -- it blew up, obviously, partway through, but that is expected as part of the development process. So they got all the data that they needed, didn't destroy the launch pad, so they were really happy. And they're already working towards launch 2. But that first successful launch in terms of the data collection unlocks a capital for EUR 1 billion valuation. So that one has shown good growth in the half year. Thought Machine, although it's not moved that much, I just thought I would call this one out because people are interested in that one. That's obviously core native banking software. You'll maybe remember a year ago, we'd actually taken that one down quite significantly as it sort of stalled in terms of the speed of its revenue growth. In the second half of last year, we started to write it back up, and we've done a little bit again in this first half of the year. The story hasn't really changed. It's a really good business. They're signing Tier 1 banks. They've got a good pipeline of logos. It's just the cycle for that particular line of business. It takes a while to turn it to permanent ARR and longer than they originally perhaps forecast. So as they get these books of business live, the ARR will grow again quite lumpy and that speed of revenue growth should start to accelerate again, justifying more of a premium valuation. So we should see that start to pick back up and walk back up as they hit those commercial proof points. ICEYE is another one that's had a really strong period. You may have read about it in the press, dual-use technology, it synthetic aperture radar satellites, which are just a very cool technology, can see through cloud, can see at night. They've just released their latest version of them, which are even more high definition. You can see things about the size of a laptop from space. Obviously, the shift in defense, particularly for European governments, financing themselves mean they've signed a lot of contracts with different European governments. So they've got really good traction, both in terms of hardware, the actual satellites themselves, but then the software in terms of delivering the images to people. And obviously, the comps in that sector have really benefited from that as well. So it's really strong growth in that one. CoachHub is the only one in the core really that we've had to take down much. That one, CoachHub is obviously coaching software for enterprises and it matches coaches with executives. That's had a slightly tougher year. Firms are probably being a bit more mindful of what they spend their money on and things like that can be the first to be paused. It's actually profitable, but the growth has just stalled. So in terms of the valuation, you need revenue to really be growing at a stronger level to justify a higher premium. So as they get back to that growth, we would expect to be able to walk that valuation back up again. But until they hit those commercial traction proof points, we've pulled that one back slightly. Aircall is business communications software, AI cloud-based, more than 20,000 customers, really good solid business. It's profitable. It's doing more than 20% revenue growth year-on-year, consistently performing a really good example of a mature company in the portfolio that should be heading towards some kind of exit scenario, whether it's an IPO or a trade sale as it really matures. Ledger, again, benefiting from really strong tailwinds, crypto and NFTs, it's a hardware wallet and software that goes with it. Really strong revenue growth, really strong performance. Comps are doing well because of the U.S. market being very favorable towards that kind of asset class. So it's been a strong beneficiary of that. And then finally, Revolut, you'll all have seen the news yesterday about their GBP 75 billion round. That obviously came a bit late for us in terms of this performance. So we've held it based on commercial traction and commercial milestones. It's obviously still performing really well, more than 60 million customers. They did GBP 4 billion of revenue last year, should do something like GBP 6 billion this year based on the growth rates they talk about. So we've been able to take that up quite considerably, but we obviously have a bit of scope to grow further if it's going to grow into that GBP 75 billion valuation. So overall, really positive, I think, for the core portfolio. So I think I would just say just before I hand back to Ben, it's a really positive set of numbers. It's pleasing to be up there talking about fair value growth coming back, really driving NAV per share. We've obviously continued to generate that momentum in realizations, which allows us to allocate capital to the new future winners of the investment and also to allocate some to buybacks, recognizing the NAV accretive benefit of being able to do that. So a nice set of numbers to talk about. And with that, I'll go to Ben, who can tell you a bit more about the portfolio. Benjamin Wilkinson: Thank you, Andy. So as Andy described, we wanted to give you a bit more of the breadth of the portfolio, at least 10 in the call there that's showing those uplifts. We're also trying to show a little more of a -- shed a light on the emerging so that you can see the core is driving the growth. There's GBP 888 million of value there, but the emerging, there's almost GBP 500 million of value sat within that. So what we'll do here is take you through some of the drivers of the growth in the core, but also give you a little bit more of an overlay of how the portfolio comes together. You can see here that gross portfolio value that we talk about GBP 1.4 billion, core being GBP 888 million of that. And then think about the emerging, that GBP 256 million in the light blue bar. We'll talk to some of the details of that. And Andy touched on the fact that there are 68 companies sat within there. And then there's GBP 293 million sat within fund investments. If you look to the right-hand side of this chart, you'll see how that splits down. That's splitting down between some secondaries that we've been doing over the last few years, also SPVs, special purpose vehicles that we've invested in through the years, but also the fund of funds. There's GBP 120 million in that seed fund of fund program where we're an LP into funds across Europe, and there's about 80 funds across Europe that we're invested into. So small checks going into those funds, but that supports the ecosystem, gives us the data on those companies as they come through to the Series A and Series B stages of investment where we can look to invest in those companies directly. And then finally, with Earlybird, about GBP 80 million sat there as value, which is value that's not sat within the core. There are a few assets like Aiven and ICEYE, which are sat in the core, which are look-through into Earlybird investments. So if we touch on the larger part of the portfolio first, the core companies, their growth is driven by their revenue growth, that commercial traction that then feeds through into fair value growth. And we can see that the margins are very strong in that part of the portfolio as they are through the rest. That really gives an indication of really strong technology businesses with 68% gross margins, 6 of those companies being profitable, also some of those moving to profitability in coming years. So we have about 40%, 45% of that core being profitable now as well. Companies are well funded and growing strongly. You can see here that growth has continued and just touched on some of the assets, in particular, that Andy has just taken us through, but it's that commercial traction in the underlying businesses that we really look to. So where we're taking valuations up or we're taking valuations down, it's really underpinned by the growth in the underlying companies. One thing in terms of the age of the portfolio, the average age of those companies is 11 years, and our average age of the holding that we've had is 6 years. So it gives you a sense of where we're investing in those businesses on their own journey. And it's really where we start to see those commercial proof points, commercial traction selling to customers, increasing that revenue, demonstrating that you can sell to a breadth of different customers, but also increase your value within each of those logos. So upselling to those customers as well. Those are the points of reference that we're looking to when we're first putting our investment tickets into these companies. So the emerging portfolio, trying to provide a bit more color on how that comes together. On the left-hand side, we've got the capital deployed. Obviously, now we've been deploying for 9 years, over GBP 1 billion deployed. A lot of that's gone into the core, and that's driving strong returns. But then a lot of that has also gone into the emerging. And you can see here that that's been invested over a period from 2017 right through to now with the majority invested up to 2021. So you can see on the left-hand side that there's a real balance of that vintage creation within the emerging. It's not just focused on any one vintage. And I think that portfolio construction point comes across strongly when you look at that left-hand side of the chart. Average holding is about 9% equity, which is in line with our 9% to 11% probably average across the portfolio, which is also really where we start to think around 10% to 15% of initial equity. Sometimes that gets diluted down. So that's all in line with our original investment thesis. And talking to scale, you can see on the right-hand side here, how much of that is split by revenue. So the blue, the 44%, that's GBP 10 million plus of revenue. So it demonstrates a degree of maturity of those underlying companies. Some of them are pre-revenue, particularly where they're in the deep tech parts of the market where revenue might come later than the traction in the technology. But also you can see that some of those are earlier-stage businesses, GBP 1 million to GBP 5 million of revenue or GBP 5 million to GBP 10 million as they start to scale through that journey. Our job is to portfolio manage. Some of those will not scale and grow, and we'll reduce them down in our holding value or sell them on. Some of them will scale and grow into the core. And we talk in a couple of weeks about one of the investments that we've made in one of our existing companies, a Series B investment where we've led the round in that company preemptively, that's where we start to see that commercial traction coming through, and we want to put more of our shareholder capital to work in that business and then those companies can become the core companies that drive the growth going forward. So I wanted to talk for the next few slides about some of the specifics. We're touching on four of the core portfolio companies, and we'll also touch on a little bit of the emerging as well to give you a flavor of those underlying businesses. Revolut, we've talked a little bit about here, and it's obviously very strongly in the press. I think the only comment I'd like to add in addition to what Andy said here is this is a business that was founded 10 years ago, now has over 65 million customers, was a company that was scaled in the U.K. and then grown into other markets, and it is now getting licenses in South America, Mexico, and Colombia as an example. And it's just driving growth globally. So this is a really good example of a success case in Europe that we need to celebrate, and we need to make sure that the capital that goes into these companies to enable that success is there for these businesses that have the ambition to have global scale. And we're talking about productivity earlier today in some of my conversations. We need to drive more productivity growth, and these are the types of businesses that really allow that to happen. If you look back and think about when you had to go into your bank at least once a week to process checks or to go and deal with anything that required an over-the-counter service or when you traveled and maybe you had to have travelers checks, for example, at a certain stage of that journey. Think about how seamless your banking is now relative to how it was perhaps even just 10, 15 years ago. And this is the productivity that's been driven through all of the companies in our portfolio and it's been driven by this part of the ecosystem that drives job creation and innovation. In a similar theme, ICEYE, we invested in that business in 2018 into 2019. So they have now 50 satellites up in low earth orbit. And those satellites, as Andy touched on, can take images of the earth giving a range of 400 kilometers from single pictures down to the laptop scale of granularity. And that allows security to be a factor and a use case, but it also allows use cases and climate change. So thinking around forest fires, thinking about flooding and the impacts of that on the insurance part of the business, that drives a massive efficiency looking at areas that are affected or impacted by that. And our use of space is going to drive a lot more productivity in our daily lives. It already drives productivity with things like GPS. But clearly, that's becoming an important driver of growth going forward. And this company is performing very strongly. And another business that's quietly under the radar for several years while we've invested into those companies. And then they start to emerge as growth companies and drivers in our portfolio. And then in the last year as security and defense becomes more of a theme and sovereignty around assets becomes more of a theme, you can see that these companies are getting much more focus in the press. A similar business that Andy touched on is ISAR Aerospace. It's definitely worth watching the launch, 30 seconds into the air was important. There's over 100,000 components coming together in a single rocket. That's the first test of that rocket. And so demonstrating that it can get off the launch pad, demonstrating that they can safely bring that rocket down as per the plans, but also taking all the data into that next launch. This is a business that's exciting to watch. And hopefully, in the next few months, we'll be able to give you a bit more of an overview of that next launch happening, and we can all watch that one. And then Ledger, Andy touched on Ledger, cryptocurrency, hardware, security layers, security in anything, clearly very important. Even more important, as we've seen all of the cryptocurrency marketplaces have their own ups and downs over the years. A lot of people are recognizing you have to have it stored on a Ledger device. That's the most prominent device, hardware wallet for crypto and blockchain applications. And there's about 20% of the cryptocurrency market stored on Ledger devices. So it gives you a sense of their scale and what they've been building. Very strong tailwinds now for crypto and blockchain, particularly out of the U.S. And as this institutionalizes as an ecosystem and Ledger at the forefront of that with their hardware devices and the software that they can drive to allow trading. And then some of our emerging companies, equally exciting, the ones that we'll be talking about in a lot more detail in the coming years. BeZero is a carbon market. It's verifying offset projects and creating a pricing market for carbon. This is a business we invested in 2022 in the financial year and is growing strongly and undertook its Series C funding round, total funding of over GBP 100 million. And again, this is a business that's driving a new part of the ecosystem, a new part of the market that doesn't currently exist and hopefully becomes ubiquitous and something that we just take for granted in the next few years. If I look at that productivity theme, Deciphex, which is focusing on workflows and AI-driven support for pathology, that's a part of the ecosystem where we're investing a lot of capital into the NHS and investing a lot of capital into health. But a lot of that capital needs to go into the productivity tools that drive efficiencies. Public sector efficiency has reduced over the last few years, not increased. And these are the tools that allow that to happen. In a similar way to the space theme, we have Satellite View, another company in the portfolio, which is looking at thermal imaging of buildings. And so low earth orbit satellites go up, images of those buildings, looking at the heat signatures, looking at the efficiency of buildings, looking at security aspects that go alongside that. And this is a company that has a really strong order book behind it already. And then finally, Andy's favorite company, Manna, delivering -- it's interesting when you think around if you stand in London and you talk to people about drone delivery, it's a pipeline dream. In Dublin, that's already happening. There's hundreds of thousands of deliveries that have been occurring already over 200,000. And Manna, as it expands, we will go into 11 sites across Dublin, but we'll also be expanding into Finland, into the Middle East. It's a company that's born in Europe, that's scaled in Europe that is already ahead of many of the big players that we would assume would be at the advanced stages of this. So Manna is a very exciting company that we'll be hearing more about this year. Give you a sense across the board of the excitement that comes through our portfolio. But one important factor within our portfolio is how we think about driving growth. Direct investing is clearly the heartbeat of what we do and fund-to-fund investing, as we've touched on, helps to drive the ecosystem. But another important part of our platform is driving growth through secondaries. I just wanted to touch on that for a moment because sometimes when we invest in secondaries, people are trying to understand, well, why are you investing in other people's portfolios. But if you think about the journey of scaling technology businesses, they often scale in years 10 to 15 of their life. You can see in our core, the average age of 11 years. And then if you reflect on the average time horizon for a private structure is a 10-year fund. And so those technology businesses that are the winning companies in those funds are scaling and maturing at the very latest years of those funds where the managers of those assets need to show realizations and drive returns. So we provide a liquidity solution to those managers that allows them to give money back to their investors that allows those investors in turn to put new capital commitments into the managers' new funds. So you're unlocking a part of the ecosystem, which is clogged up. For us, the benefit is clearly investing in scaled mature assets. And we've demonstrated with our track record here that we can drive returns averaging 2.4x multiple. A lot of that has been realized in a short period of time. And it's really a way for us to create additional value for our shareholders by being active in the market and using our network and using our relationships and using our ability to value technology businesses and being very fundamental about the value of those companies and drives additional value to the direct investing that we have in the portfolio. So delivering returns in excess of GBP 200 million on our secondary strategy. It's not something we do every year. It's something that we do where we feel there's pockets of value and discounts that we can take advantage of. So then finally, how does that drive to returns across our entire portfolio, over GBP 700 million of realizations over the 9 years and thinking about venture capital as an asset class, the returns are skewed to the winners. You have to run your winners. And in turn, the management skill of a venture capitalist is managing an entire portfolio and ensuring that you can drive returns from the rest of the portfolio as well. And you can see here that we've had over 5x plus returns, which have driven the majority of the value. That's the pure power law playbook of venture capital. And those are the companies that we'll naturally talk about a lot, but also driving returns coming from more modest multiples in the 1 to 3x ranges, that's an important part of what we do. And I think that's been very differentiated at Molten in terms of how we think about the portfolio and consistently driving those returns coming back through -- and even in the scenarios where we might not be making positive returns, we get less than 1x our capital back. We are in the risk business. We should be taking risks. We should be investing in companies that have great potential, but clearly, not all of those companies will make it to be the key returners. And therefore, trying to drive some returns of capital back is an important part of that portfolio management as well. So finally, as we look to wrap up, I'll just give a sense of the current market environment that we're investing into. Left-hand side, you can see Europe has been scaling as an ecosystem up until '21, a lot of capital put to work in that period, but has really settled to a level of around GBP 60 billion to GBP 70 billion a year being deployed. If you compare that with the right-hand side, though, we're seeing a lower number of companies being funded. And that deal count coming down has shown that the capital has been going into companies where there are perceived winners, particularly around AI. And therefore, there are companies that can raise substantial pools of capital, substantial amounts of capital, but that's not growing across the whole of the ecosystem. The area where we invest will be in the GBP 5 million up to GBP 20 million sort of range. So if you think about that in the context of these charts, that's the dark blue lines on the left-hand side going into the lighter pink lines. That's had a reasonable amount of consistency in terms of the capital that's been deployed there, but there's still a gap to capital. And one of the things we'd like to do is drive more capital coming from pension funds coming from our own institutions to support this part of the ecosystem where the opportunity set is fantastic. The innovation that's occurring in Europe is very strong. The opportunity to invest in generational shifts in technology is here right now. And these are technologies that are going to be profoundly changing our societies and how we work and the productivity that occurs over the next 20 years. This is the time to put capital to work, and we're the vehicle to do that through, and we've demonstrated that over many years. So finishing up before we move to questions, just to reiterate the priorities that we started out with the outset of this presentation, how are we performing against those, so core investing in Series A and Series B. We've demonstrated that. We've invested GBP 33 million in this first half of the year. We've also continued with our secondary strategy. And then post the period end, another GBP 20 million has been invested. The company that we've been indicating as a Series B investment exactly in line with our strategy of supporting our best companies, helping them scale and grow, and we'll be announcing that in the next couple of weeks. Co-investment capital touched on as an important feature, bringing more capital into the ecosystem. We have Molten East, which is focused on Eastern Europe and the technologies and the entrepreneurs and the engineering ecosystem that exists there. That is a fund that we'll look to close in the next calendar year, some good progress being made there, and that will demonstrate additional capital coming into the ecosystem that we will manage. Narrower fund of fund commitment, focusing that capital back to our direct investing and secondaries. We've been speaking to all of the managers in that ecosystem, supporting the ones that we're already an LP into, but also being clear that we'll put the capital into a narrower cohort of managers going forward. And then balance sheet strength, Andy has touched on this in some detail, continued realizations and continuing to redeploy that capital into those NAV accretive areas. And finally, narrowing that gap to our discount in the share price. So NAV 724p a share, shares clearly trading at a discount to that. So the buybacks have been an important feature of the model over the last year. And I think that flexibility we demonstrated of allocating capital that comes back into new investments, into secondaries and into buybacks has been a core pillar of the last year or 18 months that has been a way of us driving value. So looking ahead, extremely positive, strong portfolio, very good growth coming through the portfolio, strong balance sheet, capital pools expanding and then the performance coming through in the NAV accretion as well. So very happy to be up here and to demonstrate all of those pillars of our strategy and our platform and seeing those coming through the numbers. So I think with that, we will say thank you and go to questions. William Larwood: Will Larwood from Berenberg. Firstly, I was just wondering if you could give us a flavor of how valuations are changing across from Series A, Series D and then sort of more towards some of the later-stage businesses. And then secondly, if we think about future capital deployment, how should we think about sort of secondaries, primaries, buybacks? I noticed that you've got GBP 39 million committed or potentially going to be invested in your forecast for this rest of this financial year. So just a bit of a sense around that for this year, but also into the next couple of years as well. Benjamin Wilkinson: Thank you, Will. So taking them in order, valuations at this stage we're focusing on is A and B. At that stage, you will see -- let's take Series A, you'll see commercial tractions, maybe a couple of million of revenue. And then what you're focusing on at that stage is how much money the companies are raising, trying to make sure that's balanced between what they need to raise versus what they'd like to raise. And what I mean by that is if they're raising [ GBP 10 million ] because that unlocks the next level of proof points for them, that's usually a better thing for them to do versus raising [ GBP 30 million ] and having excess cash. And so the valuation is a function of how much they raise versus the dilution. So getting that balance of the size of the raise is important, but also being able to demonstrate to new investments that we're an investment house that can follow on in our capital. If you keep proving your growth, if you keep proving your commercial traction, we'll put more money to work. And that's when you start thinking about Series B investing. The tickets are going to be deeper. So you're thinking GBP 20 million type tickets as an average. And then again, it's a function of dilution. But by that stage, you should be seeing GBP 5 million, GBP 10-plus million of revenue. So it starts to become a function of multiples alongside. As you get to later stages, the commercial proof points come through, and therefore, you're really valuing those businesses more on financials and pure financials and there's more capital available at those stages. So you'll often see higher, larger raises, but also more availability of capital. So when I talk about gaps to capital and why we play in a part of the ecosystem, which is very important, it's because you need people with deep pockets that can write consistently GBP 20 million investment checks plus, but also have the venture skills to balance risk and growth and help those companies with active management. So that's why I think the part of the market that we invest into is quite important, but also something that we do, which is a unique point of reference. In terms of how we deploy capital going forward, we think about GBP 100 million is where we'll end up this year, GBP 95 million to GBP 100 million is what we're budgeting. We clearly want to put more capital into those Series B deals we've been talking about supporting those later A deals as well. And then secondaries are still an important feature. I think that's a great way of us balancing the portfolio. We've got this core, which is maturing. We think that those will turn to realizations in the next, call it, 2 to 4 years, you'll see a lot of that value coming back through to our portfolio. And our job then is to be NAV accretive allocators of that capital. So we want to put it into direct investing. We want to put it at the Series B stage, which is where we feel is that right balance of commercial traction, risk and upside. But also we want to be putting that into buybacks if we're trading at these discounts. So that's the way we'll think about it. Getting back to a level of GBP 100 million, GBP 150 million of deployment might be where we'll end up. But what we will be doing is balancing our capital deployment with other pools. So if we have third-party capital coming alongside the public balance sheet, that means that we can more consistently write those bigger tickets at Series B, and that's the way we're thinking about the strategy going forward. William Larwood: I just follow on with the Series A -- sorry, just the Series A and Series B valuations, how have they changed versus sort of 12 months ago or 18 months ago? Benjamin Wilkinson: It really depends on the type of business, honestly. If it's got an AI wrapper around it, clearly, those companies have been getting elevated valuations. And if it's a more normal, let's say, business that we like to invest in, clearly, companies that are driving productivity, innovation, they are infrastructure layers into certain themes, then I think they've been fairly stable, actually. You've seen a real degree of consistency. And when I showed you the European market and the movements we've seen in the market in terms of capital, a lot of the capital that's going to a fewer number of companies has been going into the AI ecosystem. Clearly, early stages in terms of the large language model levels, that's really intensive capital area. That's not somewhere that we've been looking to play. We're more interested in those application layers thinking around how do enterprises use the underlying technology, how does it drive productivity? How do you get more customers wanting to buy it? That's where we think about technology. Patrick O'Donnell: Patrick O'Donnell here, Goodbody. A couple of questions. So just on the secondaries, in terms of sort of what you alluded to in terms of near-term realization, anything you could give us whether it's relating to Connect and some of the key assets there or anything -- any developments strategically or commercially in some of the kind of secondary funds? Benjamin Wilkinson: Yes. When we invest in secondaries, we're pinpointing key assets that are a maturity profile that we can then map that out and look to get our target returns. In terms of the Connect Ventures deal, that gave us exposure to Typeform and Soldo, 2 very good businesses, also already levels of maturity that suggest within a 3-year time frame, which is roughly the average we've seen in secondaries, you might see those turn into liquidity. So that's the way we think about it. Not necessarily right, we've invested now go and sell the asset. It's more about -- it's within their maturity window, sell it at the right time to create the right value. And those companies are on that journey, but they're also scaling their own businesses. They're at a stage where scaling that and continuing to grow might be the best option, and we're going to get the benefit of that fair value growth that goes with it. So I don't want to paint it as a picture of we're invested now. This is your time, you're on a clock. It's just about value creation and value creation from growth is just as good as value creation from realizations. In the most recent SpeedInvest deal, again, we've got companies that we haven't been able to be specific about them, but there's at least 5 assets there, one key asset in particular that we're excited about that hopefully we'll be able to talk to you about a bit more next year. Patrick O'Donnell: Very good. And just on the sort of valuation, anything you could point to sort of since you bought, say, the Connect Venture assets, anything moving in the right direction or whether it's some of the key assets? Benjamin Wilkinson: There are some uplifts in the secondaries. When we bought them, we've acquired them at discounts, more often than not because you're providing liquidity to a part of the market where the LPs who are the investors in those funds can choose to stay in and ride the upside, but they might be in for a time period when they've already been in those companies for 10 years in those funds rather for 10 years that they would feel actually taking some cash off the table now is more appropriate. So we can usually acquire at discounts. And then with the commercial traction of those businesses, they continue to grow, then we can write those up. And you've seen, I think, on the last slide that I showed you that the multiples of capital on those most recent investments are in the positive territory. Patrick O'Donnell: Clear. And just maybe one last one. In terms of sort of the operating costs that you've flagged the sort of reduction over the last 6 months in general admin expenses. Would you expect a similar pattern of cost between H1 and H2 on that? And like is the H1 number broadly sort of a 50-50 split? Andrew Zimmermann: It should be, yes. We're continuing to work on efficiencies and managing our operating cost base, both in terms of third-party costs, administrative fees, technology and leveraging the maximum from those and also with our headcount. So we've obviously reduced our operational headcount slightly by being a bit more efficient, but maintaining that investment in the investment team so that we have that quality, high part quality with the investment team to keep growing that NAV in the portfolio. But we'll be very on top of the costs going forward because we're obviously mindful of that and how that benefits shareholders. Patrick O'Donnell: Understood. And very last one, just on the sort of core portfolio. You obviously have very mature assets now. You pointed a 2- to 4-year exit time frame on revenue. I'm actually a bit surprised at the length of it. Anything you can kind of give us on that? Are any nearer term sort of which ones you'd point to as sort of from an exit point of view that have the shortest timeframe within the core? Benjamin Wilkinson: Yes. We're always quite careful to talk about our targets through the cycle because things tend to be lumpy naturally. When we talk about exits, we want to talk them within a timeframe because it's ultimately what's right for the business. If you're going down an IPO path, as you know, that's a minimum 18 months project. And then if you're going through an M&A process, that can happen at any time on your journey, and it's then about working out what's right for the company and for the returns profile. So we always talk about them in broader terms because we're not in control of exactly when these things happen. If I look at the shape of the core, though, you have companies like Revolut that have a stated IPO target. I think in the press, most recently, they were talking about that within 2 years or at least 2 years. So that might be the horizon. For us, if the business continues to grow at 70%, 50%, let's say, uplifts, then the reality is we're going to create value by holding on to our position and just managing that as a portfolio position as we see pockets of liquidity, taking some off the table. We think that that's the right balance. Companies like ICEYE clearly scaling to a maturity, supporting parts of the ecosystem where naturally you think that might be a public company, certainly has a profile of a company that would perform well. And then things like Thought Machine have talked about potentially going public at some stage on their journey also. What is true, though, is that 85% of our returns have come through trade sales. So this is often an arbitrage of larger businesses acquiring great technology companies and then putting that technology into their existing customer channel. That's the arbitrage that often exists, and we'll see many instances of that as well. So I think the maturity of the core companies, the breadth of the technologies that they're addressing and the markets they're addressing really lends itself to us seeing a lot more coming through in the next -- in the coming years. James Lockyer: It's James Lockyer from Peel Hunt. Maybe just a follow-up to the last question about exits, not specifically timing, but given that you were able to exit some of the Revoluts, which allowed you to sort of demonstrate liquidity for your trophies. Are there others out there that you have the ability to do that? Because obviously, as they grow and those core are the ones that are going to grow most presumably, that risk in terms of proportion of your business gets larger. Is there any thoughts around going, well, as it gets to a certain size, we'll think about trimming if we can because then it reduces our lingering overexposure sort of threat perception, let's say? And then secondly, you seem to allude that your particular AI exposure isn't so much the bubble or perception around there. You said your valuation has been relatively steady. Is it fair to say that if there was an AI bubble burst, the assets you've got are less exposed to that? And how are you valuing the AI adjacent companies such as General Index, Polymodels and Deciphex in that context? Benjamin Wilkinson: You're going to ask me another one then. I was going to forget them. James Lockyer: I can, but... Benjamin Wilkinson: Yes. You always have a list. Thanks, James. Let's start with the Revolut position and thinking about the shape of the portfolio more generally. We look to take value off the table, thinking around returning costs, thinking around opportunities for balancing each of the investments. So I think we demonstrated that clearly with Revolut where it becomes a more significant asset. It's still growing strongly. Commercially as a business, very, very positive. But for us, it becomes a moment of thinking around what's the shape of the portfolio, what's the time horizon over the next few years. And we would take a bit of liquidity on the journey has been our strategy. And we'll do that with other companies as well. Quite often with funding rounds, there's an opportunity to take some liquidity, and we'll take some of that off the table. But what we'll also want to do is balance that with the commercial traction and the upside. So we'll always think around this point about NAV accretive use of capital. If we're going to recycle capital, we want to put it to work into assets that are growing faster than the company we're already in. And some of it is balancing because you don't want the luxury problem of risk, if you like, in the way you've described it. I think it's certainly a luxury problem. But you don't want too much of your eggs in one basket, and therefore, the balance of the portfolio is the way we will think about that. I think we've demonstrated that we've been sensible about taking liquidity at the right times, balancing with riding the upside and also balancing with reinvesting into new opportunities. In terms of the AI assets, the companies that we're investing in fundamentally are driving business by being efficient, if you like, for the customers that they're selling to. So think about a General Index, that's driving an efficiency in a market by using technology that makes it quicker and cheaper to get the data that people like Bloomberg and ICE ultimately need for their commodity prices. That doesn't go away if there's an AI bubble burst. It's about ultimately fundamentally, what's that technology used for. That's what we care about. And then the pricing of those deals, I would say, has very much been in line with the market. I don't feel like there's been a sense where we've had to massively overpay. And you say, okay, well, why would that be? It's because we build relationships with those teams. We build a trust that we understand their companies and we understand their markets, and we can help them grow and scale. Their chance of success in those businesses is higher with our capital and our support than if they didn't have that. That's ultimately the way that we will try and create value. James Lockyer: If I may ask a third question. Just on the 6% on that basis specifically on that 6% fair value growth, how much of that was financial upgrades versus multiple reratings, I'd say as a sort of split? Benjamin Wilkinson: Andy, if you want to... Andrew Zimmermann: It's a mix, actually, because comps have helped in certain sectors. So obviously, things like ICEYE, that's obviously been beneficial. They've probably not helped in some sectors like SaaS and cloud. But -- and CoachHub is a good example, I guess, where that revenue proof point has fallen away a bit. So we've had to reduce the premium for that value. But other ones have had very strong commercial traction as well as the benefit of the tailwinds, Ledger being a good example as well as Revolut. Benjamin Wilkinson: I think that brings us to the end of the questions, and we're about time. So thank you, everybody. It was a slightly longer presentation, but we really wanted to get into a bit more of the depth of the portfolio. So hopefully, those slides are very useful. There is also appendices to the presentation, which we won't take you through now, but there's some more interesting information to look at in there as well. So just leads me to say thank you to everybody. We're very pleased to have a positive set of results, and thank you for your attention.
Operator: Good morning. My name is Joelle, and I will be your conference operator today. [Foreign Language] I will now introduce Mr. Mathieu Brunet, Vice President, Investor Relations and Treasury of Alimentation Couche-Tard. [Foreign Language] Mathieu Brunet: English will follow. [Foreign Language] Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard's financial results for the second quarter of fiscal year 2026. All lines will be kept on mute to prevent any background noise. After the presentation, we will answer questions from analysts during the web conference. We would like to remind everyone that this webcast presentation will be available on our website for a 90-day period. Also, please remember that some of the issues discussed during this webcast may be forward-looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Alex Miller, President and Chief Executive Officer; and Mr. Filipe Da Silva, Chief Financial Officer. Alex, you may begin your conference. Alexander Miller: Thank you, Mathieu, and good morning, everyone. Thanks for being with us today. Before we dive into the results, I'd like to flag something for your calendars. On February 11, 2026, we'll host a business strategy update where we'll walk you through the next phase of our growth journey and our vision for the future of convenience and mobility. We'll share a clear and thoughtful view of where we're headed and what it means for our customers, our network and the opportunities ahead. You'll receive a formal save the date and additional details in early December. Today's focus is very much on the solid progress we've made this quarter. It's been a little over a year since I stepped into the CEO role, and I'm genuinely proud of the way the business is performing and of the relentless focus our team is putting on winning the customer. Since the start of the fiscal year and for the second consecutive quarter, we've delivered positive same-store sales in every geography, along with steady, reliable performance in fuel. In an environment that remains challenging for many of our customers, they continue to respond to the value and convenience we're working hard to deliver, both inside our stores and on our forecourts. Our customer-focused initiatives are gaining traction, and we're seeing clear proof of that in this quarter's results, which are outperforming the industry. As we strengthen our value proposition and continue enhancing the customer experience across our network, we're also expanding our reach through disciplined organic growth. Together, these efforts are creating meaningful opportunities to welcome new customers and deepen the relationship with those we already serve. We are well on our way to reaching our goal of 500 new stores in 5 years with 29 new stores opened since May, and we are on track for more than 100 new locations in North America this fiscal year with many offering high-speed diesel to serve our B2B customers, and we continue to seize opportunities in rural communities, along with our traditional metro area sites. As of today, we have another 73 stores currently under construction, and our real estate team has 1,000 sites in the pipeline for potential future development. In Europe, our rebranding of TotalEnergies retail assets is progressing across our 4 new business units with the Circle K brand and programs now at 80 sites as of the first half of the year, and half of those sites feature the Circle K car wash offer. Our rebrand of the EV offer in mid-Europe is now complete. In my recent visits to these stores, I've been very pleased to see our team members energized, embracing our programs, executing them with excellence and engaging with our customers who are responding enthusiastically. Along with our efforts to grow and optimize our network, we are also investing in capabilities to support our stores through best-in-class inventory management solutions and supply chain optimization, which Filipe will address later. This past week, in Otsego, Minnesota, we cut the ribbon on the first of 3 new distribution centers in the U.S. that will open in the third quarter. These 3 facilities will support approximately 1,600 stores across 14 states. With these openings, combined with our existing facilities in Texas, Arizona and Quebec, approximately 3,200 stores across North America will be supported by self-distribution. It is an important milestone in our efforts to strengthen and better align our North American supply chain, enhancing speed, accuracy and product availability while enabling the broadening of product assortment. Now let's turn to our convenience business. As I mentioned earlier, we're continuing positive trends in same-store sales across our geographies for the second straight quarter, with the U.S. up 1.2%, Canada up 5.4% and Europe and other regions up 0.5%. U.S. revenues increased on solid performance in food, packaged beverage and other nicotine products. Canada's growth benefited primarily from alcohol and food. Food also contributed to the positive sales results in Europe and other regions segment. Given the challenging consumer environment, these results are especially meaningful, and we're seeing clear gains in customer traffic and share, which speaks to the strength of our offering and the compelling value and ease of our experience. We believe the disciplined focus on the customer is helping us distance ourselves from broader industry trends and continue delivering quality, sustainable growth. Looking at our food category, as consumers look for ways to stretch their dollars, our meal deals are meeting their needs with the choices and options they want at an attractive price point. Meal deals are winning with customers, thanks to effective communication across our in-store and digital platforms, along with a focus on simplicity and execution. Food penetration continues to rise, and the strong adoption of meal deals across markets further highlights the increasing contribution of food to our overall growth trajectory. In North America, same-store food growth had its best performance in well over a year, fueled by disciplined execution and the ongoing strength of our meal deals platform. This quarter, we sold over 10 million bundles up from 8.6 million in Q1, averaging over 850,000 bundles per week. I'm even more excited to share that at the very start of Q3, we surpassed the 1 million meal deals mark sold per week in North America. This milestone underscores the growing relevance of our food offering and the value we are bringing to our customers, and we're just getting started. In the months ahead, we'll continue expanding the meal deals platform, introducing greater variety and innovation, strengthening vendor partnerships and offering customers unmatched optionality. We are also seeing meaningful customer excitement and incremental sales growth from our exclusive partnership with Guy Fieri, which we announced in September. The Flavortown inspired menu rollout across the Northern Tier business unit is contributing to an increase in overall hot food weekly units alongside meaningful margin dollar contribution. We are encouraged by the customer response to this differentiated offer as we prepare for a broader North American expansion. In addition, our SKU reduction initiative launched in FY '25 continues to drive margin improvement in our U.S. business units, enabling us to focus on execution excellence and maintain reliable in-stock performance while also reducing spoilage. In Europe, food continues to be a bright spot driven by increased in sales per store. Sweden, Norway, Ireland and the Baltics were key markets with substantial growth in hot dogs, burgers, sandwiches and bakery items. Building on our success in North America, we accelerated the European rollout of meal deals last quarter with 3 well-defined offers at tiered price points to capture a broader range of customer occasions, from smaller impulse buys to full meal solutions. The early results are promising. Turning to our efforts to own thirst. U.S. packaged beverage category delivered solid performance with basket size and pricing offsetting category-wide declines in trip frequency. Energy drinks continue to lead the category with same-store sales growth in the mid-teens, supported by ongoing innovation, meal deal inclusion and exclusive vendor partnerships that are driving consumer engagement. Dispensed beverages are also seeing strong growth in the cold and frozen segments, lifted by our loyalty pricing strategies. Meanwhile, we're launching new programs to drive excitement into the hot dispensed category. Earlier this month in the U.S., we kicked off our win free Coffee for a Year Sweepstakes in partnership with International Delight creamers, inviting customers to enter for a chance to win 1 of 14 prices. We are also piloting an aggressive Inner Circle price on hot coffee to complement our highly popular any size Polar Pop offer for loyalty members. In adult beverages, we continue to see healthy beer and wine growth in Canada. While we expect growth trends in this category to normalize, these results more than offset the declines in nicotine in Canada resulting from the illicit tobacco trade and government restrictions on pouches in the convenience channel. In the U.S., our performance in nicotine is strong with mid-single-digit same-store sales growth. We've outpaced the convenience channel in cigarette sales and trips driven by market-centric pricing and affordability across premium and discount segments. Our September ZYN promotion sparked double-digit unit growth for ZYN as we distributed close to 8 million free cans. Not only did this offer increased total nicotine trips year-over-year and versus the pre-promotion period, but it also boosted the overall modern oral segment and sustained increased nicotine trips post-promotion. These results highlight our successful vendor collaboration and customer engagement as well as our ability to deliver value and maintain momentum in a complex regulatory landscape. In Europe, amidst a challenging regulatory and market environment, our nicotine business continues to outperform the broader market with other tobacco products driving year-over-year category growth while we still see some volume gains versus last year from the supermarket bans on tobacco in the Netherlands and Belgium. Looking at our loyalty programs with our launch of Inner Circle in Texas in September, we added more than 1 million new customers in Inner Circle, surpassing 12.5 million members across the U.S. as of the end of the second quarter. With the completion of our rollout in the West Coast business unit earlier this month, Inner Circle is now available at more than 5,000 sites across the U.S., and we expect enrollments to continue to accelerate in the coming months. As we bring Inner Circle to new customers across the U.S., our retention rates are sustained and healthy. More than 85% of members are active in fuel, 65% are active inside the store. We are leveraging some of our recent investments in our customer data platform and personalization capabilities to help drive repeat visits from Inner Circle members, and we are seeing existing members visit more frequently. Elsewhere in Europe, we've taken a major step forward with the rollout of our enhanced extra loyalty program, a unified visit-based model that rewards customers for every interaction, whether they fuel, charge, shop or wash their cars, the new platform delivers a more seamless personalized experience that strengthens engagement and customer loyalty across our network. Following a successful pilot in Sweden, we have now completed the expansion to Poland and the Baltics this quarter with other markets to follow. Turning to our fuel business. Same-store road transportation fuel volumes were down 0.6% in the U.S. and 1.8% in Europe, but up 1.1% in Canada. Despite these declines, overall volumes remain healthy and are outperforming industry peers, and margins are holding steady compared to previous quarters. We remain focused on unlocking additional value from our fuel supply chain across our global operations with our supply, trading and logistics teams working to expand lower-cost supply options and execute programs that deliver meaningful value to our customers, such as our seasonal Fuel Day events. Our October Fuel Day in Canada drove traffic and excitement to more than 1,100 sites across the country with savings of $0.10 per liter. In the U.S., we have tied recent Fuel Day events to Inner Circle not only providing great savings for our customers, but also driving sign-ups to the membership program and deepening customer engagement. In B2B, our European business continues to navigate a dynamic environment with mixed volume trends. Card volumes came in just below last year's levels, but this was offset by robust margin gains. Non-fuel income continues to be a strategic growth area as steady increases in B2B transit charging volumes helped counteract accelerated declines in traditional fuel and bulk fuel volumes remain healthy. While slightly lower this quarter due to price competition among resellers and a volatile biofuels market, they were offset by improved margins. We are seeing sustained growth in mobile payment adoption, up 30% versus last year, with the Baltics leading in customer onboarding and transaction volume with rollout of new digital platforms and functionalities such as self-service enrollment and instant virtual card issuance, we are gaining market share and operational savings for our customers. In the U.S., our B2B fuel share continues to grow as we build strong customer relationships, leverage the national scale and reach of our network and work to provide a reliable, seamless fueling and payment experience for drivers, focusing on direct partnerships, commercial diesel growth and strategic collaborations that have set us apart. We are seeing higher retention and increased usage among fleets of all sizes. We are also increasing Inner Circle penetration with B2B members as customers enjoy personal rewards for commercial fueling, enabling both acquisition and retention. Shifting over to e-mobility. We are building on our market leadership in Europe adding more than 230 DC ultrafast Circle K branded charge points and 33 new sites added across our European network during the second quarter. Overall, we now have close to 630 locations with Circle K branded chargers up nearly 30% versus a year ago. And our fast-charging network now consists of just under 3,900 charge points. In addition, we saw nearly 2 million charging transactions on Circle K branded chargers in Europe, an increase of 55% versus same quarter last year. As we expand the network with an emphasis on Scandinavia, we are also increasing our focus on new markets in our mid-European business, where our sites contributed more than 300,000 charging transactions. With that, I'll now turn the discussion over to Filipe, who will provide further details on our financial performance this quarter. Filipe Da Silva: Good morning, everyone. We closed the second quarter with growing optimism, reflecting steady progress supported by consistent execution and effective cost management across our operations. Core operating expense growth remained under control, while we continue to advance our multiyear investment journey to unlock new capabilities that strengthen our network and create greater value for customers. As Alex outlined, this quarter extends the positive momentum we began in Q1, with U.S. same-store sales growing for the second consecutive quarter, reinforcing that our self-help initiatives are delivering steady measurable progress. Food remained a bright spot, continuing its upward trajectory, supported by strong in-store execution. Shrink improved further, now at its lowest level in about 9 quarters, while food service gross margin expanded by more than 400 basis points year-over-year, providing an important lever in managing inflation and supporting margin resilience. This also marked the first full quarter from GetGo, which further broadens our food and convenience offering in the U.S. and unlocks new opportunities for customer engagement. For example, just this month, we're testing a small pilot in Ohio that lets myPerks members from Giant Eagle redeem point at Circle K. It gives customers more flexibility and helps connect directly with fuel shoppers. It's still very early days, and we'll watch how it performs before looking at next steps. In Canada, performance remained robust, supported by the ongoing benefit from the alcohol legislation changes in Ontario. As we move closer to cycling last year's favorable impacts and face a more tempered retail environment, we are approaching the coming quarters with a prudent outlook with continued focus on execution and compelling food offerings. In Europe, all regions posted healthy results with broad-based category growth driven by compelling food offers and attractive meal deals, helping us to capture additional market share. In Asia, operations were temporarily disrupted by the typhoon. However, the overall financial impact was minimal and did not materially affect EPS. Turning to our TotalEnergies assets, synergy delivery remains ahead of plan. That said, we did see a modest acceleration in the Netherlands, where the prior year benefit from the supermarket tobacco ban is not fully cycled. Overall, merchandise and service gross margin expanded by approximately 140 basis points year-over-year, and fuel margin also improved by nearly 600 basis points. These results demonstrated meaningful progress in both performance and integration. I will now go over some key figures for the quarter. For more details, please refer to our MD&A available on our website. After nearly a year, net earnings attributable to shareholders of the corporation returned to positive territory in the second quarter of fiscal 2026, which stood at $741 million or $0.79 per share on a diluted basis. Excluding certain items described in more details in our MD&A, adjusted net earnings were approximately $734 million or $0.78 per share on an adjusted diluted basis, representing an increase of 5.4% compared to the corresponding quarter of last year. Now let's review in detail each of our business segments on an FX-adjusted basis. The adjusted EBITDA for the second quarter of fiscal 2026 increased by approximately $94 million or 6.2% compared with the corresponding quarter of fiscal 2025, mainly due to the contribution from acquisitions, which amounted to approximately $75 million, improved merchandise and service and road transportation fuel gross margin as well as organic growth in our convenience activities, partly offset by the impact of the regulatory divestiture related to the GetGo acquisition, which amounted to approximately $8 million. During the second quarter, merchandise and service revenues increased by approximately $254 million or 5.8%, primarily attributable to the contribution from acquisitions which amounted to approximately $163 million in organic growth, partly offset by the impact of regulatory divestiture related to the GetGo acquisition, which amounted to approximately $20 million. Merchandise and service gross profit increased by approximately $126 million or 8.3%. This is primarily attributable to the contribution from acquisition, which amounted to approximately $56 million by organic growth as well as by improved merchandise and service gross margin in the United States partly offset by the impact of regulatory divestiture related to the GetGo acquisition, which amounted to approximately $7 million. In a context where we are delivering increasing value to our customers across all regions, I am happy to report that our gross margin expanded this quarter. In the United States, our merchandise and service gross margin increased by 0.9% to 34.7%, favorably impacted by the Zyntember promotion as well as by strong food execution. On the food side, the margin lift also reflect a significant reduction in shrink of more than 400 basis points alongside our 2025 rationalization efforts, ensuring that our promotions and assortment are relevant to our customers. In Europe and other regions, our merchandise and gross margin increased by 0.7% to 38.9%, mostly driven by a favorable mix -- product mix from lower tobacco revenues and e-mobility continued momentum in Scandinavia. In Canada, our merchandise and service gross margin increased by 0.6% to 34.2%, driven by a favorable change in product mix from cigarette revenues. Moving on to the fuel side of our business. Our road transportation fuel gas margin was $0.4586 per gallon in the United States, a modest decline of $0.0024, but overall consistent with previous quarters. In Canada, margin averaged an impressive CAD 0.1507 per liter, an increase of CAD 0.0172. Fuel margins remained healthy across the network, supported by ongoing supply chain optimization and strong in-store effectiveness. We're also advancing our data-driven approach to pricing and promotions, helping us stay agile and competitive in a dynamic retail environment. In Europe and other regions, our road transportation fuel gross profit was USD 0.1151 per liter, an increase of USD 0.01, driven by favorable foreign exchange translation and effective supply chain management, partly offset by the impact of lapping a onetime gain from a prior year fuel supply agreement adjustment. Turning to SG&A. Normalized expenses increased by 3.4% year-over-year in the second quarter of fiscal 2026 driven by disciplined core operating costs and targeted investments. Roughly 2/3 of the increase came from our core operating expenses, which continue to be managed effectively and remain on pace with average inflation across our regions, supported by our fit-to-serve. This also reflects targeted effort to scale our food service offering with resources directed towards enhancing capabilities at the store level. The remaining 1/3 reflects planned investment in technology and operational capabilities to support long-term growth and enhance the customer experience. I would like to emphasize that year-to-date, our normalized expense growth remains in line with inflation, aligned with our focus on cost discipline and maximizing operational leverage. I'm pleased to report that we exceeded our fit-to-serve target of $800 million ahead of schedule. This achievement reflects the collective commitment of our teams to deliver real measurable improvement. It's an important milestone that strengthens our ability to reinvest with purpose while maintaining disciplined expense control. Moving on, we continue to see gains in more workforce productivity. In the U.S., overtime wages remain below 3% for the 23rd straight month and below 2.5% for the 12th consecutive month, landing at 2.1% in Q2 versus 2.7% last year. These results speak to the effectiveness of handheld devices, smarter labor scheduling and automation tools that are translating into more impactful customer-facing hours. We are also capturing incremental savings through our centralized procurement efforts for goods not for resale, further leveraging our global scale to reduce cost and drive efficiency. Turning to strategic investment. We continue to advance our digital capabilities and operational tools to position the company for long-term growth. A key focus this quarter has been the North American pilot of our RELEX ordering and space planning platform now underway across 6 locations in 4 business units. Fuel scale deployment remains on track for the first half of calendar 2026. Early results are promising, with notable gain in product availability and inventory accuracy. As we scale, RELEX is expected to further reduce spoilage and also inventory efficiency, support margin resilience and strengthen vendor collaboration, all while streamlining in-store operation by simplifying ordering and optimizing shelf layouts. Beyond RELEX, we are making solid progress on other elements of our digital road map. Our upgraded handheld devices and labor scheduler are now embedded in more locations, continuing to streamline operations and improve team productivity. We're also seeing early promise from our AI task management pilot, helping store manager quickly translate data into clear, actionable insights. These investments are sharpening execution at the store level and helping deliver a more seamless and personalized customer experience. Turning over to depreciation and amortization expenses increased by approximately $59 million or 12.6% year-over-year, including the GetGo assets, which amounted to approximately $23 million, along with equipment upgrades, store remodel program, new store openings, technology enhancement and EV charger deployment. This initiative represents significant strategic investment made in recent quarters. From a tax perspective, the income tax rate for the second quarter of fiscal 2026 was 22.8% compared with 23.4% for the corresponding quarter of fiscal 2025. The decrease is mainly stemming from the impact of a different mix in our earnings across the various jurisdictions in which we operate. As of October 12, 2025, we recorded a return on equity at 17.7%, and our return on capital employed stood at 11.9%. During the fiscal year, our leverage ratio stood at 2.21. We also had strong balance sheet ability with $2 billion in cash and an additional $3 billion available through our revolving unsecured operating credit facility. During the quarter, we issued Canadian dollar denominated and U.S. dollar denominated senior unsecured notes totaling CAD 500 million and USD 1.2 billion, respectively. The $1.6 billion net proceeds from the issuance were used to repay indebtedness under our United States commercial paper program. Additionally, we repurchased 16.6 million shares for an amount of nearly $900 million through the buyback program, while for the first half of the year, we invested close to $900 million in capital expenditure, reinforcing our balanced approach to capital allocation. Subsequent to the end of the quarter, 6.1 million shares were repurchased for an amount of approximately $306 million. Turning to the dividend. The Board of Directors declared yesterday a quarterly dividend of CAD 0.215 per share, an increase of 10.3% for the second quarter of fiscal 2026 to shareholders on record as at December 3, 2025, and approved its payment effective December 17, 2025. In closing, our second quarter results reinforced the resilience of our business model and the operational excellence of our teams. We are encouraged by the continued top line momentum across key categories, particularly in food, packed beverage and fuel as well as by our progress in loyalty, underscoring the advancement of our customer initiatives. Looking ahead, we remain committed to delivering earnings growth over the course of the year by maintaining our cost discipline, thanks to fit-to-serve initiatives and by enhancing our gross margin profile through continued progress on shrink and spoilage food growth and vendor-funded promotions. We are also deploying capital with purpose, investing in tools that optimize execution and elevate the customer experience to support long-term value creation and deliver best-in-class returns. I thank you all for your attention. I will turn the call over again to our President and CEO, Alex Miller. Alexander Miller: Thank you, Filipe. As we move forward, our priority remains clear, delivering meaningful value for our customers and making every visit to our stores and forecourts easy and enjoyable. We're strengthening our execution, making better use of our scale and sharpening our operations, so our sites consistently have what customers need. We're also elevating the loyalty experience in ways that make it more personal and more engaging, helping customers come back more often. I'm proud of the work our teams are doing across the network and the progress we're making together. As we move into the back half of the year, we're well positioned to keep serving customers reliably and to be the stop they trust most when they're on the go. On that note, let's turn it over to the operator to answer analyst questions. Operator: [Operator Instructions] Your first question comes from Martin Landry with Stifel. Martin Landry: I want to touch on your U.S. merchandise margins. They have expanded nicely on a year-over-year basis in the last 2 quarters. And they've reached levels that are near the highest in the last 10 years. And you seem to have good margin drivers. You've talked about white nicotine. You've talked about food, energy drink, vertical integration of your distribution and then even SKU reduction. But -- so I'm trying to understand a little bit where are we in that journey for your merchandise margin in the U.S. How much more upside do you see there? And if you can talk a little bit about what is left in terms of drivers to get these levels higher? Alexander Miller: Yes. Thank you for the question. I'm pleased with the 90 bps improvement year-on-year for the quarter. I think the -- for this quarter specifically, about 38 of the bps came from white nic and our ZYN promotion. We continue to improve shrink, as Filipe talked about, that's contributing nice to our ongoing margin improvement. I think I've talked in past quarters about our improvements around promotions and our ability to analyze promotions and our data capability, doing less promotions but doing promotions that really add value to consumers and drive traffic and present real value to them. We talked about the ongoing new distribution centers. We just opened one. I was -- last week, I was in Minnesota and saw our new facility. These facilities are going to improve our COGS as we go forward. They're going to help us service our stores better when our stores really want and need to be serviced for the less lease disruption. So we -- and then lastly is food, right? I mean we continue to grow food. Our food, we grow in the U.S., we improved food by 480 bps quarter on -- versus last year in the same quarter, and we believe we will continue to do these things. So we're executing quite well against the items we're very focused and feel good about the direction of our margin gains, really not just in the U.S., in all 3 of our big geographies. Filipe Da Silva: Yes. And just to complement, Alex. So I think also, Martin, as we are integrating more the supply chain, we'll have the possibility also to get more control on the negotiation with suppliers. And we believe that there is also a nice potential upside there. Of course, we need to continue to reinvest in value, as mentioned by Alex, many times this morning. But yes, overall, the profile of the gross profit, we feel good about the prospect and what we can continue to build in this aspect. Operator: Your next question comes from Irene Nattel with RBC Capital Markets. Irene Nattel: Can you talk about the cadence of same-store sales improvements as you went through Q2 and where you're tracking Q3 to date, please? Alexander Miller: Yes. Thanks, Irene. The quarter was pretty consistent. We continue to see pretty big variations across the United States. So an example would be our Midwest business unit, which is Iowa, Illinois and Indiana for the quarter. Same-store sales were up 5.3%. Same-store volume was up 2.3%. And we can send -- and that's offset by challenge along our Southern states. And the Midwest BU at 7% of our merch sales. Texas and Arizona specifically remain challenged. They were slightly negative in the quarter. And those 2 areas are 23% of our merch sales. So we continue to see those kind of large differences across the United States. With that said, our teams in Texas and Arizona are performing very well from a market context and taking considerable share, and so then as we look forward, we did see a slight softening due to the government shutdown. And specifically, we believe the SNAP or EBT benefits, just slight softening for a couple, 3 weeks. Since the government has reopened and those programs are back, we've kind of pivoted back to really consistently where we've been this past quarter, Irene. Irene Nattel: So then do you think this sort of 1% to 1.5% level, Alex, should be sustainable through the balance of the year? And then, I guess, how do you accelerate it from there? Alexander Miller: We're going to -- we're feeling good. We've had several weeks and periods of success and seeing our business strengthening. And again, it's -- I'm never going to try and predict the future, Irene, but I feel really good about the activities of the team, the focus of the team. Our operating metrics are just extremely sound. Our food numbers continue to grow, and we're continuing to see that as we're into P3, our execution against those programs, our production availability. Our zero, zero for heroes, the products we sell the most, we have them in stock on the shelves, the proliferation of our meal deals really in all 3 of our geographies, consumers continue to really respond to those programs. And as I mentioned, we passed 1 million for a couple of weeks ago, which was a huge benchmark for all of us here, and we're celebrating that. Our digital platforms continue to grow. We added 1 million members in the quarter. Our visits were 6.6 versus 6.1. we grew traffic by 7%. So the areas we're focused on, Irene, we're gaining momentum, and they're working. And other nic and energy -- other nicotine, specifically white nicotine and energy, our execution, our vendor relationships and partnerships, we feel like we're clearly winning in those spaces, and we will continue to lay into those spaces. So I remain -- I'm cautiously and positively optimistic as we go forward, Irene. Operator: Your next question comes from Chris Li with [ Desjardins. ] Christopher Li: Sorry, can I just -- maybe a quick follow-up to Irene's question. So for Q3 to date in U.S. merchandise comps, Alex, is it trending more or less in line with what you achieved in Q2? Alexander Miller: Yes. P7, we softened just a bit. And again, we're pretty sure that was the government shutdown and EBT and SNAP, not a lot. We softened a bit. But as we've gone into P8, the last 2 weeks and the government reopened in those programs, we've converted right back to the trends we were seeing and really see acceleration in those programs that we saw before. Christopher Li: Okay. That's helpful. And then, sorry, my main question is just maybe on the SG&A growth rate. It did sort of accelerate in Q2. And I wanted to ask, for the second half of the year, how should we think about the normalized growth rate? Filipe Da Silva: Thanks, Chris, for the question. I think we feel good about the SG&A. Year-to-date, we are in line with the inflation, and I think we need to realize how much transformation we are doing in this company and investing for the long term. We have been talking a lot about supply chain, digital capabilities, RELEX. All these [ we mentioned ] that are really there to make us a better company. And we are doing all that, again, being able to match inflation. So it means that there is a lot going, and I have to recognize the hard work done by the team there, just to find ways to be more productive. So just on the quarter, we have been very disciplined in terms of labor hours being down in hours by 0.8% compared to last year across the regions, a lot going on from the procurement side. So Chris, I think we are -- yes, we are very confident by the plan. As I mentioned earlier in the call, we already reached the ambition that we had on the 5-year plan regarding fit-to-serve. There is more there. So when you look at the full year, yes, that's -- our ambition is to continue to be kind of in line with inflation. And at the same time, making sure that we do the right thing for the business and investing for the future. We have a lot to do there. But again, confident that we'll keep our discipline in cost. That's what we have been in the past and we will continue to be, Chris. Operator: Your next question comes from Michael Van Aelst with TD Cowen. Michael Van Aelst: So in your OpEx discussion, it did pop up in terms of your normalized operating growth from Q1 to Q2. And I think you mentioned for the first time you segregate a comment about investments to accelerate growth in food service. So can you explain to us what these investments are? And should this drive -- is this something you expect to drive same-store sales in the U.S. north of 2% eventually? Filipe Da Silva: I can take maybe on the expense side. So yes, we are investing, for example, in U.S. We are investing on the digital capabilities, helping to get a better forecasting. So we are investing on that. We are partnering there to get a tool. And that really makes a big difference, making sure that we have the food at the right time when the customer needs it and the employee knows when to put that in the shelf. So there has been a lot of investment there. And also, we are investing in -- on additional shifts from a labor standpoint to make sure that food is there when it's needed. So again, here, when you look at the overall labor hours, we have reduced the number of hours versus last year, reducing from an administrative point of view, the hours used in stores, but redirecting that to customer-facing activities and part of it is food. So we'll continue to do that because that's the right thing to do for the business. So feeling confident that, again, looking at the overall expense profile, we will continue to invest in food for sure. But having in mind that we want to be in line with inflation as a whole in expense. So looking for productivity in other parts of the business. Alex, do you like to take the... Alexander Miller: Yes. I can just build -- yes, build on that a little bit. I think that some onetime investments in food around production availability and the rollout of a specific program, I view those as onetime investments. We absolutely see food growing, and you see it in our results. And food, like anything, it's driving increased transactions and increased transactions are good. We continue to grow that percentage. And I think as I've shared with you previously, our goal is to get to 20% penetration in North America, and we believe we can do that, and we have a long runway to do that. I think from a cost perspective at the operating level, the last year has been absolutely focused on operations and back to our core, and our operating metrics are as good as I have ever seen them. Our turnover levels, our retention levels are -- just continue to improve. We referenced our overtime percentage, our labor hour compliance, our scheduling compliance, our shrink continues to go down. So the focus on our core -- at our core, we are operators, we are focused on operations, providing the tools at our stores and to our customers to be successful, and it's resonating. And part of that core culture of ours is controlling cost. We are doing that at the operating level and offsetting these strategic investments. And we will very much aim to continue to do that. Michael Van Aelst: Okay. And just to clarify, the meal deals, is that available throughout the U.S. network now? Alexander Miller: Absolutely, it is. It's not just the U.S. network, it is available across our entire footprint now. We are growing them in Canada. We've launched them in Europe and feel pretty strongly. We're already hitting levels close to our U.S. levels in Europe, where our food penetration is higher. It's really one of the most exciting things when I'm out with our teams in stores, just hearing it resonate with customers and hearing our store teams talk about how customers relate to the value that we can provide. So we will continue to lay into meal deals. We think we've really found something here that is really resonating with consumers and consumers that are strapped for cash. Operator: Your next question comes from Mark Petrie with CIBC. Mark Petrie: Hoping to just go deeper on some of your comments with regards to U.S. same-store sales, specifically the regional performance. Could you talk more about the drivers there? Is that just a matter of traffic? Or are there other factors like loyalty penetration, category mix, food, et cetera? And then if you could also just expand on the market share comment. Are you taking more share in those slower-growth regions? Or would you say it's more generally consistent across regions? Alexander Miller: Yes. I don't think -- I think our execution level continues really to improve across the company. I think it's more of a macro dynamic that's happening in the United States. The Texas and Arizona traditionally have been big growth states and big growth areas. We are very happy with our positions in these southern geographies. We absolutely believe this to be transitory. But we are seeing fairly significant differences in the Southern states versus our Midwest states currently. We think that will ultimately normalize as we go forward. And again, we're very happy to have those positions. It's not -- our loyalty penetration, it differs by business unit, but they're -- it's growing everywhere. Our execution on food differ slightly, but it's growing everywhere. And again, I'm just really proud of the teams. We've been very focused. We're executing against programs, and we're taking market share not in every business unit. But clearly, in total, we are. And in most business units, we are taking share in merch and in fuel. Mark Petrie: Okay. And sorry, just to clarify, when you talk about the slower growth in Arizona and Texas, for instance, is that mostly in traffic? Or does that show up in basket size as well? Alexander Miller: Sorry, I didn't catch the last bit of your question there? Mark Petrie: When you talk about the slower same-store sales growth in some of your regions like Arizona and Texas, is that mostly just in slower traffic versus like the Midwest? Or is it also in basket? Or how does that show up? Alexander Miller: Yes. I think traffic is a little more challenged in those geographies. We're growing basket in pretty much every business unit. So it generally is traffic driven, yes. Operator: Your next question comes from Bobby Griffin with Raymond James. Robert Griffin: Congrats on the performance. Alex, I just -- I want to double-click into the food category as a whole, given some of the success here with the sales as well as the margin improvement? Ultimately, where is that category as we stand today from its full margin potential? Is there still hundreds of basis points left? Or is it getting close to something you would say is running from a margin side of things, best-in-class or up to where you would like it to be at? Alexander Miller: So where we sit today, we are laser-focused on growing sales and continuing to grow sales. Our spoilage rates in our food category is about where we want them now. And obviously, we've improved 400 to 500 basis points versus previous year. So our spoilage rates are about where they want them. We are really focused on growing sales. As we go forward and as we grow sales and as we continue to improve our supply chain, we absolutely believe there is future margin expansion as we continue on this journey. Operator: Your next question comes from Vishal Shreedhar with National Bank. Vishal Shreedhar: Alex, as it relates to food, Couche-Tard has been on a journey for food for, call it, more than a decade and sometimes the initiatives didn't necessarily come through as investors might have anticipated. So as you look at the -- your food programs right now and you've expressed confidence, what gives you more certainty that this confidence will be realized in actual performance and hitting your targets at this time? Alexander Miller: Yes. Thanks for the question. I do have a great deal of confidence, and I think we've talked to you about it, we needed to reset. So we rationalized our SKUs. We really focused on the underlying processes and programs on the products, the taste of the products, what was resonating with consumers, and we've largely finished that reset. And you're seeing it in our results. You're seeing the growth in both traffic and sales and margin improvement, and we are now poised for significant growth. Our production availability, our operating execution continues to improve, and we are reaching levels that we believe are very solid going forward. We've talked about our meal deals and the unique nature of us to be able to really offer value and to bundle products that are unique to QSRs. And candidly, we see a lot of people perhaps copying us or taking that. So we think we might be on to something there. But I've never had this much confidence in our journey in food. This organization, we are operators, when we get focused on things, we execute pretty well. I hope that doesn't sound arrogant. But our teams are focused on food. We are executing every period, every quarter at an improved level, and I think we're in for some really strong growth as we look at the quarters ahead across our footprint. Vishal Shreedhar: Okay. And could you just update us on the acquisition backdrop, maybe what you're seeing? Alexander Miller: Yes. Thank you. Very active. We are active with files in all 3 of our large geographies in Canada and Europe and in the United States, both smaller and larger files out there today. We're engaged, and we continue to see quite a bit of deal flow. And I think we'll be able, as we have done historically, to continue to execute on M&A inside of our financial framework and at multiples and return levels that we have consistently delivered on, I think, in our 46-year history. So it remains very active. And hopefully, we'll be able to announce to you in the coming quarters that we've gotten some stuff done. Operator: Your next question comes from Luke Hannan with Canaccord. Luke Hannan: I wanted to go back to the discussion on meal deals. Alex, you talked about expanding that platform in the coming months. And I'm curious to know, what does that look like? Is that more availability of certain deals, let's say, within the existing price points? Do you anticipate there being an expansion of the price points available? And then maybe also sort of as a follow-up to that, introducing more complexity and SKUs naturally might also get to a point where similar in the past Couche-Tard has run into issues when it comes to spoilage, how do you make sure that you put the guardrails in place to ensure that you don't introduce too much complexity as part of expanding the meal deals platform? Alexander Miller: Yes. I think when we think about meal deals, first and foremost, it's about value. So the value element is resonating with consumers who are increasingly stretched. And through our vendor partnerships, our procurement capabilities, we're able to offer these meal deals at margin profiles that work for us and that work for our partners. So as we look to the future, we will continue to offer value. We will continue to keep it simple and straightforward in what we are offering, and we will leverage down even harder with our vendor partners to give the products that our consumers want. The energy sector is growing rapidly, continues to grow rapidly across all 3 of our geographies. We have great relationships. Consumers look to us for those products. So continuing to make those various drink products with our best-selling food items at value will be our focus as we look to the future. Operator: Your next question comes from John Zamparo with Scotiabank. John Zamparo: I'm wondering if you could add a bit more color on the Flavortown initiative? I know it's quite early, but can you say what level of growth you're seeing at those stores? And is there anything you can say to give a sense of how incremental this is and what impact it has on margins? And then lastly, can you remind us on the pace of that rollout, you've said national within a year, but I'm wondering when this will hit most of the U.S.? Alexander Miller: Yes. Thanks for the question. This is a great example of making sure we stay disciplined on SKUs. So we added 11 Flavortown items in our Northern Tier business unit. We stopped selling 12 other items as part of that. We've reached about 65% to 70% of our goal of unit growth from those items. And I think more importantly, it is serving to grow hot food in Northern Tier, and we are growing hot food in Northern Tier as a result of Flavortown. We're still working through some supply chain elements for the 10 states we're serving. We're still working with the Flavortown team around the various products and what -- how consumers are responding to those. But we feel good about where we're at this far into the journey, and we continue to see a strong likelihood that we will expand across the U.S. We've got a little bit more work to do. And probably we'll be able to update you more next quarter, I think, on where we're at on that and what the expansion plan will be. Operator: Your next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: Alex, I wanted to ask a high level strategic question. You talked through a lot of your key initiatives this morning to accelerate growth and expand margins. So hoping you could give us a sense of the top maybe 1 or 2 initiatives that you believe will have the greatest positive impact on your business in the next, I don't know, 2-plus quarters. And then maybe drill down a little further on how impactful you expect these initiatives to be on your top and bottom lines? And then also, where do you see the biggest risk to your business in the next couple of plus quarters? Alexander Miller: Thanks for the question, Bonnie. Our focus remains right where it's been. First and foremost, operations, execution, operating metrics, serving our customers, the equipment in our stores work friendly, customer ready. So that has been our focus the last year, and I'm really proud of the improvement. I have talked with you at length about food and the journey and meal deals, it remains right there. Growing our digital platforms is absolutely and increasingly personalizing our platforms. We are seeing just uptake in our programs, increased visits, increased basket. We're going to layer down into these programs and feel really good about those. We have some tailwinds, right? The energy sector is great. We have some mix tailwinds. We've talked a lot about other nicotine and white nicotine specifically. Nicotine was positive in both Europe and the U.S. for this quarter. And we continue to see that transition, and our relationship with the vendors in these spaces and just how we work with them strategically, we feel really good about. So Bonnie, it's going to be more of the same. We're going to lay into those things. I guess the greatest risk, I feel strongly about our teams and our culture and how we're executing and the momentum we have. I continue to see us widen our gaps versus our data that we see from various markets. It's the underlying environment and how the consumer is doing and just -- that is obviously impossible for me to predict. And that's -- I don't spend a ton of time worrying about that because it's not something I can control. We're focused on the things we can control. And we feel good about the momentum we have. Operator: [Operator Instructions] Your next question comes from Mark Carden with UBS. Mark Carden: So you guys talked about opening the 3 new DCs to bring in some more self-distribution. How long would you expect the ramp to take at those locations? And then to what degree could you see yourself ultimately using self-distribution across even more of your footprint? Alexander Miller: Yes. Thanks for the question. Our focus will -- we opened our one in Minnesota. It was great to go visit, and then we'll open our one in St. Louis and Columbus in the coming couple of months. And our focus for the first couple of 3 months is really just servicing our stores, making sure that we're getting the products to our stores in a timely way when we're supposed to. I think after those first couple of 3 months, we will then start to optimize around when we deliver to stores. We're obviously starting conversations and different things with vendors and our partners around products. We will continue to look to expand assortment and enable additional local assortment through these DCs. And for us, I think I've spoken previously, we will go into our food supply chain as well. We believe the path of going into our supply chain on the merchant food side, we see a lot of incremental value both in the assortment we can carry, our underlying cost of goods, simplifying how we serve our stores and serving them when it makes sense for them and for our customers. So this is not a near-term thing for us. This is -- we've been planning this for a long time. It's great to get this first one open, and this will be a journey for us over the coming years. Operator: There are no further questions at this time. I will now turn the call over to management for closing remarks. Mathieu Brunet: Thank you, Alex and Filipe. That covers all the questions for today's call. Thank you all for joining us, and we wish you a great day and look forward to discussing our third quarter 2026 results in March. [Foreign Language] Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Pony AI Inc's Third Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the management's prepared remarks, there will be a question and answer As a reminder, today's conference call is being recorded. And a webcast replay will be available on the company's Investor Relations website at irpony.ai under the News and Events section. I will now turn the call over to your host, George Shao. Head of Capital Markets and Investor Relations at pony.ai. Please go ahead, George. George Shao: Thank you, operator. And hello, everyone. We appreciate you joining us today for Pony AI's third quarter twenty twenty five earnings call. Earlier today, we issued a press release with our financial and operating results. Which is available on our Investor Relations website. An earnings presentation, which we'll refer to during this conference call, can also be accessed and downloaded on our Investor Relations website. Joining with me on the call today are doctor James Tong, chairman of the board and chief executive officer. Doctor Tianqin Luo, chief technology officer. And doctor Liu Wang, chief financial officer of the company. They will provide prepared remarks followed by a q and a session. Before we begin, please refer to the safe harbor statement in our earnings press earnings release which applies to this call as we'll be making forward looking statements. Please also note that we'll discuss non GAAP measures today. Which are more thoroughly explained and reconciled to the most comparable measures reported under GAAP in our earnings release. Available on our Investor Relations website. And filings with the SEC and Hong Kong Stock Exchange. I will now hand it over to our chairman and CEO, Doctor. James Peng. Please go ahead. CEO Remarks (James Tong) James Tong: Thank you, George. Hello, everyone. Thank you for joining our earnings call. I'm excited to share that we have successfully completed the dual primary listing on the Hong Kong Stock Exchange. Under stock code 2026. On November 6 just one year after our Nasdaq listing. With strong support from both international and the domestic investors, We secured the largest IPO in the global autonomous driving sector this year. Raising more than 800,000,000 US dollars. This significantly strengthens our balance sheet and provides the dry powder to accelerate mass production and the largest scale commercialization. We now expect stronger growth surpassing 1,000 robotaxis fleet plan by year end and expanding to more than 3,000 vehicles for 2026. We have already seen the flywheel. In action. Expanded fleet is driving higher user adoption. Shorter wait time, more orders, and a strong revenue growth. After launching Gen seven Robotaxi, we have already sync a citywide unit economics breakeven This in turn gives us more room to increase fleet size. The capital we raised also fills our business development research and development, market making strategic investments in new markets, new applications, and attracting world class AI talents. All these are set to further propel our technology leadership and the long term growth. Our Hong Kong IPO also powers our core mission bringing autonomous mobility to everyone around the world. We're firmly delivering on this commitment Earlier this month, we officially launched fully driverless commercial service. For gen seven robo Texas across Guangzhou, Shenzhen, and Beijing. Today, our management team, including myself, actually arrives at our Shenzhen office in a fully driverless gen seven robotaxis to host this conference earnings call. This is more than just a normal ride for us. It actually marks a giant leap in autonomous driving's advancement. We are making level four autonomy more accessible than ever to a much broader user base. I'm excited to share a critical milestone Our gen seven robotaxis have reached city level UE breakeven in Guangzhou. Shortly after their official commercial launch. This is pivotal to validate our viable business model It not only gives us strong confidence to further scale our fleet, but also attract more and more third party partners enabling them to fund our fleet. And the support. Our asset light model. The scaling up of a fleet is key to our growth. As large scale operational footprint drives efficiency through the economy economy of scale. Our robotaxi vehicles are moved essentially moving billboards. In fact, many new users discover and download our Pony pilot app after spotting our vehicles. On the road for daily operation. To lead fleet expansion serves as a highly efficient self reinforcing marketing engine facilitating user adoption and strengthening brand recognition. This creates a powerful upward spiral more vehicles, generate greater visibility which attracts more users and establish network effects. The results are already evident. Building on that momentum, new registered users nearly doubled within just one week of launching gen seven from late October. Reflecting robust user demand and effective go to market strategy. Now let me highlight some key advanced advanced we made in recent months in executing our scale up strategy. First, we have ramped up production at a accelerating pace. Since the start of production in the middle of this year. By November, more than 600 gen seven robotaxis had rolled off our assembly lines bringing the total fleet size to be over 900 vehicles. Thanks to the streamlined production process, we now expect to outperform our full year target of 1,000 vehicles. Delivering ahead of schedule. This gives us increasing confidence to sustain robust momentum. Driving speed size, to surpass 3,000 vehicles in 2026. Second, in Q3, our robotaxi revenue surged by 90% year over year. With their charging revenues delivering over 200% year over year growth. This was fueled by rising user adoption across all four tier one cities, improved fleet operational efficiency, and tailored pricing strategy for diverse user segments. We have seen that the higher order density leads to lower users average waiting time. And in turn, higher vehicle utilization rate. This allows us to continuously optimize our pricing strategy. Third, we have continued to expand our operational footprint. For example, in Shanghai, we became the city's first company to launch fully driverless commercial global taxi operations earlier this July. Covering the Jingqiao and the Huamu areas of Pudong. In Shenzhen, we extended commercial fully driverless operations to more and bigger city areas. Including Circle and Overseas Chinese town. We're taking major steps toward scale up strategy. So following our collaboration with Hehu in June, we recently forged another partnership with Sunlight Mobility This alliance reflect growing market recognition of our business model, with increasing number of third parties wanting to fund fleet deployment. This actually enables us to speed up further fleet expansion. Now let me turn to our global expansion. We are deeply dedicated to advance global taxi services while strategically expanding our international fleet. Now we have robotaxi presence established in eight countries across China, The Middle East, East Asia, Europe, and The US. We entered a new market in The Middle East. Qatar. Through a partnership with Nova Salet in third quarter. Nova Soleil is the country's largest transportation service provider. As part of this collaboration, our robotaxis have recently begun testing on public roads in Doha the capital of Qatar. We have also advanced our presence in South Korea by securing nationwide robotaxi permits enabling operation across the country's autonomous testing and operational zones. Our collaboration with local partners continue to deepen We're closely with Comfort Air World, the country's largest transportation fee transportation service provider. To begin road testing in Luxembourg, we plan to deploy testing vehicles based on the perjury eTraveler through our alliance with the Stellantis. It's a European leader in light commercial vehicles. This effort will initially focus on vehicles designed for Europeans diverse mobility need to enable a range of use cases. In addition, we have partnered with global ride hailing platforms that also participated in our Hong Kong IPO. Those platforms include Uber, and Bolt. A boat is a Estonia based mobility company operating in over 50 countries and 600 cities. Built upon our collaboration with Uber, we aim to leverage Uber's robust ecosystem to in enter The Middle East and then scale into additional international markets. Last but not least, we recently released our fourth generation robot truck. With production and the initial fleet deployment expected in 2026. Featuring fully automotive grade components, optimized software hardware integration, and the transition from internal combustion engine vehicles to electric vehicles. The Gen four Robotex robotruck delivers a significant more efficient cost structure and a greater energy saving. The new platform fully leverages the technological foundation and operational expertise developed through our gen seven robotaxi vehicles. In addition, we deepened our collaboration with SANE Group and added Liuzhou Moto as a new partner to have multiple vehicles to support. Our further operations. To sum up, 2025 is a critical year of mass production and the commercialization for Pony AR. We take pride in the progress we have made and are steadily delivering on the promise we have made to our shareholders at the time of our US IPO last year. Our recent Hong Kong listing not only marks a major milestone for our company, but also underscores the promising future of the industry. Moving forward, we will drive technological innovation and create lasting values. By scaling fast efficient, and comfortable autonomous mobility services toward our mission. Autonomous mobility everywhere. With that, now I'll hand it over to our CTO, doctor Tianten Lo, to share more about our technology strategies. Hinton, please go ahead. CTO Remarks (Tianqin Luo) Tianqin Luo: Thanks, James. Hello, everyone. This is Tian Cheng. Let me first share my thoughts on our home driving technology stack. From day one, we believe that full stack integration across software, hardware, and operations was the only way to build a truly scalable autonomous mobility. That conviction have been validated again and again. Especially for this critical year of scaling up. With the achievement we made, it is clear to over early technology best help us help us achieve the leading position and it will further accelerate our future growth. Our deep foresight into tech stack what is what is positioning us as a leader in the industry today. As we become one of the few company to operate large scale 40 driverless stroke protection services. So as early as 2020, we recognize the importance of a training go through base on reinforcement learning unit simulation. In that year, we transit transitioned over tech stack into a one model. Which is what we call a pony word today. Through years of R and D effort and the real real world validation, over a top driving world of the driving model have evolved into a closed loop training. We achieved unsupervised self improving iterations. In recent years, we are seeing the broader autonomous and robotic industry coverage converge on one model. Validating the approach we adopt today. This full time in AI tech stack has given us a meaningful head start and we're confident that we will stay ahead of for multiple years. Tianqin Luo: Then let me dive into the three criteria that put us the frontier forefront of of what model development. First, the high fidelity impacted simulation. This is far beyond the ability to just generate the scenarios and render sensor data. Driving is by nature interactive. The robotaxis action directly affect how to run the agent to behave. Such as other vehicles and pedestrians need to react to over driving behavior. It must understand and adapt to new situation and the complex physical interaction in real time. Mirroring true unload interactions. It enables robotax operation that are safe, smooth, and social aware. After 10,000,000,000 kilometer of test miles that only were generated each week, more than 99% kept vehicle agent detections, while less than 1% are still static environment such as center rendering. Okay. Second, the ability to reproduce scale and the realistic color cases. While this long tail scenario don't occur frequently, the way are they they are critical to safety. In our top More importantly, every scenario must be something that could real have really happen in the real world. Not those use case useless edge cases with no basic no basic in reality reality. So the third, the AI based learning evaluator. This is the reward based evaluation mechanism. Driving is a multiple object optimization problem What is considered as a good driving also changes in various driving scenarios. Within the cross loop training environment, the PonyWord and our virtual driver are continuously evaluate on key driving metrics. This assessment does not rely on real world data. Human label data, or rules. Instead, it use AI in part model to learn what good driving looks like directly from the outcomes. Turning real and assimilated experience into a powerful cycle of self improvement. A best in class word model must meet all three criteria to enable truly unsupervised and self improving closed loop training. This is critical to realizing large scale driverless auto driving. And leveraging over full stack technology as a core strengths, I will now turn to how to drive business progress during the third quarter. First, on cost and operational efficiency. We pioneer we pioneered 100% automotive grade autonomous driving kit. For for gen seven robotaxis. We've optimized the design reduce reducing bomb cost by 70% compared with the previous generation. The gen seven v have been officially operating for public in Guangzhou, Shenzhen, Beijing, fully validating our safety standard and operational efficiency. We build on our momentum and deliver further progress. Driving by scale the production and enhance R and D We've already realized an additional 20% reduction in the atomic driving kit from cost for the gen seven platform designed for 2026 production, compared with 2025 baseline. This slide foundation for sustained cost fit Our our robust AI algorithm and fleet management has proven effective at driving operational efficiency. To better identify user demand in hotspot areas, during rush of hours, we will hand our algorithm for all the dispatch. Matching, scheduling. Thereby ensuring sustained different sustained sustained sustained efficient robotactic utilization. Have also improved our virtual driver to recognize more and more complex scenarios. This allow us to improve over remote assistant to vehicle ratio substantially. On the track to reach one to one to 30. By year end. Our our superior servers service experience have become the key reason user choose only Airover taxi. After launch of Gen seven robotaxis, we will earn the worldwide widespread positive feedback and and generate great social media bot from users. As we deliver high quality experience, users are increase increasingly willing to pay a premium for the enhanced effort reliability, the safety of the of our autonomous journey. For ride comfort, over advanced interactive planning cap capability intelligence to optimize for the frequency, and the magnitude of acceleration, braking, and steering. This delivers smooth natural motion control. Tell to the electronic vehicles and the ride sharing markets. Offering consistent comfort experience for every Polyair prover taxi ride. This enhancement have reflect the imaginable improvement for gen seven such as the emergency brakes and the steering over the past few months. Tianqin Luo: Additionally, our low tech features are super in cabin experience. We also pioneered the innovative smart positioning feature with one tap, user can remotely adjust their vehicle position for more convenient pickup and drop off. Introduced the voice active features call it POPO voice assist. Allow users to do star trips, and the country air condition, etcetera. We will continue to upgrade to the cabin into an AI powered mobility terminal. Together, this upgrade create a more accessible and streamlined user experience. Tianqin Luo: So third, over text stack is also built for generalization. The alpha native tech architecture allow us to adapt quickly to new markets and platforms. In terms of cost region generalization, all virtual drive and the show is can quickly understand and adapt to diverse traffic conditions around the world. For example, leveraging over high fidelity training environment and evaluation mechanism powered by 40 jobless coverage in Pudong District in just a few weeks. In addition, when sending to Europe, the system intelligently identified and adapted key difference in in local road conditions. Such as unique traffic signals configuration, and the various driving driving patterns. Our technology boost generation power across platform as well. The latest generation robot truck will commence production and operation from next year. This demonstrate our capability to create synergy between Robotexi and Robotrex tech stack. Looking ahead, we will leverage our success Hong Kong listing to reinforce our technology core leadership. Increasing r and d investment, and attract top AI talent to advance our robotaxi, robotruck, and new market initiatives. We will continue pushing the frontier of the autonomous mobility refining what is possible in the transportation. Okay. This concludes my prepared remarks. I will now pass the call over to our CFO, doctor Liu Wang. For a closer look at our financial results. Liu, please go ahead. CFO Remarks (Liu Wang) Liu Wang: Thank you, Tien Tsin. Hello, everyone. This is Leo. I will focus on year over year comparisons for the third quarter. Unless otherwise noted. Q3 twenty twenty five was a landmark quarter. We delivered a robust revenue growth specifically with solid progress in robotaxi large scale commercialization. And now we expect to outperform our full year fleet target of 1,000 vehicles. Moreover, our newly deployed Gen seven robotaxis fleet have reached a pivotal citywide unit economic breakeven milestone. This layout a solid foundation for further scaling up. And the implementation of ASA Live business model. Well which will be further accelerated by our success Hong Kong IPO capital raise. In this quarter, revenue finished at 25,400,000.0 US dollars. Growing by 72% This strong performance was primarily driven by the continuous optimization of our robotaxis services. And the sustained demand in our licensing and application business. Firstly, robotaxi services revenue reached 6,700,000.0 US dollars. Representing a remarkable growth of 89.5%. Year over year. And the 338.7% quarter over quarter. Specifically, fare charging revenue continued to deliver a triple digit growth surging 233.3%. This was achieved even before the commercial rollout of our gen seven robotaxis. Supported by a stable commercial fleet of our Gens five and Gens six vehicles, the strong growth during Q2 and Q3, stemmed from growing user demand in tier one cities in China. Our continuous effort to optimize fleet operation and the pricing strategy, altogether leading to increased fleet utilization and efficiency. This is a testament to growing user recognition and the brand royalty to Pony Pilot service Going forward, as we follow this strong momentum towards a significant fleet expansion, of over 3,000 vehicles by 2026. Tianqin Luo: We expect Liu Wang: robotaxi revenue growth to accelerate even further driving more orders and a higher operational efficiency. In Q3, another key robotaxi update is the implementation of our ASA Lido asset light model for fleet expansion. As we have shown promising numbers, in vehicle unit economics, We received a strong interest from third parties who are willing to purchase gen seven vehicle. To run as robotaxi operators Such partners include, but are not limited to, leading ride hailing or taxi operators. For instance, Shenzhen Shihu Group and Sunlight Mobility. The asset light model has contributed revenues through technology licensing fee and the vehicle sales. While giving us further leverage and capital efficiency for further fleet expansion. Aside from strong top line growth domestically, we are also seeing fast growth of robotaxis revenues from overseas market. Moving forward, we expect robotaxi revenues from overseas market to continue to grow. Currently, our robotaxi footprint have already expanded into a country globally. Serving as a promising foundation in our exploration of the international opportunities. Secondly, moving to Robotruck. Robotruck service revenues were 10,200,000.0 US dollars, growing by 8.7% Moreover, as we launch our Gen four, fully auto grade robot truck, we expect to reduce the bound cost of its ADK autonomous driving hardware kit. By 70% and the reach a thousand unit scale of Robotruck fleet going forward. This new generation of Robotruck will powerfully accelerate the progress of Robotruck commercialization at scale. Thirdly, licensing and application revenues were 8,600,000.0 US dollars. Growing significantly by 354.6% We continue to see robust and growing demand of our autonomous domain controller. Primary from robot delivery clients. Turning to gross margin. We delivered a significant gross profit margin improvement from 9.2% in Q3 twenty twenty four to 18.4% in Q3 twenty twenty five. With gross profit of 4,700,000.0 US dollars in the third quarter. This remarkable improvement was firstly driven by our strategic initiatives to optimize the revenue mix and secondly, by a greater contribution from robotaxis services. Which carry a relatively higher margin. The UE, the unique economic breakeven achievement validates our due focus on go to market execution. And optimize the operational efficiency. Since the launch of gen seven commercial operations in Guangzhou, daily net revenue per vehicle has reached 299 RMB. The net revenue refers to the total RMB value generated from ride hailing service after deducting discounts and the refunds. Notably, daily average orders per vehicle have reached 23. Fueled by a robust widespread user demand and our operational optimization. Meanwhile, we have also optimized the hardware depreciation as well as operational cost. Including charging remote assistant, ground support, service, maintenance. Insurance, parking, and network costs. This will further improve our margin down the road. The total operating expenses were 74,300,000.0 US dollars up by 76.7% Tianqin Luo: Excluding share based compensation expenses, Liu Wang: non GAAP operating expenses, were 67,700,000.0 US dollars. Up 63.7%. Tianqin Luo: The increase primarily reflects Liu Wang: the one one off r and d investment in gen seven vehicles and the expansion of our r and d personnel. Critical to securing and extending our technological leadership. Specifically, approximately half of the increase in research and development expenses stemmed from onetime customized development fee of 12,700,000.0 US dollars for gen seven vehicles. Net loss for the third quarter was 61,600,000.0 US dollars, compared to 42,100,000.0 US dollars in the same period of last year. Non GAAP net loss was 55,000,000 US dollars, compared to 41,400,000.0 US dollars last year. Looking ahead, we expect to sustain disciplined investment to accelerate larger scale commercial deployment. Turning to the balance sheet. Our cash and cash equivalents short term investments, restricted cash, and long term debt instrument for wealth management were 587,700,000.0 US dollars as of 09/30/2025. Compared to the balance as of 06/30/2025 of 747,700,000.0 US dollars. Around half of this decrease comes from one off cash outflow, including capital injection to Jifeng our joint venture with Toyota, to support a gen seven mass production and deployment All of the capital commitment in Jifeng has been completed The remaining cash balance reduction primarily reflects our mass production and the large scale deployment status including firstly, ongoing operational cash outflow, and secondly, capital expenditure for the Procurement of gen seven vehicle in Q3. To support our goal of 1,000 vehicle fleet by year end. For the nine months ending 09/30/2025, we have a accumulated free cash outflow of 173,600,000.0 US dollars, With the completion of our recent Hong Kong IPO, we have over 800,000,000 US dollars cash newly added providing us with substantial fuel for the next phase of growth. The IPO proceeds will help us accelerate fleet expansion into key addressable markets further optimize our platform for scale, and deepen our R and D investments. To further solidify our technology mode. Looking ahead, our mass production momentum continues to strengthen. And we are on track to exceed our full year vehicle target of 1,000. Achieving this milestone ahead of schedule. This acceleration reinforce our confidence in scaling rapidly. And we now anticipate to grow our fleet to be more than 3,000 vehicles by 2026. In addition, we've already transitioned to a asset light model for a meaningful portion of our new vehicles. This will enhance our capital expenditure efficiency. And provide a greater leverage for scalable fleet expansion. With the proven operational model, and the financial runway from the recent Hong Kong IPO. We are uniquely positioned to accelerate our business plan turning momentum into sustained profitable growth, I will now turn the call over to the operator to begin our q and a session. Thank you. Question & Answer Session Operator: Thank you. We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. For the benefit of all participants on today's call, please limit yourself to one question. If you have more questions, please reenter the question queue. If you ask questions in Chinese, please repeat them in English. And the first question comes from Ming Shun Li with Bank of America. Please go ahead. Ming Shun Li: Thank you. Thank you management to give the opportunity for me to ask a question. So I just have one question. So could the management team give us some more update on the flea size for this year and also outlook in 2026. For the new vehicles added, what is the full fleet deployment plan across different city? Thank you. James Tong: This is James. I'll take this one. So as you can see that since the launch of our gen seven robotaxi, we actually have seen a much faster than expected production and the the deployment. So so for this year, we certainly expect to outperform our previous target of 1,000 robotaxis by the year end. We certainly expect this strong momentum to continue into 2026. Now with conservative target of over 3,000 vehicles, This is mainly because we have already seen upward spiral with the launch of our gen seven vehicles. Essentially, the fleet density creates a much shorter wait time for the passengers. And then that creates a better user experience. And then the user experience leads to much higher utilization for our vehicles. And, then we can actually then charge a better pricing So so this spiral really created a strong momentum for us to expand much faster. In addition, we also started experimenting with the asset light model. By collaborating with fleet managers such as, Shihu, Sunlight, and and certainly we'll add more partners This asset light model allows us to deploy at a much larger fleet with, less CapEx. So this is our growth plan. Then in terms of the fleet deployment plan, we'll go deeper on our existing markets and at the same time, we'll go much wider to explore some new opportunities. The citywide UE breakeven for the gen seven in Guangzhou In my view, it's a pivotal milestone to validate our business model. This gives us a huge confidence and allow us to deepen our collaboration and our operation in the existing markets, which are the tier one cities in China. This is because as I already mentioned, expand expanded fleet size creates a upward spiral. But at the same time, we also expand into many more domestic cities and also the overseas markets. We see those for our future growth, Our go to market strategy on those markets is that we'll collaborate deeply with the local partners and the local government agencies to establish presence and prepare for our future growth. So stay tuned. I think we'll have, great news ahead of us. With that, back to the operator. Operator: Thank you. The next question comes from Bin Wang with Deutsche Bank. Please go ahead. Ming Shun Li: Hi, management. Thank you for taking my question. I I just have one question. Which is about the charging. I'd like to know fair charging revenue delivered another growth in 03/2025. So what is the outlook for fair charging revenues as we deploy more vehicles? Thank you. Liu Wang: Yeah. This is Leo. I'll take this question. Yes. In Q3, our fair charging revenue actually surged even faster. It was growing about two hundred and thirty three percent. Though at that time, our fleet were still with the gen five and gen six, gen six vehicles. So we believe such growth was driven by both the demand side as well as the operational side. On the demand side, we have been continuously to do our effort to improve the whole writing experience and also the user experience. So with this effort, we've seen, robust and organic user demand in tier one cities. This is also a signal of a strong consumer adoption of our robotaxis service. Giving you an example that the total registered user Was more than doubled, year over year in Q3. And on the operational side, we have also been optimizing the fleet operation to improve our vehicle utilization and the order fulfillment as Tianqin already mentioned in his remarks. So for example, we enhanced our fleet dispatching and the deployment This has consistently reduced our wait time. It's approximately 50% shorter compared to the same period. In 2024. And we also continue to expand our pickup and drop off points to create a much more smooth user experience. For example, in Shenzhen, now we have more than 10,000 such points. More than 300% increase since the end of June this year. With all this, you know, demand side and operational side improvement, I believe we could see sustained strong growth momentum through the continuous fleet expansion with more and more gen seven vehicle are into our service. First of all, we expect that our fleet has been growing exponentially from 270 next last year and to be more than 1,000 this year. And a target of more than 3,000 next year. This scaling up would also create a a better network effect. Which means shorter wait time and higher vehicle utilization and higher user adoption. We would also progressively expanding our service area. In cities such as Shanghai, Shenzhen, we've already been doing so today. We would increase the population coverage and expanding to more drivable mileages. Etcetera, etcetera. With all these being done, I think we can boost the average order value per chip. Okay. I'll get back to the operator. Operator: Thank you, sir. The next question comes from Kyle Wu with Citi Research. Please go ahead. Unknown Executive: Thanks for taking my questions. This is Kyle from Citi Research. And congratulations on achieving the milestone of Citi wide UEFA even. Could you elaborate more about the assumption behind the delivery per event? Including daily order, pricing, daily operating hours, and a ratio of remote assistance. Thank you. Liu Wang: Yes. I'll I'll take this question. Like you said, we we all believe the citywide u unique economic breakeven is a pivotal milestone for the company and also for the industry. First of all, we you know, achieved this pivotal milestone, in Guangzhou City, since our gen seven vehicle. Has been put into commercial service. And we always believe China is the largest market of global ride hitting market. And for the tier one cities, the total TAM accounts for a huge percent of ride hailing market in China. So achieving this milestone in this market is far more meaningful. From commercial perspective. Then if we talk about the unique economic, there's the revenue side. There's always the cost side. On the revenue side, first of all, on the daily net revenue per vehicle, As I mentioned, our daily net revenue per vehicle has hit 299 RMB. It's based on a two week daily average figures as of November 23. Following the launch of our gen seven vehicle in Guangzhou. And this net revenue also refers to the total RMB value generated from ride hailing service after deducting discounts. And the refunds. And in terms of daily orders, from this 299 RMB number, it was average 23 orders per day. It's fueled by robust widespread of user demand. Now let's look into the cost side. So the cost side of the unique economic basically, has two major component. First of all, it's the hardware depreciation. For gen seven vehicle, the annual vehicle depreciation is based on a six year useful life. The other major component on the cost side is the operational cost. Which include the charging remote assistant, and the ground supporting staff. Vehicle service and maintenance, insurance, parking, Internet network cost, So regarding the remote assistant, we are on track to achieve our well over 30 vehicles. And from this milestone that we achieved, we are very confident to capture the China huge TAM. Meanwhile, it also established a strategic foundation for further scale scaling up. Domestically and internationally. This not only give us strong confidence to further scale our fleet, But we also see more and more third party companies are enabled to fund their fleet and helping us to transition into a satellite model. So all these together we believe will drive our top line growth and also the call cost optimization. Okay. I'll go get back to the operator. Operator: Thank you. The next question comes from Purdy Ho with Huatai Securities. Please go ahead. Unknown Executive: Hello, James, doctor Law, and Liu. Thank you for taking my question, and congratulations on the results. Purdy Ho: We've observed a surge in diverge players attempting to attempt into the robotaxi operation. Particularly the easy makers. Right? So what's your take on these new entry entrants in the l in the level four autonomous driving space? And not so specifically, could you elaborate on the main technical and operational challenges such as tackling corner cases and fleet management for digital commerce. James Tong: Thank you. This is James. I'll take this one. So so first and the foremost, I think it's definitely as we see more and more companies announcing that they're gonna enter into robotaxi industry, I think itself, is actually a great thing because it indicates increasing recognition and the confidence in robo taxi imminent potential for the large scale of of commercialization. As the the awareness increase more resource, More companies come in. More resources will pour into this robotaxi industry. To actually accelerate its development. So overall, I view this as a good thing. But on the flip side, the robotaxi industry is actually not a one that any new player can easily enter. Because as you can see, the fact is that currently none of the new entrants are being OEM maker or being a ride hailing platforms? None of them have fully driverless vehicles deployed on the road to road. So it's clear evidence this is not easy industry to to be entered. I think there certainly three huge hurdles for the any new players. And those hurdles are business side, regulatory side, and also technical challenges. Let's probably look at the business challenges first. Because Volvo Taxi, as you see, it's not just about airfoil driving itself. It also has many more aspects such as user acquisition vehicle production, fleet dispatching, fleet maintenance, such as the cleaning, charging, and everything else. So as a leader, and first mover in this industry, we certainly enjoyed the early mover advantages. As we have a much bigger l four fleet on the road. We generated a better brand awareness We have optimized the cost on every aspects of the business as Leo already mentioned in his answer to the last question. And and the we because of early mover, we also have secured more partners. I think all those are important and it creates big hurdle for any new entrants. The second hurdle that I wanna mention is on the regulatory front. Because l four, a robotaxis needs very high safety requirement. All the policymakers worldwide have fundamentally will require a much, much higher safety requirements for the robotaxis compared with the traditional taxi That means in any city, a new player needs to prove its safety stepped by step. Before they can expand. Even into a fully driverless fleet. Typically, a new player will start with a testing with just a few dozen or maybe even less vehicles. And then once those vehicles prove to be safe, they add more vehicles and then expand operational areas. After they can accumulate the the safety records. And along the way, they also need to acquire all the required licenses and permits And this is in itself is actually a lengthy process. So overall, the whole process takes time. And this code starting process cannot be easily accelerated. So that's the second challenge. The third challenge challenge is certainly in my view, is on the technical side. And probably for this one, I'll tend to tend to elaborate. Tianqin Luo: Yeah. Sure. So I'm Kenton. So let me continue from a technology perspective. So as I as I said in my prepared remarks, we are now seeing the broader industry starting to using one model. Such as robotaxi players and automakers. Essentially, they are all about using reinforcement learning based on simulation training environments. First and foremost, I would say we started developing reinforcement learning for account driving five years ago. This give us a early mover advantage. They have one of the most experienced company in the world model. We believe that we'll continue to stay ahead as more peers follow the same path. So once the word more mature now, the human feedback and the real word, they no longer used for further iterations. Purdy Ho: So Tianqin Luo: at at the stage of training cost loop, the word model and the virtual driver co evolve into a dual spiral cycle. This means the word model and training the virtual driver And at the same time, the word model improves sales through feedback of the virtual driver. This sharply reduce reliance on the real world data. Question will touch on the technical challenge before the meeting of corner cases. Maybe example here that why the virtual driving some corner cases. So this is gonna give feedback to the word model. And the word model will improve its distribution of the corner cases. Then the next generation next version of our model will be able to create a generator testing and also improving the the the capability of the virtual battery handle the chronic cases. Okay. So looking ahead, our real advantage lies in ability to validate new technology safely and then deploy that scale. So based on our proven track record of scaling Robotech's operations, so we believe can quickly capture the next wave of innovation. Also, last but not least, our current Hong Kong IPO will further accelerate IND and the attrition cycles. Reinforcing our technical leadership at a widening over competitive mode. Yeah. With that, I'll back to the operator. Operator: The next question comes from Xia Li with Jefferies. Please go ahead. Purdy Ho: Thanks for taking my question. I have one as well. My question is about what do you see as the main factors behind the faster expansion of your operational areas. And beyond technology, what else do you think really matters? And from the technical perspective, are you using large language models? And if so, how are they helping push for autonomy fall forward? Thank you. Tianqin Luo: Thank you. This is Kim Chubb. Will continue to answer this question. I think your question consists of two parts. Let me answer your question on generalization first. Then we address the other one on large language model later. Generalization, would say tech technically, over text side, it's by nature built for generalization. So a good example is that over operational area expansion into new areas in Shanghai, Pudong and Shenzhen, Nan Shan District, the third quarter. In both cases, it only took us only a few weeks for our verifying the city to truly realizing fully drivers operation to the public. There was no need for additional model training. Quick the key reading that and, also, native architecture is a beautiful handling corner cases and to June cases. While these cases are actually very consistent across different regions, They are really nothing more than things like small obstacles, boxes on the road. Pedestrians that they are crossing. And suddenly, they change from other cars without looking at the vehicle behind. Etcetera. So it's just about the likelihood and the probabilities of each what happening. So hope that can help understand why the awful tech stack by nature built for generalization. So at this moment, I will say, the key to over new area extension, the number of v number of robotaxi vehicles. If we extend to too many areas without adding more cars, it will instead dilute the density. So that is the reason why the speed of operational error extension cannot significantly faster than that of three five. Yeah. So then then let me share my thought on the second part. That's a land large language model. First, I will say first and foremost, there are two non negotiable requirement for l four onboard value model. Uncompromising safety. And also low latency. There are the lot longer more than chatbot don't need and that are not designed to meet as well. So for safety, last we went not not long long model generally have issue like model health and nation. Which is which is unacceptable for l four in terms of safety. And for latency, large language models are optimized for throughput like tokens per second, In contrast, l four, the optimized for low latency and the ability to run fully driverless over textile chips. That are both low power consumption and the cost efficient. Moreover, large language model overly run human data. Fundamentally limits them to the boundary of the existing human knowledge. Add anything ever inevitably makes them pick up human errors. Bad habit from human driver. So we also extensively use l a lot of language model in the IND effort such as AI has human machine interaction, engineering productivity tools for coding and documentation, and analysis for the rider feedback for extended improvement. But, however, due to the multiple reasons mentioned above, large large language model is by nature not good for driving model onboard. So with that, so back to the operator. Thank you. Unknown Executive: Thank you. That's very helpful. Operator: The next question comes from Jin Yu Fang with UBS. Please go ahead. Unknown Executive: Hi. Thank you, management, for taking my questions. I have one question here. It is currently that only cooperate with multiple OEMs for robotaxi manufacturing including BAIC, GAC, and Toyota, Does management see potential for improving operating leverage through working with only one OEM team staff? Thank you. James Tong: This is Jets. I'll take this one. So the matter of the reality is that in the whole global taxi industry, local governments and the local residents actually have a strong preference preferences for the local branded taxi vehicles. So so that's a reality. Typically, when, robotaxi fleet is relatively small. The brand that doesn't really matter much. But if we need to deploy a significant fleet size, the requirements certainly is no longer true. And the local branded OEMs is much more more preferred. So it is necessary for us to cooperate with multiple local OEMs in different regions it actually can help us to expand into different markets much quickly And that's why we are now collaborate with three OEMs to produce our gen seven robotaxis. It is true that feeding our autonomous driving kit into a different vehicles actually posts a huge technical challenge But on the if you look at from the other side, the mere fact that we were able to standardize our technology and being able to treat our setup into different vehicles. That shows our technical generalization And down the road, it actually can create a huge competitive edge. So as a result, we can add new models much faster to accelerate our expansion into new regions. For example, in the Europe, we currently added the partnership with Stellantis. So with that, back to the operator. Operator: The next question comes from Tung Zhujia with Guosun. Please go ahead. Thanks for taking my question. Purdy Ho: I have one question. Why Pony can use remote assistant on robotaxi when the car meets difficulty? Instead of remote control human take up. Over? And what is the technology difference behind that? Tianqin Luo: This is Kim Chen. I will take this one. I think one of the previous question also touched on the remote assistant for robotaxi. So let me elaborate on that at least more detail. First and foremost, I'd say over remote assist never control the vehicle. Through the thin wheel or pedal. Instead, they provide remote support and suggestions by responding to service request. For all the time, the vehicle can independently drive from this independently make decisions without remote assistance. Assistance only initiates one of vehicle requested. Rather than through the remote driving. So one vehicle received the assistance response. The onboard driving system will still make time decision based on the actual situation. Because the vehicle never waits for remote command to react to act. So it will remain safe, operates operation without any dependence on network latency. So one typical example of remote assistance is the situation of a temporary traffic control. In such cases, the system may request remote assist which can provide high level suggestion to confirm the car's decision navigating through a scenario. But also, as I mentioned, we have to continue to improve the AI algorithm, and also leverage our general AI capability to recognize more and more complex contact context This allows us to improve remote assist to vehicle ratio in a third quarter quarter. To reach one to 30 by year end. Hope that can answer your question. Go back to the operator. Operator: The next question comes from Serena Li with China Securities. Please go ahead. Purdy Ho: Okay. Thank you for taking my question. This is Serena Li from China Security. As far as we know, some countries in The Middle East have issued fully driverless robotaxi license recently. What's our view on that? What town is overseas? To stretch it? James Tong: Sure. This is James again. Let me take this one. Our company's mission has always been autonomous mobility everywhere. So we certainly have the global ambition since our funding to actually utilize our technology to benefit the local societies worldwide. Currently, our global efforts are focused on the markets with hyper growth potential. Those are the markets with typically strong mobility demand well developed infrastructure, and a supportive regulatory environment. When we evaluate a potential market to enter on a high level three factors, we'll consider. One is the, adjustable market size, which is 10. Second is the openness and the execution of the local government. To support. And issue permit for the fully driverless commercial operation. Third is how strong is the local partner for their on the ground resources. And operational capacities. So as you can see, our globe current global expansion status is that we have already entered eight countries for our robotaxi. And we also for example, in Q3, we added Qatar as a new market by collaborating with Movasaleh. In Q3, we have also saw a rapid revenue growth especially for the robotaxi for our overseas from our overseas markets. And we certainly expect this momentum to continue. So going forward, we will enter other global markets if we see, there's a good growth opportunities. So this is our overseas strategy. With this, back to the operator. Operator: As there are no further questions, I'd like to turn the call back over to the company for closing remarks. Tianqin Luo: Thank you, operator. This is George again. If anyone has any more questions, feel free to contact the IR team. We will conclude our call today. Thank you, everyone. Operator: This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your line.
Clint Tomlinson: Good morning, everyone, and welcome to the Anavex Life Sciences Fiscal 2025 Fourth Quarter Conference Call. My name is Clint Tomlinson, and I'll be your host for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. And during this session, you would like to ask a question, please use the q and a box or raise your hand. Please note that this conference is being recorded, and the call will be available for replay on website at www.anavex.com. With us today is doctor Christopher Missling, president and chief executive officer and Sandra Bohnish, financial officer. Before we begin, please note that during this conference call, the company will make some projections and forward looking statements. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. We encourage you to review the company's filings with the SEC that include, without limitation, the company's forms 10 k and 10 q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward looking statements. These factors may include, without limitation, risks inherent in the development and or commercialization of potential products, uncertainty in the results of clinical trials or regulatory approvals, need an ability to obtain future capital, and maintenance of intellectual property rights. This conference call discusses investigational uses of agents in development and is not intended to convey conclusions about efficacy or safety. And there is no guarantee that any investigational uses of such products will successfully complete clinical development or gain health authority approval. And with that, I would like to turn the call over to doctor Misslin. Christopher Missling: Thank you, Clint. And good morning, everyone. Thank you for being with us today to review our Q4 financial results and quarterly business update. We are fully committed to bringing Oral Black Amazin and oral ANAVEX three seventy one to patients. We are dedicated to delivering on the value of our pipeline and maximizing its potential for patients investors, and our employees. Over the coming months, we will continue to focus on progressing our clinical trials and regulatory actions. At the same time, we're aiming to expanding our collaborative initiatives and strategic partnership activities. As previously announced, through our update on the status of the regulatory filing of blacaramazine in Europe, we expect the CHMP to adopt a negative opinion on the MAA at its December meeting. We intend to request a reexamination of the CHMP opinion upon its formal adoption based on feedback and continued guidance from the CHMP, EMA and the Alzheimer disease community. DMA procedures adopted by the CHMP allow an applicant to request reexamination of its decision. Which would be undertaken by a different set of reviewers that conduct a new examination. Independent from the first opinion. Our expert advisers investigators, as well as patients and their caregivers encourage us our commitment to continue working in partnership with global regulatory bodies to advance science and potentially new treatment options for patients and their families. As part of the MAA review process, we have successfully undergone a full good clinical practice GCP inspection of the trial data by EMA. The manufacturing package has passed the EMA review as well. A good clinical practice GCP inspection is an official review by a regulatory authority over clinical trials documents facilities, records, and other resources to ensure compliance with g p GCP guidelines. We're looking forward to working closely with EMA and other stakeholders advance our investigational therapy for early Alzheimer disease. Importantly, we also announced we had initial contacts with the authorities in The US regarding our Alzheimer's disease program. And we intend to provide further updates on our interaction with the FDA as they become available. Going forward, we will provide both regulatory and clinical trial updates on dacamazine in other indications, such as Parkinson disease, Rett syndrome, and fragile X. This will include the disclosure of planned future clinical trial designs as we continue to advance our therapeutic pipeline. Scientific & Clinical Data Updates Christopher Missling: During the most recent quarter, we announced several new scientific and medical publications includes a peer reviewed publication in the journal Neuroscience Letters, titled Prevention of Memory Impairment: in Hippocampal Injury with blacamazine in an Alzheimer's disease model. This study shows that pretreatment with blacarbazine prevented amyloid beta induced memory impairment. And brain oxidative injury suggesting that blackamcin is an attractive candidate for Alzheimer disease pharmacological prevention. A peer reviewed publication the journal Eye Science asserting the precise autophagy mechanism of sigma one receptor through blacamazine activation titled conserved LI R specific interaction of sigma one receptor in GABA RAB. A publication oral glycogen phase two b slash three trial confirms identified precision medicine patient population significant broad clinical and quality of life improvements for early Alzheimer disease patients. To be available online as a preprint and in submission to a peer reviewed medical journal. Anavex announced the latest published scientific results for blacamazine. On all standard scales for measuring Alzheimer's disease and cognitive decline after forty eight weeks, the defined precision medicine population ABCEAR three, consisting of early Alzheimer's disease patients with confirmed and progressed pathology taking thirty milligram once daily oral blacamazine demonstrated barely detectable decline This was comparable to minimally perceptible decline in prodromal which is pre dementia aging with adults. On October 29, we announced additional long term clinical data for blacamycin, This new data demonstrated continued long term benefit from oral blacamazine compared to decline observed in the Alzheimer disease neuroimaging initiative control group also called ADNI, a control group established by a clinical research project launched by NIH in 2004. In the intent to treat population, significantly less cognitive decline was observed for the black carnosine participants compared to the acne control group at forty eight weeks with a significant and clinically meaningful difference in mean change from baseline at a 13 total score of minus 2.68. Points. Over the course of the open label extension study, at time point ninety six weeks, these two groups further diverged sharply with statistical significant differences in mean change in ADAS cogs. 13 total score at ninety six weeks of minus 6.41 points. The difference between groups continues to increase at one hundred and forty four weeks. To ADA's COC 13 total score difference of minus 12.78 points. The results provide evidence of the significant beneficial therapeutic effect of blacamazine which positively separates from black from which positively separates from the ADNI control group with duration of treatment. This significant beneficial therapeutic effect of blacamazine compared to decline observed in the ADNI control group, trans translates into seventeen point eight months of time saved with oral blacamazine. Allowing for longer independence of the patients by approximately over one point five years. Looking ahead, Annavec will be presenting additional data and scientific findings at upcoming conferences and in publications. These include the direct relationship between cognitive function and reduced brain region atrophy with blacamazine. Oral blacamazine for early symptomatic Alzheimer's robust effect size through precision medicine an analysis of the ANAVEX two seventy three AD024 randomized trial. Also, newly identified precision medicine gene collagen 24A1, with over seventy percent, seven zero, prevalence, establishes effective treatment of early Alzheimer's disease with glacamazine. And also, continued long term benefit from oral blacamazine compared to delayed start analysis and decline compared to natural history studies. ANAVEX 3-71 (Schizophrenia & Neuropsychiatry) Christopher Missling: With regard to ANAVEX three seventy one, in October, ANAVEX announced positive top line results from its placebo controlled Phase two clinical study, evaluating ANAVEX three seventy one for the treatment of schizophrenia in adults on stable antipsychotic medication. The study successfully achieved its primary endpoint demonstrating that ANAVEX three seventy one was safe and well tolerated. The safety profile was consistent with previous studies of ANAVEX three seventy one in healthy volunteers. With no serious or severe treatment emergent adverse events reported in either Part A or part b of the study. In addition, to meeting the primary safety endpoint, secondary and exploratory analysis revealed encouraging trends in several outcome measures. Our other oral medicine candidate ANAVEX three seventy one, represents therefore, a transformative opportunity in neuropsychiatric drug development. Leveraging its unique dual sigma-one agonist unique sigma-one m one PAM mechanism to address multiple high value indications through a unified neuroinflammatory biomarker platform Further detailed analysis of randomized, strictly double blind, and placebo controlled clinical trial under DEX371 SZ001 revealed very encouraging data in suffering from schizophrenia. Following successful Phase two results from the SZ 001 study while confirming the accident safety profile of ANAVEX three seventy one, the study demonstrated reduction in GFab NYLK40 neuroinflammatory markers. G Fab is a structural protein of astrocytes in the brain, represents aberrant activation of astrocytes the major brain glycol cell lineage. Astrocytes participate in brain neural function in multiple ways. Amongst them, critical modulation of synaptic relay between neurons in neural circuits. Its dysfunction a key pathogenesis mechanism in schizophrenia. This positions ANAVEX three seventy one to advance into pivotal trials with the once daily modified release oral tablet enabling once daily dosing across depression, and psychosis indications where current therapies have failed or shown limited efficacy. Addition to schizophrenia, one high unmet need opportunity would be depression in Alzheimer's disease. With currently no approved therapies. Up to forty percent of people with Alzheimer experience significant especially in early and middle stages of the disease. Depression in Alzheimer's is associated with worse quality of life. Accelerated cognitive decline, and earlier onset of dementia symptoms. The neuroinflammatory biomarker strategy positions Anavex 371 to potentially achieve disease modification claims beyond symptomatic treatment, representing a paradigm shift in neuropsychiatric drug development. And now I would like to direct the call to Sandra Boenisch, principal financial officer of ANAVEX, for a financial summary of the recently reported quarter. Sandra Boenisch: Thank an you, Christopher, and good morning to everyone here. I'm pleased to share with you today our fourth quarter financial results for our 2025 fiscal year. Our cash position as September 30 was 102,600,000.0, and we had no debt. During the quarter, we utilized cash and cash equivalents of 8,600,000.0 in our operating activities. After taking into account changes in non cash working capital accounts. As of today, with a current cash balance of over a 120,000,000 we anticipate that at the current cash utilization rate, our cash runway is more than three years. Our research and development expenses for the quarter 7,300,000.0 as compared to 11,600,000.0 in the comparable quarter of last year. General and administrative expenses were 3,500,000.0 as compared to 2,700,000.0 for the comparable quarter of last year. Compared to the same quarter of fiscal twenty twenty four, we saw a decrease in operating expenses mostly driven by the completion of a large manufacturing campaign of larcamesine and a decrease in clinical trial activities. As a result of the completion of our open label extension studies and our ANAVEX three seventy one phase two study in schizophrenia. And lastly, we reported a net loss of $9,800,000 for the quarter which is $0.11 per share. Thank you. And now I will turn the call back to Christopher. Christopher Missling: Thank you, Sandra. In summary, we are focused on continuing to advance our precision medicine compounds we are excited to be potentially making a difference for individuals suffering from these diseases by presenting a scalable treatment alternative alongside the ease of all administration. I would now like to turn the call back to Clint for Q and A. Clint Tomlinson: Thank you, Kasr. We'll now begin the Q and A session. If you have a question, please raise your hand or enter it into the q and a box. It looks like our first question will from Michael Obadiah from HC Wainwright. Hello. Good morning. So are we asking the questions on behalf of Ram Selvaraju? From H. Wainwright? Have a couple of questions for the management. And the first question is, what is the likely commercial impact of the failure of semaglutide on the outlook for glycogenesine in Alzheimer's disease? Second one is when is the next formal discussion of black hemisinin scheduled to take place with the FDA? And the third question is, what initiatives does INOVIX plan near term pursue glycemic sign approval in regions beyond the European Union and The United States? Thank you. Christopher Missling: I appreciate the questions. So to answer the first question about the impact of the semaglutide glutide results. We understand there's an unmet medical need here. And this is certainly further highlighted by the recent setback by the two EVOQUE studies from Novo Nordisk. And also by other companies, including other large pharma companies recently, with also with anti tau injectables. So there's a lack of upcoming pipeline certainly. We also understand that the Evoque semaglutide GLP one finding highlight the complexity of Alzheimer disease biology. And the challenges of expecting metabolic pathway alone to meaningfully alter your dinner processes. But Alzheimer's more complex, involves impaired proteostasis, autophagy dysfunction, synaptic failure in multiple converging mechanism. So therapeutic effects seen in related conditions do not always translate into kind of benefit here. However, we have with oral once daily blacamazine with this upstream mechanism of action, which restores autophagy, which precedes these pathologies adjust summarized and has demonstrated in early Alzheimer disease patients clinically meaningful efficacy of slowing cognitive decline significant amounts. Some cases over fifty percent. With an acceptable safety profile with no ARIA, and as demonstrated in the phase two b less free study. So the answer to the question is this makes it more clear that this is a complex disease and there's a lack of compounds near term available for patient to address this unmet need. Second question is about timing. So we provide as we stated, updates what we'll follow-up in the initial discussion with The US regulators and we'll provide updates as we receive them. But we're very excited about the initiation of these discussions. Regarding the third questions, we are continuing to now explore other regulatory geographies. As well as moving forward where we can see fit to address open questions. So I trust this addresses the question. Michael Obodai: Yes. Very much for the clarity and transparency. Christopher Missling: Thank you. Clint Tomlinson: The next question is gonna come from Tom Bishop at BI Research. Tom, you need to unmute Christopher Missling: per the press release, the, CHMP seems to have given you some guidance about the additional information they they need to see, for example, biomarker. But can you elaborate, what this includes? Christopher Missling: So we we want to proceed with the reexamination. Because we owe it to the patient, and we get the feedback also from investigators that the unmet need is very high, And we it boils down to CHMP the benefit await the risks. Of the drug to be on the market. And that discussion includes all available data. And it might be you know, to make the glass half full, that the should or may out biomarker, which are not subject to influence, might be helping in getting to that point. So that is the background of biomarker best including biomarker assessments. Tom Bishop: Well, there was no particular biomarkers that you you hope to bring out? Christopher Missling: We have communicated, and it's, been published that we have a brace strong biomarker of the pathology. Which is the analogy of oncology where tumor grows and you look at the size of the tumor, which is measurable objectively, can be measured objectively, and it cannot be influenced by a patient or by anybody else. The same as in Alzheimer's disease is the brain shrinks. So the brain gets smaller, then the the brain mass shrinks, and we can measure that as well. And it's a very objective marker of neurodegeneration, and we demonstrated that this marker of neurodegeneration is significant, the less or even halted in some patients, with active oral blacamazine. While in the placebo arm, this shrink, the brain continues. Which is the clear definition of the advancement of the Alzheimer pathology. And we like to include, of course, that as well in the discussion. Tom Bishop: What about the ABC Clear data? I mean, that was very compelling with forty eight to eighty six percent slowing depending on the gene biomarker, or combination Was this guess this was not considered by the CHPT as it came out, MP because it came out kinda late. But, can this be included for consideration on reexamination? Christopher Missling: It's a good question. So we like to emphasize our focus is on each individual patient affected by Alzheimer. And we see that very clear beneficial signal of cognitive also clinically meaningful effect in both cognitive and functional also in all the other endpoints consistent improvement and significant improvement of the clinical outcomes that is the CGI that is the quality of life and PRQ, MMSE, all the measures are the SCOC 13, see there from the boxes, ADCS ADL, In all this a b clear, two and three, populations, we see clearly clinically meaningful and significant improvement. So we would like to also point that out and that is really good a good dataset to have and to put this forward. And also, last but not least, making the point about the focus on each individual patient we see a reversal of the negative trajectory of quality of life of the patients in seventy percent of the patients seven zero, in the trial. That means the quality of life is better after one year than at the start of the trial. That's very impactful because that's what is really impacts the individual patient. Tom Bishop: Okay. If the approval ultimately came from the EMA, and and let's assume perhaps it was conditional. Is is there a rule of thumb or how long you would have to to do a conditional trial? Christopher Missling: It's really not it's it's really hard to speculate about this. But we would like to make sure we wanna point out we are motivated and driven by the fact that there's a huge significant unmet need for a drug which with these features today, and we pointed out the recent pipeline failures, And also, I wanna point out that between twenty and twenty five, this year and 2030, there will be more than 300,000,000,000 of large pharma revenue at risk from loss of exclusivity with over 40% of top pharma sales exposed creating an estimated $90,000,000,000 growth gap even after internal pipeline contributions. So that means there's also a huge unmet need not only for this indication, but also for overall pipeline to be filled by large pharma. Tom Bishop: Well, that's interesting that you brought that up because I wanted to ask about how you're coming with you know, exploring your options if you get approval. For example, blarcamesine to market. large pharma, organizations, and so forth to take Christopher Missling: Yes. So we pointed out in just in this call that one of the key things we are focusing on now is expanding the corporate development partnership activities And we mentioned that we are presenting at the most important conference every year, which takes place in San Francisco in early January. And we are a presenting company on Wednesday. On at that conference itself. And that allows for more meaningful discussions, which is the hotspot for business development activities. At at this conference, and we will make sure we are present in that regard. Tom Bishop: Okay. Well, I think it'd be a real tragedy for Alzheimer's patients to to to not see this drug approved because especially the ABC CLEAR data to me is so convincing. That and and the risks are so low, and it's oral. That it I I just can't fathom that it wouldn't get approved, but that's just me. I wish I had a vote. Christopher Missling: We would agree. Thank you for your vote as well. Clint Tomlinson: Tom, are you there? Tom Bishop: Yeah. Okay. As long as I'm still on, is there a mechanism of action for call 241? Christopher Missling: Yes. There is. And this will be now published in a peer review paper But in summary, I can say that collagen twenty four zero one is the ingredient key ingredient of the extracellular matrix called ACM. When you look at pictures of brain neurons or astrocytes, we see this very nice you know, connections or network like a web. Spider web description or pictures. And in the background, it's always like pitch black. And you're wondering this is how the brain looks like. And, of course, it doesn't it does not. And this background is actually the axosodular matrix. And that's where these neurons and astrocytes are residing or sitting on. Your brain. And if you have a mutation of this extracellular matrix, then your response to blacamazine is impaired. The autophagy flux the autophagy restoration, which is the recycling mechanism of the neurons, which precedes a beta and tau. So it's further upstream closer to the origination of the pathology of Alzheimer, if you like, that is impaired. And for that reason, we found that patients with a wild type, with not mutated collagen genes, they respond extremely well. And we see effects of in ADAS-Cog13, minus 4.7. In the patients with that effect. With that wild type gene. And in in the CDS or the boxes, the scores go up, up to 1.4, minus 1.4. And these are really very unprecedented effects of benefit. And we pointed out that that means since patients are actually almost not declining or declining less than prodromal patients. Which are less impaired. So that's quite impactful. And this is really intriguing science. And it will be published in a major peer review paper very soon. So extremely intriguing. And also consistent with the mechanism of blackamazin. Tom Bishop: Great. Okay. Well well, that's it for me. I'm just excited to see this ABC data get examined by the e CHMP as well. Christopher Missling: Appreciate it. Thank you. Clint Tomlinson: Thank you for the questions, Tom. The next question going to come from Jesse Silvera. Spirit of the Coast Analytics. Jesse Silveira: Hey. Good morning. Can you hear me alright? Clint Tomlinson: Yes. You're fine. Ahead, Jesse. Jesse Silveira: Good morning, Clint and doctor Missling. This is Jesse Silvera from Spirit of Coast Analytics. Thank you for taking my call. Some of these questions you've kind of addressed a little bit earlier, but hopefully you can maybe provide some additional color on on some of them. Yeah. Just to reiterate kind of one of your previous points. My first question is sort of an assumption, though I think you got at it earlier. But considering the CHMP review is ongoing and a final decision hasn't even been rendered yet, is it safe to say that you can't discuss the reasons negative CHMP trending or give details on the strategy going into the reevaluation Christopher Missling: That that's, yeah, correct. That's correct. Jesse Silveira: Okay. Got that. And perhaps adjacent to that conversation, you think you can give more detail on a statement that was found in the fourteen November press release? It stated, quote, the company intends to request a reexamination of the CHMP opinion upon its formal adoption, including providing relevant biomarker data based on feedback and continued guidance from the CHMP, EMA, and Alzheimer's disease I think it was Tom that was getting at this earlier, but can you can you comment any further on the the biomarker data? I think I saw in your press release this morning that you plan to publish maybe a paper about brain atrophy and its direct correlation to cognition. Is that accurate? And is that some of the data that you may may not be presenting to to the EMA? Christopher Missling: That's accurate. So the advantage of the biomarker is that the biomarker endpoint is objective and cannot be influenced by a patient the caregiver, or the physician, or anybody else as a matter of fact, because it's objective. And I pointed out that in analogy to oncology where you get drugs approved purely by the effect of the brain measure sorry, of the tumor measurement. And while, for example, the clinical effect was not yet significant, And that is something which we like to point out that the analogy is in Alzheimer, the clear pathological shrinking of the brain, which is one of the first features Alois Alzheimer himself actually identified his patients with Ultima, the first patient he assessed. Subsequent later on when he looked into the brain, he found this additional, you know, aberrant features of proteins than identified as a beta plaque or tau. But the first thing he identified was really that the brain shrinks and the holes, the gaps widen in the brain. And that's really the pathological logical consequence of a declining brain, less less functional brain. And it's like a lemon which is drying up. You cannot squeeze anything out of it. And that is really a strong objective biomarker and biomarker end point for demonstrating an objective effect of a drug and that was demonstrated with blacamazine. So we just make sure that gets visibility and and part of this is also a correlation analysis. That we are able to find that not only that there's a shrinking less shrinking of the brain, shrinking of the brain going along with blackamazin treatment, but also that correlates with each patient with a improvement in the respective regions. Of the brain's activities of the adascoct 13 subdomains, for example, For example, learning and and reading and writing as in one area of the brain, and if that is improved, in the clinical trial for the patient, that same region of the brain responsible for that if that also is less impaired in the active glycogen treatment arm compared to placebo. And if you can find this this further confirms the true effect of the drug. And that will be convincing in our opinion. Jesse Silveira: I I think that's really interesting. I'm definitely looking forward to that. And I think kind of related is in light of the semaglitude failure is that they reported that you know, that the drug had improved bio markers, amyloid, maybe tau. I don't recall about tau. But you know, the improved amyloid but had no clinical effect no improvement on CDR sum of boxes. And I think that I'm not sure exactly when there needs to be if there will be a time where regulators will no longer see amyloid equals, you know, better cognition or whatever. But moving along kind of on September, the company PR'd really impressive AppClear three comparisons to Prodromal. Populations and had a detailed follow on analysis of AbClear two and AbClear three subpopulations in a GWAS preprint a little bit later. AbClare three in particular appears to showcase an effective functional cure in early Alzheimer's patients and you covered the mechanisms of these earlier But can you give further color on APCLEAR one versus APCLEAR two and APCLEAR three? Specifically whether they were prespecified or exploratory and how regulators may or may not view these subpopulations in light of being exploratory or being prespecified. Is this something you can talk about? Christopher Missling: Yeah. So the definition of a b clear one which basically is the wild type sigma one gene. Which was identified already in the beneficial effect of that gene, in the previous preceding phase two a study. Which was published 2020, we identified that patients with the sigma one wild type which represents seventy percent, seven zero, of the population, had a better response to blarcamesine than those with the respective mutation. It's a point mutation and that's how biology is. Thirty percent of overall population, that's not patients, but overall population has a one point mutation, r s one eight hundred eight sixty six, and this one mutation changes the confirmation of the gene makes it a little bit less viable or effective in its ability to restore homeostasis. Increase autophagy, which is the mechanism of the activation of blackamisines through sigma one activation as its ultimate effect. And so the patients with the wild type, the fully functional non mutated gene respond better. So this was identified in the phase two a. So we prespecified the analysis of the primary endpoint as well as the secondary and exploratory endpoints With these in mind, how would patients do in the phase two b slash three study? With the wild type sigma one. And that was prespecified, and we now define this as a b clear one. And we did indeed demonstrate or it was demonstrated that indeed that was confirmed Blacamazine increased effect of patients with that of seventy percent, roundabout is the number of patients, seven zero, which improved better than the patients with the mutation. And that is improving. So now ABCLEAR2 was the result of a pre planned in the trial. We did a whole genomicosome analysis. That means we looked at all patients in the study and analyzed their genes and genes expression and response to the drug based on the genetic profile as well. That is the DNA of all patients. And in this analysis, which was preplanned, we found to our surprise, unexpectedly, one gene showing up is a extremely strong driver of efficacy And that gene turned out to be the collagen 24 a one gene. And that gene, I explained it just before, is involved in the buildup of the extracellular matrix. That's really really intriguing novel science and underappreciated or overlooked up to now by the in the field because everybody always looks at the neurons or the astrocytes or the areas of active involvement in the brain. But the extracellular matrix is where all these neurons and astrocytes are residing or sitting on. It's like a a pavement, like a street. And if that street is not smooth, like a highway, or like a a pavement, then then this then this these neurons cannot function well. And we were able to find find them because the patients with the mutation of this colagene in gene in this extracellular matrix, not respond so well, to blackamazine, representing that they're not as viable as the respective wild type carriers. And the good news, though, is the collagen wild type represents seventy one patient percent of the overall population. And that was also found in our trials. We had run about seventy percent with patients with this cytology and wild type gene. So very intriguing new data, and that was, as a consequence, was preplanned in the study. Of course, not prespecified because we found it in the analysis of the phase two b slash three study. Jesse Silveira: Okay. And it's my understanding that Leqembi and Kisunla were both approved after a CHMP reexam, and that subpopulation data enrich their filing by conferring a more desirable like, safety efficacy axis. Is that true, and is this any way relevant to Anavex's current position with some of this data, the the ABC CLEAR two and ABC CLEAR three data. Christopher Missling: It's it's it's correct. Both lecanumab and donanemab and these are run by large pharma companies. They had been a low prior approved in The US, reached the same point as we did just as we communicated a few weeks ago. And they underwent the same reexamination and were able to get approval. I don't want to I would say, make that that this is a guarantee for us because every review is complex and we are not able to anticipate or know the outcome of this re reexamination process, but the body pulls down to in the assessment of lecanumab and donanemab. Was the assessment and the judgment of benefit needs to outweigh the risk. Sure. And our our drug has safe has safety. It's has no ARIA. We talked about the efficacy, which we just discussed. But we cannot anticipate, of course, an outcome of the regulatory review. Jesse Silveira: Okay. Understood. And moving forward, will you be immediately refiling for the EMA reevaluation? To my knowledge, it took about three and a half to four months for the CHMP to give Leukemia and Kasimha their next opinions respectively. So maybe we could see something around April. Is that about what you're projecting? Christopher Missling: That that's correct. We will immediately ask for the reexamination as soon as possible. And, again, while there's never certainty to obtain approval from regulators, we remain highly excited about the science and the data. Jesse Silveira: Okay. And, you know, being a small with a unique mechanism of action, it's probably difficult for you to garner support from the community. I recall that the European Alzheimer's disease consortium, Alzheimer's Europe, and even the US Alzheimer's Association kinda put together persuasive arguments for the CHMP to consider during the Lyckembian re evaluations. Does Anivex have any support like this? Are you aware of any organizations, key opinion leaders, or even patients from the trial attempting to persuade the CHMP to reconsider. Do you have that support from the community? Christopher Missling: It's really not for us to make that move, and the community is aware of our of our drug, and we let them basically do what they think is appropriate. And what we only can do is point out the data and this is a process. And we are committed to this process. But also, very importantly, with this process, we gain also confidence with the regulators We are doing this in a partnership. We are doing this in a open discussion. We are are also getting the the ability to get feedback, which we need to move this forward in what way it takes to help patients addressing this unmet medical need. Jesse Silveira: Okay. Well, I see that we're, you know, nearing time. So to conclude for me, least, it's pretty obvious to anyone paying attention that, you know, Blarcamesine should likely be approved for early Alzheimer's patients and, you know, the the efficacy has been absolutely unprecedented in these megalithic effect sizes were achieved in a really small population, which should theoretically make it more difficult to do So I think it's a clear win for patients, caregivers, and payers, and I I think part of the problem the first time around may have been that it was sort of you know, piecemeal analysis and you're, you know, you're introducing analysis as you're going. But now that you have all analysis at your disposal, and a clear narrative, it's my hope that the company will use know, the reexamination to tell Barcambizine's story and earn the approval it deserves. So thank you for taking my call, and you have a good rest of day. Thank you. Christopher Missling: Oh, we appreciate the kind words, and our expert advisers advises us also to proceed and so do the patients and investigators They also advise us to proceed. And we may remain committed to do our best. Thank you. Clint Tomlinson: Yeah. Thank you, Jesse. And doctor, I don't see any further questions at this time. Christopher Missling: Well, thank you. So we are thankful for your continued interest and trust in ANAVEX. Wishing you a happy and blessed Thanksgiving. But in closing, we like to continue to point out our focus on execution as we advance our therapeutic pipeline to potentially improve patients' lives living with these devastating conditions. Oral once daily blacaramazine has the potential to address high unmet medical need in early Alzheimer patients. With its clinically meaningful efficacy profile, of slowing cognitive decline by more than thirty percent and sometimes even higher for certain populations. Its acceptable safety profile as demonstrated in the phase 2bthree program. Thank you very much. And, again, happy and blessed Thanksgiving. Clint Tomlinson: Thank you, ladies and gentlemen. This will conclude today's conference call. We appreciate you participating, and you may now disconnect.
Operator: Good morning, and welcome to the Analog Devices' Fourth Quarter Fiscal Year 2025 Earnings Conference Call, which is being audio webcast via telephone and over the web. I'd like to now introduce your host for today's call, Mr. Jeff Ambrosi, Head of Investor Relations. Sir, the floor is yours. Jeff Ambrosi: Thank you, Gigi, and good morning, everybody. Thanks for joining our fourth quarter fiscal 2025 conference call. Joining me on the call today is ADI's CEO and Chair, Vincent Roche; and ADI's Chief Financial Officer, Richard Puccio. For anyone who missed the release, you can find it and relating financial schedules at investor.analog.com. The information we're about to discuss includes forward-looking statements which are subject to certain risks and uncertainties, as further described in our earnings release, periodic reports and other materials filed with the SEC. Actual results could differ materially from the forward-looking information as these statements reflect our expectations only as of the date of this call. We undertake no obligation to update these statements except as required by law. References to gross margin, operating and nonoperating expenses, operating margin, tax rate, earnings per share and free cash flow in our comments today will be on a non-GAAP basis, which excludes special items. When comparing our results to our historical performance, special items are also excluded from prior periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and additional information about our non-GAAP measures are included in today's earnings release. References to earnings per share are on a fully diluted basis. And with that, I'll turn the call over to ADI's CEO and Chair, Vincent Roche. Vincent Roche: Thanks, Jeff, and good morning, everyone. So our fourth quarter results reflect the ongoing business recovery with continued growth in revenue and earnings per share, both of which finished above the midpoint of our outlook. Now widening the aperture to our fiscal '25. Revenue accelerated throughout the year and returned to meaningful growth despite the persistent macro and geopolitical headwinds. All of our end markets increased by double digits, reflecting both cyclical and company-specific drivers, including strong execution against our Maxim revenue synergy targets. Top line strength, combined with margin expansion, resulted in earnings per share growth of more than 20% in fiscal '25. Our strong operating results and reduced CapEx enabled us to generate record free cash flow of more than $4 billion or 39% of revenue. We also returned more than $4 billion to our shareholders, supporting an 8% dividend increase as well as share count reduction. Innovation has always been integral to ADI's brand and our value proposition, forming the foundation for strong financial performance. Consequently, R&D activities received capital prioritization with record investments made in FY '25 to advance our leadership in analog, mixed signal and power technologies. We've also intensified our focus on software, digital and artificial intelligence capabilities to strengthen our core franchise, enabling us to address increased customer complexity and expedite their innovation cycles and time to market. Our comprehensive technology portfolio, combined with extensive application domain expertise uniquely positions us to proactively identify and resolve the most complex engineering challenges for our customers. As a result, we're realizing stronger value capture as reflected in the increase in our average selling prices, particularly in new products, where ASPs significantly exceed those of legacy offerings. Beyond product innovation, our dedication to customer success encompasses ongoing investments to streamline and accelerate their product development activities. To this end, we are rapidly expanding our development support environment from research to deployment with a combination of proprietary ADI tools and leading ecosystem and open-source platforms. Furthermore, following the acquisition of Maxim, we've allocated over $3 billion in capital expenditures to substantially enhance capacity, optionality and resiliency for our customers supporting our long-term vision for sustained growth. Now as you've seen, our relentless focus on driving customer success translates to strong results and a diverse design pipeline that grew more than 20% in fiscal '25. So I'd like to share a few examples of our success this past year. Within industrial, every sector grew, driven by improved cyclical dynamics and powerful secular trends such as AI, automation, and the drive for efficient and reliable energy generation, transmission and distribution. For example, the exponential growth in demand for AI and high-performance compute drove a record year in our automatic test equipment business, building upon and extending our strong position in the SoC and memory test markets. We anticipate further growth in FY '26 due to our expanding design pipeline industry transitions to HBM4 and expected double-digit growth in hyperscaler CapEx. In '25, robust automation design and growth was propelled by the burgeoning demand for enhanced productivity, efficiency and reliability across key sectors such as manufacturing, logistics and health care. This momentum was particularly evident within our Robotics segment, which saw notable expansion as customers increasingly prioritized automation to streamline operations and improve business outcomes. As highlighted in our previous quarter, we foresee tremendous long-term opportunity as advancements in AI fuel the emergence of content-rich humanoid robots positioning ADI at the forefront of the next wave of robotics innovation. Within health care, the proliferation of robot-assisted surgical systems represents a vibrant vector of growth alongside our Imaging and Diagnostics segments. Additionally, we expect growing demand for our suite of diabetes management solutions to continue to contribute to growth in FY '26. Energy was our fastest-growing industrial segment this past year, driven by high demand from the industrial, transportation and data center sectors. Design and activity was especially strong for grid management and battery storage systems, and we anticipate continued growth in '26 and well beyond. Aerospace and Defense achieved record results, and we expect further growth in the year ahead, driven by our expanding portfolio of advanced sensor, mixed signal and power solutions, coupled with an increasingly strong opportunity pipeline. We also expect to maintain our strong presence in the growing low earth orbit satellite market. Turning to automotive. Advances in autonomous driving and cabin digitalization led to a record year for ADI in fiscal '25 with growth outpacing light vehicle production. Our intelligent audio and video connectivity solutions, which avoid bulky and expensive cabling, drove multiple new growth awards across GMSL, A2B and our signal processing and safe power portfolios. Building on this success, our new E2B Ethernet bus is expanding our market, simplifying customer systems, boosting power efficiency and lowering costs as it gains traction. In the communications sector, AI CapEx investment led to a record year for our data center segment with design and activity more than doubling. Strong demand for high-throughput connectivity and power delivery solutions support our confidence in continued growth through '26. Wireless communications is one of the few areas of softness in '25 but we believe customers have completed their inventory digestion phase and that the market bottomed during the year. In addition, we see a positive impact of new products such as our software-defined AI-enabled macro base station on a chip solution for which we secured design wins from leading OEMs and service providers and see additional opportunity beyond telecommunications in private industrial networks as well as other secure communications applications. And finally, as consumer markets rapidly evolve, we're expanding our SAM and growing a diverse pipeline by delivering integrated solutions in hearables, wearables, gaming, AR, VR and many related areas. For example, our new Acoustics platform combines analog, power, digital software and machine learning for advanced environmental awareness and adaptive noise cancellation. We've secured design wins for these solutions in consumer and health care segments, enabling ADI to triple the value generated over legacy designs. We've also captured several new power management design wins in premium handsets and smart glasses in FY '25, positioning us for further growth in '26. So in summary, our diversified business model has proven agile and consistently capable of generating superior outcomes reflected in both last year's resilient margins and this year's strong rebound in profitable growth. While we're mindful of the macro environment and the continued impacts of tariffs and trade uncertainty, we remain confident in our growth in FY '26 and beyond as we continue to leverage our key differentiators, namely, an enviable technology leadership position at the intelligent edge as it becomes a center of gravity for a host of secular growth markets, unrivaled application domain expertise and the trusted brand that we have developed and strengthened with our customers over the decades. And so with that, I'll pass it over to Rich. Richard Puccio: Thank you, Vince, and let me add my welcome to our fourth quarter earnings call. I'll start with a brief overview of our full fiscal '25 financial performance. Revenue for the year came in at just over $11 billion, up 17% from fiscal '24, with double-digit growth across all end markets. Gross margin finished at 69.3%, up 140 basis points driven by higher utilizations. Operating margin finished up 100 basis points at 41.9% and includes the headwind associated with the normalization of variable comp. All total, earnings per share of $7.79 increased 22% versus fiscal 2024. Now on to our fourth quarter results. Revenue in the fourth quarter came in toward the higher end of our outlook at $3.08 billion growing 7% sequentially and 26% year-over-year. Industrial represented 46% of our fourth quarter revenue, finishing up 12% sequentially and 34% year-over-year. The stronger than seasonal results underpins the cyclical momentum we see across industrial as well as the secular growth unfolding in AI infrastructure, which drove record quarter for our ATE business. For the full year, Industrial increased 15% with growth across every major application, including record years for aerospace and defense and ATE. Automotive represented 28% of quarterly revenue, finishing up 1% sequentially and up 19% year-over-year. Double-digit year-over-year growth continues to be driven by our leading connectivity and functionally safe power solutions. For the full year, automotive increased 16% to an all-time high, driven predominantly by our higher content and share position across Level 2+ ADAS systems globally. Communications represented 13% of quarterly revenue, finishing up 4% sequentially and 37% year-over-year. Our data center segment surpassed the $1 billion run rate this quarter and on a year-over-year basis has now grown more than 50% for 3 consecutive quarters, fueled by continued strength in the AI infrastructure market. Wireless revenue was up double digits year-over-year for the second straight quarter, owing to improving cyclical dynamics. For the full year, communications was our fastest-growing market, increasing 26% driven by our data center segment, which had a record year, while wireless revenue was flat. Lastly, consumer represented 13% of quarterly revenue, finishing up 7%, both sequentially and year-over-year. For the full year, consumer increased 19%, driven by strong growth in handsets, gaming and a record year for our hearables and wearables segment. Now on to the rest of the P&L. Fourth quarter gross margin was 69.8%, up 60 basis points sequentially and 190 basis points year-over-year, driven by higher utilization and favorable mix. OpEx in the quarter was $809 million, resulting in an operating margin of 43.5%, up 130 basis points sequentially and up 240 basis points year-over-year. Non-operating expenses finished at $60 million, and the tax rate for the quarter was 12.7%. All told, EPS was $2.26, up 10% sequentially and 35% year-over-year. Now I'd like to highlight a few items from our balance sheet and cash flow statements. Cash and short-term investments finished the quarter at $3.7 billion, and our net leverage ratio decreased to 0.9. As I discussed previously, we continue to build die bank buffers for our fastest-growing applications. As such, our inventories were higher by $59 million sequentially while days of inventory declined by 1 to 159. Channel inventory increased but remains lean at approximately 6 weeks. Fiscal '25 operating cash flow and CapEx were $4.8 billion and $0.5 billion, respectively, resulting in record free cash flow of $4.3 billion or 39% of revenue, up from 33% in 2024. In total, we returned $4.1 billion to shareholders through dividends and share repurchases. As a reminder, we target 100% free cash flow return over the long term, using 40% to 60% for our dividend and the remainder for share count reduction. Now moving on to our first quarter of 2026 outlook. Revenue is expected to be $3.1 billion, plus or minus $100 million. Operating margin at the midpoint is expected to be 43.5%, plus or minus 100 basis points. Our tax rate is expected to be 12% to 14%. And based on these inputs, adjusted EPS is expected to be $2.29, plus or minus $0.10. In closing, fiscal 2025 was a strong year, highlighted by a return to growth, margin expansion and record free cash flow. Importantly, I'm confident in our ability to continue navigating macro and geopolitical challenges and believe we are well positioned to drive further profitable growth in 2026. With that, I'll give it back to Jeff for Q&A. Jeff Ambrosi: All right. Thank you, Rich. Now let's get to our Q&A session. [Operator Instructions] With that, can we have our first question, please. Operator: [Operator Instructions] Our first question comes from the line of Vivek Arya from Bank of America Securities. Vivek Arya: I had a near and a medium term. On the near term, I think you're guiding Q1 slightly up, which is a little bit above seasonal. So I was hoping you could give us some color by segment where you're seeing the strength because I do think industrial was slightly below what you had thought in Q4. So just any dynamics going into Q1. And then if we zoom out, when -- say, I mean, if I were to just annualize Q1 guidance, that suggests a very strong kind of 12%, 13% sales growth year in fiscal '26. And I was really hoping to get your perspective as you start the new fiscal year on what you're seeing from a broader macro perspective and whether this kind of growth rate is possible in fiscal '26? Vincent Roche: Sure. Thanks, Vivek. Rich? Richard Puccio: Vivek, I'll take the first part of your question. So Q1, which is our weakest sequential quarter with normal seasonality typically down mid-single digits. And our outlook is up slightly quarter-over-quarter, reflects our seventh straight quarter of above seasonal growth. And another key point is additionally, our outlook assumes sell-in and sell-through are equal. So from an end market color perspective, industrial, we expect to be up mid-single digits above seasonal. We expect auto to be down mid-single digits below seasonal, where we continue to see some risk there around tariff and some of the macro environment. Comms, we expect to be up 10% above seasonal. Again, as Vince mentioned, we're seeing real strength in the AI infrastructure and demand for our data center products. And then consumer seasonally down low double digits. And then all markets, we expect to be up year-over-year. Vincent Roche: Yes. So maybe if we look year-over-year, Vivek, so we believe we're well positioned to see broad-based growth in '26. And I think cyclical as well as many idiosyncratic factors giving us tailwinds. My expectation is that in '26, industrial and communications will lead the charge. I think when you look at industrial and comms, the -- as I said, the cyclical dynamics are good, bringing inventories out there. I think both of those markets bottomed some quarters ago. Data center, which is going to see, again, we believe, a strong surge in CapEx. We've got good exposure to that sector, and it's 2/3 of our comms business at this point in time. Aerospace and defense as well as ATE, which are together about 1/3 of the industrial market. We've got strong content growth stories in both. And coupled with the AI demand surge in the ATE business, I think, is very, very well positioned. And I think as well in consumer, we talked a little bit on the -- in the prepared remarks there about the higher content in key applications. And so we've got tremendous diversity in that business at a level we never had before as a company. So both in applications and customers and platforms, we're well positioned. Last but not least, if I talk a little bit about the auto sector. It's been -- I think SAAR has really been flat now for quite a while. We see that persist in '26. And given that we've been able to show against our 10% content growth per annum, we see that continue given the strength of the pipeline that we've got. But all that said, we've got a very uncertain macro environment. But my expectation is all the end markets will be up despite the outlook from a macro perspective. Operator: One moment for our next question. Our next question comes from the line of Joe Moore from Morgan Stanley. Joseph Moore: Great. Speaking of autos, I think you guys had indicated when you guided the quarter that you'd be slightly down, you ended up slightly up. Can you talk about what's coming in a little bit better? And you guys have been pretty good about helping us understand pull forwards and things like that. Any sign of any activity now? Richard Puccio: Sure, Joe. I'll take that one. So for us, auto has been our strongest market, right, double-digit CAGR through cycle driven by secular content gains, compounded by our share gains, particularly in connectivity and power for ADAS and next-gen infotainment systems. Here, I would note we've had pretty significant share gains in China, which where you see a lot of the light vehicle share getting increased. So that's been beneficial. Near term, the market has been more resilient than we and many have predicted, right, evidenced by the stronger volumes on vehicles. We do think some of the upside we've seen in the volumes in our business this year was tariff and policy related. We've talked in prior calls about our view that there might have been some pull-ins. I can't be precise or certain, but we did make that estimation. And given this, we did approach Q4 with some caution and expected to see -- I think I said on the last call, we thought we'd see some of this pre-buying unwind in the fourth quarter. That did not appear to happen to us. Our results were fairly seasonal and bookings were normal with a book-to-bill just below 1, which is actually pretty typical for Q4. We're still being a bit cautious on the market as it's unclear how the tariffs and volatilities we saw will ultimately impact us and our customers. And also just given short lead time orders, visibility tends to be pretty low right now. So as we think about our Q1 outlook is a sub-seasonal quarter or down mid-single digits sequentially, but up year-over-year. And given the content gains in this market and the positive design win traction that Vince mentioned, we do think fiscal '26 can be another strong year. Joseph Moore: Very helpful. Operator: One moment for our next question. Our next question comes from the line of Stacy Rasgon from Bernstein Research. Stacy Rasgon: I wanted to ask about gross margins. You sort of talked about being at 70% gross margins around $3 billion. So you're sitting over there and you're still -- I mean, even in the quarter, you came in a little below 70%. As far as I can tell, the guidance implies gross margins relatively flattish around that 70% range, you can let me know if that's right or not. But I'm just wondering why we're not seeing more leverage on the gross margin line, especially as utilizations are going up and everything else. Like why shouldn't we expect that more leverage on gross margins? Richard Puccio: Stacy, I'll take that one. So obviously, with our industry-leading gross margins, where you can see the impact that we get from the innovation premium, we did increase quarter-over-quarter and year-over-year, and we did have higher utilization and some favorable mix. We didn't get to the 70% as planned as the mix component wasn't as strong as we were expecting. As we've talked about, we had a much stronger result in auto, which kept the industrial mix a bit lower than we planned, and that's what kept us from getting all the way to the 70%. Now if I look out to Q1, the gross margin percent for us is typically lower in Q1 seasonally, given the annual shutdown factories for required maintenance and around the holidays in conjunction with customer shutdowns. However, based on our outlook, we are anticipating that the higher industrial mix in Q1, which we think will offset seasonal the seasonal component and hold gross margin flat. So you're right, embedded is a flattish gross margin where we get an offset from higher mix, which will offset the pressure from the shutdowns. And then I guess -- and the last piece, as we think about the continued go forward, Stacy, and at this revenue level, one of the things I'd like to remind is we did have a pretty significant capacity expansion while we were addressing our resilience over the last several years. And so it will take us higher revenue dollars to continue to expand beyond 70%. And also, as we've talked about, the continued movement in mix. And given the strength we see in industrial into going into '26, we expect that, that share of our business will continue to increase. Vincent Roche: Yes. I think just one other piece of color, Stacy. The pricing is in good shape. So it's really a question of mix and continuing to push the utilizations. Jeff Ambrosi: Thank you, Stacy. We move onto our next question, please. Operator: One moment for our next question. Our next question comes from the line of Christopher Danely from Citi. Christopher Danely: Just to follow-up on Stacy's question. Has the relative gross margin levels, have those changed at all between the end markets? Have any of them gone up or down versus the corporate average, I guess, just to cut to the chase, is -- have the auto gross margins gotten a little worse relative to the corporate average over the last like 2, 3 years or anything else changed? Richard Puccio: Chris, I would say that the way it was characterized the individual end market margins versus average has not changed, not in any meaningful way. Operator: One moment for our next question. Our next question comes from the line of Timothy Arcuri from UBS. Timothy Arcuri: Vincent, you talked about Maxim revenue synergies. Can you update us on that? I know you said you're on track, but maybe you can give us a sense of where that stands. And then Rich, can you tell us sort of what your sense of like a normal fiscal Q2? It seems like normal seasonal in fiscal Q2 is up like mid-singles. Is that sort of how you think about a typical fiscal Q2? And then maybe like what are the puts and takes as you kind of head into fiscal Q2? Vincent Roche: Yes. So Tim, I'll start with the synergies. So we began the conversion process, the conversion of the pipeline in '24 and began in earnest in '24. It contributed tens of millions of dollars to ADI's top line in '24. It's clearly accelerated in '25, and it's in the hundreds of millions against our $1 billion target by '27. And we expect an even stronger contribution in '26 given the momentum that we have in terms of new products and cross-sell. So we're seeing -- as we said, when we acquired Maxim, we saw tremendous complementarity in terms of some technology niches that Maxim filled, particularly in areas like power, these connectivity structures that we use in automobiles and now in industrial products. So the complementarity actually works for ADI right across the spectrum of applications, but particularly although as I've just said, consumer, health care and data center. So I think we are well on track to meet our commitment, possibly even a little earlier than what we thought. Rich, do you want to take that? Richard Puccio: Yes. Tim, you're absolutely right. Our Q2 tends to be our seasonally strongest quarter where we tend to be up mid-single digits. I think that's the right way to think about it. Jeff Ambrosi: Thank you, Tim. We move onto our next question, please. Operator: One moment for our next question. Our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: Vince, in your prepared remarks, you talked about ADO drivers led by AI in the data center. And I was hoping you could perhaps speak a bit more to a framework that we should be thinking about across both industrial and comms. Obviously, you dominate semi test analog. You've got some real design wins on the optical and power side. And then you also spoke about energy strength. So is there kind of a percentage of mix that we should be thinking about that should be growing significantly faster than the rest of your business? And if there's kind of numbers around that, that would be very helpful. Vincent Roche: Yes. Maybe I'll just give some color and Richard can give some numbers. Yes. So look, specifically when we talk about AI, there's the data center and the ATE businesses. And if I look at data center in '25, it grew about 50% and the ATE business, which also benefits from the skyrocketing compute intensities, the new memory types that are being used as well, new memory chips. That business -- so the ATE business grew at 40% last year. And we can -- we believe we'll see that growth continue in '26. If I just talk about where we are, data center, I think as Rich said in the prepared remarks, is running about $1 billion run rate at this point in time. And there are really 2 primary sectors there. One is at the electro-optical interface, and we're seeing tremendous upsurge in demand for 800 gig. Now we're seeing 1.6 terabit electro-optical interfaces that require very, very sophisticated power management and control systems. And then there's power more generally, I think, in the areas of protection, we're beginning to see a shift in very, very high-voltage technologies that require very sophisticated monitoring and control. There's power conversion and power delivery. And we're seeing our portfolios in those 3 areas gain significant traction. On the delivery side, we had mentioned before, vertical power. That technology now is beginning to be adopted broadly. So we're at the kind of -- we use the term in the electronics industry, we're at the knee of the curve. We're beginning -- I think we're in place to see exponential growth there. ATE, $800 million run rate. And as I said, very, very well positioned with all the key players, both the vertically integrated players as well as the OEMs in chip testing. And as the shift to HBM4 takes place, we're going to see higher pin count, more complexity, more speed, basically more instrumentation compute density in our chips. So I think we're in a good place from a customer engagement standpoint, from a technology standpoint. My sense is we should see double-digit growth in both those areas over the next few years. Rich, do you want to add anything? Richard Puccio: I will add my concurrence on your view about the outlook for the next few years in these areas. I look at -- if you look at the external factors, particularly around the data center piece and the high-performance compute, the like forecast continue -- forecast from all of the hyperscalers and the big buyers in the space continue to go up. And even recently, several of the large hyperscalers have added even further increases to their CapEx plans. So I do think that, that near medium-term spend is going to continue, and we should be a big beneficiary given our strength there. Jeff Ambrosi: Thank you, C.J. We move onto our next caller, please. Operator: One moment for our next question. Our next question comes from the line of Harlan Sur from JPMorgan. Harlan Sur: One of the other strong dynamics among several, which separates ADI from peers is obviously the strong exposure to aerospace and defense. This has been a growth area for ADI during this last downturn. I think the business is now driving well over $1 billion of annualized run rate revenues or roughly greater than 10% of your total revenues. It grew strongly double digits in fiscal '25. Does the team anticipate continued strong double-digit growth in fiscal '26? And maybe help us understand like what are some of the ADI-specific product cycles here that's going to continue to drive the strong growth profile going forward? Vincent Roche: Yes. Thanks very much for the question. So yes, I'd say the journey for ADI in that aerospace and defense market really took off in earnest when we acquired Hittite. And we got Hittite's really high-quality RF and microwave portfolio, which is central to all the communications activities right across the aerospace and defense market from defense systems, and every type of defense system you can imagine to satellite communications. The primary portfolios we have there are obviously microwave and RF sensors, the highest performance conversion products that we build on the precision and high -- very, very high-speed signal processing side are central. And increasingly, when we acquired LTC and Maxim, we were able to cross-connect with all those signal processing technologies, the power tech, all the power management technology. So if you look then at the market drivers, you've got -- the world isn't becoming any more peaceful. So there's going to be increasing capital deployment to build defense systems globally. We're seeing very strong demand and increasing demand in Europe and beyond. And we work with all of the primary OEMs. And so that -- all that coupled with increasing ASPs. I mean some of these products we built attract tens of thousands of dollars per system. So I think that business has the capacity by the end of the decade to more than double. Jeff Ambrosi: Thank you, Harlan. We move onto our next question. Operator: One moment for our next question. Our next question comes from the line of Joshua Buchalter from TD Cowen. Joshua Buchalter: Congrats on the strong results. I wanted to follow up on the comments about fiscal 2Q being a seasonal plus mid-single-digit percent. Could you maybe speak to what's driving the confidence in the visibility there? Any metrics you're able to give on lead times? And then bigger picture, how is your visibility looking forward changed as the mix has changed? Like do you think compared to a couple of years ago, there's more of your exposure tied to ADO drivers like aerospace and defense and data center, and that's increasing your visibility? I'd just be curious to hear because you mentioned there was some uncertainty on the shape of the year in the press release, I'd be curious to hear how you're feeling about visibility. Richard Puccio: Thanks, Josh. So first, I didn't guide for Q2. I confirm what the historical seasonality is. As we've been talking about, right, we still have -- don't have a ton of visibility beyond current quarter plus 1, right? As we've talked about, the lead times are -- most of our products have lead times sub-13 weeks. So we get a lot of orders in quarter. We get a lot of quarters -- a lot of orders with short lead times, which does reduce some of that visibility. So I think on the first part of your question, I don't think we've necessarily seen an improvement in visibility over the last 2 years. Although I do agree, I think that the -- we've now got broad strength in a number of the ADO areas that Vince described. But given where we are from an inventory on hand position as well as our cycle times, we're not getting a ton of outside of a quarter visibility. Jeff Ambrosi: Thank you, Josh. And we'll move to our last question, please. Operator: One moment for our next question. Our next question comes from the line of Tore Svanberg from Stifel. Tore Svanberg: Yes. So Vince, ADI has been always very thoughtful about allocating R&D dollars and the economy is changing in the front of eyes structurally quite significantly here. So how are you thinking about prioritizing your R&D spend right now? And are there any areas you would like to double down in and perhaps areas you would like to deemphasize as a company? Vincent Roche: Yes. Thanks, Tore. Yes. When I look at the analog space in the core analog business, we continue to push the edges of signal processing, data conversion systems and precision as well as very, very high speed. I think power management for ADI is still an opportunity with a lot -- a much, much bigger growth story. So that is a place that as we've gone through our strategy planning cycle in the last few quarters here, we're doubling down on for sure. The -- there are areas as well of our digital portfolio where we see very, very strong niches for what we do in terms of, for example, low power, low latency, these heterogeneous compute structures as well as algorithmic technologies. So I mentioned during the prepared remarks how we're enhancing the functionality of our core analog technologies by using machine learning techniques, for example, in base stations, in the consumer areas as well. So -- but I think most of what we do is making sure that we have the platforms to be able to compete globally across all the geographies, across the spectrum of markets that we find most attractive, solve the most important problems. And what I can tell you is that our customers are asking us to do more and more to tame their complexity and help them speed up their innovation cycle. So that's -- when we think about the investment portfolio. We're very opportunity-rich. And we've got a very high-quality problem, which is picking the most valuable opportunities in that spectrum of -- let's repeat with opportunity. Jeff Ambrosi: Thank you, Tore. Thanks, Tore, and thanks, everyone, for joining us this morning. A copy of this transcript will be available on our website and all available reconciliations and additional information can also be found in the Quarterly Results section of our Investor Relations website. Thank you for your continued interest in Analog Devices and Happy Thanksgiving. Operator: This concludes today's Analog Devices' conference call. You may now disconnect.
Operator: Please stand by. Good afternoon. And welcome to the fiscal year 2026 third quarter financial results conference call for Dell Technologies Inc. I'd like to inform all participants this call is being recorded. At the request of Dell Technologies. This broadcast is a copyrighted property of Dell Technologies Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies is prohibited. Following prepared remarks, we will conduct a question and answer session. If you have a question, simply press star then 1 on your telephone keypad at any time during the presentation. I'd now like to turn the call over to Paul Frantz, Head of Investor Relations. Mr. Frantz? You may begin. Thanks everyone for joining us. With me today are Jeff Clark, David Kennedy, and Howard Johnson. Our earnings materials are available on our IR website and I encourage you to review these materials. Also, please take some time to review the presentation, includes additional content to complement our discussion this afternoon. Guidance will be covered on today's call. all references to financial measures During this call, unless otherwise indicated, refer to non GAAP financial measures. Including non GAAP gross margin, operating expenses, operating income net income, diluted earnings per share, free cash flow and adjusted free cash flow. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and our press release. Growth percentages refer to year over year change unless otherwise specified. Statements made during this call relate to future results and events are forward looking statements. Based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our web deck and our SEC filings. We assume no obligation to update our forward looking statements. Now I'll turn it over to Jeff. Jeff Clarke: Thanks, Paul, and thanks, everyone, for joining us. Before we get started, I'd like to congratulate David on his appointment to CFO. We worked together closely for the past couple of decades, and I look forward to what's ahead. Now moving to our results. We delivered a strong third quarter. With a record for both revenue and earnings per share and an all time high in AI server orders. Total revenue reached $27 billion, up 11%. CSG and ISG combined were up 13%. Year to date, total revenue was up 12% with ISG revenue up 28%. EPS was up 17% to $2.59 driven by improved profitability in AI and storage and continued operational scaling. Our strong performance and operational led to continue robust cash flow and significant capital returns for shareholders. Now let's move to AI, where momentum has accelerated meaningfully the second half of the year building on an already strong first half. AI server demand remained exceptionally strong. We booked $12.3 billion in orders in the quarter, bringing year to date orders to $30 billion, both record figures. The large scale customer base continues to broaden with expansion across Neo Clouds, which tier two CSPs and sovereigns. Our strong orders and customer base expansion clearly shows customers value unique ability to design, deploy, and maintain large at scale AI factories especially our engineering and rapid deployment capabilities. We have AI racks operational within twenty four to thirty six hours of delivery with up time exceeding 99%. We shipped $5.6 billion in AI servers during the quarter for a total of $15.6 billion year to date. We ended the quarter with a record backlog of $18.4 billion. Our five quarter pipeline continue to grow sequentially across Neo Cloud sovereigns and enterprises and remains multiples of our backlog even when accounting for the robust demand we've seen. As expected, AI server profitability improved sequentially. Moving to traditional servers. Overall demand grew double digits with growth accelerating sequentially in both EMEA and North America. We saw growth across units, TRUs, our buyer base, and the mix of the sixteenth and seventeenth generation reflecting customers preference for dense, high performing compute configurations. Traditional x 86 compute demand continues to benefit from workload expansion and AI driving broader IT modernization and consolidation. Moving to storage. While revenue declined 1% year over year, demand for our Dell IP portfolio remained strong. For two consecutive quarters, our all flash array portfolio has from power store, delivered double digit demand growth supported by strong double digit growth PowerMax, ObjectScale, and PowerFlex. PowerStore demand has now grown for seven consecutive quarters with six quarters of double digit growth. Profitability improved as we increased both the mix and margin of Dell IP offerings underscoring the differentiated value of our platforms. In CSG, we saw momentum continue. CSG revenue increased 3% with commercial up 5%. International growth accelerated sequentially, up double digits year over year. North America also showed improvement. Demand for small and medium business remained strong, and we now have five consecutive quarters of P and L growth and seven consecutive quarters of commercial demand growth. Consumer revenue declined 7%, although the demand environment turned to growth. As we refocused on expanding where we play in the market. Commercial profitability was stable, while consumer and education were competitive. The PC refresh cycle remains durable, supported by an aging installed base and a significant portion of system not yet upgraded to Windows 11. And before I wrap up, I'd like to briefly touch on the commodity supply environment. We are well positioned across our commodity basket. Q3 was the and our outlook for Q4 is largely unchanged from last quarter. Looking ahead to next year, there will be dynamics that we will have to navigate, but we are confident in our ability to secure supply and adjust pricing as needed. As always, we'll leverage our world class supply chain to deliver the best outcomes for our customers and shareholders. In closing, we delivered a record third quarter. With strong performance across all segments and continued operational discipline. Revenue and EPS reached Q3 highs. Supported by growth in ISG, CSG, and improved profitability in AI, and in storage. AI momentum remains exceptional with record orders, backlog, and a growing diverse customer base. Our competitive edge in AI is our ability to engineer bespoke high performance solutions deploy large scale clusters rapidly, and support them globally, all backed by an unmatched ecosystem and flex financing offerings. This end to end capability is why Dell continues to win in AI. We are well positioned to capitalize on AI infrastructure build outs, expanding traditional infrastructure demand and the ongoing PC refresh cycle. Now let me turn it over to David to talk more about Q3 in detail. David Kennedy: Thanks, Jeff. I'm pleased with the team's strong execution this quarter. Delivering Q3 records for both revenue and EPS along with strong cash generation and above trend capital return. Total revenue was up 11% to $27 billion ISG and CSG combined grew 13%. Gross margin was up 4% to $5.7 billion or 21.1% of revenue. Gross margin rate was driven primarily by a mix shift to AI servers with shipments doubling year over year partially offset by improved profitability in storage. Operating expense was down 2% to $3.2 billion or 11.8% of revenue as we continue to drive scale within the P and L. Operating income grew 11% to $2.5 billion or 9.3% of revenue. The increase in operating income was driven by higher revenue and lower operating expenses partially offset by a decline in our gross margin rate. Q3 net income was up 11% to $1.8 billion primarily driven by stronger operating income. And our diluted EPS increased 17% to $2.59 a Q3 record. Moving to ISG. ISG revenue was a Q3 record $14.1 billion up 24% marking seven consecutive quarters of double digit revenue growth. Servers and networking revenue reached a Q3 record $10.1 billion up 37% and is up 43% year to date. AI server demand accelerated. With a record $12.3 billion in orders dollars 5.6 billion in AI server shipments, and a record ending backlog of 18.4 billion. In traditional servers, we saw demand improve throughout the quarter and stability within the P and L. Storage revenue was $4 billion down 1% with strong demand across parts of our Dell IP portfolio. PowerStore continued its double digit growth trajectory with seven consecutive quarters of growth. ISG operating income a Q3 record $1.7 billion up 16% marking six consecutive quarters of double digit growth. This was driven primarily by higher revenue. Our ISG operating income rate was up three sixty basis points sequentially to 12.4% of revenue. This improvement was driven by mix of AI servers, sequential improvement in AI server margins, and stronger profitability from storage. Turning to CSG. CSG revenue was up 3% to $12.5 billion Commercial revenue grew for the fifth consecutive quarter up 5% to $10.6 billion while consumer revenue declined 7% to $1.9 billion CSG operating income was $700 million or 6% of revenue. Commercial profitability was stable, driven by steady pricing sequentially as customers prioritize rich config AI ready devices. In consumer, profitability improved year over year and demand returned to growth. Moving to cash and the balance sheet. We delivered another strong cash quarter, with cash flow from operations of $1.2 billion This was primarily driven by profitability and working capital improvements. We ended the quarter with $11.3 billion in cash and investments, up $1.6 billion sequentially. Our core leverage ratio is 1.6 x. We returned $1.6 billion of capital to shareholders, including 8.9 million shares of stock repurchased at an average price of $140 per share. And paid a dividend of approximately $0.53 per share. Through 3 quarters, have returned $5.3 billion and repurchased over 39 million shares. With record Q3 results in hand, I'll now walk you through our outlook for Q4. a record. In ISG, we expect to ship roughly $9.4 billion of AI servers in Q4, Bringing full year shipments to roughly $25 billion or over a 150% year over year. Our Q4 outlook for traditional server and storage remains unchanged from last quarter supported by continued data center modernization and consolidation and above market growth in Dell IP storage. In CSG, with the ongoing PC refresh cycle, we are improving our execution to drive revenue growth and gain market share. Given that backdrop, we expect Q4 revenue between $31 and $32 billion up 32% at the midpoint of $31.5 billion ISG and CSG combined are expected to grow 34% at the midpoint with ISG growing mid-60s and CSG up low to mid single digits. Operating expenses will be flat sequentially. We expect operating income to be up roughly 21% with continued sequential improvement in ISG operating income rate. We anticipate a diluted share count of roughly 672 million shares and an 18% non GAAP tax rate. Our diluted non GAAP EPS expected to be $3.5 plus or minus $0.10 up 31% at the midpoint. Our Q4 guidance implies a strong FY 2026 with revenue of $111.7 billion up 17% and non GAAP EPS of $9.92 up 22% at the midpoint both well above our long term framework. And briefly on FY 2027, it's still very early in our planning process, We wanted to give you some context on how we are thinking about next year. We have strong conviction in our AI business, supportive of what we see in our backlog, the pipeline, and ongoing customer discussions. We've proven we can execute and deliver for our customers in this space. For the rest of the business, the long term framework we outlined at our Securities Analyst Meeting remains a solid starting point as you think about next year. We are highly confident in our ability to drive EPS growth, supported by multiple levers including leveraging our go to market engine, improving gross profit, scaling operating expenses, and ongoing share repurchases. In closing, we delivered a record Q3, with revenue of $27 billion and EPS of $2.59 both quarterly highs, driven by strong execution across ISG, CSG and disciplined cost management. ISG continues to see sustained double digit growth, and accelerating AI demand, evidenced by $30 billion in AI server orders over the past three quarters. We are focused on capitalizing on the ongoing PC refresh and expect continued growth from CSG. We remain focused on driving shareholder value through strong cash generation and capital returns. Thank you all for your time. I'll turn it back to Paul to begin our Q and A. Paul Frantz: Thanks, David. Let's get to Q and A. In order to ensure we get to as many of you as possible, please ask one concise question. Operator, let's go to the first question. Operator: Thank you. We'll take our first question question from Samik Chatterjee with JPMorgan. Samik Chatterjee: Hi. Thanks for taking my question. Jeff and David, I mean, maybe since this is sort of the topic of investor conversation mostly at this point, if you can flesh out your thoughts on the kind of reaction you expect from customers in relation to the pricing discussions by sort of the product categories do you think it's more sort of easier to take some of those pricing actions versus not relative to your overall portfolio? And David, if I heard you correct, you're saying to sort of use your invested targets for about mid teens EPS growth as still a starting point for next year despite those sort of dynamics of headwinds on the memory side. If Can I just clarify that as well? Thank you. Jeff Clarke: Sure, Samik. Let me, wade my way through that. I it will be the first question this afternoon. Or the only question I should say. Look, we're in a very unique time. It's unprecedented. We have not seen costs move at the rate that we've seen. And by the way, it's not unique to DRAM. It's NAND, It is hard drives. Leading edge nodes, across the semiconductor network, There is a if you will, I'd categorize it as demand is way ahead of supply. And as we wait our way through that, we're gonna lean on the things that we've always done. We we have a lot of experience at this. This isn't our first DRAM cycle. There have been seven, I think, in the last forty years. Michael and I have been here navigating the organization in various ways. Through that time. Our senior leadership team and our supply chain has been through everyone this decade. First rule of our supply chain is to get the parts. Supply matters. Mix matters. And as we get to supply and mix, our job is to minimize the impact of that to our customers. But clearly, we're in a situation that is not typical. We've learned a a great deal since COVID. Since previous cycle of this last super cycle of this magnitude was 2016 through 2017. And we're gonna do everything we can to minimize the impact, but the fact is the cost basis is going up across all products. No one more unique than others, Everything uses a CPU, has DRAM, has storage in it. So with that said, we're gonna do things we've always done. We're gonna work on configurations. We're going to work on availability, adjust mix, Our direct model allows us to move demand where supply is. Our direct model allows us to act to the market signals it gives us quicker than anybody else, allows us to price, accordingly, reprice when needed, and we will make our way through that across consumer PCs, commercial PCs, in the server storage, and through our AI servers. No no product category is not going to be impacted in terms of the aggregate cost basis moving. Again, our number one rule is get parts. Secure supply, secure the mix we need, to meet the customer demand. The world needs more computational intensity, needs more compute, If you're in the world of AI, token growth is going. We see a consolidation in servers. Consolidation in servers is dry driving denser servers with more DRAM, more storage. And we're in the middle of a PC refresh that's not complete. So I I don't see how we will not, what's what's best way to do describe? I will not I don't see how this will certainly not make its way into the customer base. We'll do everything we can to mitigate that. As we mentioned earlier, our cost outlook for Q4 is largely unchanged. And David just gave you what our guidance is that we believe that you'll see sequential profitability improvement in our company across the broad portfolio. While managing an increased in our cost basis. That's what we're gonna do. That's what we know how to do, and we have all of the tools in our company to be able to do that effectively and fast. David Kennedy: Yeah. Hey, Samik. Yeah. Like we said, it's very, very early in our planning process, obviously. But the framework from our security analyst meeting is is a good reference point to start with. Know? So I think EPS included in that is the ZIP code will be in. We'll be looking out to leverage our go to market engine, which is differentiated. All the things Jeff has just outlined there in relation to our supply chain, We'll continue to drive significant scale in our OpEx. And then obviously stay committed to our capital return KPIs, right, whether it's share repurchase, or staying committed to our dividend. So look, we feel we have many tools in that toolbox that allow us to stay agile and deliver on our EPS numbers. But like I said, it's still very, very early in the the planning process here. You. Thank you both. Thank Paul Frantz: Thanks, Eric. Operator: And we'll take our next question from Mark Newman with Bernstein. Mark Newman: Hi. Thanks for taking my question. Congrats on a great quarter, particularly impressive on the AI server orders. I I wondered on AI servers, if you could talk about some of the recent comments that have been coming from NVIDIA around the potential vertical integration that they're doing, getting a little bit more involved in in in the supply chain, and how that may impact on how or how Dell is navigating around that. And, also, on AI servers, any any color on the mix of AI servers, any change on the mix, for example, enterprise as a portion of AI server orders would be useful. Thanks very much. Jeff Clarke: For Mark, let me make my way through that. I mean, first of all, as we look forward to the new technologies that are in front of us, we remain excited We think there's ample opportunity for us to continue to differentiate. These large scale deployments are very complex. Our value add is at the rack level, is at the solution level, l 11 and beyond. That differentiation, we believe, remains for the next several cycles easily. In fact, the our ability to engage with customers early, which we can on the next generation technology, to work through their needs to bring these very complex offers to the marketplace fast in it, scale with a significantly better uptime and outcome, we believe is a differentiation. We focus on optimizing performance per watt. Performance per dollar at the data center level, We focus on our services, our value add and deployment, our financing side, the ecosystem that we bring to our customer base, none of that changes in the next generation of technology. And I to be honest, I I I think the opportunity for us gets greater in the future as we head towards 500 kilowatts of rack of power density moving to a megawatt in beyond, the engineering skill required to do that at rack scale is significant. We've invested in that ahead of the curve and we believe that gives us the opportunity to differentiate remain the leader in time to market, drive broad installation and deployment capabilities ahead of our competition at a higher level, uptime of 99% or better. And that's why we win, and I don't see that changing. When I look at the mix, two forms of the mix that I'll address is we saw a change in the quarter towards GB 300. So in our backlog of $18.4 billion there's been a significant shift towards GB 300 as expected. And then lastly, we continue to see great build on our five quarter pipeline around sovereigns and around enterprise and remain very encouraged about the opportunities in both. Thanks, Mark. Great. Thank you very much. Of course. Operator: And the next question will come from Ben Reitzes with Melius Research. Ben Reitzes: Hey. Great. Good with the commodity environment guys, and I'll try to be concise for Paul. The question is around your AI server margins. You mentioned it was up sequentially. Was wondering if you guys can talk about, you know, order order of magnitude there. And is that gonna continue into the four q? And are you starting to see more product attach, more high margin attach? To that end? Thanks. Jeff Clarke: I'll take a run at it, Ben, and then David can certainly add to this. Clearly, we made reference in Q2 that we had some onetime cost elements that hit us. If you recall, we talked about expedites and supply chain reconfiguration. Those went away in Q3 as expected. We also talked about shipping a lot of the early aggressive GB200 deals in the quarter. Those went through the system. And we continue to now see the ability to add differentiation as I just mentioned in in the previous question that we see in the GB two hundred and three hundred designs. And our margins move to safe right in that range that we've talked about, mid single digits. We see that continuing as part of our long term value creation framework that we laid out eight weeks ago. It's what we'll continue to talk about here, and we we believe that we can operate going forward in that range. In fact, we're very confident of that. And then we also had a mix change or, if you will, a change in customer mix to the good. When you look at the broad portfolio and diverse customer set that we have within the AI portfolio, portfolio shipping to a broader set of customers across a greater range of solutions helps margin. Hope that answered your question about AI margins. Yeah. Thanks a lot, Jeff. Appreciate it. Of course. Thanks, Ben. Operator: And our next question will come from Eric Woodring with Morgan Stanley. Eric Woodring: Hey guys. Thank you for touching my question tonight. I wanted to touch on PCs. Jeff, you sound very bullish on the PC opportunity into year. Some of the channel partners earlier in earnings were talking about maybe the seventh inning of a PC refresh. And I'd love to just get your comments because you sound more bullish So where do you think we are on the PC refresh? And is that still Windows end of life upgrades that still need to get done? Or are there new factors that you think could elongate the PC cycle well into 2026? Thank you. Sure, Eric. I mean, I mean, a couple of things. One, we we have not completed the Windows 11 transition. In fact, if you were to look at it relative to the previous OS, end of service. We are 10, 12 points behind at that point with Windows 11 than we were the previous generation. So we still have ample opportunity to convert. If memory serves me right, the installed base is roughly $1.5 billion or dollars. 1.5 billion units. We have about 500 million of them capable of running Windows 11 that haven't been upgraded. And we have another 500 million that are four years old that can't run Windows 11. Those are all rich opportunities to upgrade towards Windows 11 and modern technology. Equally important AIPCs. Small language models, more capable applications, improvements in operating systems and their capabilities in the embedded AI there, the use of an MPU, the capability of an MPU and future piece PCs, gives me the view that the PC market will continue to flourish going forward. Now let's define flourish. We have the PC market in our outlook roughly flat year over year. That's after a year that we grew mid to high single digits, I think it's flat as we look into next year's planning horizon, and we're building plans accordingly that would take share against that outlook. Thanks, Eric. Awesome. Thank you, Jeff. Of course. Operator: And the next question will come from Wamsi Mohan with Bank of America. Wamsi Mohan: Yes. Thank you so much. I was wondering if you could just, maybe give some color around this AI business. You noted very strong conviction going into fiscal twenty seven. Obviously, you you just raised your your guide here from 20 to 25 billion. Can you just put that in context of some of financing issues at NeoClouds? And how much of of your conviction and growth is predicated on some of these neo clouds being able to procure financing versus maybe other customers that you might have visibility into? And Jeff, if you could just clarify, you mentioned the cost base moving up across the product portfolio, and I was wondering if you could maybe share at the highest level how much of that conceptually could you recover from pricing how much of OpEx reductions are are possible to offset some of these pressures? You so much. Maybe I'll start once and Jeff can add some color. Look. I think if you start answer first, you look at our Q4 guidance, $9.4 billion. That represents $25 billion obviously for a full FY '25. So you look at that appetite for AI demand, and it's across the neo clouds. Sovereign opportunities, and obviously within the enterprise. shipments of $5.6 billion in Q3, orders of $12.3 billion. That's year to date at $30 billion. Backlog at $18.4 billion. And as Jeff referenced in his opening remarks, the next five quarter pipeline is multiples of that. So every conversation we're in which is also being very aware of all the opportunities that are out there, It's about demand. It's about opportunity. And eagerness to to work and see the opportunities in front of us. So we actually see huge scale to come Every opportunity, reality is we're not going to win them all. But we love our momentum that's there, and we think we're well positioned to meet the expected needs of the customer base. Yeah. I I would add to that maybe some color. $25 billion this year. 150% increase over last year. On the guidance that David called out, we will ship nearly as much in Q4 as we did all of flash year. I think that gives a on the need for compute The need for and what we see as token generation increasing at an incredible rate. And the corresponding compute that has to be behind that to generate those tokens. It's reflected in that five quarter pipeline that David said that is up across all three customer types. Neo Clouds, sovereigns, as well as enterprises. And we're seeing progress in all three. So I think that's very important for us to make sure that we communicate that the momentum as we head into Q4 continues. You saw that in orders in Q3. The backlog building and significant shipments in Q4. If I flip to the other question about the cost basis and our ability to recover that's an interesting question. We we would we've said over the years in normal times, when our input costs go up, we can recover roughly two thirds of that cost in a ninety day period. I would tell you this is not normal times. This is extraordinary times, and we put extraordinary actions in place weeks ago as we saw this to be able to mitigate the impact upon our company our customers, and our shareholders. And, again, it goes back to our business model. Direct Direct signals, we understand the demand, our long term partnerships and agreements with our partners to make DRAM and make band, the agreements we have in place around capacity, those relationships are meaningful and impactful as we navigate these types of situations that again, that are unprecedented. And then our model gives us tremendous flexibility. Whether that is to reprice whether how we set up quotes, whether that's to reconfigure, redirect to different products, the ability to determine how long price will be in effect, the ability to understand where we're gonna drive demand to and change our demand generation vehicles to drive that. It's important that our engine and the way we run, I think, is very different than others in our ability to respond. Those of you that took note, you saw that in COVID in a very similar situation. The experience that we had there where there was material shortages and increased cost, our ability to navigate that I think, was unmatched in the marketplace. Our supply chain is very good at this. And we're gonna lean on them. Those lessons learned from the COVID time and most recently what happened with tariffs. I think show that we can operate with the right sense of urgency We're managing this real time actively managing it. I was on three pricing calls today alone. And we're driving to get a better outcome. So our our belief is we will do better than our normal twothree in a ninety day period given the actions that we've put in place and our understanding of demand and our understanding of supply. Thanks, Wamsi. Thank you. Operator: And our next question will come from Amit Daryanani with Evercore. Amit Daryanani: Thanks a lot for taking my question. Know, I guess, maybe you could just spend a little bit of time on i's margins that improved rather well by about 350 basis points sequentially. Can you just touch on like what drove the strength in ISD margin in Q3 versus Q2? And then, you know, your guide, I think, reflects the largest AI server revenue number you guys gonna put up in Q4 at $9.4 billion plus. How should we think about that impacting your P and L? And do you think gross margins should remain in the Q2 levels, or is there kind of further movement from there, as we think about the P and L impact from the I s from the AI numbers in Q4? Thank you. Yes. Thanks, Amit. Yes, look, really pleased with the team's execution in Q3 around ISG, ARP Inc, at 12.4%, like you said, up three fifty basis points quarter on quarter, so a lot to like here. I guess a couple of things to call out First, on the storage side. Look, Q3 was no different than what we've seen year to date. Where we've seen demand growth at a premium to market for our Dell IP storage portfolio. You know, probably a strong call out there will be PowerStore also. Six consecutive quarters with double digit growth. So obviously, that Dell IP portfolio gives us better operating margins as you'd expect. So there's a natural mix effect that creates a tailwind there. Secondly, in storage, our pricing discipline was something I was very pleased with also. And then thirdly, look at the focus of the teams looking to find improvements at a by product level within the portfolio also. So again, like I said, a lot to like on the storage side. Also within that, on the AI margins, like Jeff said earlier, Q3 on track to what we've consistently committed to mid single digit up ink here. In relation to that. And we obviously didn't have those And then your reference, I think your question was Q3 into Q4 then from a guidance Q2 one timers that were there, and we'll keep that consistency as we go into Q4. perspective, If we expect to continue to make progress. Our Q4 profit guidance is anchored again through the storage P and L. With the Dell IP storage growth, we expect to make it four for four in terms of quarterly growth. In that portfolio. That should allow us to grow at or likely slightly ahead of normal sequentials which will allow us to see an uptick in our op inc rate sequentially also into Q4. Yes, Mam, and I'd just again to emphasize that. AI shipments 5.6 to 9.4 quarter over quarter. Our strategy of focusing on Dell IP storage, the mix is up the rate is up, and increased velocity of our traditional sore server business is the recipe for the performance that we expect to have in Q4. While increasing AI shipments significantly as we mentioned. Thanks, Amit. Operator: And the next question will come from Aaron Rakers with Wells Fargo. Aaron Rakers: Yes. Thanks for taking the question. I want shift gears a little bit away from the AI to the more traditional server business. Jeff, I think in your prepared comments, you've mentioned double digit demand growth. I think if my math's correct, I don't think revenue grew necessarily at that clip. So I'm curious if you could talk a little bit about what you're seeing as far as the aged installed base, where we're at in the upgrade cycle. For traditional servers? And do you think double digit growth is a good baseline that we could think about going into fiscal twenty twenty seven as that demand follows through to revenue? Sure. A couple of comments, yes. So the double digit was demand, the P and Ls certainly didn't track that, but we obviously would have built backlog as a result. We talked about North America recovered or improved quarter over quarter and that the international market demand were double digits, and that's two in a row now off last quarter's double digit performance. We continue to see modernization in the data center consolidation in the data center, which is reflected in the fact that our TRU's continue to go up, our content continues to go up, the number of cores, how much DRAM, how much NAND per server, is corresponding with that. And we still see a pretty significant opportunity with roughly 70% of our install base is still the older generation servers. That we have shipped many years ago. So the ability to continue to upgrade them modernize them, is the opportunity that we have in front of us. And then we see that cycle continuing into next year. This has been a longer consumption cycle. We're encouraged by what we see. That's reflected in the Q4 guidance that we just talked about. And that momentum as we update you on '27, we'll give you the the best look we have. But right now, that momentum of consolidating, modernizing, refreshing old servers to new one continues, and we're working on making sure our pipeline grows and we can convert it into orders as quickly as we can. Thank you. Of course. Thanks, Aaron. Operator: And we'll take our next question from Michael Ng with Goldman Sachs. Michael Ng: Hey, good afternoon. Thank you for the question. I just wanted to follow-up on the commodity costs recovery point, which was encouraging to hear. When you talk about the actions that you've taken to help mitigate the impacts I guess, do you expect to see a benefit from below market costs, strategically purchased commodities and you know, if if so, you know, how long can that be you know, a benefit for And, I I think you may have alluded to opportunities to maybe, like, reprice longer term commercial contracts. In response to the rising commodity costs. Just wanted to see if that was the case or are there any kinda longer term contracts that might inhibit your ability to price at all? Thank you very much. Well, I mean, maybe working backwards towards the the first parts of your questions. And clearly, we have to do what's right by customers. And where we have contracts, we have contracts and we we will honor those contracts and work through the situation. I I think what maybe I didn't convey correctly or to the right balance that's needed is we tend to talk about the commodity cost here. There's a commodity scarcity too. In other words, there's not gonna be enough parts. So there's a combination of the demand that's in the marketplace, one's ability to procure the part, which is why job one of our supply chain is to get the material never run out of parts, and then price it to the commensurate value with having that material. That's what we're gonna work our way through. We're I think, very skilled at this. The last two cycles have certainly honed our skills. And we'll use all of the tools available from configurations. It's not uncommon in the PC industry to see configurations come down. That's happened before. Likely to happen again. That tends to happen in the lower price bands. You tend to see mixed where what comes out of the factory isn't necessarily what was forecasted. We think we have a unique ability to adjust our demand faster than anybody. We think the ability to navigate how you price with a very large transactional business selling to small and medium businesses, selling to the day to day needs of many corporations, we can adjust that to what's available. Those are all skills and techniques that being a direct manufacturer and a direct seller, we believe us an advantage and will help our partners and customers through that as well. And all of these tools that I've mentioned in one of the previous answers are in effect now. Our special pricers know the cost for all of next year our best guess for next year, what's available. Our Salesforce, our product business leaders all know and we're acting working as one team to collectively work this real time, as I mentioned before, to get the best outcome for the company, our shareholders, and customers. That's what we'll work through. So our ability to recover I think, is better than the normal times. And I think that's probably amplified or improved by the fact that there'll be a scarcity of parts. Thanks, Mike. Operator: And our next question will come from Asiya Merchant with Citigroup. Asiya Merchant: Great. Thank you for taking my question. Just looking ahead into storage, seems like that business, you know, is doing perhaps, you know, a little bit better than what was previously expected. As you look into the server demand that is driving up the revenues for this the core server, And as you look into next year, just given all the, obviously, the backdrop of commodities, headwinds here, how are you thinking about storage from here on? And if we can get that inflection towards more Dell IP storage, which is obviously positive for your margins, quicker relative to some of the unwinding of the HCI storage, if that can happen faster than what was previously communicated at the Analyst Day. Thank you. Yeah. I think, again, just to clarify, I guess, in Q4, what we're looking at in terms of guidance, Continuing to show that Dell IT storage growth and seeing that sequentially hopefully above our expected to be above normal sequentials. That'll allow us, along with the pricing discipline, keep that margin improvement coming along for the p and l. On the server comment again, strong demand in Q3, particularly in month three. So to Jeff's point earlier, building a bit of that backlog. So I think you can expect you know, high single digit growth in that business for Q4, which would you know, end us on a high point as we exit the quarter. That said, look, as we head into FY twenty twenty seven, still very early. Obviously, it's a lot happening in the market and changing. I would still reference you back to the long term framework that we've got. I think it's a good reference starting point. We'll work from there. And then, obviously, be agile as we assess and and see how it it evolves. But yeah, for now, I I think it's still a little early for for FY '27. But strategy wise, we we made the pivot to Dell IP. Not looking back. It is serving us well. The mix continues to increase. Across our storage revenue dollars. The margins within the portfolio continue to improve. We talked in our comments about the all flash portion of the portfolio growing double digits for the second quarter. So thank PowerMax, PowerScale, PowerStore, Object Scale, and PowerFlex all growing. We've talked about PowerStore in seven quarters of growth, six of those double digits. The buyer base is growing. The net new customers buying Dell Storage with PowerStore is up. The strategy that we've flipped to, which really drives this notion of three core areas where the Dell private cloud which is really open, disaggregated and automated storage. It's our three tier storage with our Dell automation platform. Our AI and unstructured storage assets, so think of those as the construct of the AI data platform and cyber resilience, is really data domain and power Those are all Dell IP assets. That's what we're driving. That's what the Salesforce is incented to do. And we're seeing nice results from it. Thanks, Assia. Thank you. Operator: And our next question will come from Simon Leopold with Raymond James. Simon Leopold: Thanks for taking the question. I wanted to see if you could maybe unpack the elements that contribute to the roughly $5 billion of incremental AI revenue for the full year. I I guess what I'm trying to get at is how much is this about your ability to get key components new orders, or existing orders occurring earlier? Just help us unpack what factors led to the raised forecast for AI. Thank you. Well, at the highest level, $12.3 billion of new orders and a growing backlog and then a supply chain that I think is unmatched that finds materials and gets materials lined up with customer availability. This is equal parts customer readiness. Buildings, power, direct liquid cooling, So we've used the word lumpy before, which we purposely didn't use here, but it's really driven by a customer's readiness and our ability to deliver matched up with the supply chain's ability to get the material and matched up with our sales force out winning new opportunities across the Neo Cloud customer base. The sovereign customer base, and enterprise customer base. So it's that combination and why you see one quarter five billion dollars, 1 quarter $9 billion in shipments. It really is equal parts customer readiness customer delivery acceptance, that drives that. And The stars align in Q4. With the amount of orders with the GB 200 and GB 300 business that we have booked that we'll be able Deliver at that rate in Q4. Thanks, Simon. Operator: And the next question comes from David Voigt with UBS. David Voigt: Great. Thanks, guys. Maybe just one for David. So you talked about margins and commodity pressures quite extensively. Can we look at your purchase commitments as barometer for how you're thinking about margins going into next year? I know a big chunk of that is probably tied to the AI server business. But is there anything in sort of those purchase commitment numbers that we could look at as sort of evidence of how you're thinking about where DRAM and NAND prices could be? And I think last quarter, you exited the queue north of $5 billion but most of that is for this fiscal year. So if you can give us any update on kind of how to think about purchase commitments going into fiscal twenty seven, and as an indicator, that would be great. Thanks. Yeah. Sure. Look, have no discernible change in the pattern of our you know, purchase commitments. Or in relation to positioning on things like inventory, etcetera. So if you think of AI, and this is a good kind of litmus test for us within the finance side as well as we observe it. You take that $12.3 billion that Jeff just referenced, sequentially, we actually took down our inventory values about $300 million. If you look at it in the year on year, the year on year inventory is roughly flat, give or take. Yet our year to date demand is up over $19 billion in that period too. So obviously, we have our normal supply chain procurement processes kicked in. As part of it. So no no real discernible change from last quarter. Or anything to read in as we look into FY twenty seven just yet. Yeah. Thanks a lot, David. Operator, we'll take one more question, and then we'll hand it over to Jeff We're closed. Operator: We'll take our final question from Tim Long. With Barclays. Tim Long: Thank you for squeezing me in. Two parter, if I could, on on gross margins. First part, talking about the mix in AI servers, as you start to convert more of the Neo Cloud and sovereign and enterprise, to revenues, would you expect to change to that mid single digit operating margin? Could that move higher? Or how meaningful would that be? And the second part, on the PC side, think there was a comment at the analyst day about you know, really doing well in the high end commercial but trying to recapture share in other parts of the PC market. Is that something that we could expect might impact operating margin on the on the PC business? Thank you. Yes. Maybe let's let's start with the AI side. Look. We're gonna stay consistent on our single digit delivery in terms of operating profit. You will stay within that range Yep. While we'd like to in every deal, the reality is we won't write on a lot of those can be competitive, particularly the larger ones. So look, we'll remain judicious as we manage the profitability and the ongoing activities there. Some will flow slightly lower. Other deals will be slightly higher, but we'll stay pretty consistent as an objective within that mid single digit. Momentum. As we kind of go forward. And that's if you like, the bedrock of which we'll build it on. The other element for me is which is part of it, is making sure every deal is accretive from a dollar perspective too. So, again, cash flow is something that at the forefront of all our operations. We think that's a good thing. In fact, we think it's a great thing. We wanna make sure we keep it front and center as we look at the at the activities. And Tim, your second question on PCs, when we were last together, you're exactly right, I talked about the PC business being a scale business. And our share had slipped in the non premium segments. And we leaned in this past quarter. We leaned in with our Dell Pro Essential and education boxes in commercial, and we were more aggressive in the holiday in the consumer and the results are encouraging. International growth accelerated sequentially up double digits in demand year over year. That's exactly where Dell Pro Essential is targeted. And while it is a very competitive marketplace, we made a slight reference to it, but I'm going to call it out specifically. We return to demand growth in consumer for the first time in three years. We returned to growth in the consumer business for the first time in three years. We're gonna continue to work on our cost position, tuning the products so they're the right products at the right cost for the right price span, We went into the market with what we had. We'll continue to refine that. Lots of changes in the road maps going forward, and you have our commitment that we can grow while balancing the profitability within the operating ranges that we've given. Thanks, Tim. And to you, Jeff, to close this out. Jeff Clarke: Thanks, Jim. Sure. Thank you all for joining us today. A few a few as we wrap up. First, we achieved record Q3 results across both revenue and EPS underscoring disciplined execution and the strength of our business models. Second, our AI momentum remains exceptional. We saw record orders in Q3 and have booked $30 billion through the first three quarters of this year. Our pipeline and customer base continues to expand and we remain well positioned to capitalize on accelerating demand for AI solutions. And lastly, we saw improved profitability and strong cash generation enabling above trend capital return to shareholders. We are set up well to close the year strong and to drive long term value. Thanks for joining us today and happy Thanksgiving everybody. Operator: Thank you. This concludes today's conference call. We appreciate your participation. You may disconnect at this time.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I'd like to welcome you to the CleanSpark Fiscal Full Year 2025 Earnings Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Star one again. Thank you. Terry, you may begin your conference. Harry Sudock: Thanks, Colby. And thank you for joining us today to review the fourth quarter and full fiscal year 2025 financial results for CleanSpark. We encourage you to review our earnings results press release, which was issued today and is available on our website. Our 10-Ks will be filed shortly. A webcast replay and transcript of today's call will be added to our website once available. On the call today, I am joined by Matt Shultz, our Chief Executive Officer, and Gary Vecchiarelli, our President and Chief Financial Officer. Some of the statements we make today will be forward-looking based on our best view of the world and our business as we see them today. The statements and information provided remain subject to the risk factors disclosed in our 10-Ks. We will also discuss certain non-GAAP financial measures concerning our performance during today's call. You can find the reconciliation of non-GAAP financial measures in our press release which is available on our website. And with that, my pleasure to introduce Matt Schulz. Matt Shultz: Thanks, Harry. Good afternoon, everyone, and thank you for joining us. I'm so excited to have stepped back into the role of CEO of CleanSpark this past August after serving as executive chairman for the past five years. In my first one hundred days, the team has been relentlessly cementing our current leadership position in Bitcoin mining while simultaneously positioning us to evolve our portfolio. We've also set a strategic direction for CleanSpark going forward as a digital infrastructure platform serving a wide range of compute opportunities. These opportunities include, but are not limited to, generative AI, workloads, grid balancing through Bitcoin mining, and high-performance computing broadly. I've also had the opportunity to meet with many of you listening to today's call. Your enthusiasm for the future of CleanSpark's business means the world to us and we're excited to execute our strategic plan and extend our track record of operational excellence into AI factories. As the company has matured, I'm inspired by our world-class team and operating business. Our strong balance sheet and most excitingly, our growing power and land portfolio across the U.S. and the optionality it represents. Together, all of these elements are evolving into a diversified compute platform to serve the needs of the next digital age. I've taken stock of what we built, I want to share with you just how well prepared the company is for this moment in time. While Bitcoin mining remains foundational to our business, we recognize that our expertise in securing power, developing infrastructure, and deploying at scale uniquely positions us to support the fast-growing demand for AI compute. A blended approach to growing and monetizing our portfolio serves to diversify revenue, enhance margin, and build long-term shareholder value. 2025 was the year CleanSpark achieved escape velocity. Reaching 50 exahash per second in operational hash rate with 100% U.S.-based infrastructure and run by our operations and technology teams. We delivered record revenues and demonstrated capital stewardship by not issuing a single share through an equity offering throughout this calendar year. All without slowing down our growth. I'm proud to share a few financial highlights from our 2025 fiscal year. We achieved record revenues of $766 million. Our gross margin was 55%. Now that's a 1% decrease year over year. This small decrease is actually impressive due to this being the first full year post-halving when the Bitcoin block rewards were reduced by 50%. Our Bitcoin treasury grew by nearly 62% to over 13,000, generated entirely from our wholly owned and operated hash rate. This puts us in a fundamentally different position relative to treasury companies purchasing spot Bitcoin since we mine it at greater than a 55% gross margin and we're actively monetizing our holdings. We now have a sustainable self-funded mining business thanks to our industry-leading mining team. And they're backed by an innovative digital asset management operation that's generating meaningful premiums and leveraging our treasury balance as a truly productive asset. We're in the process of deploying the 19,000 S21X XP immersion units that have an industry-leading 13.5 joules per terahash. It's beginning this quarter, and we expect that process to be complete in calendar '26. Now while this timeline is a bit longer than we had initially contemplated, our priority was a comprehensive portfolio review to ensure that we would not consume any AI applicable megawatts with this deployment. We have always had an infrastructure-first thesis. We avoided the asset-light strategies of past site and we prioritized control of power and infrastructure given the fundamental scarcity we're now seeing borne out in the market. Scaling our mining business required securing and developing a world-class power and land portfolio, and growing significant supply chain, engineering, construction, and operational capabilities. All highly relevant as we evolve into AI data center development. Today, we have more than a gigawatt of power under contract live in our data centers and infrastructure. Additionally, we have nearly 300 megawatts in Texas, fully contracted and scheduled to begin energization in early 2027. Coupled with a multi-gigawatt pipeline of additional near-term opportunities. Importantly, many of these locations are excellent candidates for AI campuses while others are best positioned for Bitcoin mining, load balancing, and securing the grid. Our objective is clear: to deliver each megawatt to its optimal use case. Have always had an internal philosophy of people first. As we look to expand our business, That was true in the earliest days of microgrid development. It was true as we grew into a Bitcoin mining company. It was clearly a winning strategy when we hired Taylor Monig to lead us to the forefront of immersion cooling. And most recently, it remains true as we added Jeff Thomas to lead our AI data center initiatives following his successful tenure as president at Humane. We've accomplished three key initial steps in our business evolution thus far with Jeff on board. The first thing is we reviewed our diverse to identify the most productive use of every single megawatt. Second, we secured a 285 megawatt site in Texas with the explicit intent of building an AI factory for a high-quality tenant. And three, we're aligning and expanding our internal team in conjunction with market-leading partners to deliver projects on time, and on budget that meet the exacting needs of offtake customers. When we took a close look at our facilities, it became clear that our 250 megawatt site in Sandersville, Georgia provides an immediate opportunity to host a large-scale tenant. Other sites surrounding the Atlanta Hartsfield Airport totaling over 100 megawatts with ready access to fiber are already in extremely high demand. In Texas, the site we recently acquired just outside of Houston, will be the location of our first exclusive exclusively purpose-built AI factory. We hold 271 contiguous acres of land located on a regional fiber backbone and have executed 285 megawatts in long-term power supply agreements that have already been fully approved by ERCOT. Better still, the site is located near several high-capacity natural gas pipelines which are being evaluated for industrial-scale behind-the-meter generation opportunities. This purchase positions us to deliver scalable resilient and energy-efficient capacity to meet demand from AI, cloud, and enterprise workload and represents a key step in our long-term strategy to leverage our vertically integrated infrastructure-first model. While this may be our first purpose-built facility, it certainly won't be our last. The entire team is focused on first securing tenants for Sandersville and Houston, which will then drive efforts to take the projects from commercialization to commissioning. Long-term tenants represent a superior risk-adjusted profile return profile, pardon me, for these assets rather than direct GPU exposure initially. Similar to past industrial revolutions, AI represents a new ecosystem. Power companies, chip companies, hyperscalers, infrastructure technology providers, and others are all collaborating And we're in direct discussions at every level to deliver maximum value for our customers and our shareholders. Jeff has been building the full life cycle playbook for AI campus development and operations that best serve this ecosystem. Together, his growing team is already vetting potential tenants, building high-quality site commercialization plans for our pipeline, and defining our project delivery roadmap. As part of those efforts, we entered into a memorandum of understanding with Submer a global pioneer in liquid-cooled and prefabricated data center solutions. Its end-to-end capabilities spanning from liquid cooling systems and mechanical, electrical, and plumbing modules to full facility builds set new benchmarks in energy efficiency, density, and sustainability, making them an ideal partner for CleanSpark's growth strategy. This relationship is our first step in taking elements of the construction process away from the data center and putting them into the factory. With approved reference architecture designs to support a broad range of tenant requirements. Together, we're working on an infrastructure that integrates power generation, data center development, and AI service delivery. Under this framework, CleanSpark focuses on selecting, developing, building, and operating AI-focused campuses while Submer will offer its technology and expertise as a strategic vendor in delivering sustainable modular data center systems. Meanwhile, we completed our largest financing ever. With a $1.15 billion upsized 0% convertible note. Gary, our President and CFO, will discuss the finer details and numbers momentarily. But before I pass it over to him, there are some elements I'd like to highlight. The terms are even better than our prior raise in December 2024. With the same 0% interest rate, a higher 27.5% conversion premium, and a six-point two five-year term. This financing provides the resources to expand our power and land portfolio, seed our first AI deployments, and continue investing in strategic growth opportunities. And as part of this transaction, we bought back $460 million worth of our own stock more than a 10% reduction in outstanding shares. We've once again bet on ourselves and we will succeed the CleanSpark Way. With that, I'll hand it over to Gary to take you through the financial results both for the quarter and the full year. Over to you, Gary. Gary Vecchiarelli: Thank you, Matt. I'd like to start by reviewing the numbers for the entire twelve-month fiscal period which was a landmark year for CleanSpark. Our revenue grew more than 100% year over year to $763.663 million with almost 8,000 Bitcoin produced. The major driver of this increase was due to a combination of growth in Exahash and Bitcoin price. Our full-year gross margin was 55%, which we're particularly proud of given that this was the first full year post-halving. These margins remained relatively in line with the prior year, which is attributed to the significant increases in efficiency our fleet had over the last twelve months. Also contributing to our gross margin consistency is our average marginal cost per bitcoin, which was slightly below $0.043 for the fiscal year. Our average revenue per Bitcoin was approximately $98,000. Our margins and cost per bitcoin represent the strength of our infrastructure quality, our world-class teams, and commitment to managing our business to profitability and margin rather than any single operating metric. Our high margins translated to an adjusted EBITDA of over $800 million which I must point out does not adjust for certain noncash items such as the mark to market on fair value of Bitcoin. When normalized, by excluding our gain on the fair value of Bitcoin the adjusted EBITDA from operations would be approximately $305 million which represents a net margin of approximately 40%. Additionally, the combination of increases in margins and fair value of the 13,000 plus Bitcoin we have on the balance sheet contributed to a significant positive net income of about $365 million. Looking at the most recent quarter over quarter performance, we also saw significant gains between the third and fourth quarters. Our revenue increased by approximately $25 million or 13% in Q4 versus Q3, and our margins increased two points to 56.5%. It's important to note that we achieved 50 exahash in June And while that remained our operational high for the fourth quarter, we still experienced increases in revenues and margins because of favorable mining economics during the quarter. Our high uptime also allowed us to capture periods of significant appreciation in Bitcoin price. In the fourth quarter, we recognized a slight net loss compared to the third quarter. This was due to a much larger gain on fair value of Bitcoin during the third quarter, and noncash tax adjustments recorded at our fiscal year end. Our adjusted EBITDA margins also saw similar changes which is inclusive of the noncash mark to market adjustment on fair value of Bitcoin. However, when adjusting any noncash mark to market effect, our normalized adjusted EBITDA was $97 million for the fourth quarter, a 25% increase over the $78 million normalized in the third quarter. This translates to margins of 43% and 39% respectively. Going forward, we do expect that our professional fees as we execute on our AI strategy, payroll, and G and A line items will increase. Additionally, I will point out that the AI data center business comes with stable cash flows and high margins. Both of which will help CleanSpark through the peaks and valleys of Bitcoin mining economics. Our escape velocity translates to operating leverage. We have developed scaled data center infrastructure that is delivering revenue and margin necessary to self-sustain and further support incremental investment in AI data center capabilities as we evolve into a power, land, and compute platform. Turning our attention to the balance sheet. I want to point out that we are one of the first if not the only company, which has a scaled cash-flowing business that is also using Bitcoin as a productive capital asset. Utilization of our Bitcoin stack resides in a team we refer to as digital asset management, or DAM. The fourth quarter was the first full quarter of DAM activity, we are extremely excited to share in more detail the steps we have taken in our crawl phase. Two initial strategies rolled out by DAM are our Spot Plus and yield strategies. Both utilize covered calls. But Spot Plus is designed to optimize for the cash needs of the business while Yield is designed to generate go-forward risk-adjusted output from our treasury holdings. Given that we are monetizing a significant portion of our monthly Bitcoin production, the Spot Plus strategy delivers a tactical uplift to cash generated on a weekly, monthly, and quarterly basis. This program functions smoothly because of the consistent output from our world-class operations and strong uptime. We are able to utilize this approach because of the investment we have made in making DAM an institutional-grade platform. It began with a comprehensive RFP for a range of products that you have heard us discuss on prior calls. And executing these option overlays requires a disciplined approach to risk management. Rather than selling Bitcoin through the spot market, we utilize apps near the money covered calls to generate both option premium and realized proceeds. If and when we ultimately get called away on these contracts. Our yield strategy utilizes covered calls as well. But instead of high delta short duration, we shift delta and extend or latter term to reduce the likelihood of exercise. Under our yield program, we saw an annualized yield of approximately 12% on a blended basis. Addition, as we scale our strategy and increase the volume, we believe there's room to incrementally increase the annualized yield and cash generated. Potentially significantly. While the fourth quarter represents a period when we're still in the crawl phase of the strategy, we were nonetheless able to generate a total of $9.3 million in premiums. To illustrate what that represents, our average spot Bitcoin sales price for the quarter was $111,721. However, when considering the additional premiums generated per Bitcoin, of $4,184 the all-in effective cash generated per Bitcoin was almost $116,000 a material uplift. One of the early wins for the DAM team was the successful monetization of costless Bitcoin repurchase options received as part of a Bitmain minor procurement contract from the third quarter. This was an excellent example of how our investment in the digital asset management function can help us to complete the arc of opportunities driven by our world-class mining operations. While our mining operations drove leverage in preferential terms to obtain mining rigs. DAM was able to monetize that option which would have otherwise had expired worthless. Driving $7 million of additional cash to the balance sheet. Due to the performance of DAM to date, we have increased the volume of transactions subsequent to our fiscal year end. In October alone, we traded more contracts than the total number of contracts traded during the entire fourth quarter. Additionally, we generated over $5 million in cash premiums for the month of October alone. The last leg of our current strategy involves writing puts. The put transactions we enter into are cash secured primarily using the premiums previously generated under the SPOT plus and yield programs. While this cash corpus is still growing, we saw analyzed returns of 8% on the put strategy. These three strategies do two things. First, they integrate in our operating business with the enhanced sale of production and second, create a capital flywheel as they relate to our balance sheet. Would also like to add that the results we are seeing in DAM do not necessarily translate directly to telling the story via US GAAP accounting. While all pieces are reflected across the income statement and balance sheet, there are certain punitive treatments of noncash mark to market valuations at contract expiry. What we think is important about these tables that, once again, CleanSpark is at the cutting edge of real nonhyperbolic strategies. Paired with full market-leading transparency. These tables can be found in the management's discussion analysis section of our Form 10-Ks. I want to note that US GAAP rules separate the accounting for covered call exercises into two different line items, for what is in substance a single transaction. Two line items on the income statement are loss and derivative contracts, and gain on fair value of Bitcoin. This is important because there are two sides of the same transaction. For example, the difference between the spot price expiry and the strike price is shown as a loss on derivative contracts. While the corresponding markup in Bitcoin value to the spot price recorded separately as a gain on fair value of Bitcoin. Offsetting that noncash loss with a noncash gain. Taken together, they reflect the economic outcome of our covered call program, continues to generate attractive risk-adjusted returns. I also want to point out that the Bitmain option was effectively costless to us. However, GAAP required us to bifurcate a portion of the ASIC contract to the option value. Even though the contract didn't explicitly state a value. That value of $6.8 million was recorded at contract inception in the third quarter. As the option ultimately expired out of the money, had we not taken steps to monetize the option, would have had a noncash write-off of that $6.8 million. However, instead, we generated almost $7 million of cash on that option. Which under GAAP considered it to be a net gain of approximately $200,000 even though we ended up with $7 million more cash in the bank at the end of the day. The overall takeaway is that the digital asset management strategy has met and, in fact, exceeded our expectations thus far and become a second source of cash generation to the business. Are looking to increase the size of our team to allow for greater volume and more complex derivative trades. Which we believe will not only grow the total cash generated from premiums, but also maintain attractive yields. On a final note, I'd like to take some time to discussing our capital strategy. Our focus is on building a capital stack which minimizes dilution. This starts with the sale of monthly Bitcoin production to cover our monthly OpEx. We also have Bitcoin-backed lines of credit with a total capacity of $400 million. We will continue to use the lines of credit opportunistically in the marketplace for accretive acquisitions. And as we previously mentioned, we issued a $1.15 billion convertible note. With a coupon of 0% and a conversion premium of 27.5%. Proceeds from this transaction were used for several purposes. First, we bought back $460 million of our stock. Which represents a reduction in our outstanding shares of 10.9%. The stock buyback not only helped facilitate the convert, we saw this as a bet on ourselves as we see our valuation increasing given the opportunities in front of us. Second, we used over $200 million from that raise to pay off our lines of credit. It's important to note that we have access to the full $400 million line available to drawdown at any time. On terms we continue to believe are market leading. The remaining net proceeds from the transaction will be used to do what we have a proven track record of doing. And that is hunting for power and land. The acquisitions of power and land, such as the most recently announced transaction in Sealy, Texas, are expected to be primarily used for our AI data center strategy. While we are in the early innings of our AI data center journey, the market is moving quickly and so is CleanSpark. Our conversations with off takers are ongoing. And it is not a matter of if but when we will have our first customer. Details regarding financing of our data centers will be coming in future periods. However, I will tell you this. There's an abundant amount of capital at a much lower cost of capital than previously available to our mining business. Our venture in AI data centers will open new pools of capital allowing us to benefit from the significant levered rates of return the market is providing. To close out another strong defining quarter for CleanSpark, and to discuss how these results position us for what's next, let's return to our Chairman and CEO, Matt Schulz. Matt Shultz: Thanks, Gary. Wow. As I listened to those results I can't help but think back to the earliest days of this company and the journey we've all been on together. Our fundamental thesis on being infrastructure-focused and people-first has served us incredibly well. They are two of the reasons we have such a meaningful opportunity in front of us today to grow into an infrastructure and compute platform that maximizes the value of every megawatt. The task in front of us is clear. We're working to secure tenants at our two initial flagship AI-ready locations while simultaneously expanding our land and power footprint to meet the market's insatiable demand. These efforts are made possible by our strength as a scaled Bitcoin miner, our capital markets rigor and, critically, our company's cultural focus on operational excellence. This past summer, our operations team coined the motto be the standard. I had the pleasure of having them present to me what that phrase meant to all of them. And I commit to you that in each of our endeavors, you can count on CleanSpark to continue to be the standard. I want to take a moment to thank our entire team for their tireless work I'm beyond grateful to our shareholders for their trust, and I truly appreciate all of you for joining us today. With that, I'll hand it back to Harry to lead us into Q and A. Harry Sudock: Matt. We will now open up the floor to questions from the analyst community. Operator, please provide instructions and manage the queue for the Q and A session. Operator: Thank you. We will now begin the question and answer session. Your first question comes from the line of Brian Dobson with Clear Street. Your line is open. Brian Dobson: Hey, good evening gentlemen. Just a quick question. There's been a considerable amount of volatility in the stocks as of late. Perhaps you could take this opportunity to give us a little bit of color on the types of conversations you're having with potential clients and your outlook for demand in the HPC AI space over the course of the next two years? Matt Shultz: Yes, absolutely. Brian, thanks for calling in, thank you for the question. I can tell you that we've had extensive conversations. Now I posted on my social media. Our whole team was invited to Northern California to spend some time with the team at NVIDIA. From that meeting, we've had subsequent follow-ups, and I can tell you that there is don't wanna say a bidding war, but strong multiple layer inquiries about Sandersville specifically, and we're starting to gain additional traction on the Sealy, Texas site. So we feel like the demand is there. Obviously, there have been some delivery challenges in credit risk on some of some of the other peers that maybe haven't been able to perform to the expectations. But we're based on the fact that we're running a company with nearly an $800 million annual run rate at 55% gross margins, we have the cash necessary to get us to that next level. So we actually feel very optimistic about it. Brian Dobson: Yeah. Outstanding. And as you're thinking about various campuses, what do you think about pairing Bitcoin mining with HPC campuses to provide, call it, power usage versatility? Or do you think that they'll be separate to start? Matt Shultz: You know, that's a really thoughtful question. We were invited by Jack Dorsey and his team to go to Dalton, Georgia. And spend some time as they launch their new domestic manufacturing ASIC, the proto rig that's built by Block. And it was a fascinating event. But leaving the event, the CEO of the utility there in Georgia grabbed Gary, Harry, and myself and asked us to go to lunch. And he shared that there's about a hundred and twenty hours a year that really causes problems for the utility. And he said, historically, they love Bitcoin miners because of the interruptible load. Now we've experienced providing that service in load balancing in many of our jurisdictions. I mean, you've heard the stories about, you know, redirecting power in Georgia to a hospital when the hurricane hit or whatever the case may be. But the takeaway from the utility was their interest and the fear that came from them was because Core Scientific is a big consumer power there in Dalton, and it's historically been a flexible load. And the concern is that extra hundred and twenty hours a year when they need somebody to be able to give back. So what they specifically the request from us was to consider blending AI, HPC, and Bitcoin mining so a component of those loads remain interruptible. So we see it as a dual-pronged strategy. And I think you'll see a lot of our sites will serve both loads. Brian Dobson: Excellent. Thank you very much for the thoughtful answer. Operator: Your next question from the line of Mike Colonnese with H. C. Wainwright. Your line is open. Mike Colonnese: Good afternoon, guys, and congrats on the strong fiscal year here. First one for me on the HPC side. Curious, what are some of the key development milestones that investors should be on a lookout for in 2026 as it relates to the HPC strategy? It sounds like the near-term focus will be on deployments. I know Texas and San Jose sites. So it'd be great to get some more color there. Matt Shultz: Yeah. You nailed it, Mike. I can tell you I had a conversation not with a Neo Cloud or anybody like that, but actually with the senior director of site development for a global hyperscaler. Last night, on my way leaving here, And what he shared with us is their 2026 forecasts are so constrained that they're looking at alternative types of builds just to facilitate the needs for 26. Takeaway from the conversation was Sandersville and Sealy because both of them can be energized. Sandersville is live and active right now. Powering 11 exahash of Bitcoin miners. But it could switch to a 200 megawatt critical IT load and be online, you know, in a reasonable period of time. And I think of a cool thing that maybe has gone unnoticed, and that is this MOU a submer. We don't historically I mean, if you look at CleanSpark's past, we don't announce MOU or LOI or anything that isn't definitive or concrete. It was really important to ink that with Submer because of the way that they approach the business. Submer has approved reference architecture for AMD, for NVIDIA, and they build the entire MEP solution, so mechanical, electrical, and plumbing, with all the fiber runs. They take that out of the field, put it into the factory, So a company like CleanSpark builds the powered gray shell We contract with Submer to roll in the MEP solution for specifically to the reference of the end user requirements. So speed to market is really, really critical right now. And having that modular approach, I think, is gonna be a massive differentiator for us. Mike Colonnese: That's helpful color, Matt. Appreciate that. And then the second one is on the Bitcoin mining side. I know you mentioned some of these near-term deployments you guys are looking to install in the first quarter. Just remind us of what your near-term expansion plans will look like for the Bitcoin mining business and existing site expansions versus any sort of new development opportunities on the greenfield side or mergers and acquisitions at this stage? Matt Shultz: Yeah. So I think what you're going to see is a migration of our Bitcoin mining away from areas that are closer to major metropolitan areas that are maybe more sensitive to utility rates? And into more remote locations. There are a number of utilities that have either recently passed or are discussing blockchain-specific tariffs. To my point on the last question, that interruptible component of the load is in such demand that they give us favorable rates, whether it's or Wyoming or any of a number of different jurisdictions, to have the offtake that allows us to flex and to assist the utility. So I think what you'll see is locations like Sandersville, locations like, the Metro Atlanta stuff sites in Norcross and College Park, etcetera. Those will probably be prioritized for HPC AI because of the quick access to fiber, the low latency loads that they can serve. Etcetera. And then the Bitcoin mining from those facilities will likely migrate out to some of the other locations. So to answer your question directly about scale, we're at 50 exahash per second right now. We have six exahash of the S21X immersion miners. We had slotted out a deployment strategy. Now we use modular immersion cool data centers for the vast majority of those. When we secured the 100 megawatts in Wyoming, we actually beat out a hyperscaler because of the fact Wyoming wanted to energize those megawatts today and not in three years. So we have the infrastructure purchased, delivered on hand, ready to roll to deploy these in very short order. So I think what you'll see is between now and towards the '26, calendar Q1, you'll see that additional six extra hash come online. Above that, what you'll see is as we do fleet upgrades, not in the $250 million capacity that we've historically done, but in a more disciplined, more thoughtful manner to ensure that we're protecting our share of the hash rate. And supporting what we believe to be a national security issue, and that is ensuring that there's Bitcoin mining hash rate domestically. So we're gonna take a real balanced approach at that, but you'll see us continue to grow And really, the differentiator is just in the fact that we have right now one of the most efficient fleets in the world. And with the deployment of this six extra hash of 13.5 jewel machines, we'll have hands down the most efficiently around. Mike Colonnese: Great. Thank you for taking my questions, Matt. Matt Shultz: Thanks, Mike. Operator: Your next question comes from the line of Paul Golding with Macquarie Capital. Your line is open. Paul Golding: Thanks so much and congrats on a strong finish to the year. I wanted to ask with the 13,000 Bitcoin on the balance sheet around $1.2 billion at fiscal year end. And with the recent financings that you've done, how should we think about the total aspiration to build this powered land bank as you think about the opportunity to bring tenants in for HPC or to simultaneously grow your Bitcoin mining fleet as you were just discussing? And then I have a follow-up. Thank you. Gary Vecchiarelli: Thanks for the question, Paul. Our tune around the Bitcoin stack really hasn't changed. Right? To give you context, we consciously have stacked Bitcoin quite rapidly over an eighteen-month period, and that brought us about 13,000 Bitcoin on the balance sheet. And we believe that we're one of the only companies using it in the strategic ways that it should be used as a capital asset. So I think going forward, what you can count on from us is if few things. One, we'll continue to monetize Bitcoin stack through yield strategies to generate some cash. Two, we'll continue to borrow against it to be opportunistic to draw down on cash make sure that we're nimble in the marketplace and take advantage of accretive acquisitions. And, you know, we've always said that we're not ideological about the Bitcoin balance. We're very strategic. And so if there comes a point in time where we needed to or we felt that the right thing to do is to part with that Bitcoin, balance through sales, we most certainly would do that, and we were open to do that. Because, again, we've built this entire company and even the financial wherewithal on optionality. But I'll tell you that you know, with those sales comes, punitive tax treatment because we have mined those at such a low basis. We'll have to pay, will be a cash-paying taxpayer on those items. So we take those into account, when we're looking at the stack. But overall, we'll continue to use this as a form of non-dilutive capital. Paul Golding: Got it. Thanks, Gary. And then turning to the MOU with Submer and, Matt, the explanation you were just giving on how you might break out the, shell development versus the MEP componentry. How should we think about the potential economic impact of that, if you can give any color? Just thinking about how pricing on some colocation deals involves yield on cost and, of course, build to suit can involve more capital, but with a partner just looking for any additional color you could provide. Thank you. Matt Shultz: Yeah. Great question, Paul. Thank you for joining. So the summer relationship really was born out of a prior relationship between Humane and Summer. Jeff had a working relationship with Patrick, the CEO at Submer. And we've also got Summer infrastructure deployed in our Bitcoin mining side. So we're very comfortable with them. And I can tell you that the quality of the product that they deliver it's much simpler in the Bitcoin mining side than some of the other modular immersion cool type companies. But because we haven't done a deployment domestic and they're just spinning up a manufacturing facility in Houston, I don't want to comment too much on what the cost per megawatt is, but I can tell you in general terms that the cost to build out a megawatt of mining infrastructure is about a million bucks. To do the same for AI and HPC, according to the reference architecture required by the menu the major chip manufacturers. Closer to $10 million. We also know that the mechanical, electrical, and plumbing, the MEP solution, is a pretty extensive, pretty robust build-out because you've got all those trades working inside a facility at the same time. Building these in a factory increases the speed to market by an order of magnitude and the initial representations are that it saves us anywhere from 10% to 15% over a built-in-the-field deployment. So we believe there's cost savings in speed to market that give us a very unique competitive advantage. Paul Golding: Fantastic. Thanks so much and congrats again. Matt Shultz: Thanks, Paul. Operator: Your next question comes from the line of Greg Lewis with BTIG. Your line is open. Gregory Lewis: Yes, hi. Thank you and good afternoon everybody and thanks for taking my questions. I guess Gary or Matt, I was hoping you could talk a little bit more about the Texas facility and just kind of you mentioned that it starts to energize in 2027. Is that energization is there steps along the way? And then longer term, as we think about that site, is there the ability to expand at that site or potentially grow with the customer? Harry Sudock: Hey, Greg, it's Harry. Want to give you the rundown on Texas because I think it's a really exciting project for us And it's the beginning of what you've seen from us across the Georgia, Tennessee, and Wyoming markets, which we take a fundamental land and expand approach, which is we get a foothold and then we know that once we have that toehold in the market, the opportunity to significantly extend our footprint is available to us. The energization schedule there, is that the first 200 and change megawatts are scheduled to come online 2027. And then there's two forty megawatt tranches in 'twenty eight and 'twenty nine. But what's critical is that the counterparty that we purchased, the land, the contracted power from is also among the largest substation developers in the state. And so what we were able to step into are the long lead time items and the placeholders that they had on those components giving us a high degree of build certainty to land the power on the site. The second piece is that that site is fully ERCOT approved. And so when we look at the energization schedule, we've already passed all of the regulatory hurdles that would typically be associated with a project in the state. The final piece of what you asked that I wanna touch on is about expansion. And you know, the ERCOT approval status wouldn't come with the expansion on grid that we're looking to accomplish there. But one of the parts that was most attractive, only to the power contract at that particular location and the service point from the utility that's going to be delivering to us, but it's also the parcel that's there. We have significant land capabilities to be able to digest more power in the same type of AI data center footprint going to be represented by the two eighty five. And so excited about the scalability. Matt touched on in his comments the behind-the-meter gas generation opportunity, but this is where we find ourselves at our true core competency. Which is being an opportunistic acquirer of land and power not only because we're able to locate high-quality assets for our portfolio today, but also for what those assets can represent to our business going into the future. Gregory Lewis: Okay. 100%. That was super helpful, guys. Hey, have a great Thanksgiving, and talk to you soon. Matt Shultz: You too. Thanks. Thanks, Greg. Operator: Your next question comes from the line of John Tadaro with Needham and Company. Your line is open. John Todaro: Great. Thanks for taking my question. Congrats guys on the progress here. As the first question here, as it relates to the AI readiness at Sandersville, just remind us if that site has forced curtailment. And then if so, really kind of how much should we earmark for HPC versus mining if you intend to kind of have both at that site? Harry Sudock: Yeah. Thanks, John. So, you know, what's important to understand about, the Georgia and the MEAG power specifically is that it is not subject to forced curtailment. At that location. It's part of why we didn't just we didn't just trip all on land with an AI thesis around the Sandersville assets. Those were also inbound because of the highly attractive nature of the Georgia power markets more broadly. And so we feel great about the applicability, of that location to the ultimate AI campus use case. And how we balance that versus the Bitcoin mining is gonna be the way we do everything, which is a fundamental return on investment profile We take a measured approach. We're data-driven. And the early indication is that every one of those megawatts is highly applicable for AI as its highest and best use. We're gonna remain data-driven across the analysis period for that asset. John Todaro: Great. Thanks. That's helpful. And then just as it relates to credit becoming a little bit of a concern out there, especially as it relates to Neo Cloud customers, Just walk us through how you are thinking about the customer profile, if there's a maybe bigger focus on hyperscalers now than maybe a couple of months ago when you guys were initially thinking about it. And then also, you know, hyperscaler backstops that starting to become a necessity? Would love to get some color on that. Gary Vecchiarelli: Hey, John. Thanks for the question. I'll tell you this about the financing. And I mentioned it in my prepared remarks is that new pools of capital that are going to be available to us. At much lower cost of capital. So we feel really good about that. We know we're going to introduce, at some point secured debt into the capital stack. So we're closely monitoring the deals that are going on and the debt markets. But I'll tell you the focus really first is to get that, you know, high credit quality tenant in there, to make sure that we can get the best deal possible because, as you know, levered IRR is significantly higher the more the higher the loan to value is. But I'll also tell you that you know, while we might expect to get dead at about 80, 85% LTV over time, we have no problem also bringing a little bit more equity to the table, maybe at 60% to 70% LTV for the first project or two. Yes, that will decrease our levered IRR just a bit, but also produce cash flows in the arm, which would also be helpful. But ultimately, to us, it's really going to come down to execution for which we still think that the industry hasn't proven. But we're going to see that over the next twelve to eighteen months, particularly as we bring our land and power to market. So I don't have specific answers for you right now, but I'd say that we are content. There's a number of options for us to get financing at attractive prices and get the levered IRR that this market is offering. John Todaro: Terrific. That's helpful. Thanks, guys, and congrats again. Operator: Thank you. Your next question comes from the line of Reggie Smith with JPMorgan. Your line is open. Reggie Smith: Congrats on the quarter. And on the pivot. Guess I had a question on the Sandersville site as well. I'm not sure if you guys talked about what type of CapEx would be required to upgrade that to HPC or if it's ready, like kind of move-in ready now? And then I'm curious, I know it's early, you thought about, you know, the use cases, whether it would be used for training or entrance, and whether that at all plays any role in the price that you may be to get throughout to kind of lease that space out? Like does the influence pay more or generate more revenue per megawatt than training? Any insights you can provide at least around how you're thinking about you know, kind of self-appraisal of the site and what it could be worth? Matt Shultz: Hey, Reggie. Thanks for joining. And thanks for the call. You've been to that Sandersville site, I believe. On some of our show and tell journeys. And I think what's important to note is the facility, you saw it would not be a conversion to HPC AI. We have a phenomenal relationship with the economic development director in the county. And so we secured an additional plot of land, hundreds of acres of land that's immediately adjacent. So what would what you would see would be construction that is parallel with Bitcoin mining continuing. And when we're ready to energize, we literally flip the switch, de-energize the Bitcoin mining and migrate that out and go to compute. Now specific types of compute. Jeff has built a model. Obviously, you have the Giga campus, which is large-scale training. Those are generally close to a gigawatt and above. Then you have the mega campus, which is that kinda sweet spot two to 800 megawatts. And that's generally perceived to be kind of a combo site where it's inference and training or primarily inference depending on the offtake client. The last mile or the low latency real mission-critical sites like what you've seen in and around Metro Atlanta would be kind of the exception to that rule, and those would obviously be low latency inference type operations. So this is gonna be I think Sandersville gonna be an interesting case study because quite frankly, the demand that we're seeing is for multiple one ninety to 200 megawatt critical IT loads and the off takers are asking for twenty twenty-six delivery. So there are some real challenges in getting that tipped up in time But as we saw, even with companies like Meta, for example, they're putting tents up and using behind-the-meter gas at 12¢ a kilowatt hour. Because the demand is such that there's no sensitivity to those utility rates. So we really feel like we're uniquely positioned in this, Reggie, and, you know, you and I when you first launched coverage on CleanSpark, we talked about the fact that when CleanSpark entered the space, there were a handful of household names that were the standard from Bitcoin mining. We mined our first Bitcoin in December 2020. And as of today, we have more hash rate in The United States Of America than anybody else Our uptime is second to none. And I think you can see you can count on seeing that same type of operational excellence and efficiency rolled into our next strategy. And Jeff is just the perfect guy to lead those initiatives. Reggie Smith: And if I can get one more in, because I'm not trying to nail you down to a timeline, I'm kinda reading between the lines. Like, I think about Cypher and, yeah, they purchased a property in Texas a year ago, and kind of just now announced a deal. And I understand it takes a while to sort these types of things out. But I'm curious, like, are you thinking about it if it took you a year to sign a deal, would that be your satisfactory or kind of disappointing based on what you're seeing from a demand perspective now? We think of something you know, much sooner than that? Like, any color you can help. On how you're thinking about that internally? Personally, that would be great. Thank you. Matt Shultz: Yeah. So that's a phenomenal question. I can tell you that you know, you called me, I was at my kids' basketball game. You called me when CoreSci Core we've announced their deal. And we talked about what the demand portfolio or the demand profile looked like back then. And at that point, it was we're going to convert these megawatts and we're going to identify a customer. I think there's been a complete paradigm shift in the space. And now you have customers knocking at the door because they have loads that need to be served very rapidly. So what I can tell you with a I would say, a strong amount of certainty is you'll see a lease executed much quicker than what you've seen in the space. And the flexibility that's now come, you know, I mean, we look at some of our peers that have extended their energization schedules because they're falling behind on construction, etcetera. The hyperscalers and the end users that work we're having conversations with, you know, we've made it abundantly clear. We're constrained like anyone else for the MEP side, but we have a distinct advantage. So I think what's likely to happen and, you know, Reggie, quite frankly, they're two different off takers. That wanna sign con sign the lease agreements by year-end. Is that going to happen? It's hard to say. But the demand is there. It's real. And I'm as I mentioned in earlier comments, we were working on this script in the slide deck that we showed today, and I left here at 08:00 last night. And the global director of site select for a hyperscaler was calling me wanting to confirm that they were still in the running. So I don't think there's any question that you're gonna see a lease much quicker than a year. Reggie Smith: Great. Perfect. Congratulations. Matt Shultz: Thanks, Reggie. Happy Thanksgiving. Operator: Your next question comes from Brett Knoblauch with Cantor Fitzgerald. Your line is open. Brett Knoblauch: Hi guys. Thanks for taking my question. Maybe Matt just on the land and tower side of the equation, Could you comment on what you had to pay for the new site in Texas that you guys just announced? And, you know, think you guys are the one out there that are looking to go out and find additional land that is, you know, energized soon, you know, think all of your peers, even hyperscalers, probably they're looking at to do it themselves. But I guess, how hard is it? How expensive is it? And how much is there out there that you think you can go out and buy that is kind of turnkey ready? Similar to the site that you guys announced in Texas? Matt Shultz: So yes, I could say what we paid for it, but I'm not going to. And I'll tell you why. There are some very fertile hunting grounds in the ERCOT region, and we don't want to price ourselves out of the market. What I can tell you is that the acquisition cost was a combination of equity and cash. We obviously filed the proper the appropriate filings for the share issuance. But the purchase price of that land and power came in line with what seeing in the market towards the low end of that range. Our advantage, I think, in securing land and power and speed to market is really because we've continued to state that Bitcoin mining is going to be a part of what we do going forward. And eighteen months ago, when we were invited to sit down at Mar A Lago, with Donald Trump during his candidacy. He brought in senator Hagerty from Tennessee And because the question that came was, can Bitcoin miners actually plow the road, so to speak? Can Bitcoin miners go in and monetize megawatts for utility that needs to generate revenues now? while they're waiting for an interconnect agreement. Or for an energy developer that needs to monetize their power And and so mister Trump asked Bill Hagerty, can Bitcoin miners do that? And what he said is unequivocally, they not only can they, but they do in TVA, and CleanSpark is one of them. And so when we talk about Cheyenne, you know, we're driver nine iron across the street there from Effie Warren Air Force Base, and there's another trillion-dollar company, trillion-dollar market cap company that's in our same neighborhood. They were bidding for those megawatts. And we won. We didn't win because the utility thought that our balance sheet was pretty or we were a better credit risk. We won because we said if you sell us those megawatts, we'll start buying them in six months, not a year and a half or two years. So I think long answer to your question, I think being a Bitcoin miner with a diverse mining portfolio and the flexibility of the modular deployments that we've done on some of the sites that you've actually seen it gives us an advantage to jump in, monetize those megawatts on a small portion of the campus while we're tilting up the powered shell in the background. So you know, I think our speed to market is complemented not only by the modular approach with summer partnership, but also by using Bitcoin to go in and buy the power today. Brett Knoblauch: Awesome. Really appreciate it, Happy Thanksgiving. Matt Shultz: Thanks. Brett. Happy Thanksgiving too. Operator: Your next question comes from Jim McIlree with Chardan Capital. Your line is open. James Patrick McIlree: Thank you. Good afternoon. Is Sandersville the only existing mining site you've identified for critical IT applications? Or the first one, and there's going to be others? Matt Shultz: Hey, Jim. Thanks for the question. The answer to your question is b. It's the first one. The inbound inquiries we've had for the 100 megawatts surrounding the Atlanta Airport are second in urgency only to Sandersville. And Sandersville is because it's two fifty megawatts energized operating today. The demand for College Park and Norcross is because it's low latency in the most dense compute environment in North America outside of Northern Virginia. So there's a tremendous amount of demand there as well as some of our sites in Tennessee. So it's really just a sorting process. And as we mentioned in our prepared remarks, we've done a portfolio analysis to kind of determine. We don't wanna move Bitcoin mining infrastructure into a facility that's going to be rapidly pivoted to an AI HPC deployment. So I think the answer is Sandersville is the low-hanging fruit that everybody wants. The Metro Atlanta stuff is second, and then we've got a whole bunch of third-place sites. James Patrick McIlree: And the way you described it, it sounds like that flipping of the switch from mining to AI can take place before the CLI facility is energized. Am I understanding that correctly? Matt Shultz: Yeah. So think about it this way, Jim. Our facility in Sandersville is purpose-built Bitcoin mining. We have a couple of hundred acres adjacent. We're gonna build on that land while we're still mining. Now the speed to market really the summer is a big differentiator. As I mentioned before, you know, there are hyperscalers that are popping up tents because they need access so quickly. So I think it's a relative question. The Sealy project is very appealing. Because we've done all the analysis, all the engineering is done. We we've gone to the levels of completing the survey and finding where there are easements for the gas lines on-site, etcetera, So we can configure the footprint based on the needs of an end-use customer. So we spent a great deal of time in NVIDIA with some of their teams, and they have a giga site. They have all the reference architecture for a g v 300 deployment for a gigawatt of power. And everything is detailed down to the inch of fiber runs. So that type of build is obviously much more detailed and gonna take a longer period of time than tilting up a powered shell and slotting in a modular solution like you'd see from a submer, like you'd see from a company like Integra out of Houston. There are a number of these companies that provide that full MEP turnkey solution. So I think what is likely to happen is we'll probably execute on both simultaneously. The delay on Sealy and it's not really a delay. It's just the energization schedule on ERCOT is fixed. The cool thing about that is the large load studies are done. There's no if. It's just when. And the first two zero seven megawatts energizes the first half of 'twenty seven. You know, their commitment is April, but they have flexibility for the first half. So I think the conversations we've had with off takers for Sandersville they're looking to get something in the books fast, with Sealy. It's also high demand and with the understanding that by Q2 twenty-seven, it's energized, and you can build in the meantime. James Patrick McIlree: Understood. Thank you. And just one more, if I might. You talked about increased expenses And given that as well as the recent prices of you need to sell the entirety of your Bitcoin production in order to cover your expenses? Matt Shultz: Not at all. We're, you know, we're generating $607,100 bitcoin a month and we're doing sort of 54, 55% gross margin. So the expenses we talked about and, you know, as we're building, I think it really depends on the lease we put together. And the ability to leverage that lease for financing. But what we're seeing is that you know, depending on the credit quality of the end-use tenant, the LTVs are anywhere from 15% to 30%. Having just put up or the inverse of that, I'm sorry, 70 to 85%. Having just put up that $1.15 billion 0% bond, we're sitting on a pretty healthy stack of cash. Then as Gary mentioned in his prepared comments, we have $400 million in low single-digit interest unused capacity on Bitcoin-backed credit facilities. So I think you'll see us take more of a hybrid approach rather than sell the stack And then the last thing, you know, with regard to the compressed margins in the environment, having the highest uptime and the most efficient fleet in the nation means that as energy prices press up, margin compression happens to everybody. We just happen to make more money out of the same megawatts because of fleet efficiency and uptime. So, you know, I tell the story. It's like when you know, my grandfather told me when, you know, two guys are camping in a tent and a bear walks into the campsite, and the one guy puts on his shoes, and the guy says, what do you you putting on your shoes? You can't outrun a bear. And he said, I don't have to outrun the bear. I just have to outrun you. And that's really what we see as our Bitcoin mining advantage. You know, they're still industrial-scale miners operating fleets greater than 20 joules per terahash with not significantly better power pricing than we do. So we have a ton of flexibility and I really like the position that we're in to continue using Bitcoin mining. Operator: Next question comes from the line of John Hickton with Ladenburg. Your line is open. Jon Robert Hickman: Hi. As you might imagine, most of my questions have been answered. But I was just wondering if you could maybe opine about there are others in the space that are trying to do the same thing that you're doing, taking Bitcoin sites and moving them over to HPC and AI. And they've been, you know, telling us they're gonna do this, and it's been a year's gone by and there's no like, lease. Why would could you opine as to why it would be taking so long when there's so much demand? Matt Shultz: I'll tell you from my perspective, and then certainly invite either of my colleagues to chime in on it. What we learned when we spent some time with NVIDIA and AMD There's there are very specific reference architecture that is required for specific clusters. And I think that the challenge that we're seeing, and I'm certainly not casting aspersions on anyone's strategy, But I think if there's so much demand for a hyperscaler, but they want a specific cluster, be that the new Google chips or AMD or NVIDIA. The site needs to be specifically designed for those clusters. And I think building a site and then suggesting that it's flexible for somebody else to reconfigure or modify it you know, it could be useful. I think, is a little bit of a challenge. So to have it purpose-built to the specific architecture of the off taker I believe, is a real advantage. And having all these sites that are already energized, that we're currently using those megawatts to mine Bitcoin give us that flexibility. I'm not in a rush. I don't have to do anything quite frankly, until we have a lease I don't even have to start construction because I wanna make sure that it's built to suit for the offtake customer. So I guess my perspective, John, and, again, I invite Harry or Gary to comment, I think that build it and they will come mentality doesn't apply if it's not to the specific architecture requirements of the end user. Harry Sudock: I would just add one quick thing, John. Which is just that the market today is different than the market a year ago. The demand profile was accelerated. The crunch for power is tighter than it was And so we're seeing some of the hesitation that some of these off takers might have had twelve or eighteen months ago the sense of urgency is just more significant. And you know, that's gonna represent a difference in execution timelines today than they would have looked like back then. Jon Robert Hickman: Okay. And then I just have one question. On Sandersville, you get the AI part built and you want and sign it flip the switch, what happens to the Bitcoin mining site? So fantastic question. Would they have no power You shut it you the shutter, would you? Matt Shultz: Yeah. No. A couple of opportunities there. First and foremost, the ASICs would be migrated to a facility that needs them right and there's always plenty of demand for that. The facilities that we built and, John, I don't remember if you visited Sandersville on our Analyst Day. The facility is at Sanders Okay. So they're identical to what we built in Jackson, Tennessee as an example. So the cool thing is we build all the foundational stuff and then what goes vertical is basically bolt together. So we have the ability to repurpose those buildings based on any number of different factors. But, no, it wouldn't be a write-off in mothball. It would be repurposing those assets for deployment elsewhere. Jon Robert Hickman: But you'd need more power. Matt Shultz: Yeah. For sure. That's why we would move it somewhere else. Like, for example, you know, Wyoming or Tennessee or even other sites in Georgia, we would for sure. Now Sandersville is a bit of an anomaly because there are some for power expansion there. And that's something that's still out for discussion. Okay. But the demand is significant. Jon Robert Hickman: Okay. Well, thanks. Appreciate your time. Matt Shultz: Thanks, John. You bet. Happy Thanksgiving. Jon Robert Hickman: You too. Operator: And with your last question, it comes from Nick Giles from B. Riley Securities. Line is open. Nicholas Giles: Great. Thanks for squeezing me in guys. You spoke to a multi-gigawatt pipeline, and I was hoping you could break that down a bit. I mean, how many of these opportunities would you describe as late stage? Or how soon can we see those drop down? And then which of your existing power markets do you see most of these opportunities? Thanks a lot. Harry Sudock: Yes, Nick. Great question. And I wanna give you a historical example to kinda illustrate, you know, why we don't always give direct pipeline granularity as our business. So look back to the prior quarter's call, we talked about pipeline. And it was contemplated in that environment. Wasn't contemplated in either of those numbers was the two eighty-five megawatts that we purchased in Texas. And that's because the relationships that we have across the utility and infrastructure space are diverse, they're all very warm and deep. And so there are opportunities that come out of the woodwork along the way. That leapfrog to the front of lists that we thought were very set. And so it's part of our capital strategy. Have dynamic flexibility and execution with speed And it's also part of the pipeline and relationship management that we do work on across the infrastructure and utility partners that we have And so that type of dynamic flexibility is why we've been successful acquiring Power and Land and developing it with the quality that we have And so when we look at that multi-gigawatt pipeline, a lot of those regions where we see expansion opportunities are places where we have relationships, the Georgias, Tennessees, Wyomans, and now Texases of the world. But some of the utilities that serve those regions I'll use TBA as an example because I'm a homer, Tennessee Valley Authority serves seven different states. And so while it's the same utility partner, it bleeds outside the lines of the great state of Tennessee. And so those are the types of dynamics that we see replicated across those relationships, and part of why we feel so good about the pipeline growth opportunities and why we capitalize the business to hunt, power, and land, just like Gary said. Nicholas Giles: Understood. Well, guys, appreciate the update and have a great holiday. Matt Shultz: You too, Nick. Happy Thanksgiving. Operator: And with no further questions in queue, I'd like to turn the call back over to Harry for any closing remarks. Harry Sudock: Everyone, thank you again for joining today's earnings call. We look forward to staying in touch and sharing future results with you in the coming quarters. Stay tuned for more progress and exciting achievements ahead of us at CleanSpark's. America's Bitcoin Miner. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Urban Outfitters, Inc. 2026Q3 Conference Call. If you would like to ask a question during the presentation, please press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I'd now like to turn the conference over to Oona McCullough, Executive Director, Investor Relations. Ma'am, you may begin. Oona McCullough: Good afternoon. And welcome to the Urban Outfitters, Inc. Third Quarter Fiscal 2026 Conference Call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three and nine-month period ending October 31, 2025. The following discussions may include forward-looking statements. Please note that actual results may differ materially from those statements. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company's filings with the Securities and Exchange Commission. For more detailed commentary on our quarterly performance, and the text of today's conference call, please refer to our Investor Relations website at www.urbn.com. I will now turn the call over to Dick Hayne. Dick Hayne: Thank you, Oona, and good afternoon, everyone. The Urban Outfitters, Inc. teams delivered another outstanding quarter. Total revenues grew by 12% and net income increased by 13%, both new third-quarter records. We are especially pleased to report that all brands produced positive comps across all geographies this quarter. This includes the powerful double-digit comps the Urban brand generated in both North America and Europe, and the exceptional growth in subscribers and revenue from the Nuuly brand. The agenda for today's call includes comments from Frank Conforti, our Co-President and COO, who will elaborate on Q3 performance by brand and business segment. After Frank, Tricia Smith, CEO of the Anthropologie Group, will speak to the performance of that brand and their newly launched Maeve concept. Melanie Marein-Efron, our CFO, will then walk you through our outlook for the fourth quarter, and I'll wrap things up with a few closing thoughts before we open the call for your questions. Frank, the floor is all yours. Frank Conforti: Thank you, Dick, and good afternoon, everyone. Today, I'm excited to share our company's third-quarter record results compared to last year, and then I will dive into some detailed notes by brand. Overall, our teams delivered another outstanding quarter, exceeding our plans and setting new sales and profit records. Total Urban Outfitters, Inc. sales grew by over 12%, reaching a Q3 record of $1.5 billion. All our Retail segment brands delivered positive retail segment comps, while four of our five brands posted record third-quarter sales, and Nuuly continued its impressive double-digit revenue growth. Our total Urban Outfitters, Inc. sales growth was partly driven by an 8% increase in the retail segment comp, with digital comps slightly exceeding store comps. Nuuly delivered strong 49% revenue growth driven primarily by an increase of 118,000 average active subscribers compared to the prior year. Additionally, the wholesale segment delivered an 8% increase in revenue driven by growth in the specialty store accounts, which was largely fueled by healthy increases in FP Movement. Next, I will turn your attention to gross profit. Urban Outfitters, Inc. saw a 13% increase in gross profit dollars, reaching a record $563 million. The gross profit rate improved nicely by 31 basis points, rising to 36.8%. Please note that this includes a $2 million impairment charge in the current quarter, which is worth 13 basis points. The improvement in gross margins was primarily driven by lower markdowns at the Urban Outfitters and Free People brands, as well as occupancy leverage driven by strong sales growth across all our brands. These gains more than offset lower initial product margins at all our brands due to increased tariffs versus the prior year. In the quarter, SG&A increased by 14%, deleveraging by 32 basis points. The growth in SG&A dollars was primarily driven by increased marketing spend, which fueled sales and customer growth for all brands. The marketing efforts drove increases in traffic and transactions, both in stores and online, for the total Urban Outfitters, Inc. retail segment. While Nuuly's campaigns resulted in healthy double-digit growth in average active subscribers. Overall, total Urban Outfitters, Inc. operating income rose by over 12% compared to last year, reaching $144 million, while the operating profit rate was consistent with the prior year. Net income saw a 13% increase to a new Q3 record of $116 million or $1.28 per diluted share. Now moving to brand performance, starting with the Free People brand. The team delivered a 9% increase in total revenue. Their sales growth was driven by a 9% increase in Retail segment sales, including a 4% retail segment comp, significant non-comp sales growth, and an 8% increase in wholesale segment revenues. The retail segment comp was driven by positive comps in both the store and digital channels, across all geographies, with an outperformance in accessory product sales. Non-comp sales grew by over 200% driven by new Free People and FP Movement store openings over the past twelve months. The brand is planning to open 43 new stores for the year, including 18 Free People, and 25 FP Movement stores. The brand is also encouraged by the strong results in Europe. While European operations are small relative to the total brand, new store openings continue to perform well, and the region drove a double-digit retail segment comp in the quarter, building on double-digit retail segment comps last year. I know Sheila Harrington and team are excited to capture more of the European market potential in the future. Within the Free People brand, the FP Movement business delivered strong total growth of 18% driven by a 4% Retail segment comp, strong Wholesale segment sales growth of 29%, and robust non-comp growth driven by new store openings. Continued strength in performance-related products is driving healthy new customer acquisition growth. The FP Movement brand saw increases in new, reactivated, and retained customers during the quarter. Based on our current plans, we believe the Free People retail segment could deliver a low to mid-single-digit positive comp in Q4. Free People wholesale revenues increased by 8% during the quarter, driven by sales gains in all geographies, while specialty store accounts led the way versus other accounts. As noted on our last call, as we move through the back half of the year, the wholesale segment faces more difficult year-on-year comparisons versus the prior year. Based on our current plans, we believe the Wholesale segment could deliver mid-single-digit comps in the fourth quarter. Now let's move on to the Urban Outfitters brand. Urban Outfitters recorded a strong 13% global retail segment comp for the third quarter. Congratulations to the team on delivering the first double-digit comp in some time. UO North America recorded a 10% retail segment comp and UO Europe an exceptional 17% retail segment comp. The total global comp was driven by strong store and digital comps with positive traffic in both channels and positive conversion in stores. In North America, the UO team continued their focus on their customer, and delivered a solid comp in both channels for the quarter, building on the strong start to the back-to-school season in Q2. In the third quarter, the business grew nicely across all major categories, anchored in strong regular price sales, new customer growth, and continued success in focused growth categories. Within women's, the denim business continued to be strong, complemented by pants, lounge, sweaters, and accessories. The brand is also encouraged by the progress in the men's apparel category, which delivered double-digit regular price comps in the month of October. In North America, from a marketing perspective, the team is focused on meeting customers in the moments and places that matter most. Whether that is across social channels, digitally, in our stores, or by hosting culturally relevant events. In the third quarter, the brand celebrated back to campus by hosting game day events at college campuses across the country, introducing and welcoming more customers into the brand. The brand also celebrated partnerships with some of Gen Z's most loved brands through On Rotation, a 360-degree brand spotlight, showcasing discovery, product engagement, and curated assortments. These engaging brand marketing events have been successful, driving an increase in unaided awareness and new customer growth. In Europe, the Urban Outfitters brand delivered an outstanding 17% retail segment comp driven by double-digit comp increases in both the store and digital channels. During the quarter, the business achieved positive double-digit comps across all major product categories. With these exceptional results, it is clear the European team is winning market share through amazing product execution, compelling marketing events, and strategies. Moving back to the Urban Outfitters brand globally, we are proud to note that the brand delivered low single-digit operating profit margin in the third quarter. This significant improvement was driven by a remarkable year-on-year profit increase in Europe, followed by a meaningful reduction in operating loss in North America. Based on our current plans, we believe the global Urban Outfitters brand could deliver a high single-digit positive retail segment comp for the fourth quarter. Now turning to the Nuuly brand, which delivered another exceptional quarter. Total Q3 revenue grew by 49%. The impressive growth was primarily driven by an increase of over 40% in average active subscribers, reaching just shy of 400,000 average active subs versus the prior comparable quarter. Nuuly's growth added 3.5 percentage points of revenue growth to total Urban Outfitters, Inc. sales. Our primary focus remains on scaling the Nuuly business and building brand awareness, which we are doing through investments in logistics and strategic marketing. We are pleased to report that our planned logistics expansion in Kansas City, Missouri, including increased storage capacity, and the implementation of new sortation automation, remains on track. Our latest marketing campaign was successful in driving new customers and continues the positive momentum of the brand. Overall, Nuuly's continued strong performance highlights the large growing opportunity for apparel rental in the US, and we believe we are making the appropriate investments to enable Nuuly to continue winning market share. Based on our current plans, we believe Nuuly could deliver healthy double-digit revenue growth in the fourth quarter. Now moving on to tariffs. The macro landscape remains consistent with what we discussed on our last call. We estimate that tariffs negatively impacted our third-quarter gross margin rate by approximately 60 basis points, and we currently believe will have an impact of approximately 75 basis points in the fourth quarter. Despite these headwinds, we still believe we can achieve approximately 100 basis points of gross margin improvement for the full fiscal year 2026. Our teams continue to work diligently on tariff mitigation efforts, including negotiating vendor terms, modifying our countries of origin, adjusting transportation modes, and strategically managing pricing. I want to emphasize that this plan reflects our current knowledge, and there is still a lot of uncertainty in today's environment. This uncertainty, in addition to our ongoing mitigation efforts, makes it challenging to predict the impact of tariffs beyond the fourth quarter. In summary, it was an exceptional quarter. All brands delivered positive retail segment sales comps, wholesale produced healthy revenue gains, and the subscription segment drove double-digit revenue growth. We believe we are on track to deliver record sales and operating profit for the year, including approximately 100 basis points of growth and operating profit margin improvement despite tariff headwinds. We could not be prouder of the teams and their amazing execution. On that note, I will now turn the call over to Tricia Smith, Global CEO of The Anthropologie Group. Tricia Smith: Thank you, Frank, and good afternoon, everyone. In the third quarter, the Anthropologie Group delivered an 8% retail segment comparable sales increase, driving 8% growth in total brand revenue. This achievement marks the nineteenth consecutive quarter of positive comparable sales for the Anthropologie Group. Importantly, we were able to maintain strong double-digit profit rates through improved gross profit margins despite ongoing tariff headwinds. The Retail segment's comparable sales growth was robust, driven by strong comps in both digital and stores across all regions. Category strength remained consistent across apparel, accessories, and weddings, complemented by an acceleration in sales trends within the home category. Turning specifically to apparel, our strength continues to be driven by the brand's multiyear focus on modernizing the assortment and elevating our own brands. These offerings remain our customers' most coveted selections and continue to drive substantial growth. This success is tangible. Own brand penetration achieved a historical high, increasing by over 100 basis points versus last year. We're strategically investing in these unique brands, including Maeve, Celandine, Lyrebird, and Pilcro, which are supported by a strong design team and a distinctive creative point of view. We believe this customer affinity for our own brands positions them for continued growth opportunities. Highlighting the power of our own brands, this quarter saw the launch of Maeve as a stand-alone brand, transitioning it from a beloved in-house label to a dedicated boutique concept. Our first Maeve Boutique opened in Raleigh, North Carolina, and the results have exceeded our expectations with a high double-digit beat of our forecast. This launch has proven accretive to our business in the Raleigh-Durham area, driving increases in total store sales across the region, inclusive of existing Anthropologie stores. Furthermore, digital demand for both Maeve and Anthropologie in the trade area has outpaced brand-wide demand growth since the store opening. Building on this success, our next Maeve boutique is scheduled to open at The Shops at Buckhead in Atlanta, with an additional location to be announced in 2027. Moving now to the Home business, where we saw an acceleration in sales trends during the quarter. Anthropologie Home achieved high single-digit comparable sales, which was in line with total brand comparable sales, driven largely by the strength of our full-price business. Growth was concentrated in home accessories and textiles, and notably, regular price furniture sales turned positive during the quarter. Home accessories, a key point of entry for new customers, delivered double-digit comps and double-digit new customer growth. We're excited about the current trajectory and growth potential of our home business. Our brand-wide growth continues to be fueled by strong positive comparable sales across both digital and retail channels. In our digital channel, we drove double-digit session growth while holding conversion flat. We are continuously investing in our customer digital experience to reduce friction in the online purchase process and drive conversion. In our stores, the focus on service and experience is yielding results. Our in-store styling services grew double digits this quarter, and the high-touch appointment-driven Anthro Weddings business significantly outpaced total brand comp. These strong channel performances validate our strategic investments in both our physical store footprint and our digital capabilities. Building on the success in stores, we're executing a robust plan for new Anthropologie stores in addition to the Maeve boutique launches. Year to date, in FY 2026, we have opened eight new stores in North America and plan to open an additional three before the end of the fiscal year. Internationally, we also have three new stores opening in the UK, with Liverpool and Glasgow opening earlier this month and Manchester opening later this week. Importantly, our new Anthropologie stores are not only exceeding our expectations but are also driving outsized digital demand in their local markets. By the end of fiscal 2026, we will have 250 Anthropologie Group stores globally. Underpinning our growth strategy is exceptional marketing that drives customer acquisition and retention. Our messaging this quarter was anchored by two high-impact campaigns: our 1,000,000,000 impressions and our Anthro Always Fall campaign, a cinematic cross-category story. This approach successfully balances data-led discipline with emotionally resonant storytelling that speaks to new and existing customers. As a result, our total customer count grew high single digits this quarter, and over 30% of new customers have returned to make a second purchase, with our own brands driving the majority of this new customer growth. Looking ahead, we're expecting mid-single-digit comps for Q4. We are committed to our strategy and focused on our North Star of product modernization, customer growth, and leveraging creative, as we enhance our selling environments with exceptional experiences for our customers. I would like to take this moment to thank our incredible teams and global partners. The thoughtful, customer-obsessed way in which you work continues to delight our customers and supports the growth of our business. With that, I will now hand the call over to Melanie Marein-Efron. Melanie Marein-Efron: Thanks, Tricia, and good afternoon, everyone. Let me walk you through how we're thinking about our fourth-quarter financial performance. Based in part on our start of the quarter, we are planning for total company sales to grow in the high single digits for the quarter. In our Retail segment, comp sales could grow mid-single-digit positive, with high single-digit positive retail segment comps at the Urban Outfitters brand, mid-single-digit positive retail segment comps at Anthropologie, and low to mid-single-digit positive retail segment comps at Free People. And Nuuly, the brand could deliver mid-double-digit revenue growth driven by continued subscriber momentum. Finally, our Wholesale segment could produce mid-single-digit growth. Based on our current sales performance and plan, we believe Urban Outfitters, Inc.'s full-year gross profit margins could increase by approximately 100 basis points, with the second half growing by approximately 50 basis points versus last year. Within the remaining second half, fourth-quarter gross profit margins could increase by approximately 25 to 50 basis points as lower product markdowns, particularly at the Urban Outfitters brand, are partially offset by lower initial merchandise margins due to increased tariffs. Our current assumptions on tariffs are based on the announced tariff rates as of November 24, which includes a 50% tariff rate on goods from India. Turning to SG&A, we expect expenses to grow roughly in line with sales for the full year and fourth quarter based on current sales performance and plans. The planned growth in fourth-quarter SG&A is mainly driven by higher marketing spend to support customer and sales growth, along with increased store labor costs related to new store locations. As always, if sales performance fluctuates, we maintain a certain level of variable SG&A spending that we can adjust up and down depending on how our business is performing. We are currently planning for an effective tax rate of about 23.5% for the fourth quarter and 22.5% for the full year. Now on to inventory. In Q4, we expect inventory could grow at a rate similar to fourth-quarter sales as our teams continue to focus on increasing our product turns. For FY 2026, capital expenditures are planned at approximately $300 million. The FY 2026 capital project spend is broken down as follows: Approximately 45% is related to retail store expansion and support, approximately 35% is related to supporting technology and logistics investments, and the remaining 20% is for home office expansion to support our growing businesses. Lastly, we're planning to open approximately 69 new stores and close approximately 17 this year. Most of our net new store growth will come from the FP Movement, Free People, and Anthropologie. Specifically, we're planning 25 new FP Movement stores, 18 new Free People stores, and 16 new Anthropologie stores. As a reminder, the foregoing does not constitute a forecast but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. With that, I'll hand it back over to Dick. Dick Hayne: Thanks, Melanie. As you've heard, our teams produced another great performance, with every brand contributing meaningfully to our outstanding results. Robust comparable sales across our brand portfolio demonstrated their power and the rigor of our execution. The Anthropologie, Free People, and FP Movement brands achieved record sales while successfully maintaining double-digit operating profitability. The Urban Outfitters brand posted strong double-digit comparable sales in both geographies, driven by better product, improved marketing, and more full-price customers. As a result, the Urban brand delivered significant profit improvement versus last year. Complementing their retail results, Nuuly, our subscription rental concept, continued its impressive trajectory of strong subscriber and revenue growth while delivering healthy operating profit. During the quarter, customer engagement was lively, with both store traffic and online session growth up sharply. Our customers responded enthusiastically to our compelling product offerings and distinctive brand experiences, driving record third-quarter results. This sustained performance is a direct testament to the strength and resilience of our diversified business model. We have built a strategic model that is sturdy across multiple dimensions. Our diversification by channel, spanning stores, digital, wholesale, and subscription services, and by brand, with a portfolio catering to different customer segments, provides inherent stability. Furthermore, our broad category offering, apparel, accessories, shoes, home, and beauty, ensures that as customer preferences shift, we will remain relevant. This powerful multifaceted approach to diversification gives us high confidence that with smart execution, we can continue to grow our market share regardless of the operating environment. Looking ahead, November traffic and sales remain robust. Our retail segment comp sales are currently running slightly ahead of our stated Q4 plan to deliver mid-single-digit comp growth. We anticipate the holiday season will, as always, be highly competitive and promotional. We have observed a slight shift in consumers' behavior. We believe customers were waiting a bit longer this year to make their purchases until seasonal promotions began. And we successfully met this shift with strong results in our early holiday event. As Frank noted earlier, despite the expected promotional landscape, we believe the power of our model allows us to achieve improved operating margins in Q4 versus the prior year. For now, we are focused on closing the year successfully by delivering another quarter and year of record-setting results and continuing to deliver shareholder value. Finally, my thanks to our entire Urban Outfitters, Inc. family, brands, and Shared Services, for producing another superior quarter. I want to acknowledge the phenomenal job each of our brand leaders, their teams, and our co-presidents, Meg and Frank, have done. I understand the hard work and long hours you all devote to making our brands amongst the best in retail today, and I'm deeply appreciative. Our results are a testament to your effort and your talent. I also thank our partners around the globe for your cooperation as we work together to solve the problems imposed by tariffs. And finally, I thank our shareholders for your ongoing rich support. That concludes our prepared remarks. I now invite your questions. Operator: Then wait for your name to be announced. To withdraw your question, please press 11 again. We ask that you limit yourself to one question only. Our first question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open. Lorraine Hutchinson: Thank you. Good afternoon. I wanted to follow up on the commentary around pricing. I think the words you used last quarter were gently and sparingly. And I wanted to see, a, how much of a customer reaction you've been able to realize from these price increases, and, b, if the expectation was that you would continue to protect opening price points, especially at the Urban brand. Dick Hayne: Hi, Lorraine. I'm gonna ask Tricia to take that question. Tricia Smith: Hi, Lorraine. We are being highly strategic and thoughtful about taking price, and these are definitely not across-the-board price increases. We've taken small price increases where we felt the price-value equation was appropriate and have seen really little to no price resistance where we did so. We also want to stress that we remain committed to maintaining our opening price points and our pricing architecture and protecting those items that our customers count on to have great price value. Next, we're really seeing very little incremental price increases over and above what we've already implemented this fall and holiday. We really don't anticipate price resistance. Our focus remains on protecting the integrity and the value of our product while we manage our cost structure appropriately. Dick Hayne: Yes. And, Lorraine, I want to emphasize that all the brands are protecting their opening price points. And furthermore, as we think ahead, we think that most of the price increases are behind us and that we'll have little need to raise prices next year. Operator: Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open. Adrienne Yih: Great. Thank you so much. And I have to say, I mean, congratulations. Every aspect, every geo, every brand, it's pretty amazing. So congrats to everybody. Dick Hayne: Thanks, Adrienne. Adrienne Yih: You're very welcome. So, Tricia, just on kind of you talked about the own brand penetration. Can you talk about kind of where you are in the journey of own brand, where it could go, and what the global footprint for Anthropologie may look like, Europe versus North America? And then for Frank or Melanie, just on UO, so we have a, I think you said a positive low single-digit segment margin in the quarter. Where does that bring us year to date? And I think earlier, you had said that you didn't think that this year, you could break that profit barrier, right, to become, you know, positive. So, I mean, there's so much opportunity after this. So just a little color on kind of how you think about that for the year. Thank you. Tricia Smith: Hi, Adrienne. Our own brand growth, as I had mentioned in our opening remarks, has really been a source of strength for us as a brand. We're really leveraging the talent and strength of our design teams, our buying team. As I've mentioned, the penetration grew by almost 100 basis points versus last year. And we continue to plan and execute against our own brand growth outpacing that of just our total. We have successfully launched Celandine, Lyrebird, leveraging Daily Practice, and then really proud of the results the team's delivered with our Maeve expansion as a standalone brand and our concept store. So continued growth, we believe it will continue to outpace the total of our brand and expecting that to continue. I would say from a global footprint for our brand, really proud of the team successfully opening two stores in the UK. And the past several weeks and excited about the Manchester opening that will be opening at the end of this week. So we're in a place where I think we'll continue, as we mentioned, to open stores in North America. We'll continue to gauge the results of the stores that we're opening abroad in the UK and see an opportunity for us to continue to do so. I also think it's worth mentioning Pilcro. Yeah. That's definitely Pilcro. Really good season with Pilcro. Yeah. Pilcro's been a brand that has expanded significantly, and I would say several years ago, from a penetration standpoint in denim, and that's grown significantly now as our number one performing denim lifestyle brand for Anthropologie has been significant. Frank Conforti: And this is Frank, Adrienne. Thanks for your question. I just wanted to give an update on Urban. So first and foremost, I just want to say it again. Honestly, a huge congratulations to the entire team on the turn and the overall results. It's just, it's really great to see the progress the teams are making. Delivering such strong sales growth and great profit improvement. Yeah. As you noted, the brand was profitable on a global basis in the third quarter. This was driven by exceptional profit growth in Europe and a healthy reduction in the loss in North America. We're not ready to give a forecast exactly what next year could look like. Our business in Europe is already profitable and certainly was boosted by the extraordinary comp results so far this year. And while North America has delivered a meaningful reduction to their losses, they still have a healthy opportunity to continue progress into next year. And I would say given the size of the opportunity in North America, it is possible that the brand turns to globally to be profitable year on an annual basis, but we'd like to see exactly where this year lands before we commit to exactly what next year will look like. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Matthew Boss with JPMorgan. Your line is open. Matthew Boss: Thanks and congrats on another nice quarter. Dick Hayne: Thanks, Matthew. Matthew Boss: So, Dick, could you speak to drivers of the further acceleration in business you saw during the third quarter, notably at the Urban brand? Maybe elaborate on early holiday selling trends that you mentioned? Just how you see the setup for your brands through holiday? And Frank, so with 100 basis points of operating margin expansion anticipated this year for the company, how best to think about margin drivers or levers beyond this year if we think multiyear? Dick Hayne: Okay. Matthew, the drivers of the business across all the brands were the traffic. And traffic in stores and traffic online. And sales were almost exactly congruent with the increase in traffic. So I think that that's what did it. As we look into holiday, we think that the same thing is occurring. And we believe that the holiday season is likely to be very nice from a sales perspective. But we do expect it to be slightly more promotional than we saw last year. Let's say our customers aren't responding well to the new fashion. They are. And they are particularly responding to their gift-giving favorites. But they're waiting more patiently for anticipated promotions. And the events we've run so far have been very successful promotional events. So judging by the strength of those and the strong back-to-school season, and the surge in customer spending on holiday decorations, I anticipate a very good holiday season. Frank Conforti: And then, Matt, I can touch on operating profit. So, you know, obviously, we're extremely proud of what we produced last year delivering 100 points of improvement, getting to 8.6%. And, based on our current plans, we can deliver approximately 100 points of improvement in fiscal 2026, which would certainly put us very close to our 10% goal. As it relates to next year, I would just say it's a little early for us to commit to a rate. Obviously, as Melanie said, or as we target as a company, we're certainly going to target to keep SG&A at or below sales. But so then that leads to gross profit margins. And I just think there's a ton of uncertainty as to where tariffs are going to shake out given potential deals, Supreme Court rulings, our tariff mitigation efforts are ongoing. We'll have a better picture of this at the close of the year. But the one thing I do want to say is with all of that said around tariff impacts, if you were to ignore that for a minute, where our opportunities could land in gross profit would be driven by continued markdown improvement largely from the Urban Outfitters brand. We still think there's an opportunity to leverage store occupancy as, knock on wood, the brands continue to drive healthy comp sales. And, you know, when you're excluding tariffs, we actually still think there's IMU opportunity, which is great to see at all brands. Operator: Thank you. Please stand by for our next question. Next question comes from the line of Paul Lejuez with Citi. Your line is open. Paul Lejuez: Hey, thanks, guys. You mentioned pressure on IMU a couple of times, also lower markdowns. So just curious maybe you could talk a little bit about out-the-door merch margins. And what you saw by brand? And then second, on Nuuly, I'm curious if you've seen any change in the demographics in terms of age, income, regional, you know, of the new customers that you're attracting into that business versus what you've seen maybe several quarters ago? Thanks. Frank Conforti: Paul, this is Frank. I can take the sort of out-the-door, which was favorable given the markdown reductions for Urban Outfitters, Inc. As we noted, sort of all brands were impacted by the tariffs. And the lion's share of the markdown improvement was driven by Urban Outfitters, but Free People also had a favorable markdown rate in the quarter. And Anthropologie was just slightly up, but also did a really good job at offsetting their IMU and had gross profit gains overall as a brand for the quarter. So all three brands contributed to the within the retail segment to the gross profit gains for the quarter. And then Dave Hayne, I don't know if you want to touch on Nuuly? Dave Hayne: Yes, Paul. Thanks for the question on Nuuly. I would say that largely, we are seeing our customer base remain relatively stable in terms of the curve across age, you know, subscribers, demographic, geography. If anything, I would say we have seen a slight shift, ever so slight, towards a slightly younger subscriber in terms of our new customer acquisition, and we've seen a penetration from a subscriber standpoint, a slightly heavier penetration into the southern region of the country. More so than other geographies, mainly from a new customer standpoint. But those are just slight changes. There has not been a big transition or a big change in the composition of our subscribers. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Mark Altschwager with Baird. Your line is open. Mark Altschwager: Congrats on the strong results. Thank you. I wanted to follow up on gross margins. First, I guess, where was the upside versus your plan for the third quarter? Any surprises there? By brand or on the markdown front? And then just for Q4, you're commenting on expectations for higher promotions over holiday given the shift in behavior. But you are maintaining your guidance for the full year. So just curious what the offsets are there that are allowing you to hold that plan? Thank you. Frank Conforti: Sure, Mark. This is Frank. I can take that. I think the outperformance in the third quarter was largely just top line came in really healthy. So you got some better leverage, as it related to store occupancy, which was great to see with all brands contributing to that. As it relates to the fourth quarter, you hit the nail on the head. We are maintaining our annual plan and expectation to hopes of delivering approximately 100 basis points of gross profit margin improvement. I would like to say, I hope we're being conservative. But we do expect, as Dick noted, the holiday to be promotional. And, you know, if those promotional events are bigger than last year, that could have an impact on margins, and, you know, we're hoping that we're being conservative there. This does not mean, and I just want to be clear about this, that we're planning on more or deeper promotions because we're not. It just means over the past several years, we've seen this concept of highs being high and the highs being higher and the lows being lower as it relates to sales impact, sales events, I should say. So, again, I hope we're being conservative with the level of improvement we're planning, and we're really excited and pleased to hopefully be able to deliver that 100 points on an annual basis. Operator: Thank you. Please stand by for our next question. Next question comes from the line of Alex Straton with Morgan Stanley. Your line is open. Alex Straton: Thanks so much. Congrats on a great quarter. Maybe Frank or Melanie to start, I think you've put a 10% long-term margin target out there, but you'll be very close, if not there this year. So just curious how you think about that longer term and maybe what pushes you beyond it? And then while we have Tricia on the call, I just wanted to take a step back on Anthro. Feels like there's just been a structural change in the growth that that business delivers versus where it was at pre-pandemic. I'm just curious, like, what's changed? And how do you think about the durable growth rate for that business over time? Thanks so much. Frank Conforti: And thank you for the congratulations, Alex. This is Frank. So, as I said, we are still targeting 10% and knock on wood, we're hopeful we could get very, very close to that this year. Honestly, before we set a new goal, I'd like to hit the first goal. And, you know, as you know, I think everyone knows, there's still plenty of opportunity for us to drive improvement. You've got things like the UO turnaround, which is certainly in play right now. That brand, as we said, will still have a healthy opportunity to drive operating dollars and rate gains into next year. You've got Nuuly growing at a really healthy rate, and that gives us opportunity from a profit rate perspective as well. As I mentioned, you know, all the brands delivering positive comps, you've got store occupancy leverage and excluding what's going on with tariffs, which hopefully some of that changes in the future, I think all brands have IMU as well. So there's several levers out there that, you know, I think we can pull and hopefully deliver to exceed. But for right now, we're not setting a new target. I'd like to hit the first target first and hit that 10% and operate at it, and then we'll reset the goal. Tricia Smith: Hi, Alex. I'll speak to Anthropologie. Thank you for the question. You know, our team set out a little over four and a half years ago with really three strategic priorities, but really, I would say first and foremost, it was getting or delivering on our ability to drive full-price sales, which was really focused on newness. A lot of that came from really focusing in our own brands as I had mentioned. But I would say as we've worked on modernizing our product assortment, diversifying the categories that we're able to deliver, and ensuring that we have a broad-based appeal for the multigenerational customer base that we serve, has really been the bigger driver of that. You know, our customer base, as we focused on growth and acquisition, but also retaining our existing customers, has delivered over 50% increase in the last four years in our total customer count. And I think as we leverage that and think about how we execute and we deliver experiences both in stores and our teams have been very, very focused on ensuring that those experiences and the service delivers and exceeds our customer expectations, but also investing, I would say, in our digital capabilities, multiple factors contributing to our ability to be able to deliver improved conversion. And then I would say just lastly, making sure that we really deliver on those exceptional experiences and leverage our team's capabilities of design and creative and buying, we believe that we've really built a sustainable model for growth. Coming out of, I'd say, pre-pandemic that we've been able to deliver on and are proud of our team's ability to execute on those. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is open. Dana Telsey: Thank you. Good afternoon, everyone, and congratulations on the progress. As you think about the product, that's all I'm thinking about. As you think about, Dick, you mentioned it, some of them waiting closer for deals. Any framework for that? Is that across all brands, all demos, all regions? Or anything you're seeing in terms of the promotions that you need to drive? And then it was interesting on Nuuly with the continuing average active subscriber growth over, you know, 42% or whatever, it sounded like on the gross margin commentary, some of them are buying more of the rental product now. Are you seeing that shift? Is it from all ages, all income levels? And how does that impact the margin? Thank you. Dick Hayne: Thanks, Dana. The consumer pausing to wait for promotions, I guess I would chalk it up to intellect. I mean, they know that they know the promotions are coming. As I said to you, we saw a very rapid increase in mid to late October in people putting items in their carts, and that signaled us that this was the beginning of, okay, we know what we want. We know there are promotions coming, so why not wait? And if you think back maybe two or three years ago, when everybody was so worried about, oh, there's not, I guess it's because the transportation was difficult out of the Far East with COVID. And everybody thought, oh, there's not gonna be enough to go around, and people started buying earlier and earlier. I think what we're really seeing is just a reversion to what we saw before COVID. People did wait. And they did partake more in promotions. So I don't think there's any particular magic to it. I don't think it says much about the consumer other than they're smart. Dave, you wanna take the Nuuly? Dave Hayne: Yeah. Frank? Frank Conforti: Yeah. Sure. I'm happy to touch on it. Dana, you're absolutely correct. We did see a higher rate of sales to the customer in this quarter, and that has a lower gross profit than the subscription sales to the customer. There's a lot of ways in that we can sell product to the customer, sort of in the box through Marketplace through their direct website. We're not really seeing anything different from a demographic or major geography perspective as to where those things are coming from. And I think it'll just be variable from one quarter to the next. Operator: Thank you. Our next question comes from the line of Marni Shapiro with The Retail Tracker. Your line is open. Marni Shapiro: Hey, guys. Congrats to everybody. Thank you, Shay. But Shay. Oh my god. And that cardigan with the flowers, that is, like, rich thrift store vibes. So good. So my questions are for you. I hate baseball metaphors. And I understand Europe is on solid ground, but I guess where do you feel like UO is in this recovery process? And could we also just touch on men's? I feel like we glided right past. You had, you know, some sounds like some stabilization and slight improvement in men's. I'm curious if the men's business is a smaller part of Urban's business at this point given it's been a little tougher even than women's. And is it still putting pressure on margins, or is it neutral at this point? Shay Jensen: Hi, Marni. Thank you for the nice comments. You're talking about the Rachel Cardigan. It's one of our biggest and most beloved items, so I'm glad that you love it. Lots of customers do too. I'm really, really proud of that item. So, think your first question, where do we sit in the recovery? First, we recognize that this is a journey. We're incredibly proud of the team, and, you know, I think the team is executing really well on our plan. You know, they are staying acutely focused on the customer in Q3. Really, that was about occasions of getting back to campus. Game day was a big occasion and reentering campus life. From a product perspective, I think, you know, we continue to be, you know, excited about the categories that customers see us as a destination for. That would be denim and lounge and really anchored in our own brands, BDG and Out From Under. In marketing, the team continues to really delight customers, meeting them in places and moments that matter. Some exciting partnerships and activations in the third quarter, whether that was celebrating on rotation with UGG, which is our newest partnership and on rotation experience, or the partnership with Canva. Which was a really exciting proud moment. Our team, you know, drew insights with that 54% of young customers make wish lists for their holiday gift list. And so we partnered with Canva, and had three unique formats that our creative team developed. With 100 products and drop-down menus just from Urban Outfitters. That experience is live today with lots of customers participating in it. It's something that we're really excited about. And from a channel or touchpoint perspective, feeling excited about the progress that teams are making there. Seeing our creative really showing up in our stores, on our digital channels, across social, really evolved to be much more upbeat, really inclusive, and I think representing our product in a really, really delighting way. And we're excited to have opened two new stores representing our new store environment. I think we're hearing great things from our customers. Certainly, the environment is bright. I think more modern and from our perspective, allowing us to ebb and flow with categorical performance. And we're really excited about the early reads we're seeing from a productivity perspective from those two stores as well. Your next question on men's, we are really excited about what we're seeing in men's. You heard us mention that perhaps on the last call. Real proud of the men's team and the progress that they're making. This started with their focus on the customer as well, and they identified an opportunity to really broaden the assortment as they broaden the range of customers that they were serving to. For them, that really meant being more versatile. And focusing on young college guys. These are simple people. But we have an opportunity to really be more versatile. And focus on more outfitting and wardrobing for this customer. So the team had prioritized really redesigning and rebuilding our core items and anchoring in core categories that bottom pants, jeans, and sweats. Go figure, and some of their tops, so fleece programs and woven tops. And that is resonating really well. And so with some new customers in, the business, really proud to see that we are now a destination where they have more to buy from us than ever. Men's is an important part of our business, and I think that we really have an opportunity to differentiate in the marketplace. And be a destination, not just for our own branded product, but be a place where we can have some of the best national and discoverable brands for men. And that's something the team is working on as well. Dick Hayne: Marni, if I may, I'd like to say a word about Urban. As an ex-simple college guy who hasn't gotten much more complex as the years gone by. I want to give Sheila a big shout-out and also both team leaders, Shay in North America and Emma Wiston in Europe. They both delivered outstanding quarters. And her team produced the double-digit comp sales that you've heard about. Strong, very strong double-digit full-price sales. It shows that the turnaround strategy is working very well. In Europe, Emma and her team accomplished something I've really never seen in my many years in this business. They delivered a 17% comp sales gain with single-digit less comp inventory. And very strong positive double-digit full-price sales. So clearly, the momentum for both geographies is strong going into the holidays. And I just want to give my congratulations to all Global Urban brand employees. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Janet Kloppenburg with JJK Research Associates. Your line is open. Janet Kloppenburg: Hi, everybody. Can you hear me? Dick Hayne: Yes. We can. Janet Kloppenburg: I don't have to tell you how excited I am about such a strong quarter. I do want to talk to Shay about Urban. When I look at it, Shay, and I've called the company a long time, it looks like you are working to broaden the assortment and the customer that you're targeting. And I'm wondering if you could talk a little bit about that. And if your pricing strategy has changed and if what they're doing in Europe is similar to what you're doing here. Thank you. Shay Jensen: Hi. Hi. I'll take that first. This is Shay. Yeah. One of the first things that we did was a lot of customer research, and I think that we had identified that we had become unintentionally niche or narrow as it related to our product assortment. We had been focused on a bit of grungy, a bit of a narrow assortment. And I think we recognize an opportunity to be a bit more broad and welcoming in terms of our assortment and listening to our customers. They told us very clearly. We love your denim, and we love your lounge. And we love those two brands, BDG and Out From Under. But we weren't giving our customers enough of those brands and enough of those categories. So that is what we've been focusing on, and the customer has been responding. In like, a lot. And in sales. And, yeah, in sales. And we're gonna keep giving it to them as long as they keep responding. And, Janet, I'm gonna ask Sheila to talk about Europe. Sheila Harrington: Similarities with Europe. So I think the similarities of the consumer focus are very strong between Shay and Emma. Obviously, the customer is slightly different in what they want at any given time, knowing that Emma's touching on Europe, Germany, Netherlands, Spain, etcetera, and the countries that she's touching and just like similarities in North America or New York and the South respond differently to products. I think both leaderships are concentrating on their consumer, and that feels really, really good. There's great collaboration sharing a product between both countries to find the best results for the consumer. Proud of Emma's growth because it's not only just coming from the UK now. There's double-digit growth coming from multiple countries that she's continuing to build on. And will in the foreseeable future as our continued store growth happens in Europe. Operator: Thank you. Standby for our next question. Our next question comes from the line of Jay Sole with UBS. Your line is open. Jay Sole: Great. Thank you so much. I have two questions. First, I'm just curious about your wholesale business. As you look into next year, I'm curious about the kind of orders that you're getting from your wholesale partners given as they might have a different view of what 2026 might look like. Then there's some speculation today that Red Sea shipping lanes might open up. If that does happen, what might that how might that impact your margins next year? Shipping rates go back down to where they were? Thank you. Frank Conforti: Jay, I could take the Red Sea shipping lane. I would just say, you know, obviously, if that happens, the more lanes, the more opportunities, the better the opportunity is for us. But it's a little early for us to speculate exactly what rates are gonna look like and what the impact could be. But, yes, that would be a positive. You know, the supply and demand are good things, and a greater supply of transportation opportunities is a good thing for us. Sheila Harrington: And I'll take the wholesale question. It's an exciting time for wholesale because we're seeing the brand both Free People and FP Movement perform extraordinarily well within our wholesale account base. We do believe that as we continue to react and learn from our customer, from our deep CPG perspective, we have only the opportunity to continue to fuel our wholesale channel with the partners that we built. I think FP Movement had a spectacular quarter at wholesale this year, and we don't necessarily see that slowing down. We see our specialty store business thriving as we specialize our product into the outsourced space, our studio space, and the international opportunity we have with both brands. So we're really excited. Dick Hayne: I believe that finishes the call. I thank you all very much. I wish you a very, very happy Thanksgiving. I know you've got a lot of work to do. There was a backlog of companies reporting today, so I appreciate it. And we will talk to you soon. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to Autodesk Third Quarter and Full Year Fiscal 2026 Earnings Conference. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Simon Mays-Smith, Vice President, Investor Relations. Please go ahead. Simon Mays-Smith: Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss Autodesk's fiscal third quarter results. Andrew Anagnost, our CEO, and Janesh Moorjani, our CFO, are on the line with me. During this call, we will make forward-looking statements including outlook and related assumptions and on products, go-to-market strategies, and trends. Actual events or results could differ materially. Please refer to our SEC filings, including our most recent Form 10-Q and the Form 8-K filed with today's press release, for important risks and other factors that may cause our actual results to differ from those in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will quote several numeric or growth changes during this call as we discuss our financial performance. Unless otherwise noted, each such reference represents a year-on-year comparison. All non-GAAP numbers referenced in today's call are reconciled in our press release and supplemental materials available on our Investor Relations website. And now I will turn the call over to Andrew. Andrew Anagnost: Thank you, Simon, and welcome everyone to the call. We delivered strong results today with revenue and non-GAAP earnings per share topping the higher end of our guidance ranges. Billings, non-GAAP operating margin, and free cash flow exceeded our expectations. We are again raising our full-year guidance across the board. As demonstrated at Autodesk University, shared during our recent Investor Day, and reflected in our results today, we are well-positioned to deliver for Autodesk customers and investors even in an uncertain geopolitical, macroeconomic, and technological environment. We are successfully executing on the most far-reaching transformations in enterprise software, redefining our business model, go-to-market, products, and platform. In doing so, we are making Autodesk more resilient and unlocking new avenues for growth and margin expansion. We're enhancing our products with cloud-based capabilities that seamlessly connect design and make workflows to deliver more value to our customers and expanding our addressable market opportunity. We're building a platform with a vibrant third-party ecosystem that will make our solutions more valuable, enable new monetization opportunities, and make Autodesk more efficient. And we're defining the AI revolution for our industries, empowering customers with new tasks, workflow, and systems automations, and capturing shared value subscription, consumption, and outcome-based business models that blend human and machine capabilities. Autodesk is building the future and the path to it. Our best days and greatest opportunities lie ahead. I've never been more confident in the long-term value we are creating for our customers, the industries that shape the world, and for you, our shareholders. I will now turn the call over to Janesh to discuss our quarterly financial performance and guidance. I'll then come back to update you on our strategic growth initiatives. Janesh Moorjani: Thanks, Andrew. Q3 was another strong quarter. Overall, the underlying momentum of the business was similar to prior quarters and better than the assumptions we had built into our guidance range. We again saw strength in AECO, where our customers are benefiting from sustained investment in data centers, infrastructure, and industrial buildings, which is more than offsetting softness in commercial. Upfront revenue, the Autodesk store, and billings linearity during the quarter were also stronger than expected. Our go-to-market optimization plan remains on track, and operational friction from the new transaction model implementation continues to ease. Total revenue in the third quarter grew 18% as reported and in constant currency. The contribution from the new transaction model to revenue was approximately $124 million in the third quarter. Total revenue grew 12% in constant currency and excluding the impact of the new transaction model. Please see the tables in our press release, earnings deck, and EXOR financials for details by product and region. Billings increased 21% as reported and 20% in constant currency. The contribution from the new transaction model to billings was $135 million in the third quarter. Billings grew 16% in constant currency and excluding the impact of the new transaction model. As a reminder, our billings growth this year is skewed by the new transaction model and by the transition to annual billings for most multiyear contracts. These tailwinds will significantly diminish next year. RPO of $7.4 billion and current RPO of $4.8 billion both grew 20%, benefiting from tailwinds from the new transaction model. Turning to margins, third-quarter GAAP and non-GAAP operating margins were 25% and 38%, respectively, reflecting year-over-year increases of approximately 330 and 120 basis points, respectively. This reflected operating leverage and ongoing cost discipline and was partly offset by the margin drag from the new transaction model. Our margin progress this year sets us up well to achieve the long-term margin goals we talked about at our Investor Day. We still expect progress towards that goal to be nonlinear, given incremental headwinds to reported margins in fiscal 2027 from the new transaction model. Third-quarter free cash flow was $430 million, which benefited from the earlier timing of billings in the quarter and lower cash tax payments. As a reminder, our free cash flow growth rate this year is also skewed by the transition to annual billings for most multiyear contracts. This tailwind will also significantly diminish next year. Moving on to capital allocation, we purchased approximately 1.2 million shares for $361 million at an average price of approximately $306 per share. Year to date, we have repurchased 3.7 million shares for approximately $1.07 billion. Turning to guidance, I will again speak to the numbers excluding the impact of the new transaction model and in constant currency, to give you a clearer view of the underlying dynamics of the business. In the earnings deck, you will see that we split the impact of the new model and currency movements for our fiscal 2026 guidance. We've assumed the underlying momentum of the business remains consistent with previous quarters for the remainder of fiscal 2026. We have a large pool of EBA and product subscription renewals to close in the quarter of the year. And we'll also have our toughest new transaction model billings and revenue growth with last year. The macroeconomic environment seems broadly stable, but macro uncertainty remains elevated, and we remain mindful of potential disruption as we continue to execute our sales and marketing optimization plan. So we built some risk into our guidance range for the remainder of fiscal 2026, and expect to again reflect these factors in our fiscal 2027 outlook in February. We remain disciplined and focused on the controllable factors that drive our revenue, operating margin, earnings per share, and capital allocation, which are the key building blocks of free cash flow per share. Reflecting all this, we've raised our billings guidance range to between $7.465 billion and $7.525 billion and raised our revenue guidance range to between $7.15 billion and $7.165 billion, which flows through the current momentum of the business through our full-year underlying guidance. The bottom end of our full-year guidance range reflects some macroeconomic risk for the final quarter of the year. We've also raised our non-GAAP operating margin guidance for the year to approximately 37.5% or approximately 40.5% on an underlying basis, which excludes the impact of the new transaction model. We've also raised our free cash flow guidance range to between $2.26 billion and $2.29 billion. As we said last February, utilization of U.S. deferred tax assets will mean we pay little U.S. federal cash tax in fiscal 2026. We do not, therefore, get incremental cash benefit from the One Big Beautiful Bill Act this year. Further, we now expect to buy back approximately $1.3 billion of stock, which is at the high end of our previous guidance and a 50% increase compared to fiscal 2025. The slide deck on our website has more details on modeling assumptions for the fourth quarter and full-year fiscal 2026. Andrew, back to you. Andrew Anagnost: Thank you, Janesh. Autodesk is focused on the convergence of design and make in the cloud, enabled by platform, industry clouds, and AI. We are at the forefront of convergence because we've been evolving and investing in the business models, products, and platforms, and go-to-market that capitalize on it. We are at the forefront of neural AI foundation models we are deeply integrating into our products. Not as a surface-level add-on, and have access to decades of digital data enabling us to generate greater value for the next wave of AI for the physical world. AI will enable inference across tasks, workflows, and systems which will supercharge convergence. Let me give you a few examples of our progress in the quarter. Our customers in AECO architecture, engineering, construction, and operations, are demanding convergence to reduce risk, increase quality, and optimize costs and resource use during the design and build phase of an asset. And to yield enhanced efficiency, resilience, and reuse during the operations and maintenance phase of an asset. Autodesk Construction Cloud has growing momentum with owners, designers, GCs, and subcontractors seeking to converge design and construction workflows. For example, a leading global food processor and asset owner is migrating over 700 active projects from a competitive solution to address challenges with end-to-end capital project management. Infrastructure owners, like the South Carolina Department of Transportation, will replace legacy tools with Autodesk solutions to execute long-term plans to improve state infrastructure and resolve maintenance and resilience challenges. Integrated design-build companies like Daiwa House Industry Company Limited, a pioneer of industrialized construction in Japan, is adopting Autodesk Construction Cloud and Autodesk Informed Design to connect its manufacturing and construction processes, placing Autodesk at the center of its common data environment for building systems. And general contractors like Flynn Group are migrating to ACC to unify design intent with field execution in a single data environment to improve project coordination and efficiency. These stories have a common theme: converging people, processes, and data across the project lifecycle to increase efficiency and resilience while decreasing risk. Our comprehensive end-to-end industry clouds and platform drive convergence and extend our footprint further into the larger growth segments like infrastructure and construction that we discussed at Investor Day. All this is reflected in our sustained strong revenue and new customer momentum in infrastructure and construction. Our manufacturing customers are also demanding convergence to drive cost and research efficiency during the design and make process by converging product development workflows in the cloud, leveraging centralized and granular data in unified data models, and embracing AI-driven automation capable of industry transformation. For example, industrial machinery companies like Micromatic are replacing disconnected competitive solutions with our unified design and make platform to connect data and workflows, which increases collaboration and drives efficiency and speed to market through component reuse and fast, reliable iterations. Machinists at an American cosmetics company will save hours per week by using Fusion for manufacturing and simulation to automate nesting, toolpaths, 3D printing, and programming of multi-axis machines to create spare parts. To further strengthen and scale its integrated design and manufacturing processes, Total Environment is leveraging Fusion's advanced capabilities in manufacturing simulation, design, and data management. By unifying workflows on a single platform, the company will eliminate disconnected tools, enhance collaboration, and improve efficiency across its operations. And a French automobile manufacturer is adopting Fusion to produce motor prototypes after a benchmarking analysis showed the Fusion platform could complete a machining task in twelve hours, which is ten and fifteen days faster, respectively, than competitive solutions. Converged data opens up new opportunities for Autodesk. As customers seek to drive efficient innovation, Fusion is driving strong growth with extension attach rates increasing and driving average sales prices higher. And we're delivering meaningful productivity gains to customers where we deploy AI. We have continued to see success with our AI-powered sketch auto constraint infusion. Since its launch this year, the AI model has delivered over 2.6 million constraints and has been retrained and the UX improved all along the way. The acceptance rates for auto constraint suggestions to commercial users have grown to more than 60%, with 90% of those sketches fully constrained. In education, Wake Technical Community College, Kimley-Horn, and Autodesk have entered a strategic partnership to prepare more than 6,000 students for high-demand careers in design, engineering, and construction. This initiative will integrate Fusion, Forma, Civil 3D, and Autodesk Construction Cloud into WTCC's coursework with Kimley-Horn's nationally recognized internship program, creating a direct pipeline from classroom to career. And lastly, we continue to find new ways for our customers to consume our products and services in ways that work best for them. For example, a multidisciplinary AEC consultancy firm is using flex consumption to rapidly scale and manage projects across multidisciplinary teams and distributed supply chains to accelerate project delivery and reduce risk. Attractive long-term secular growth markets, our focused strategy of delivering ever more valuable and connected solutions to our customers, and a resilient business are generating strong and sustained momentum both in absolute terms and relative to peers. Our disciplined execution is driving greater operational velocity and efficiency. We are deploying capital to grow the business, further reduce share count, and enhance value creation over time. In combination, we believe these factors will deliver sustainable shareholder value over many years. Operator, we would now like to open the call up for questions. Operator: As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. Our first question comes from the line of Saket Kalia of Barclays. Please go ahead, Saket. Saket Kalia: Okay. Great. Hey, guys. Thanks for taking my questions here and great to see the better results. Well done. Andrew Anagnost: Thank you. Absolutely. Saket Kalia: Andrew, maybe to start with you. I'd love to pick up on the theme from Analyst Day a little bit and see if you could just weigh in on sort of the seats versus consumption AI monetization debate for Autodesk. But maybe also as part of that, touch on your broader ecosystem of partners and customers. That make sense? Andrew Anagnost: Yeah. That does make sense. And thanks for that question. It's very apropos. So look, there's three things we want to pay attention to here. The first one is there's still a fundamental capacity challenge in all the industries we serve, AEC and manufacturing. There isn't enough current capacity to meet all the demand for what needs to be built or the supply chain needs that need to be throughput inside of both manufacturing and AEC. So we have a capacity challenge. The second thing I think is really important is in the future, there's still going to be projects that require intensive human engagement in order to successfully execute. They're going to be more complex. But there's also going to be projects in the future where there's less requirement for human engagement. Machines are going to execute more on these things. And there's going to be a balance between these two. You know? And the last thing is something I've been saying over and over again. You know? Our goal is to decrease the number of people that are working on a particular project but increase the number of projects that our customers and our ecosystem are working on. And if you do that, what you're going to see is we're going to be capturing incremental consumption value to the things that we do, monetizing machine-based execution, providing outcomes, and all things associated with that while also still supporting the people-based work that's going to go on in the ecosystem. This is equally true of our customers. Our customers are going to be seeing their balance shift from sometimes, in some cases, billable hours to also consumptive execution through machine-based execution based on their intellectual property and their IP. And their unique knowledge set. So we're all on the same journey together, but it's going to play out over time. And you're going to see us actually capturing more value and creating more capacity for the industry we need because the industry desperately needs it. Saket Kalia: That's that makes a ton of sense and super helpful. Janesh, maybe for my follow-up for you, appreciate the detailed guide for this year. Was I was wondering if you were able to just give us any color on fiscal 'twenty seven high level as we think about our models. Janesh Moorjani: Hey, Saket. I'm happy to do that. So let me elaborate a little bit on what I said in the prepared remarks. First off, just by way of context, the business is clearly performing very well this year. That said, we've got a lot of business to close, particularly in January. The second thing I'd point out is our sales and marketing optimization plan has gone very well so far. But we are not complete with that. As we touched on this a little bit at Investor Day. So I think there's still some risk of disruption next year. And then finally, while the macroeconomic indicators have been broadly stable, uncertainty does remain elevated in the environment. So just we just think it's best to maintain a prudent posture on our underlying growth for fiscal twenty seven. We're performing very well this year, and we're looking forward to the rest of the year. Saket Kalia: Very helpful. Thanks, guys. Janesh Moorjani: Thank you. Operator: Thank you. Our next question comes from the line of Adam Borg of Stifel. Awesome. And thanks so much for taking the question. Adam Borg: Just on the Autodesk Construction Cloud, it's great to hear the continued traction and even the customer coming over migrating 700 active projects. When you think about your existing Autodesk Construction Cloud installed base, for those existing customers, how penetrated are you in terms of the cost of the projects that are already brought over to Autodesk? Any color around that and the ability to continue selling broader parts of your growing ACC portfolio, be it payments or preconstruction, etcetera, would be really helpful. And then I have a follow-up. Andrew Anagnost: I really like that question. Okay? So first off, let me just start at the fundamental level. Alright? The reason why Construction Cloud's doing so well is that we've got this design to preconstruction through construction execution solution. It's completely unique in the industry. And it's built on a modern platform. This is not an aging platform. That's going to kind of age out of what people need in the future. It's a highly connected AI-ready SaaS-based platform. That's really a huge selling point for us. And what you just mentioned there, Adam, is completely true. As we're acquiring new customers and penetrating new accounts and displacing competitors in lots of accounts, what we're doing is we're starting off with a set of projects. So we're not even fully penetrated in all the projects that we've executed with our customers to date with I mean, in accounts where we are with our customers today. So there is actually not only increased penetration that will happen over time within the accounts we have as new projects come and light up and old projects sunset, but there's also additional expansion just driven by the power of our value prop. Adam Borg: That's really helpful. And maybe just building on the theme of convergence. In design and manufacturing, we talked about this a little bit at Investor Day. But as you think about convergence and the opportunities with fusion over time, how do you think about the PLM market more broadly? For all that? Thanks so much. Andrew Anagnost: Yes. So another great question. Alright? And I really appreciate it. So first off, remember, we're targeted at the mid-market, and that's where there's a lot of growth in supply chain activity. These customers need convergence because they need this end-to-end digital productivity. And I just want to make it super clear to everybody. Most of those customers have nothing. With regards to PLM. They don't have anything. Alright? They may have a data management solution. They may not. Most of their work is actually done through spreadsheets and ad hoc connectivity with some of their ERP systems. They don't have any kind of strong data management or lifecycle solution. We're building a solution for those customers. And we're going to go in there and say, you can get what the big boys have. And you can get the kind of control and the cloud visibility and the cloud data flow that was reserved only to a few. And they need a modern platform. They need a SaaS-based platform. They need what we're bringing with Fusion. So that's how I look at the market. We built these capabilities in the Fusion. We're continuing to enhance them, and we're already starting to see success with small accounts of two to three users expanding to larger accounts because we have these tools that are really hard for a lot of people in the mid-market to get and deploy. Adam Borg: Incredibly helpful. Thanks again. Operator: Thanks for the questions. Thank you. Our next question comes from the line of Jay Vleeschhouwer of Griffin Securities. Please go ahead, Jay. Jay Vleeschhouwer: Thank you. Good evening. Andrew, my first question for you is a corollary to the question I asked you a quarter ago about the pace of new technology adoption. And the question has to do with something interesting you said at AU. I think it might have been a main stage you said, as far as your customer base is concerned, that, quote, no one gets left behind. End quote. Which is an important general commitment. But what are the practicalities of that in terms of customer migration, packaging, promotion, all those sorts of things that you've done or will need to do with regard to migrating your customers in the way that you implied? Andrew Anagnost: Yeah. So look. We're attacking this from multiple vectors. Okay? So first off, packaging is the first one. Right? As you know, if you're a collections customer or a Revit customer, you get the Forma design application shipped with your subscription. So you're already getting something that is you're paying for the future and the present. Alright? So you're capturing the value right there. And you're part of the ecosystem. The other thing that we're doing is we're also making sure that we have the CDE available to as many customers as possible. That's Forma data management. And we'll talk more about that in the future, which is a really important piece of the puzzle as well. The other thing that's really important, and it needs to get airtime because you're going to see something similar evolve in the Fusion world as well as we talked about Revit as rolling out as the first Forma connected client next year. And what that means is what we're doing is we're tightly connecting the workflows between the feature-deep desktop product that customers use today and the evolving emerging product they'll be using tomorrow. So that they can seamlessly move between these two products in such a way that they can get the benefit of one while also harnessing simply and easily the benefit of the other. That's a really important part of the strategy as we move forward. Because the adoption does take time. It takes time for people to change these things. And we're also hyper-focused, especially on the AI side, on rolling out features that may not look sexy at the headline level, but are real productivity enhancers for our customers that get real adoption. What you're seeing with auto-constrained infusion is a great example of that. It's a highly adopted feature. Now explaining it to everybody exactly what it does usually requires a video, but to a customer, they get it. And they love it. They accept these things at, like, 60% acceptance rates. Some of these sketches are 90% constrained. It's the kind of stuff that you're going to see us continue to roll out that really makes a difference in how our customers work. Jay Vleeschhouwer: Thank you for that. Janesh, given the revenue upside across each of the segments, could you comment on any new or incremental trends you're seeing in usage telemetry, either by vertical or geo or standalone product versus collections, anything of that kind? In terms of the usage component that helped drive some of that growth. Within AUC manufacturing and so forth. Janesh Moorjani: Jay, thanks. What I'd say is the momentum in Q3 continued from the first half. And the trends we saw in Q3 were similar to what we saw in Q2 as well. And you see that strength reflected in the different product lines and the different areas of the business. I touched on some of the areas within AECO, for example, around data centers, infrastructure, and industrial that were all bright spots again. And you see that reflected in products as well. Similarly, when you look at the Autodesk store and some of our emerging geographies that did well, you'll see the trends reflected in those, the products that get sold through those routes as well. So overall, I'd say it was very consistent with what we had seen in Q2. Nothing new that I would highlight as an emerging trend. Jay Vleeschhouwer: Thank you. Operator: Thank you. Our next question comes from the line of Jason Celino of KeyBanc Capital Markets. Your line is open, Jason. Jason Celino: Hey. Great. Thanks for taking my question. I wanted to ask about the normalized growth you saw this quarter, the 12%. You know, again, similar to last quarter, slight acceleration. But was there, like, what was the inorganic contribution to that normalized number? I'm just trying to understand if there was some modest acceleration. And if there was, you know, what do you think drove that? Janesh Moorjani: Yeah. I'm happy to touch on that. There was nothing unusual with respect to M&A activity in Q3 that affected those underlying growth rates. I'd say what we saw there was just the continuing momentum we've seen in the business, as I mentioned just a moment ago. The sources of where that outperformance came from in terms of the upfront revenue, the Autodesk store, and stronger billings linearity during the quarter, I think all of those played a role in helping us get to the ultimate outcome that we delivered over here. So overall, it was a strong quarter across the board. The team executed really well, and I think that's what you're seeing reflected in the numbers. Jason Celino: Okay. Great. No. That's helpful. And then when we think about the commentary around the EBA cohorts that you have for Q4, I'm just curious what type of behavior you've seen so far from, like, a renewal standpoint or if customers are willing to engage earlier, just curious if you have any tidbits that will be helpful there. Thank you. Janesh Moorjani: Jason, in terms of what we saw in Q3 was very strong engagement from many of those customers. We closed all the business that we were expecting to close. And if I think about some of the typical metrics that we have around attach rates and so forth, those all played out as we expected they would. Q4 is our largest quarter for EBA renewals, and we also have a very large product subscriptions renewal cohort to close here in this quarter. Q4 is heavily weighted towards January, so there's still a lot that we need to get done. But, again, the team did well here in Q3, and that momentum has continued nicely. Jason Celino: Okay. Wonderful. Thank you. Operator: Thank you. Our next question comes from the line of Taylor McGinnis of UBS. Please go ahead, Taylor. Taylor McGinnis: Yeah. Hi. Thanks so much for taking my questions. Andrew, first one for you. Just on you mentioned earlier about still some elevated uncertainty out there, but it sounds like you guys are seeing some strength in areas like data centers, industrials, and whatnot. When you speak with customers regarding their spending plans across AEC manufacturing and M&E for calendar 2026, or fiscal year 2027? I guess any early insights that you could share with the group in terms of what you guys are expecting to see? Andrew Anagnost: Yeah. You know, customers aren't flagging any differences in their spending pattern. Alright? I think one of the things that's really, really important to note is one, the current momentum is going to continue a little bit. And also, what the customers are looking for is they're preparing for future productivity enhancements. So everyone's investing in their digital infrastructure. It's trying to get ready for any changes in the demand patterns, what sector might be more important as we move forward. So most of our customers are flagging a continuation of their investment. Some areas are flagging a little bit more investment because they've been kind of maybe slow on the investment in the past, but we don't see anything changing in terms of the consistency level right there. Taylor McGinnis: Perfect. Thank you. And then, Janesh, maybe just one for you. On billings growth, you made several comments in the prepared remarks just about how growth has been elevated this year because of the new transaction model and also because of the larger base of multiyear billings customers, and we're going to start to lap that going into next year and see some moderation in growth. So can you just help us unpack the mechanics there a little bit more? So as we look into 2027, could we start to see, if we adjust for FX and the new transaction model, revenue growth and billings growth start to align with one another? Or is it possible that we could actually see some tougher comps and maybe there's a divergence between the two? Any additional color you can give there, I think would be helpful. Janesh Moorjani: Taylor, I'll break that into two parts. One is around the underlying business performance that you mentioned and the second is just the mechanical aspects of modeling the growth for fiscal 2027. So first, in terms of just the underlying growth that we see in the business, we feel very good about this year. And if you look back at the last couple of years, we've demonstrated consistent growth, and that trend has continued this year. We've also talked before about the diversification of our business across industries, across geographies, and customer sizes, that's a strength for us. And again, we saw that play out here in Q3 as well. If I look ahead, we're excited by the growth potential of businesses like Fusion, Infrastructure, and some of the others that we outlined at Investor Day. So overall, I think we're executing really well, including on the AI and road map, and we feel very well positioned in that regard. So if I think about the growth for the future, I think all of those things give me confidence. But also when I guide for next year, I will consider, as I mentioned, the go-to-market optimization and the macro risks that I touched on at the start of this call. And then in terms of some of the underlying mechanics, thank you for the question. I think it's actually helpful to spell out what we expect to see next year. So to break that apart, if I think about the billings and free cash flow growth rates this year, they have been inflated because of the transition to annual billings, so most multiyear contracts. That's a business model transition that we expect to complete during Q1 of next year. And so we expect that reported billings and free cash flow growth will start to normalize during next year. Billings and revenue growth rates have also been inflated this year from the new transaction model, for which we provide the details separately on an underlying basis. And on that transition, we expect a smaller impact from that in '27 than we had in '26. We'll also have incremental headwinds to reported operating margins from the new model next year. But ultimately, as you know, these are just near-term accounting effects. And the underlying business has been performing consistently well. Our goal is to try and get to as reported numbers as soon as we can. So that will be our focus in the future. Taylor McGinnis: Great. Thanks for all the color. Janesh Moorjani: Of course. Operator: Thank you. Our next question comes from the line of Elizabeth Porter of Morgan Stanley. Please go ahead, Elizabeth. Elizabeth Porter: Great. Thanks so much for the question. I wanted to follow-up regarding some of the new AI capabilities like auto constraints, which appear to have high rates and measurable productivity gains. The question is, are these product improvements translating into observable changes in multiproduct adoption or expansion activity? And just as the platform overall delivers more value with AI, how are you thinking about the pricing power? Any sort of larger, more periodic price increases, or a steadier cadence tied to just incremental AI-driven capabilities? Is that an opportunity that you look forward to? Thank you. Andrew Anagnost: Yeah. So thank you for the question, Elizabeth. So first off, let's be very clear. This is a multiyear journey here that we're on. Alright? And I want to be clear that we're going to be kind of moving along with our customers here and focusing on key areas of adoption and finding levers of productivity that make a real impact on them. We're starting with tasks. Auto constraints is a classic example of a task within the modeling. We're going to do a lot of that. That task automation is highly protective of our existing business and the hour. What the customers love is they see large incremental productivity increases that are not classically easy to replicate in a traditional kind of development model and feature creation model. So task automation is highly protective of the existing business. It is highly retentive, and we see some of that with some of the satisfaction ratings we get with some of this technology move forward. We're going to be moving more and more into workflow automations as you see us move next year. We talked about some of this at AU. We showed some pretty compelling workflows between various products and across various products from design to preconstruction planning and things like that. Those workflow automations are going to ultimately offer additional monetization opportunities because some of it will be included with the subscription, but some of it will not. Will be charged for incrementally. And as the customers adopt those and as we find the right workflow levers, you're going to see us start to capture some of that value. Now as we move down the curve into systems level optimization, those are going to capture the most value. They're further down in the pipeline, but they're also the kind of things that have huge impacts on our customers and huge value delivery. And we're going to capture some of that value. We're going to share some of it with our customers, but we're going to capture that value. So face automations are highly retentive. They have retentive effects. You can see that with the way the customers are satisfied with the product and what they see in the product. The workflow automations are going to be also highly retentive, but they're also going to offer incremental monetization opportunities and system level optimizations will offer more monetization opportunities. But this is going to take time. Elizabeth Porter: Great. And then just as a follow-up, I wanted to ask on the margins, where it was really impressive to see the underlying margin kind of move up in the full-year guide. The question is, where are you seeing the most outsized success that's driving up the full-year view? And what are the levers that are having more of an impact in the near term versus what can be more of a driver next year for the underlying margin trajectory? Janesh Moorjani: Elizabeth, maybe I'll take that one. I think the underlying levers are the same near term as well as longer term. The biggest lever in terms of achieving our margin targets over the long term will be our go-to-market optimization. And on that, we've already made great progress so far, and that will ultimately further reduce our sales and marketing as a percentage of revenue. We also have inherent operating leverage, which is something that we've demonstrated for a few years now. And so that shows up in the near-term numbers, and that will also be a driver for us longer term. And embedded in that operating leverage, there are a few puts and takes. You know, to start with, on the gross margin front, we expect that cloud and AI workloads will be accretive to gross profit dollars, but they will pose a headwind to gross margin as they scale. We think that's actually a sign of success if that happens in terms of our strategy for adoption working quite nicely. On the R&D side, as we've shared before, we'll continue to prioritize investments in innovation and AI-driven initiatives. But at the same time drive efficiency through common components in the platform. And on the G&A side, we will just scale efficiently as we continue to grow the business. So those are some of the things that I see. And in terms of the rate of progress of getting to the 41% margin target that we outlined, as I've mentioned earlier, the path to getting there will be nonlinear, just given the additional margin headwinds we expect from the new transaction model this year. But overall, we feel we are well on our way to achieving the target, and we've already raised the current year outlook here by 50 basis points. So we feel pretty good about that. Elizabeth Porter: Thank you. Operator: Thank you. Our next question comes from the line of Josh Tilton of Wolfe Research. Your line is open, Josh. Josh Tilton: Hey, guys. Thanks for sneaking me in, and congrats on another great quarter. Two for me. One more near term, one maybe long term. Just in the near term, you know, I think if I look back, this is probably one of the biggest to the billings growth guide going into a Q4 that we've seen maybe ever. And I'm just trying to understand, or maybe you could help me unpack what exactly is driving that near-term performance. And then my follow-up to that is just more longer term. The agency transition seems to be going well. It's wouldn't say well underway, but, you know, I feel like it's hit maybe critical mass to some extent. Can you maybe talk to some of the levers that you have to incentivize this newly formed channel to drive better new business growth for you guys going forward? Thanks. Janesh Moorjani: Josh, maybe I'll start. In terms of the outperformance that we had here in the third quarter, there's a couple of sources. One is, as I mentioned, just consistent strong execution from the team, which is something that we are all very proud about. But the second is also just in terms of the guidance philosophy that we had and the approach that we took entering the quarter where, as you know, against the low end of our billings guidance, we had assumed a pretty severe macro scenario, which we had been quite transparent about. That didn't play out. The broader macroeconomic environment was relatively stable. I think you saw some of the benefits of that here as well. And as if I think about the Q4 view on that, and the extent of risk that we've got baked in, the guidance range, particularly on billings, is a little bit of risk baked in at the lower end of the range. But given that we've got basically just a little over two months here left to go in the year, we didn't feel like we needed to take as a dim view of the macro Q4 as we had previously taken. Andrew Anagnost: And to the second part, Josh, I'll weigh in on that a little bit. Okay? So there's a couple of things that we're enabling with the new transaction. One, we have better customer intelligence, which is going to allow us to be more efficient with our partner engagements. The other one is we're working really hard to automate more of the things that are associated with renewals. So if you look at the way we want to move forward, you're going to see us incenting the channel more on new business than on renewals, which is going to align the channel with kind of our long-term objectives. It's easier to make renewals now, so we should be paying less on renewals. And we should be paying more on new business so that the channel can build the right kind of capacity for the new business and hunt a bit more and renew in a more automated way. So look for us to continue to push that as we head into next year. Tighter intelligence going into the channel, more efficiency, more automation, more self-service tied to renewals. And a stronger emphasis on new business generation. Josh Tilton: Love to hear it. Thank you so much. Operator: Thank you. Our next question comes from the line of Joe Vruwink of Baird. Your line is open, Joe. Joe Vruwink: Hi, great. Thanks for taking my question. I wanted to go back to the FY 2027 outlook. And I guess what I really want to ask is, do you need the same level of prudence when you frame the forward outlook like you have been using? And I just sit here and appreciate that this year, started eight to nine. It looks like it'll end closer to eleven. There's something to be said about prudence, but also nothing wrong with communicating strength when it's evident. And I think you're not only seeing strength, but it would seem like next year, you know, definitely end of stages and some transitional elements, early stages on things like consumption or cloud adoption that can contribute more. I'm just wondering if some of that factors into a different approach to the Outlook. Janesh Moorjani: Hey, Joe. So, look. On fiscal twenty seven, it will make sense to talk about the specifics when we are actually guiding to fiscal twenty twenty seven in February. What I wanted to do today is just share our overall enthusiasm for how we're executing here in Q3. I talked about some of the momentum that we're seeing and some of the factors that continue to excite me about the business in the long run and just be transparent about some of the factors I'll consider when I set guidance. In terms of the specific levels of those, we will talk about those on the next call. Joe Vruwink: Okay. No. That's fair enough. At AU, there are some good sessions from your large customers on how they've set up kind of centralized Autodesk development teams, and you have different regional teams that are now building around platform services in a coordinated way. You know, a lot more talk about how agents are factoring into what these teams are now starting to do. I guess there's this idea still percolating out there that AI is going to make it easier for your large E&C customers, these same entities, to maybe just do more internally. And I guess, I want to ask what you're seeing on this topic and really when we see a large E&C account, talk about data scientists on staff and, you know, what they're doing. We really think, well, Autodesk is ultimately having a role here? Andrew Anagnost: Yeah. You should absolutely think that, Joe. Okay? Our goal is to make it easier for them to apply their IP with their data scientists to the workflows that make the most impact on their business. But our platform is going to be everywhere in this. And the services and agents we build associated with our platform are going to be core to how they create that value from their IT. Incrementally above some of the models that we build ourselves and that we deploy into their environments. We want to coordinate and work with agents they may build internally with the agents that we have, and one should be augmenting the other. So look for our platform to be everywhere that these customers actually execute and incrementally build capabilities on. Joe Vruwink: Okay. Thank you. Operator: Next question comes from the line of Bhavin Shah of Deutsche Bank. Your line is open, Bhavin. Bhavin Shah: Great. Thanks for taking my questions and congrats on the strong results. Janesh, I know you spoke about this briefly in your prepared remarks, but in terms of channel productivity, excuse me, how much time is still spent on operational elements? When do you think the channel gets back to full productivity? And is there any kind of impact also with all the M&A activity happening with your resellers? Janesh Moorjani: Yeah. We continue to address some of the operational friction that partners faced on the new transaction model. Andrew referenced that as well. I think we've made very good progress, and I think much of that is behind us at this point in time. There's a bit more to be done, but we are well on our way. We saw the EMEA partners get their first renewals here in September on the new transaction model, and that generally went as we expected it would. And I think at this point, we've lapped all of the first annual renewals. So in terms of the future, we continue to focus on how we and our partners can deliver more valuable and data-driven and connected products and services to our customers. We have seen, you know, the strategy working quite nicely, particularly at the low end where many of the customers previously used to buy from the non-contracted partners or the silver partners are now buying from us directly on the store. And some of our larger partners are focused on continuing to build out value-added services that allow them to build more connectivity and offer better solutions to customers, which then works quite nicely for us in the long term as well. Bhavin Shah: That's helpful there. And as a follow-up, Andrew, maybe just for you, there's been some recent headlines about agents turning 2D sketches into 3D models via CAD software. As innovation continues to evolve here, what role can Autodesk play? How are you thinking about evolving the product capabilities as agents and copilots to turn sketches into the models continues to evolve? Andrew Anagnost: I think you should assume that the level of data that Autodesk has in this particular area and the level of focus will certainly excel above anything else you see out there. We just focus where the biggest returns are right now. Bhavin Shah: Makes sense to me. Thanks for taking my questions. Janesh Moorjani: Thank you. Operator: Thank you. Our next question comes from the line of Tyler Radke of Citi. Please go ahead, Tyler. Tyler Radke: Yes. Thank you for taking the question. So the direct revenue has grown I think it was up 85% this quarter. You called out strength in the online store, the Autodesk store. Just wondering, you know, is this strength is this coming in well above your expectations? And how should we just think about the mechanics of taking more business direct and potentially that being a tailwind to the reported revenue that we're seeing? Janesh Moorjani: Tyler, I'd say in Q3, things were as we expected they would be. We were expecting to see an increase in the mix of direct revenue as the new transaction model continues to scale. So that generally played out the way we expected it would. And in terms of the impact of that on the model, it does affect the as-reported numbers, as you know, which is why we also provide the views on an underlying basis. I'd say the store strength has continued for some time. A portion of that might be channel shift, but a lot of it is also just general strength we've seen particularly in a number of the countries around the world that we've talked about where we haven't rolled out the new transaction model, we've been seeing strength in those countries as well. So I think it is a bit broader based on that. Tyler Radke: Great. Helpful. And then, Janesh, just on the underlying growth, I know you got some questions on this, specifically as we think about FY 'twenty seven guidance. But you know, you started off the year in sort of the high, single-digit ballpark. And I think we look at the Q4 guide, normalized growth is closer to kind of the low teens. Is that a fair characteristic of where the underlying growth of the business is today? Maybe there's some one-up or one-time revenue in that Q4 number as it relates to EBAs. Just help us understand, like, where is that underlying growth of the business? In your view now? And I assume that's maybe a few points higher than it was at the beginning of the year. Janesh Moorjani: Tyler, at the start of the year, when we laid out our guidance, again, we had prudent for a variety of reasons. It was also my first guidance for the full year as CFO. We had just done a restructuring. There were a number of other factors as well that played into that. But if I and at that point, I had mentioned that I viewed the business as being a consistent and resilient business, and I think that played out quite nicely. If you look at the growth we've seen over the last couple of years, and then if I look at this year, we've had very consistent growth across the three quarters of this year and that same consistency is implied in the guide for Q4 as well. So we feel very good about the way we've executed and all the irons we have in the fire to continue to sustain our momentum in the future. But again, we will consider our overall risks around go-to-market execution as well as the macro when we guide. Tyler Radke: Thank you. Operator: Thank you. Our next question comes from the line of Ken Wong of Oppenheimer and Company. Please go ahead, Ken. Ken Wong: Thank you for taking my question. Andrew, I wanted to circle back on a comment that you made about the incentive structure to partners. Realized that you guys are taking it down on renewal to incentivize some hunting. Any early feedback from partners? And I realized it doesn't take effect usually until February, but any early behavioral changes that you guys are noticing from the channel? Andrew Anagnost: Yeah. Nothing pronounced. Okay? No early changes. Obviously, partners always have lots of questions when we change their incentive structure. But generally speaking, they get what we're trying to do, and they understand what's going on here. We're not trying to take money out of the channel ecosystem. We're trying to shift how it gets paid out. Makes total sense to them. We haven't seen any initial kind of changes in their behavior right now at all. Ken Wong: Okay. Perfect. And then on the OBVA side, Janesh, I realize you're not expecting any tailwinds on the free cash side. Are you guys seeing any early impact on the top line in terms of kind of customer spending behavior or any customer project activity? Janesh Moorjani: Nothing that I would directly attribute to the One Big Beautiful Bill Act yet. Ken Wong: Okay. Great. Thank you, guys. Janesh Moorjani: Thank you. Operator: Thank you. Our next question comes from the line of Koji Ikeda of Bank of America. Your question, please, Koji. Koji Ikeda: Yeah. Hey, guys. Thanks for taking the questions. I wanted to follow-up on a previous question on free cash flow. And Janesh, I think you mentioned there's about two more quarters left before free cash flow normalization. Did I hear that right? And then beyond that, what should quarterly free cash flow seasonality look like? Is there a fiscal year example from the past that we could look at that would be a good representation of what it would look like going forward? Janesh Moorjani: Yes. Koji, the comment earlier was around the growth rates that we would expect will come down. If I think about the app dollars of billings that we have at this point in time associated with the change in the multiyear to annual billing transition, I think that that piece is done. But in terms of thinking about cash flow and providing maybe a general rule of thumb, I would say holding aside any significant discrete items, we generally would expect free cash flow growth to be correlated with our underlying non-GAAP net income growth. And, of course, we will call out any large discrete items when we provide guidance. Koji Ikeda: Got it. And then maybe a follow-up here question for Andrew and thinking about the AI strategy and the data access strategy for AI through MCP, and API calls. How have customer usage trends been around there? And any update on how we should be thinking about any timing of the monetization opportunity with the data access strategy. Thank you. Andrew Anagnost: Yeah. So there's actually fairly robust use of some of our APIs by the customers. And, you know, also we'll be monetizing some of that access as well, and a lot of customers are expecting that. Most customers won't be impacted by that, but those customers that are most heavily using machine-based kind of applications associated with our APIs will probably see impacts in terms of billings associated with their usage. Right? Again, the AI monetization will play out over time. The API monetization will play out over time. But MCPs and APIs are definitely another source of monetization that you'll see us pulling the lever for as we move forward. Koji Ikeda: Thank you. Andrew Anagnost: Thank you, Koji. Operator: Thank you. Our next question comes from the line of Michael Turrin of Wells Fargo Securities. Michael Turrin: Hey. Thanks for squeezing me in. I'll give you a chance to summarize some of the prior comments. I think high level the question is you're raising numbers across the board for fiscal twenty twenty six, it's not something we're seeing a whole lot of across software these days. So maybe just expand on your perspective around what's driving that and how much of that is beyond the scope of just macro and business model changes? And then on cats, specifically, it's another quarter of standout growth, 15%. So maybe touch on that segment and if there are any specific dynamics to be mindful of there as well. Thank you. Janesh Moorjani: Yes. I'm happy to touch on both of those. If I had to summarize Q3, I would say it reflects the consistent momentum we've seen from sustained execution this year. Against the backdrop of a stable macro, while in the guide at the lower end, we had assumed that the macro would worsen. So I think it's both our execution as well as the more prudent guidance assumptions that didn't play out. In terms of the growth of the AutoCAD business, there's a few factors there. That growth is partly affected by just the mechanical accounting on the new transaction model as well. So I think that's part of what you're seeing. But, also, we talked about strength in the Autodesk store and strength in emerging countries like India and LatAm and The Middle East. And some of the AutoCAD strengths that we've seen come from those countries and from the Autodesk store as well. Andrew Anagnost: You know, Michael, I'll just add one more thing to this because I have to. You know, we have been making some serious and important strategic decisions over the last three years about how our business is structured and how we move forward. You're seeing the results. Alright? These are the results that we ultimately said we were going to deliver, and a result of those investments and those changes. They were hard changes, difficult lifts. Now you're seeing the performance associated with those lifts. Michael Turrin: Thanks very much. Operator: Thank you. And that is all the time we have for Q&A today. I would now like to turn the conference back to Simon Mays-Smith for closing remarks. Sir? Simon Mays-Smith: Thank you, Latif, and thank you, everyone, for joining us. Looking forward to seeing many of you on the road over the coming weeks. Wishing my fellow Brits a happy Budget Day tomorrow and my fellow Americans a happy Thanksgiving on Thursday. Thanks very much, everyone. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
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.
[speaker 0]: Good afternoon, and welcome to the Petco Third Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Tina Romani, Head of Investor and Treasury. Please go ahead. Good afternoon. [speaker 1]: And thank you for joining Petco's Third Quarter twenty twenty five Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.pepco.com. On the call with me today are Jewel Anderson, Pepco's Chief Executive Officer Sabrina Simmons, PETCO's Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward looking statements which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation and SEC filings. With that, let me turn it over to Joel. [speaker 0]: Thanks, Tina, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results where I am pleased to share that we delivered another profitable quarter in line with our plan [speaker 2]: We've continued to strengthen the foundation of our operating model improve retail fundamentals, and position Petco for sustainable, profitable growth over the long term. We delivered sales in line with our outlook and meaningfully improved our profitability. Increasing operating income over the last year by over 25,000,000 generating 99,000,000 in adjusted EBITDA and more than 60,000,000 in free cash flow. I want to thank our teams across the organization for their dedication, focus, and execution on our transformation initiatives that are continuing to gain traction as reflected in our improvement in profitability and cash flow in Q3 and year to date. You've heard me talk about the importance of culture, and you will continue to hear that as a key theme of our transformation. When I joined Petco, we had a strong culture centered around pets first. The passion of our 30,000 partners was one of the many things that attracted me to joining. Over the last nine months, as a collective leadership team, we've been building on that culture in two ways. First, through reinstilling retail fundamental discipline which is driving increased financial rigor and accountability. This is a testament how the organization has embraced new ways of working with strengthened operating principles and was a large contributor to our results. Second, creating a culture that is playing to win. We are fostering a culture equally focused on operating discipline and a winning mindset. Last month, I had the opportunity to spend time with our support center and store leaders at our Leadership Summit. Together, we aligned on what our go forward values will be for a reimagined Petco, and what that means for our customers and our plans to execute on our One Petco Way vision. We are squarely in phase two of our transformation. Which is centered on improving profitability and strengthening our foundation from which to grow. The success to date has fundamentally changed the way we think and work to continuously identify future areas of opportunity that will further unlock long term value. At the same time, we are now strategically shifting resources towards phase three. A return to growth Now that our bottom line has meaningfully been improved, Last quarter, I outlined the four pillars that support Petco's return to growth. First, delivering compelling product and merchandise differentiation. Second, delivering a trusted store experience. Third, winning with integrated services at scale. And finally, serving our customer with a seamless omni experience. Let me now provide you more specific color on each pillar. Starting with compelling product, and merchandise differentiation. I view this in two categories. On the consumable side, we have improved shoppability. With higher in stock availability, Our customers rely on us to have everyday go to product. Better integrated assortment planning, and merchandising teams have been created improved in store experience as well as online. On the discretionary side, we are focused on infusing a steady stream of newness in 2026 that complements our evergreen product assortment with more seasonal, and trend driven buys. Previously, there has been a set it and forget it mentality. Which is not a very aspirational shopping experience, and one that we are changing. As we look forward, we see significant opportunity to change our collective merchandise mindset from solely a needs based business to also a wants based business by overhauling our product offering, and surprising our customers with unexpected ideas for their pets. A great example with the success of our online pilot our new My Human product line was expanded into over 200 stores This is a small milestone, but exemplifies our team's focus and ability to lean into trend forward impulse purchases. Next. Moving to a trusted store experience. Joe Venizia, our chief revenue officer, who joined us just about a year ago, leads our operations and services team. Since joining, he has been focused on store simplification, standardizing processes across our fleet, and taking costs out of our operations. He is now shifting his focus to additionally include revenue driving KPIs like increasing transaction size, driving sales contests, and increasing customer interactions. With our passionate partners, strong customer engagement, and a full suite of services, we can create both a fun and convenient experience that pet parents are unable to get anywhere else. Our store partners are a unique differentiator for Petco. We benefit from having long time passionate and knowledgeable partners that serve our pets and our pet parents. Our opportunity today is around making it easier to run our stores. Freeing up our store associates to interact with customers, and use what we call their superpowers of pet knowledge. Improving these areas will make it easier for us to drive sales growth in 2026. Moving now to services at scale. Our nationwide wholly owned and operated services business continues to be our fastest growing category. And is our competitive moat given its in person nature high barriers of entry, and difficulty to replicate. The holistic ecosystem between grooming, owned hospitals, clinics, and center of store can only be found at Petco. What especially excites me here is the opportunity we have with our existing assets. I think about it in three ways. One, improving utilization through increased staffing and appointment availability. Two, improving engagement. Through enhanced digital capabilities. And three, improving integration of services and center of store. With regards to veterinarian staffing, I'm pleased to share that we are ahead of our doctor hiring goals that we set at the start of the year with record high doctor retention. During the quarter, we also promoted two of our longtime leaders to chief veterinarians. Reinforcing our commitment to growing our veterinary business. Simultaneously are fostering a culture of team development, top talent recruitment, and execution of our strategic veterinary initiatives. All of this is foundational and is critical to increasing the utilization of our hospitals. Additionally, we are increasing access to care by strategically adding hours back on peak client demand and making appointments easier to book. You're standardizing processes across our fleet to secure in store follow-up bookings. We are increasing efficiency through our refined grooming apprenticeship model freeing up both appointment availability and increasing volume. And finally, we are enhancing online appointment scheduling to ensure we have better coverage and better flexibility for our customers. Clearly, Q3 has been a busy yet productive time for our services businesses. Let me spend a moment on improving integration between services and center of store. As the opportunity here may not be well understood. Historically, Petco stores and services were run relatively siloed which was a missed opportunity. There is a tremendous value unlock when better integrating our stores, and services experience. I'll give you a simple example. Previously, our veterinarians did not have access to customer purchase data. We are in the process of fixing that. And in 2026, our veterinarians will be able to see purchase history, and make more informed diet recommendations based on overall pet health, and specific needs. Taking that a step further, the veterinarian will be able to direct the customer to the recommended product in store or rec store associate to assist. This is a simple example, but illustrates how increased integration of services and stores create a better outcome for pets, and improved experiences for our customers. Now moving on to our fourth and final pillar, seamless omni integration. Layered on to everything I just discussed, are enhanced digital capabilities, more compelling membership offering, and a frictionless digital to store experience to customers wherever they choose to engage. I'm happy to report we are on plan with our improvements and in fact, we are starting to implement some of these changes in Q4 of this year. For example, we are transitioning the way we buy media, beginning with better targeting, and bidding strategies, which we expect to drive efficiencies in our marketing spend as we continue to strengthen Petco's reintroduction of our tagline where the pets go. I'm pleased with the progress on the membership program, and we will begin live testing and pilot the program this quarter in a small handful of districts. Our focus on these four pillars will fuel our growth which we still expect to see in 2026. In closing, as you can hear in my voice, this has been a productive quarter at Petco. And I'm pleased with the progress we continue to make on the commitments I outlined at the beginning of the As each quarter passes, we get better at celebrating amazing pet experiences executing our strategies, and delivering on our promises internally, and externally. The initiatives planned for the fourth quarter will advance the Petco transformation and I look forward to sharing updates with you in March. Ahead of the Thanksgiving holiday, I want to personally express my gratitude for our partners, who put pets first every day and boldly reflect who we are and what we stand for. Our Petco Love Foundation, has demonstrated our long standing commitment to saving lives finding loving homes for over 7,000,000 pets to improve the welfare of animals. With that, I'll hand the call over to Sabrina take you through the specifics of our third quarter results and outlook for the remainder of the year. Sabrina? [speaker 1]: Thank you, Joel. Good afternoon, everyone. In the third quarter, PEPCO once again delivered against our commitments while building a stronger foundation from which to grow. As we've discussed all year, strengthening the health of Pepco's economic model, has been our top priority. I'm pleased with our progress as demonstrated in our expanding gross margin, expense leverage, operating margin expansion. Not only in the quarter, but year to date. In line with our outlook, which reflects our decision to move away from unprofitable sales, Net sales were down 3.1% with comp sales down 2.2%. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024, and the additional nine net store closures year to date. We ended the quarter with thirteen eighty nine stores in The US. Gross margin expanded approximately 75 basis points to 38.9%. Similar to the first half, gross margin expansion was primarily driven by a more disciplined approach to average unit retail and average unit cost. Including stronger guardrails and more disciplined processes to effectively manage our pricing and promotional strategies. It's important to note that in this quarter, tariffs began to more meaningfully impact our cost of goods sold. Moving to SG and A. For the quarter, SG and A decreased $32,000,000 below last year and leveraged 97 basis points. As we've discussed previously, our shift in mindset and increase in rigor around expense management is evident in our results. Savings were achieved across the board in especially in g and a areas. Notably, marketing spend was about flat year over year. Our expanded gross margin and expense leverage resulted in operating margin expansion of over a 170 basis points Adjusted EBITDA increased 21% or $17,000,000 to 99,000,000 and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. Moving to the balance sheet and cash flow. Q3 ending inventory was down 10.5% while achieving higher in stocks for our customers. We continue to manage inventory with discipline, which is one of the drivers of our improving cash profile. Free cash flow for the quarter was $61,000,000 and year to date was 71,000,000 Both the quarter and year to date were significant above the prior year. Notably, year to date cash flow from operations has nearly doubled versus the prior year to a 161,000,000. We ended the quarter with a cash balance of $237,000,000 and total liquidity of 733,000,000 including the availability on our undrawn revolver. And now turning to our outlook for the full year. We are once again raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $3.95 and $397,000,000. An increase of roughly 18% year over year at the midpoint. For the full year, given we are entering the last quarter, we are narrowing our range for net sales and now expect net sales to be down between two and a half percent and 2.8%. For the fourth quarter, we expect net sales to be down low single digits versus the prior year as we continue to execute on the initiatives we've outlined. We expect adjusted EBITDA to be between $93 and 95,000,000 It's important to note that the impact of tariffs is sequentially more meaningful in Q4. Additionally, the significant progress we've made year to date against strengthening our economic model and improving our earnings profile has provided us the option to begin selectively investing behind the business where it may make sense as part of our ongoing efforts to set the stage for phase three. A return to profitable sales growth. With regard to other guidance items, for the full year, we expect depreciation, to be about 200,000,000 net interest expense of approximately a 125,000,000 about 20 net store closures and 125,000,000 to 130,000,000 of capital expenditures with a greater focus on ROIC. In closing, as Joel discussed, we're in a period of significant change and I want to extend my deepest appreciation to all of our teams for embracing that change to deliver better outcomes for all of our stakeholders. With that, we welcome your questions. [speaker 0]: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up. We will now pause momentarily to assemble our roster. The first question will come from Simeon Gutman with Morgan Stanley. Please go ahead. [speaker 2]: Hi, guys. Hey, Joel. [speaker 3]: Let me I was intrigued by something you talked about. Some of the wants. Can you talk about can you frame what mix of the business is wants versus needs today? And it's maybe far out there. But what's the vision? And my guess is the wants aren't truly wants. I think it's you know, given your background, there's probably some unique merchandising that's partially wants, but curious how you can frame that and maybe tease it out a little. [speaker 2]: Yeah. Hey. Thanks, Simeon. It's a great question. And yeah, if you think about it in the traditional sense, you know, consumables is traditionally a needs business, and you know, is the overwhelming majority of our business. Even that business, Simeon, I think has some elements to it that can be more of a a wants in in principle. And and what I mean by that, and and I alluded to it in my prepared remarks, we've just had this, you know, set it and forget it mentality for our entire business. And if I just focus on consumables for a second, for example, in 2025, [speaker 1]: we [speaker 2]: our dog food business was largely all surrounded around one big episodic reset in the middle of the year. And we're really gonna change that in '25 And as as our big vendor partners come out with innovation, newness, different types of product, new flavors, cat extensions. We're we're gonna roll that out on on in line with their timing, not our timing. So that's gonna make more of a perception of wants rather than just needs in the sense that somebody walks in and and is a a sense of discovery. We just haven't been good at that in the past, Simeon. So think the whole business has an opportunity to create more of a exploration throughout our store, not just our supplies business, which is traditionally by the way you were thinking. There's an element to it in consumables as well. [speaker 0]: And certainly, when we get on the call in in March, we'll [speaker 2]: we'll go through that in more detail. I cut you off, Simeon. [speaker 3]: No. I cut you off. My my follow-up, it's related. You talked about integrating store functions. You talked about wants versus need. And then there was a little bit of maybe forward investing, I think Sabrina just mentioned. So if you and and by the way, the business itself is getting close to lapping like, whatever tough compares. It seems like it's naturally getting back to positive territory. So what what kinda clicks or what's the priority among the things we heard where the top line start to move, or is it something we haven't heard yet? [speaker 2]: No. I don't think it's something you heard. I I think look, we're gonna approach twenty twenty six from the top line the same way we approach 2025 from the bottom line. In 2024, we came out with the strategies that would fix the bottom line. And then we executed them in 2026. And 2025. We're doing the same thing for top line growth. I outlined four pillars, We backed it up with building blocks, which I talked about many of them today. And then we're gonna execute against those with the same rigor and discipline And so it it's not just to cross your fingers and hope. We've got plans around four pillars with a lot of building blocks for each one of them. And I'm I'm really excited about all four of them. I alluded to some of them that we're already testing here in Q4. But all of them are making traction, and some just take longer to implement than others. But teams are all focused, and we got a good plan. [speaker 3]: Okay. Happy happy Thanksgiving. Take care. Thanks, Simeon. Happy bet. [speaker 0]: Next question will come from Oliver Wintermantel with Evercore ISI. Please go ahead. [speaker 3]: Yeah. Thanks. Joel, what is the realistic [speaker 4]: timeline for comp stabilization? And which categories or customer behaviors would represent the biggest swing factors there? [speaker 2]: Yeah. Look. I'm not gonna get into 2026 today on this call and and the the timing of it. But certainly, what you should expect from me in March is to not only give you guidance for Q1, but we'll give you an outlook on on the full year. But, specifically, I can tell you, all four of the pillars I went through today are getting traction. And, know, so I would expect all four of them to contribute towards comp in in 2026. And then we'll just outline the timing for you on the March call. [speaker 4]: Got it. That makes sense. And then just on the free cash flow side, strong improvements there year to date and in the quarter. But how much of the Q3 working capital improvement is sustainable? What financial or operational levels continue to support the cash generation for next year? Yeah. I mean, I think [speaker 1]: we view cash flow and all of its levers as continuous improvement. We certainly are focused on continuing on the [speaker 5]: path of generate generating strong free cash. The principal lever, of course, Oliver, is net earnings. So we're gonna continue to focus on our bottom line and growing net earnings We'll continue to focus on inventory discipline, We're not done. We've made huge strides this year. and reducing In terms of rationalizing our SKUs our inventory compared to our sales, which is fantastic. But I wouldn't say we're best in class interns yet. We still have a lot of opportunity. We'll be looking at that lever as well as all of our other levers to continue delivering on strong cash generation. [speaker 4]: Excellent. Good luck, happy Thanksgiving. Thank you. [speaker 1]: Thank you. [speaker 0]: Question will come from Michael Lasser with UBS. Please go ahead. [speaker 2]: Can you size the magnitude of the potential investments that you would make and what forms those are gonna come in, whether it's [speaker 5]: labor [speaker 3]: marketing, [speaker 0]: or promotions, And are those [speaker 4]: investments [speaker 6]: necessary as you look to 2026 in order to drive top line growth? [speaker 5]: Well, maybe I'll just start, Michael, with the framework, and then Joel can chime in on how he feels. You know, he's looking at each one. What we've tried to do, and we're really pleased that we banked so much profit improvement through Q3. And this is afforded us as I said, the option and it's only an option to consider investing in areas that we think can drive improvements both in Q4, but also for our future. So everything you mentioned is on our plate of options. Certainly, marketing certainly looking at labor, And, sure, we'll always continue to look at promos to see if we can do them effectively. In a way that brings value to our customer. But also in a way that's very responsible as we continue to manage our margin expansion. [speaker 1]: Joel, do you wanna Yeah. I yeah. Sabrina, I think you [speaker 2]: you nailed that pretty good. And when Michael, I look at the four pillars we outlined, I don't think any of them as it relates to 2026 require any, you know, substantial step change from what we're doing today in terms of you know, cash investment or change in OpEx investment or something. It's it's really you know, you take merchandise. Like, we're selling through our existing merchandise, and we're buying into new. So that's really just a a steady flow change. And you know, really don't see any episodic change in in 2026. From an investment standpoint. From from the runway we're already on today. I I guess the question in the [speaker 6]: and and the critical point is Yeah. Can Petco experience the same magnitude of the improvement in the profitability while reversing what seems like some market share losses this year and beyond that path next year. [speaker 5]: Yeah. If I'm hearing you, Michael, and I and I might want you to repeat the question, but we, for sure, believe that investments are going to be necessary. Our whole focus and what I talked about all year long in terms of the economic model we're pursuing is delivering leverage. On expenses. But as you know, if sales improve, you increase operating expenses and still deliver leverage. So we're we're very aware that we need to make some investments That's why we're talking about in Q4 We may make some of those investments in advance. Of entering the new year because we've been able to bank so much profitability and leverage. And we will measure our success in meeting our goals and expanding margin and delivering expense leverage on a full year basis. That's another thing we always said. We never said every single quarter in the same way. It's on a full year basis. So that's why we've given ourselves the option because we know that the next phase will require investment we are prepared to stand behind that in a responsible way that still delivers on our full year goal to deliver the model. [speaker 6]: Hey, Sabrina. Could I could I just clarify? You know, if we look at what the embedded EBITDA margin is in the fourth quarter versus what Petco's experienced over the last couple of quarters. It looks like the pace of improvement is gonna moderate. Should we think about the magnitude of the potential investment, the option for investing would be the difference between what Petco has achieved over the last couple of quarters and what's implied in in the fourth quarter? Is that how we should think about quantifying that potential investment? [speaker 5]: I think that's a fair framework, Michael. I would add to that as we look to Q4, as I stated, remember, when we think about gross margin, there's more there's more tariff impact. That's just one factor. It's not enormous as we've said all year. It's it's we're pleased that we're in a retail sector that doesn't have mountains of tariff. It is an impact. So that's one factor. The second impact is that investment that we're talking about. And how much we will choose to do and how we'll manage through that in the fourth quarter. So, yes, I think your statement, broadly speaking, is fair. [speaker 6]: Okay. Thank you very much, and good luck with the holiday. [speaker 1]: Thank you. [speaker 0]: Next question will come from Kendall Toscano Bank of America Global Research. [speaker 4]: Please go ahead. [speaker 5]: Thanks for taking my question. Hopefully, you can hear me okay. [speaker 1]: I was just wondering if you could talk more about the impact of tariffs during the quarter I know you mentioned they became more meaningful in 3Q, but maybe not as much as you're expecting for the fourth quarter. But just curious what you saw in terms of COGS impact, if any? And then in maybe some categories where there was tariff impact on price? What did you see in terms of consumer elasticity? Thanks. [speaker 5]: Thanks. Yeah. Thanks, Kendall. Just to go back to our statement, So the first time we saw a tariff impact flow through our p and l, through cost of goods sold in any meaningful way is the third quarter. Because the second quarter had, like, let's call it, de minimis. Amounts of that. We had it on our balance sheet. We had it in inventory buys, but it wasn't flowing through COGS yet. The third quarter is the first quarter of that And my only point was in the fourth quarter, it becomes a bit more meaningful. So it's just a reminder that sequentially, the tariff headwind's a bit more meaningful. But, again, in the broad spectrum of things, it's a very manageable number, which we've managed all year and have been revising guidance upward in the face of it. So you know, I think that hopefully helps frame it up. We we also know that it's mostly in the private label supplies area. As we've said in the past. So, hopefully, that helps frame it up too. Got it. That's helpful. [speaker 1]: And then my other question was just in terms of some self inflicted headwinds in the services segment. As you've deprioritized that program ahead of the planned relaunch. Just curious as you're now getting closer to relaunching that in 2026, and it it sounds like maybe starting to pilot it in the fourth quarter What kind of tailwind would you expect to see on same store sales growth or I guess just service services growth? [speaker 5]: I I think you mean our membership program. That's Yes. That's what I meant. Yeah. That's what's combined with services in the way we report. Services and other. So I probably, Joel, if you wanna start with the membership program and [speaker 2]: Yeah. Because our our our paid membership rolls into there. But, you know, I think the more important thing to take away from that is and and I alluded to it in my prepared remarks that we are on track with our new membership program. And in fact, here in the fourth quarter, we have begun live end to end testing in several markets, and so, we really haven't seen any major glitches. In fact, minor at best. And so that's a really good sign for us. We'll then take that to a few more markets and and do, roll out the new attached to it. And are still on track then for a rollout sometime in 2026 with with the, the rest of the fleet. But membership so far has, really come together nicely. And it it's a really important element to our growth that's gonna begin in 2026. [speaker 5]: Yeah. And since you raised it, Kendall, on the services piece, I think you can see that that continues to be not only a strategically important area for us, but it's also an area of nice growth and continues to be. [speaker 2]: Thank you. [speaker 0]: Next question will come from Kate McShane with Goldman Sachs. Please go ahead. [speaker 1]: We wanted to ask, a little bit more of a higher level [speaker 5]: question, just your view on where you think the industry is now from a digestion standpoint, where you think the industry can grow, in in 2026 if if we do return to growth in '26 for the industry. And just what you may have been seeing out of the competitive set, [speaker 1]: this most recent quarter as, you know, some of these higher tariff costs and and prices have come through? [speaker 2]: Yeah. Thanks, Kate. Look. Overall, the the competitive set really hasn't changed much from the the last quarter. You know, I would say, you know, the what's changed is the consumer has been a little probably a little bit more cautious You know I mean? Obviously, with, you know, tariffs and political tensions and interest rates still high, you know, that's really been you know, bogging down their outlook on the economy a little bit. But as far as the pet industry goes, it it's been pretty stable. You know, flattish in terms of growth. I think the progress we've made on our digital side has really been promising, and and that'll be very important to us as we turn to growth next year. But overall, we're positioned nicely. Our services business is Sabrina just talked about, is already growing, and that is an area of growth in the pet industry. We'll and then we'll layer in you know, the focus we've made and the progress we've made on our our digital improvements. But overall, it's pretty stable. [speaker 5]: Yeah. [speaker 2]: Thanks, Kate. [speaker 0]: Question will come from Chris Bottiglieri with BNP Paribas. Please go ahead. [speaker 4]: Hey. Thanks for taking the question. [speaker 0]: Yeah. The first one I had was just hoping to now the cash [speaker 2]: free cash flow profile has improved. [speaker 6]: How do you think about prioritizing the usage of cash? Is it continued debt pay down? Do you think about reaccelerating the veterinary practices? [speaker 0]: Like, just curious how you think about that. Over the next few years. Yeah. Our first priority would always [speaker 5]: be to invest in our business. To sustain growth going forward. So that's definitely the priority. That said, we go back to our statement that we have a lot of assets on our book already. That really are ramping up now, vet hospitals predominantly the number one on the list, that are already on our books that we are ramping up for better returns. So we don't have to make big capital investments in those. And we, in fact, you'll hear us talk about more in the Q4 call, Chris, We have a set of those that where we're gonna focus on bringing utilization up 2026 as well, without any large capital investments. So I view this as really great news because it provides a nice path for return improvement while not having to invest a lot of capital in it. So, of course, though, we'll be looking at pockets and areas as we move forward, and we finalize what kind of remodel prototype we wanna land on. How we'll start to bring those into our system, But there's no huge big capital spend necessary in the horizon, likely to increase some in '26, but no big enormous dramatic change overall in profile because we have these assets in our books where we're increasing utilization. Now beyond that beyond that priority to first invest in our business, The second, of course, is we are always looking, as I stated, you know, on the first call when I talked to you guys, we want to bring down our leverage on an absolute basis. We also wanna bring down our ratio. We're doing a terrific job with the growth and profitability of bringing down the ratio. So it's quite remarkable. We started the year at over four times debt to EBITDA And if we hit the midpoint of our new guidance, we should be below three and a half times. Net debt to EBITDA. So quite a bit of progress indeed, we'll look to opportunities to even potentially do some opportunistic pay debt pay down. [speaker 4]: Gotcha. That that's really helpful. And then [speaker 0]: your gross margins were, I think, down 20 basis points on the product line. [speaker 6]: Is that primarily that tariff had been referring to? Or [speaker 3]: is it also somehow in is or is, like, is the [speaker 6]: elasticity offsetting the ticket increase, and there's also a headwind on comps? Just curious by [speaker 3]: like, [speaker 0]: tariff headwinds are you referring to there? Where it's manifesting? [speaker 5]: I have our merch margins expanded both in our products and services. [speaker 3]: Sorry. I meant quarter on quarter, not not year on year. [speaker 5]: Oh, quarter on quarter. Sure. Yeah. I would say that is primarily a little bit of tariff headwind coming in. Year on year, though, we are we are up in both products and services. [speaker 2]: Gotcha. [speaker 4]: Okay. [speaker 0]: Thank you. [speaker 1]: Next question will [speaker 0]: come from Steve Forbes with Guggenheim Securities. Please go ahead. [speaker 4]: Good afternoon, Joel, Sabrina. [speaker 0]: Joel, you you spoke about services in stores coming together. And and I guess my my question is is can you help us frame up [speaker 6]: sort of how you guys see that opportunity internally, whether it be how spending per customer sort of evolves as they engage in services, if they're a store only customer or vice versa? [speaker 4]: Like, any way that is sort of [speaker 0]: talk about how [speaker 6]: how, like, the net sales per customer evolves as they broaden their engagement across store? [speaker 2]: Yeah. Look. Look. I I think any you know, great bricks and mortar retailer has to define their moat, has to define what differentiates them from anybody else. And services is definitely one of our moats. Right? It's one of our key elements that, is really hard for any other pet retailer to replicate in the way we [speaker 4]: built out [speaker 2]: grooming, hospitals, vet clinics, dog dog walking, all or dog training. All those elements. And so that's obviously an area there for we've leaned in the most. And we've made incredible progress with our existing assets. You know, utilizations, we've improved. Engagement, we improved. And then what you're getting at is the integration with the center of store with product. And so what what's key to all that, Steve, is I look to 26. Is is layering that in with a membership program that really helps us better understand the profile of each one of our customers how many are using services, how many use services and merchandise, how many are buying, in store and online, and you put all those elements together, it starts to create profiles of different customers. And we we really see honestly, the better we get at services, the the halo effect that has on the overall business just gets stronger. Because it's something that's hard for anyone else to replicate. So service is probably the area that we made the most amount of progress. Pleased with the results we're seeing there. And, you'll continue to see us talk about that and but that gives you a little color on how I see it playing out. Turning into 2026. [speaker 6]: And then maybe if I just do a quick follow-up on that, like, there is there any way to set the baseline here on just sort of you know, what percentage of your customers today actually you know, buy services or or any sort of baseline KPI that we could sort of begin to track as we think about your progression in the business? [speaker 2]: Yeah. Look, I I I think at this point in time, I'm not gonna get into the the specifics on it at that level of detail. Mean, I think the the you know, baseline KPI to you know, track you know, as we we look into the future will be transactions overall. And and then let us manage it at the at the different elements we have, the serve up to the customer. But services will definitely be key component to it, Steve, as we keep growing. [speaker 6]: Thank you. [speaker 3]: Yep. You bet. [speaker 2]: Thank you. [speaker 0]: Last question will come from Zach Fadem with Wells Fargo. Please go ahead. [speaker 3]: Hi. Good afternoon. Is is there a way to quantify the impact of moving away from less profitable sales and and deemphasizing the member program in in Q3? As it seems like [speaker 6]: you expect your Q4 comp to step down a bit more, I [speaker 3]: I'm curious to what extent you're expecting those items to also impact Q4. [speaker 5]: Yeah. I mean, it's I'll I'll just start by it's it's a it's a pretty broad range. Zach, the implied Q4. So, you know, we can land anywhere in that range. Clearly, what we've stated all year very consistently is our primary focus this year was around expanding our margins walking those unprofitable sales and building this very strong foundation upon which to start sales growth. In 2026. But, Joel, I'll let you take it from there if you wanna Yeah. I I think [speaker 2]: Sabrina, I think you nailed it, and I I think I'd add to that. Like, you asked what's the impact? Well, the impact you're seeing quite clearly is you know, we're growing pet EBITDA market share. And so while sales are down, EBITDA is up. So clearly, we I I think we've done a really nice job of identifying which sales are really one time transactions and our empty calorie as I call them versus which customers we wanna grow lifetime value and and be with us for the long term. And so you've seen that play out quarter after quarter for us. As, you know, sales have been down, you know, consistently low single digits. But bottom line has continued to improve. So as each quarter goes by, we get better at identifying those largely or getting them out of our base. And you layer in a membership program. More strategic media buying, aspect, and all that'll start to lead towards improvement in the top line with the bottom line as well. [speaker 6]: Thanks, Joel. And then just to [speaker 3]: level set as we look ahead [speaker 6]: to to 2026. I mean, the expectation is to return to sales growth I'm curious how generally [speaker 3]: you would frame broader category performance in dog and cat food, supplies, services, etcetera. And then how you would layer in the the impact of both your initiatives and then net store opening and closings to kind of get to that [speaker 7]: total sales growth? [speaker 2]: Yeah. Look. I I think it's too early now to to spell that out specifically for 2026. I mean, clearly, if you [speaker 6]: look at what we've [speaker 2]: published, you can see the consumables and you know, supplies are are negative this year, and and we're getting growth in in services. We we expect to return to growth in in consumables and supplies going forward. What I've gotta just outline for you or translate for you is what I laid out today in terms of four pillars. How does that translate into growth at what time and what period next year? But lot what what you guys can't see is all the progress we're making here internally. And then we just gotta put the pieces together for you so you help you think about your model. But, you know, we haven't I think I answered on a few questions before. We're approaching 26. The same way we approach 25. Outline the strategies, and then execute. And, the the team is just getting better at that as every passing quarter goes by. [speaker 5]: Yeah. And, Zach, just to emphasize what Joel's saying, for sure, I think your thinking is in line with ours where you always look at what's you know, your base sales bill then we layer on all the many initiatives which Joel has been outlining. And we'll continue to get more granular as we go 26. But we have all of those building blocks on top of that base, and they layer on throughout the year. So what you can count on is it's a gradual ramp. And then the last thing I'll say as a little bit of a preview is we would expect fewer net closures in 2026 than we had in 2025. And, again, the 2025 expectation is about 20 net store closures. [speaker 7]: Thanks so much for the time. [speaker 2]: Thank Zach. [speaker 0]: This concludes our question and answer session. I would like turn the conference back over to Tina Romani for any closing remarks. [speaker 1]: Perfect. Thanks so much, Joel and Sabrina. Thanks, everyone, for your time. That concludes our call, and we hope everyone a wonderful holiday. [speaker 0]: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen. 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: 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.