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Lawrence Hutchings: Good morning, and welcome. It's great to see so many familiar faces here in our events center in Salisbury House and a big welcome to those on our webcast this morning. I'm Lawrence Hutchings, Chief Executive, and I'm joined today by Dave Benson, our CFO. This week in -- Monday to be exact, marks my first anniversary at Workspace. Our agenda for this morning, we have a high-level overview of performance in the first half. I'll hand over to Dave to take us through the financials in detail. Then I'll take us through our first update on strategy since we launched back in June, which was 5 short months ago, and we'll then move to Q&A. It's been a very busy time for Workspace. The economic backdrop continues to be challenging, not least because of the uncertainty around the upcoming budget. So we are controlling the controllables and taking a series of actions to deliver the fix, accelerate and scale strategy that we laid out in June. We're starting with our focus on stabilizing then rebuilding occupancy. But before I go into that, I'll summarize the first half performance, including some early and encouraging success indicators. There should be no surprises on this slide. We are clear on our expectations. The performance in the first half has played out broadly as we expected. Back in June, I said things were going to get tougher before they got better. Let's start with the performance metrics. I'll highlight a few on the light blue line, like-for-like occupancy is down, as we said. And that's driven a fall in rental income and also in valuations. Importantly, we've taken cost out of the business. So our admin expenses are down 5.6%, roughly GBP 2 million annualized. We've held our dividend flat and it's well underpinned by our cash flow because we understand how hugely important dividend is to our shareholders. On the dark blue line, Dave will talk through this in detail. but our valuation movement has been driven by lower occupancy and contracted rent along with a fall in ARVs, and this reflects our pragmatic approach to pricing. Although importantly, yields have held broadly flat. I'd like to provide more detail on what's driving the operational business. These are the interesting lead indicators that I referred to, and they demonstrate our strategic actions are gaining traction. Conversion and retention are key and together, they drive occupancy. Inquiries are down in a softer market but our conversion is up 1% year-on-year to 16%. And importantly, in October alone, up another percent to 17%. Retention has also increased, and this is a key focus for us, and I'll go into some detail on that later. A new metric that we're showing this time is our NPS, Net Promoter Score. It's up 14 points to plus 47, which is a great achievement. Our rent per square foot is marginally up. However, that is mostly driven by these fixed 5% annual increases or first year increases that we have in our lease -- standard lease model. This is the strength of our business. And it means that we are never far away from some form of reversion opportunity. I'll hand over to Dave to take us through the financials. Thanks, Dave. David Benson: Thanks, Lawrence, and good morning, everyone. As Lawrence says, we are operating in a softer economy, and we are seeing some customers deferring decisions in the run-up to -- in the uncertainty area in the run up to the autumn budget. But against this backdrop, as the top left-hand chart on this slide shows, we had slightly fewer inquiries in the first half of the year compared to the same period last year. However, as Lawrence will cover later, we have been working hard and the inquiry to deal conversion ratio has continued to improve. It's well above historic averages with a significant pickup in quarter 2. As expected and highlighted in our quarterly trading updates, we have, however, seen a fall in like-for-like occupancy, down 2.5%, largely driven by large customers leaving the Centro Center in Camden. Excluding those vacations, like-for-like occupancy would have been down to 81.7%. Like-for-like average rent per square foot was broadly flat, reflecting our selected price reductions and promotions, which have helped to drive new deal conversion and customer retention. Turning to the income statement. Underlying rental income increased slightly, GBP 0.5 million to GBP 67.3 million. The total rental income was down 2.9% to GBP 58.7 million, following the disposals made over the last 12 months. This was partly offset by lower administrative expenses, where we streamlined our support functions to deliver annualized savings of GBP 2 million. Net finance costs increased by GBP 1 million, reflecting -- sorry, a decrease in capitalized interest following the completion of Leroy House in October 2024 and also an increase in the average interest rate following repayment of GBP 80 million or 3.3% private placement notes in August 2025. Overall, trading profit after interest was therefore down 6.4% to GBP 30.6 million, with adjusted underlying earnings per share down to 15.8p. There were one-off costs of GBP 4.5 million in the period, largely in respect of the restructuring of the support functions and the implementation of our new CRM system. And these, together with the decrease in the property valuation, resulted in a loss before tax of GBP 71.1 million. Taking into account the trading profit performance and confidence in the longer-term prospects for the company, we will be paying an interim dividend of 9.4p per share, in line with prior year. On the balance sheet, and notwithstanding the decrease in the property valuation, which I'll come back to in a moment, we've maintained our capital discipline with trading profit funding last year's final dividend, and the proceeds from property disposals largely funding capital expenditure, resulting in net debt slightly increasing to GBP 833 million with NTA per share of GBP 7.21. So coming on to the valuation. Overall, we saw an underlying decrease of 4%, reflecting largely lower occupancy. On this slide, we set out the valuation movements by property category. On the left-hand side, you can see the valuation at the 30th of September and on the right-hand side, you can see the movements in the period. In the first row is the like-for-like portfolio, which accounts for around 3/4 of the overall value. And as you can see, the like-for-like valuation was down 3%, driven by lower occupancy, with the yield improvements largely offsetting a 2.3% decrease in ERV per square foot. We did continue to see smaller spaces performing relatively more strongly with units less than 1,000 square feet seeing a decrease of 0.7% in ERV compared to an average decrease of 3.6% for larger units. We also saw a significantly better-than-average performance in our high conviction and pilot sites with the valuation of pilot sites down by just 0.4%, and our high conviction down by 1.6% on average. Valuation movements in the non-like-for-like categories were also impacted by decreases in ERV which, in some cases, were compounded by yield expansion, particularly in the Southeast offices. Turning to debt. We continue to maintain a wide range of facilities with a spread of maturities, largely fixed interest rates and significant headroom. Over the past 6 months, we have successfully refinanced GBP 200 million of bank facilities, extending the maturity until 2029 as well as extending the maturity of a further GBP 215 million of facilities by one year. The facilities have the option to extend the maturities by a further year as well as increasing facility amounts subject to lender consent. Overall, this gives us significant flexibility with no additional refinancing required until 2027. As I mentioned before, though, we have seen a small increase in our average cost of debt following the repayment of the GBP 80 million of private placement notes. Looking forward, the softer economy and ongoing macroeconomic uncertainty continues to create a tough operating environment. As previously announced, H2 earnings will be impacted by a number of factors, including the lower opening rent roll, although we do expect less pressure on occupancy from large customer vacations in the second half. We will see the increase in the average cost of debt, as mentioned already, but we will also see the full 6-month benefit of the cost efficiencies that we implemented in the first half of the year. We expect full year capital expenditure of around GBP 60 million as we complete our refurbishments at Atelier House and The Biscuit Factory, alongside tactical capital-light refurbishments to enhance our offering in our conviction and high conviction buildings. This capital expenditure will be offset by proceeds from property disposals. And I'll now hand back to Lawrence to talk through our strategic progress. Lawrence Hutchings: Thanks, Dave. There are 3 elements to our strategy: Fix, Accelerate and Scale. And they are all underpinned by our objective to achieve operational excellence in our platform. That is the point where we're able to deliver highly efficient, sustainable growth in underlying recurring income. I call this the new Workspace where Workspace is once again a clear market leader. We've been working hard to execute over the last 5 months. I will go into more detail on each element over the next few slides. As we execute, we're starting to see traction, and it gives me confidence that we have the right strategy to deliver recovery in income-led shareholder returns. I'll update you first on Fix. This is the most critical area of our strategy, and it speaks directly to occupancy, which then flows through to income, valuations and shareholder value. We are laser-focused on stabilizing and then rebuilding occupancy. There are two drivers to our occupancy, new customers and retaining our existing customers. Many people don't realize that in any given year, typically 90% of our revenue comes from our existing customers. So the more we can retain, the better position we will be in, particularly in a market where the cost of acquiring new customers has grown. Within the retention area is our expansion and contraction of existing customers. We have almost 4,000 customers on our platform, and they have a diverse set of needs and requirements. They're dynamic, and we support them in a variety of ways. Often, this is in the shape of supporting their upsizing when they win a new piece of business or at times when they need to contract before then expanding again. This is part of the appeal of being at Workspace. Interestingly, our customers stay on average 5.5 years on an initial 2-year lease. Our platform and nearly 40 years of experience supporting London's creative SMEs, places us in a very strong position. However, experience, legacy and platform in themselves are not enough. So how are we driving these improvements in retention? Our customers are the owners and the CEOs of these businesses. They are in our centers daily. Therefore, the function and presentation of our buildings is absolutely critical, as is the service they receive from our center teams and especially the people that are on site every day because they interface with them all the time. We've put in place a huge amount of initiatives to support our retention. Our customer teams are taking more responsibility and leveraging their contacts and relationships to deliver expansions, contractions and lease renewals, which were previously run by our head office teams. We've further empowered our center teams to resolve the issues that come up on the ground. Nothing frustrates our customers more than 40 facilities. So we have to be right on top of it. Our new CRM platform now makes it easier for customers to raise issues and access a range of services and support. We're also delivering more events and value-added services. All of this action is delivering tangible results. Firstly, as I mentioned, like-for-like retention is already up -- is already up 2% to 85%. In October, when our center teams took over responsibility for expansions, we saw a 12% increase versus the Q2 monthly average. Our customer satisfaction score is up 1.5% to 91.2% since March. Our cleaning and maintenance score is up 3.9% since March. And finally, our value-add offers and Skills Academy, has received a 9.8 out of 10 review from our customers. We're tactically investing in our buildings to create better environments, and our pilot projects are the test centers for these improvements and innovations in both our product and experience. We're investing modest sums in the areas that our research and feedback tell us matters most to our SME customers. At Vox, we've seen the most significant changes. This high conviction building has seen occupancy improve 400 basis points to 79% since we launched the project back in June. We spent GBP 700,000 on high-impact areas, including breakout areas, receptions, meeting rooms and formal seating areas, corridors and putting new phone booths in. Over the leather market, sorry, pleasingly, our NPS at Vox has improved to plus 78 from plus 41 just a year ago. And over The Leather Market, our NPS has increased to plus 37 from plus 16, a year ago. Occupancy at other market is 82% and being transparent marginally down. However, that is mostly driven by the impact of a fail customers business. Importantly, at Leather Market, we have 5,600 square feet of space over offer that translates -- under offer, that translates to about 4% in occupancy. However, let's not just listen to my views on the impact and changes that we're making to resourcing in our centers and presentation. Francesca, who is our General Manager at Vox Studio, has some fascinating insights of our own on the impacts. [Presentation] Lawrence Hutchings: Fantastic. Turning to new customers. In a competitive market, how do we improve our performance in attracting new customers to our platform. It's not simply about the number of inquiries rather the quality and relevance of those inquiries. I'm pleased to say, Will and the team are rising to the challenge. We are leveraging a huge amount of third-party data and market research more than at any time in our history to increase our market share of London's creators, makers, disruptors and innovators. This has led to a 20% increase in First Choice consideration in our brand tracking over the course of the last financial year-to-date. This remains significantly ahead of our largest flex peers. The broadcast video, on demand ad campaign that I know many of you have seen, has resulted -- has resulted in a 22% increase in booked viewings during the campaign period. Our new drive on targeted social and digital ads has delivered a 40% increase in click-through rate to our website from LinkedIn. Whilst our website accounts for circa 60% of all our leasing deals, brokers remain important, especially in our larger spaces. Our increased focus on engagement with these firms has seen viewings from brokers up 12% over the period. And our focus on local marketing has driven an increase in walk-in viewings, especially at our lower occupancy sites, including the Chocolate Factory, Westbourne Studios and Screenworks. Better leads are translating to better conversion. We're working across the board. We're training and coaching our sales team and building a more commercial mindset. We've reviewed their incentivization and we're taking a more pragmatic approach to commercial terms. We've freed the leasing team up from expansions, contractions and renewals to focus on new business solely. We're trialing new initiatives like furnishing units, inclusive deals and more flexible terms. And as you heard from Francesca, the center teams also have an important role to play. They're busy taking viewings, proactively improving units based on feedback from customers, viewings and from our sales and leasing teams, and they're undertaking common area upgrades and maintenance on a more regular basis. We're doubling down on technology, and I'm really excited about how we're using AI. Elodie, our sales agent is accelerating conversion, working 24 hours a day when our SME customers are online. Viewings on a Monday are up 25%, and there is more to come from Elodie. We're also using AI to generate floor plans and unit layouts along with this cool tool that enables our sales team to present the unit in several different design and layout options for our customers that struggle with spatial reasoning. You'll see the majority of our units on the website now have CGIs to help with space planning. We have more improvements coming with our customer site, including a new landing page, and improved navigation, and I'm pleased to say we've launched the new landing page today. So what are the next steps on Fix? As I've said, empowering our center teams, shifting accountability to the call face and incentivizing them to provide better customer experiences whilst driving revenue, and it's working. We're going to roll out this evolution of the structure across our portfolio. This creates a need for better data and revenue management tools, which we are continuing to enhance and roll out. And finally, this focus on driving revenue is being supported by our first Head of Revenue, James Graham, who joins us from IWG in early January. James will oversee the sales and retention initiatives across the platform. As you can see, we are 120% focused and moving at pace to address the occupancy challenge. Importantly, we're making progress, but we appreciate we have a lot of work to do. Turning now to Accelerate. This is about optimizing our GBP 2.3 billion of real estate portfolio and our platform. We're fond of saying we have two verticals in our business, a super fast-moving dynamic operating business, which delivers circa GBP 140 million of revenue a year. Sitting next to that, a real estate investment business that optimizes our real estate portfolio. And these two verticals are supported by a series of corporate functions. I just want to take a moment to remind everyone of our conviction-led approach following the extensive portfolio review we did earlier this year. We're on track to meet our 2-year target of GBP 200 million, which equates to circa 30 -- sorry, 20 assets. We sold GBP 52 million so far this year, which is broadly in line with book value. That's on top of the GBP 100 million of disposals we made last year. Most of these assets are outside London. They're smaller. They're not in our SME business format and they don't speak to our target customers. We have a further pipeline of disposals, and we're constantly reviewing our portfolio with a very critical eye. We will not shy away from recycling more, including the change of use opportunities where we believe the SME market has shifted in that location. Capital discipline is always important, especially given where we are in our recovery. As we stand here today, one of the best uses of our capital is rebuilding occupancy and letting up the space we already own. The swing from vacant to occupied is circa 130% of the rent when we include the empty business rates and service charge liabilities. Whether this is investing in pilot type projects that you've just seen or the subdivision of larger spaces into our smaller studio formats, the impacts on occupancy, income, income growth, adjusted profit and valuations is meaningful. This includes investing modest amounts on new sources of demand to accelerate our rebuilding of occupancy. Importantly, we don't have any further large projects, as Dave mentioned, beyond the completion in the coming months of the Biscuit Factory and Atelier House in Camden. Instead, we are focused 100% on leasing the floor space we already own, which means we have structurally lower CapEx commitments for the next phase of our recovery. We have guided to lower leverage, reducing our interest drag and improving our balance sheet metrics. And we have a proud history of dividends and dividend growth, which are fully covered by our trading profit. Our guiding focus is on ensuring we always have the most appropriate capital structure and on delivering shareholder returns. Accelerate also incorporates the next phase of our pilot project, which is now moving into business as usual following their success. We've selected China Works and Cargo Works in Southwark. These are beautiful characterful workspace buildings in amazing locations in what I call London's creative hinderlands out of Zone 1 through to Zone 3 and 4. These are locations where our extensive research tells us there is a high proportion of our target SME customers and their staff living, working and socializing. Growing occupancy through targeted investment in high-impact areas enables us to drive income growth. These projects are high impact. They're efficient use of capital with modest investment, delivering tangible near-term results on both conversion and retention. We said when we launched our strategy, all 3 elements started together immediately. We're confident in our ability to fix occupancy and deliver capital recycling to optimize our portfolio and our platform. We're going to be creative and entrepreneurial where we see growth opportunities within our capital constraints that deliver immediate impact on our occupancy. There are ways that we can capitalize on our unique real estate customer base, adding other complementary formats to our larger campuses that create new sources of demand and provide services to both existing and potential customers. Qube is an example. More on that in a moment. Micro storage is another example. There are others we are monitoring, targeting different high-growth sectors within London's dynamic and growing SME space. We believe we are uniquely positioned to access these opportunities as both owner and operator of our buildings. Turning now to Qube. This is a great example of our strategy at work. We're unlocking an exciting new source of demand for London's growing content creators. Many don't know, London is one of the world's leading locations for content. And there are well-established Flex platforms, including the Ministry and Elephant & Castle. Our deal with Qube at the Old Dairy is one of a pipeline of sites we've identified in London as we support Qube's growth with our real estate and modest amounts of capital. The combined investment is less than it would cost us to fit out the space, and we're excited by the halo opportunities we can create for like-minded businesses to locate near the Qube facility. We're also exploring ways of working together, including creating podcast studios in our assets that are operated or powered by Qube. And we're looking forward to learning from each other, operationally over the coming months, and we welcome Amin and Nick to the Workspace platform. Turning now to next steps. One of the most insightful things for me over the last 12 months and the most eye-opening things has been to get out into our buildings and visit our customers and just see how truly diverse and successful some of them are. We've started a podcast series. And I think some of you have seen the wild podcast I've done with Charlie, who was the founder there, which is a phenomenal success story within 5 short years. He's just sold that business for GBP 230 million to Unilever. And there are many others within our business. And one of our challenges is how do we get the workspace story and how diverse our customer base is and how our studio spaces are used by such a variety of different people in such a variety of different ways. And we kicked off a video at our strategy session, which we got really good feedback from. And every time we take sell-side or investors off to our buildings, they always come back surprised, pleasantly surprised about what they've seen. In fact, we had an investor tour a few weeks ago, one of our largest shareholders. And he said to me after walking around The Leather Market. He said, "This restores my faith in London". So we've got a video for you just to provide more insight into the types of customers we host on our platform and what they're doing with their businesses. [Presentation] Lawrence Hutchings: We remain laser-focused on our Fix, Accelerate and Scale strategy, starting with rebuilding occupancy, which will drive a recovery in earnings and deliver shareholder value. To put the occupancy challenge in perspective, if we converted every single inquiry we had in a single month, we wouldn't have an occupancy challenge. And I appreciate we're not going to do that, but it gives you some indication of the volume that we're dealing with in terms of inquiries and the deliverability of what we need to do. We're closer to our customers than we've ever been, and we're far more responsive. This is giving me confidence that we're seeing the early signs of progress as we presented today. However, I am aware it's early days, and we have a lot to do. We're clear what it is that we need to do and how we are going to execute and we are executing at pace. I'd like to move now to Q&A, and we'll start with questions on the floor, and then we'll move across to the webcast. Thank you. Lawrence Hutchings: Can I just ask that we introduce ourselves for those on the webcast, everyone knows who's asking the question. Thank you. Neil Green: Neil Green from JPMorgan. Two, please. First, on the occupancy side, given your lease break profile, you're able to flag the large unit vacations well ahead of time. So we saw that coming. Have you seen or are you watching any further potential large unit lease breaks, potentially back in the second half or first half of next year? And generally, any comments you may have around when and what level occupancy might trough at, please? And secondly, encouragingly leasing activity has continued post period end, and you've got some space under offer. But interesting to see if you can tell us any more around how those leases compare to ERV, given the ERV impact on the values in the first half, please? Lawrence Hutchings: So there's probably 3 questions there. Maybe I'll have a shot at the first one, Dave. The second one, Neil, just remind me again. Second question. Neil Green: Occupancy... Lawrence Hutchings: And trough. Neil Green: Yes. Lawrence Hutchings: Yes. And the third one is how the deals post the period close effectively, how they look against ERV. I think Dave is probably reasonably well positioned to answer that as well. But picking up the first one, we've been very transparent about one of the key drivers of occupancy during this last period, has been the vacation of a large occupier in Camden, which is where, obviously, our new offices, and there's a reason for that. There aren't too many 45,000 square foot occupiers within our portfolio. There's one other large occupier in West London that we're monitoring very, very closely. So I think after those 2 large occupiers, we stepped down a long way into the sort of 10,000 to 15,000, if that makes sense. There aren't many of those in our portfolio either. And then we stepped down again into the sort of 5,000 to 8,000 square foot mark. The sweet spot of our business remains 300 to 1,200 square foot units. But as you would appreciate, businesses come in and scale with us effectively. And there's many great examples. Some of them stay with us. [indiscernible] has elected to stay, we've moved out of our corporate space in Kennington to facilitate their expansion. But there are other cases where business is sold effectively. And that's what success looks like for our SME customers is some form of exit. And as you appreciate, there are times where part of that exit is that, that business gets taken up into the mothership as we call it effectively. And we get that space back and the process starts again with dividing the space back up into small units. We are being far more pragmatic. We've seen some improvement in large unit demand and where that's taking place, we've been comparing that to the alternative of subdividing units. Hopefully, that answers that question. Dave, I might hand over to you. We're being very careful about guiding to a trough in occupancy as you would appreciate. David Benson: Yes. I mean, I think it would be rash to guide to a trough against the macro that we've seen, particularly a week before budget. Having said that, we are very focused, as we've talked about on what we can control and the drivers and the early indications and they are early indications, are positive. The visibility, as Lawrence talked about, in terms of the large units, which have been a big driver of the movement in the first half are much less in the second half, which is positive. So I think we're controlling the things we can control and leaving those in the right direction, absolutely. I think the other thing I would say is that there is uncertainty, as I said, I think it has resulted in some customers and potential customers deferring decisions until after the budget, but when we speak to the customers, they are positive about the -- overwhelmingly, they are positive about their prospects for growth next year. So I think that augurs well for next year. In terms of ERVs and pricing where we're seeing, as we saw ERV's down in the first half, and that's really been driven by the deals we're doing. We are still doing deals at the -- I mean for us, as Lawrence says, the key focus at the moment is on driving occupancy. You have 130% return on driving it. And that is wholly our focus. So we are being creative about how we deliver that occupancy. Pricing is one of those factors. So we will continue to be pragmatic on pricing. Lawrence Hutchings: Just to add to that, we have fun to stay in the business, there's 2 levers effectively; occupancy and rate. And if occupancy comes up a little bit, we let rate off, rebuild occupancy, pull rate on effectively. So as you preset, supply/demand economics fundamentally within the building. So where we have tension we can drive better rental outcomes. There's no question. What we've also realized with the pilot projects is that where we're investing and improving the environment, those rent increases at the end of that 2-year lease are much easier for us to achieve. And we're getting feedback from our customers saying, I'm okay with paying a 5% or 6% increase because I've seen you're investing in the building. Denese down the front here, I think. Denese Newton: Denese Newton from Stifel. I had a question, obviously, you started to disclose retention rates, which is a new metric and will be a good guide for trends in occupancy. I just wondered with the current rate at sort of 85%, where should we benchmark that against sort of historic retention rates? And what do you think would be a realistic target for improvement in that? And how would that then impact occupancy? Lawrence Hutchings: Yes. I think if you -- in recent times, the last few years -- sorry, retention has slipped. There's no question. And I think going back just before I joined, we had several months where retention numbers were meaningfully lower than that 82%. And as I mentioned earlier, there are really 2 key drivers to occupancy. What we're putting in from the top new business and what we're losing effectively and as you'd appreciate in a competitive/uncertain market, the cost of customer acquisition goes up, as you would appreciate, retaining more existing customers is fundamental to us. We have seen periods where -- and obviously, we're providing averages over the reporting period, we have seen months where we're getting closer towards 90% but we're not guiding to a target at this juncture. We have gone through forensically and Will is here in the audience today is overseeing the sales function until James Graham arrives and doing a great job. We've been forensic in going through line by line, those customers. And as Francesca mentioned, we've moved from being reactive to a proactive. We're positively engaging with our customers to establish what their intentions are in advance of these lease events and seeing how we can go in and help. And sometimes help looks like contraction, sometimes help looks like expansion. Just to expand on that for a moment, the balance over the period of expansions versus contractions has been positive to expansions, about 60-40 effectively is the ratio we're running at the moment. So it's another metric which we think is important. So we'll continue to update and report against these retention numbers. I think it's early for us to be providing a guide. We're doing better than we have done in recent history effectively, but we think there's a lot more that we can be doing. And as I say, the pilot projects, retention has improved effectively. It's running above the averages. So that's what's giving us confidence, not just the physical changes, but the resource changes, taking the responsibility from the leasing team effectively across into that team. And if you think about it, Francesca knows these people personally. The CEOs are in our business, in our centers every day. She sees them, she knows them. So now she's empowered to have those discussions as well as part of the wider discussions, and we're seeing the same in Leather Market, and we've now handed that -- we've already handed that across to the other center managers, and we're seeing benefits. So it is a key area of focus for us. Adam Shapton: Adam Shapton at Green Street. Two questions. One -- the first one is technical one on valuation. And I might make a fool of myself with this question. But am I right in thinking that there's a structural occupancy assumption in the valuation that the valuers take and presumably you agree with them? David Benson: I mean they obviously form an independent view. I mean, in our view as directors is obviously, it has to be materially and we have to be comfortable with it. But different valuers take different approaches. We have -- this year, we have 2 valuers. So we have Knight Frank as well as CBRE valuing different parts of the portfolio. They both do Red Book, very similar approach, but slightly different assumptions. So there is -- within there, an assumption around void, yes, for different properties, units, et cetera. The key driver, though, really is the occupancy as we say, contracted rent at the moment. That's really what's driving the -- it's less about the endpoint. It's much more about the fact that the occupancy at the moment is lower. Adam Shapton: Yes. Okay. So my question was, has that assumption changed in the last 2 years? David Benson: No. Adam Shapton: In your statements, you very consistently pointed to where income would be at 90% occupancy, which you might say is leading people to think about that as a structural occupancy number. Is that still right? Is that what your value is assuming? Lawrence Hutchings: So long-term average is that, Dave, is 90%. David Benson: Yes. I don't think there's been a fundamental shift. It's more the fact that we have a new valuer who has a slightly different approach, that's all. Adam Shapton: Okay. That's clear. And then on retentions and renewals, it's great to see the number increasing. If you split out those renewals from your like-for-like numbers, is it -- are you able to say what your renewal rates would be versus previous passing? So I know within your like-for-likes, you've got step-ups, right, and fixed increases within terms. So -- and I know you mentioned there's people increasing and decreasing in GLA, but what's the renewal spread [indiscernible]? Lawrence Hutchings: Typically, we're better to be dealing with the existing customer from a commercial terms outcome than a new customer, typically. Adam Shapton: Sorry, let's say, I'm paying 50 square foot and I renewed, what's the renewal spread, is it -- versus previous passing? Lawrence Hutchings: So it's -- the renewal spread is different. I don't have the numbers at my fingertips. The renewal spreads look different with the smaller units compared to the large units. We're being a lot more pragmatic on large units at the moment, and there's more competition in that large unit space, if that makes sense. So we're being a lot more pragmatic there. I don't have the average with me. But what we know is that small sweet spot of our business, we've got more leverage there, if you appreciate. And we -- the renewal spreads will get the 5% kickers in the -- on the first anniversary, as you appreciate, standard lease model 2 years ,5% uplift year 1. And then effectively, we go to market at -- when I say market, it's not a true market review, but we're able to set a rent at the end of that period. So we -- as I say, we're typically renewing at passing or marginally above is my understanding on the small units, the large units is where we still have some pressure. David Benson: Yes, there's definitely a difference between small and large, absolutely. I mean you can see that in the ERV spreads that I talked about for the smaller units, it's a much smaller decrease. And in terms of -- I think your question around existing versus new deals, we are and always have been very transparent on pricing. Our pricing, you can see it on the website, our customers talk to each other fundamentally. So yes, we're doing some promotions and deals and so new customers may benefit from some of those, but there isn't as big a difference as you might perhaps imagine. James Carswell: It's James Carswell from Peel Hunt. Just on the occupancy, can we just make sure I'm thinking about this correctly. The expansion of Wild Cosmetics and then your own move to Canada, that's presumably in the 80% like-for-like number you bought today and likewise Qube, which I think was post period end. The benefit of that is still to come in the occupancy number. Is that correct? Lawrence Hutchings: Yes. David Benson: Yes. So actually, while the expansion actually is post the end of September, so that's not in the September occupancy number. And you're right, Qube, no, that is not in there either. But neither is -- so they will be taking space in the Old Dairy, but that space is currently occupied. So effectively, we'll be replacing occupied space. James Carswell: Okay. Perfect. And then I mean similar question to Denese, maybe on the conversion rates, I mean, it's obviously great to see it improving. How -- what's the kind of holy grail in terms of the conversion rate, do you think you can... Lawrence Hutchings: Converting 18% roughly, [indiscernible], we have deals that come into the system. We think there's capacity to improve that, get to 20%, get to 22% as I think it's in that sort of league, if that makes sense. The flex industry use a whole variety of different measures. Some are looking at conversion from viewing, some are looking at conversion from inquiry as you would appreciate. So us getting accurate benchmarks is a little challenging. But we think there is definitely further improvement to come from conversion. Well, I think that's fair. Yes. Will Abbott: And I think back to the point of our potential pricing as we start to see occupancy increasing, there will be more aggressive on pricing, which you expect to see coming down. Our priority at the moment is to bring in customers, build occupancy and the point's made already once we've got that customer in place, then we can start to work with that customer, expand that customer. James Carswell: Perfect. And then just final question on business rates. I think I'm around thinking there's some changes to operators and landlords that issue licenses rather than leases. I think you typically issue leases, so it doesn't impact yourselves. But I mean, does that give you a bit of a competitive advantage where some of your peers are going to have to potentially pass it on to customers? Or is that a very different space and not really a market? Lawrence Hutchings: The leases give us an advantage in terms of mitigation, but the -- I think all the pressure that you're seeing at the moment, and I suspect what you're referring to, James, the flexible space organization, effectively owners organization called [ Flexor. ] And in fact, one of our team members is Chair of [ Flexor ] this year. They are lobbying government very, very actively. There's councils approach these things differently as you'd appreciate. There's enough ambiguity in the business rating system to allow for that to happen. But it really has a big impact on those operators that run hot desks. And my understanding of it is that previously, the hot desk flex operators, of which we're not one, as you'd appreciate, have been run an argument successfully with councils that the business rate should only apply to the desks. So -- because that's the least area. So if you go to one of those operators' websites, they're leasing space by the desk perfectly. The fact that it sits in a wider environment with a whole lot of amenity, they've argued that it's really just the desk that should be rated. My understanding is it's either City of London or Camden has effectively argued with one of the other flex operators and imposed a rating charge on them that ignores that and says, no, no, we're charging on the entire floor plate effectively rates. So it's a significant impact, as you'd appreciate. Fortunately, we are not -- that's not how our business operates. We don't run a hot desk model effectively. So it doesn't have a direct bearing on us. As you would appreciate, we do a lot of work around business rates. We have a business rate team. We have people that help us with that. So yes, we're -- this current issue that's getting all the press, it does not have an impact on us. Thomas Musson: It's Tom Musson at Berenberg. Curious, I suppose, just on your sales agent, Elodie. How much does that cost to run? What's the sort of equivalent number of people you might think be required to drive your inquiry levels to the levels that they are? I wanted to just get a sense of the efficiency gain there. And is there a lot more that can be done here going forward with AI and other areas, not just generating inquiries, but in supporting retention as well? Lawrence Hutchings: So I'll get Will to answer some of the specifics around that. I'll give him a moment. But just to pick up the use of -- firstly, the use of AI in the business, which was the last point that I think you made. We are trialing other what we call AI verticals. So we showed you today that we can do in a unit overlay now effectively that helps our customers because you appreciate some of our creatives will look at a blank space and see that is hugely excited, as you appreciate, because they're running a sound studio or they've got a podcaster or whatever it is or they are an influencer and they're creating an infinity wall so that they can promote their product in there. There's so many different uses. So being able to provide a blank space option is, we believe, is important effectively. However, there is also a percentage of the market that doesn't have that special reasoning. They've got a more regular type layer. They want some desks in there effectively. So how do we help them envisage? They look at a blank space. I don't know how many guests I can fit in, I don't know how many people I can get in there, how can we help them at that point on the website, that is absolutely critical. And that's where that AI is helping us. We've also been using AI and space planning, which has been phenomenal. So we take a blank floor, and we say, right, we need to subdivide this into our standard small unit format. That used to take 3 weeks. We didn't exercise a few months ago. It was done in hours. And about 98% accuracy once we gave it the parameters. So that is another area. We think our business should lend itself very, very well to AI applications. We have a very high volume of small transactions that are very similar, as you would appreciate. We're pushing to 120, 130 leasing deals a month, as you would appreciate. I was looking at some numbers from one of our peers the other day, one of our listed peers. We do as many deals in a month as they did in the year. So it's not the same value of deals as you would appreciate, but the deal volume is enormous. So that also would suggest that AI applications will have the ability to make a very positive impact on our efficiency and speed effectively. Just before I hand over to Will on this specific question about the costs of Elodie and what the next evolution of that is, I just wanted to remind you and this is where our customer is so different. I mentioned earlier, we deal with the CEOs and owners of these businesses. They're in and out of our businesses constantly. Typically, they start as small businesses. So we're part of what they call business administration. It's not their core business effectively. They're trying to make money, promote their product, grow sales, deliver the next phase of innovation and what they're doing. So where the bit that gets in the way, effectively, that makes sense there's a bit of administration that we need like VAT returns that they need to deal with. So often we find that they're coming online to us at 9:00 at night or 10:00 at night. They've their dinner sitting at home, I need to deal with my space requirements. So of course, the difference between, we'll get back to you tomorrow and we can deal with it immediately or Elodie can deal with a lot of it immediately and there's further evolutions in Elodie, will make an enormous difference because getting someone booked in, in a competitive environment versus I'll call you back tomorrow, there's a huge -- that could be the difference between winning that piece of business and not winning that piece of business. But I'll hand over to Will. He's the expert in this area. Will? Will Abbott: So the -- on your question about cost, roughly the equivalent cost of one sort of inquiries agent or in fact, less annualized. But importantly, it's not about replacing people. It's about freeing up that team to do higher value work. So first implementation of Elodie was really over the weekend, which is why we saw the big impact on Monday mornings for viewings booked in. So triaging inquiries -- initial inquiries going back quickly, capturing them in that window of opportunity to then pass them on to the team to complete the conversion into the sales team. We have a version as well for meeting rooms. We also have a version for broker interactions, each one trained specifically against the requirements for those incoming inbound queries. We're also training on outbound, which will be something we'll be rolling out in time. And we are just in the final stages of testing our agent, Elodie agent to sit on the home page, to capture that first contact and help people through that initial sort of top of funnel, if you like, conversion. Beyond that, as Lawrence touched on, we are trialing AI in a range of different places, automating campaign creation. We talked about the image creation. So it's something that's absolutely integral to our plans going forward. Lawrence Hutchings: Any other questions from the floor? I'm not sure if we have any questions from the webcast? Clare is going to translate it.. Clare Marland: Just one question. Have -- from Richard Williams of QuotedData. Have we had any dialogue with Saba Capital, new shareholder? Lawrence Hutchings: We haven't, at this stage, met with Saba. We've had some e-mail communication with Saba. We anticipate meeting them at some stage during the road show. But at this point, we haven't any detailed conversations or dialogue with Saba. Clare Marland: That's it. Lawrence Hutchings: Any other questions? There's no other questions for the floor. I'd like to close today's presentation. I'd firstly like to acknowledge the enormous amount of work that's gone into delivering this first 5 months of strategy implementation by our team across the business. And we acknowledge change is a difficult thing. It takes a lot of energy. I think as human beings, we're wired to resist it. So we fully appreciate the enormous amount of change that we're making in the business and the response to the team has been phenomenal. And as you can see from these results, we're very pleased. We know there's a lot to do. We know there's a long way to go, but I think we've made a really strong start. So I just want to acknowledge the team firstly. Secondly, to acknowledge the team that's got us here today, there's been lots of late nights. We fully appreciate. And thirdly, to thank all of our shareholders and the stakeholders, the people in this room for your time today and your continued support. We greatly appreciate it. Thank you. We look forward to seeing you at the next update. Thank you very much. Operator: This presentation has now ended.
Noella Alexander-Young: Hello, and good afternoon, everyone. Welcome to today's presentation. My name is Noella Alexander-Young, virtual event moderator here at Renmark Financial Communications. On behalf of our team, we want to thank everyone for joining us today for ProPhase Labs, Inc.'s third quarter 2025 results. ProPhase Labs, Inc. is trading on the Nasdaq under the ticker symbol PRPH. Presenting today is Ted Karkus, Chairman and CEO. Following the presentation is a Q&A session for which you can participate using the chat box in the top right-hand corner of your screen. That being said, I will now hand the floor over to Ted. Ted William Karkus: Okay. Greetings all. Thank you, Noella, as always. Thank you, shareholders and others, for joining the call. This is our Q3 ProPhase Labs, Inc. presentation to review results and what we are going to be doing going forward. First of all, I have to thank Renmark, who does a phenomenal job of hosting these calls. We do a call like this about once a month so that I can keep investors up to date. I also want to acknowledge Red Chip, who we also hired for investor relations. They work in a collaborative effort with Renmark, and I am really pleased to have Red Chip onboard as well now. Let's just hop to the forward-looking statement very quickly. I am going to assume that you have all read this. Bottom line, everything I am going to say today is accurate as of today. It does not mean that things cannot change in the future. And if they do, there is no guarantee that you will be updated in the future. Alright? But I will assume that everybody's read the forward-looking statement. And with that, and by the way, this entire presentation is available on our corporate website, so you can review it at any time. As most of you know, these are the verticals of ProPhase Labs, Inc. I am going to go into each one of them. Before I do that, and I will probably remind everybody at the end, it is critical and important we have a proxy out there. It is critically important that you vote. If you do not vote for our proxy, you are putting our company in harm's way. It makes no sense if you are an investor and you do not vote your proxy. It is really that simple. So I can understand why shorts do not want you to vote the proxy, there are a number of reasons for this that I am going to go into. I am going to go into the various subsidiaries of the company. Why do not I just tell you at the outset, we are working on some strategic initiatives. The strategic initiatives may be impacted if you do not vote the proxy. The strategic initiatives could recognize significant underlying value in our company. This would be good for all of us as investors. So please vote your proxy. We do have a lot of positive voting going on. But we do need a quorum, and we need everybody to vote. Alright? I will remind everybody at the end of this call too just because it is so important. Talk about it a little bit about the reverse stock split and all that other stuff. Or the potential reverse stocks. But why do not I just clarify a couple of things upfront? We talked about a crypto treasury strategy previously. That is not off the table. But to be clear, I will not do anything that does not significantly recognize the underlying value and assets get the votes. It could impact a very bullish strategy. I hope to update you very soon. On the strategy. And let's just leave it at that. I do not want to talk out of line. I do not want to get too far ahead of myself. I want to go through the various subsidiaries of the company and where we are at right now. The end of this call, I think that you will all realize that there is a disconnect between the market cap and the underlying assets in the company. My job is to recognize some of that underlying value and for the long run so that the stock price goes up in the long run. And so we all make money in the long run. That is what I did before. I turned around the company once before when I first took over. Had a 65¢ stock. Company potentially going bankrupt. I paid out $2.40 in cash, special dividends to the shareholders. And our start flew, and we went into all these great businesses. It is like a deja vu because right now, I am working at exactly the same thing. The only difference is back then, all I had was a brand with declining sales. It looked like I was going out of business. Now we have several assets. Each one of which by itself individually has significantly more upside potential than what called these had at the time. So with that, let's get into the various businesses. So the very first asset I want to talk about is our Crown Medical Collections. Now everybody knows I was talking about that earlier in the year. And everyone's like, okay, Ted. Are you getting tired of talking about it? We are beginning not to believe. But we went through a critically important process that took longer than anyone would have liked, and it was bankrupting COVID lab subs that are not really doing anything now anyway. So it made sense to bankrupt them. It turned out to be a significantly more complicated and cumbersome procedure than I certainly expected. Critical component of that was hiring the right bankruptcy attorney who was independent of Crown Medical to actually be the bankruptcy attorney of record. We found the perfect person to do that. He has done a phenomenal job. I cannot believe the amount of work he did. And finally, just unlike the last week, the judge gave the green light. We bankrupted the lab subs. I reported that. And then critically important, Crown Medical has now been appointed special counsel. The reason that is so important Crown Medical was already reaching out to the roughly thousand insurance companies that owe us money. We are talking about, like, a $150 million of uncollected COVID testing that at one point in time the prior government guaranteed we would get reimbursed for. So part of what got us in this mess in the first place, we built out businesses. Thinking that money was going to continue to flow and all of a sudden it just stopped. All of sudden, we had overhead. Seemed like a rounding error at the time that that became significant. When we got cut off from this funding. So in any event, Crown is now going after that. To be clear, a big part of what we are going after are underpaid claims. These are COVID tests where we submitted to the insurance companies. They paid us, but they underpaid us. Let's suppose legally there was pay us a $125 companies with the balance. We are talking to many tens of millions of dollars. A significant portion of this $150 million. And for not paying what they were supposed to pay. They already reimbursed the claim. They already acknowledged that the patient was a real patient of theirs. They acknowledged that the doctor's requisition order. Was proper, that we turned around the COVID test properly, etcetera, etcetera. So now if they have no defense, and in some cases, Crown Medical may be representing four or five laboratories, in four or five states going after the same insurance company. And if this insurance company happened to underpay, well, five of these labs in five different states, states. It shows a pattern of fraudulent behavior. No insurance company wants to defend a lawsuit that they are not dollars or more, even a million dollars just defending. A lawsuit they are going to lose. So now Crown comes to them and says, hey. Give you and I do not know what the exact percentage discount is. We will give you a 25% discount to settle right now. So they have a choice of taking a 25% discount of paying now or they could spend money on lawsuits that they are going to lose, spend an enormous amount of money in litigation, and then lose the full amount. And potentially trouble damages we can prove fraudulent behavior. So we are in a situation where certainly out of the thousand labs thousand insurance companies, half of them, let's call them the low hanging fruit, we think that they are going to settle quickly. So the key point of all this was appointing Crown Medical as special counsel. That just happened. So while Crown has been preparing to go after these thousand insurance companies, and in fact, scrubbed our data clean. They said we had one of the best, if not the best dataset of any lab. That they are representing. And he said that we we had world class IT. That, collected our data the right way, So we are pristine, and, Crown Medical means business. So the bottom line is Crown was approaching the insurance companies before, but their attitude is when you actually get court approval and you are ready to serve litigation, that is when we will talk. So now the last part of this, in bankruptcy court, what is interesting because in theory, the idea is to get the bankrupt company out of bankruptcy and operating again, They have what is called expedited litigation. You skip over months of pleadings. You go right to meet and confirm meetings, And if they are not successful, you go right to delivery and discovery. So Crown Medical has I do not know, a stack this thick. Of discovery items to serve the insurance companies. And we believe the insurance companies are going to start settling right away now the Crown has been appointed special counsel. So that is where we are at today. Yes. Has it been frustrating? Did I think it could have happened months ago? Absolutely. This was the hurdle we had to get out over, and now things should move quickly. And in fact, we have one small settlement. Not going to go into details. Does not matter. It is a small amount of money. But the point is, now that crown has been appointed special counsel, believe settlements are going to start happening. It is going to change our financial structure pretty quickly. Now I am talking about it a few months. I am going to talk about it in a few days. So we are still going to have to get through the next few months. But after that, once that money starts coming in, if our market cap is anywhere near where it is right now, you can do not know if I am allowed to say this or not. So I will just say I have a history when we have significant casts in undervalued stock. Of buying back stock. That is what I did the last time around, the last cycle around. I bought back a ton of stock. I did two Dutch auctions. We took out everybody that wanted to sell, and we paid dividends. We could be in a very similar deja vu type situation. Again, once the Crown Medical cash flow starts to flow in. We will pay off debt first, then maybe we will buy back stock, hypothetically. And then we will be in a very sweet position. So now we have to put that all into perspective of the fact that I do not know what we have. A $12 million mark cap? We are estimating Crown is estimating and they they are actually telling me they are somewhat conservative. They absolutely believe going to collect at least $50 million net. That is net. Of the $150 million we are going after, giving discounts. They are not going to go after all the claims. Some of them probably are not clean or whatever. They are going to give big discounts to the insurance companies. Taking their contingency fees. The last piece of this Crown not getting paid a penny. They have dozens of attorneys dozens of attorneys working on this. None of them get paid a penny. Except out of the collections. They have been working on this all year for free for us. They would not be doing it if we were not going to collect a lot of money. So that is crowd. So when you look at it from the perspective of I am trying to figure out some team what to do with our company, I see all this cash coming in. So I am funding the company. Principally with debt right now. Does not mean, you know, we will not issue some shares. But the the goal right now we have an ATM. I have never used I have not used the ATM. We we, have a new ATM. You know, I cannot we canceled the ELOC months ago, which we announced. Then we signed up for an ATM. We have not used the ATM yet. I cannot guarantee I am not going to, but, you know, it is based on price, based on our cash needs, it is based on debt availability, etcetera. But we have several companies willing to fund us as needed. Especially because ones that do their due diligence in Crown, are very confident that that cash will be flowing into the company. The other aspect of this is we have or three other subsidiaries that are very valuable. Let let's get out into that a little bit. Think we are going to jump to where our b smart esophageal cancer test. That is in a ProPhase Biopharma subsidiary. I am going to go just straight to this page. I am not going to do a a long detailed presentation of this. I am sure most of you have heard this before. The bottom line is esophageal cancer is one of the deadliest cancers. We have what we believe is the best diagnostic test in the world for one of the deadliest cancers. It is that simple. The reason it is one of the deadliest cancers is because it is not diagnosed accurately. We take an inaccurate diagnosis and make it accurate. It is that simple. That is the beauty of it. We are basically enhancing the endoscopy. The standard of care you are at risk of cancer of of esophageal cancer is an endoscopy. An endoscopy an endoscopy is where they stick a tube down your throat and remove. Tissue specimens and study them under a microscope. Two pathologists study the same specimen under the same microscope. One will tell you you have esophageal cancer. One will tell you you do not. All we are doing is we are taking that specimen. Running through our mass spec machine with the a a you know, associated AI, etcetera. We have patented the key eight proteins that are virtually always when you are developing esophageal cancer. So it is a no brainer. Take one of those specimens. So the interesting this is such a convenient test in critically important to physicians And broad scale commercialization is the convenience of There is nothing more convenient than our test because this is for patients already getting the endoscopy. So the roughly 67 and 67 million endoscopies in The United States alone, and this is a global problem. This is a growing problem around world. And so there is 7 million of those industries. They are just for people at high risk of esophageal cancer. We believe every one of those 7 million endoscopies should add our test onto it. If they did, they will get a significantly more accurate diagnosis. It would make no sense not to. If we get reimbursed hypothetically, a thousand to $2,000, that would make our test a 7 to $14 billion target market test. It is that simple. And the last piece of this is we are partnered, ventured with Mayo Clinic. We own the test. We have, doctor Chris Hartley, and, he indicated he wants to get more involved. He is at Mayo Clinic. Have doctor Joe Abdul, one of the scientists who invented the test. We have James McCulley. He is the CEO of another biotech company with significant experience with commercialization. Are all people working with us now. Others. And as the cash flow comes in, from our Crown Medical initiative, be able to fund this. No problem. And we are not talking about a big budget. I am looking at a small budget. Just to develop the test for the next year, get it to a point where a multibillion dollar cancer testing company wants to take us over or joint venture partner with us. You know, why build out a huge Salesforce if someone else already has one and just sort of a plug and play plugs in our test? And all of a sudden, you know, it is doing hundreds of millions of dollars a year. And we got a 7% royalty. We get, I know, We got a block of money upfront. We we could get a block of money upfront twelve months from now that is five times the current market cap of our company. So that that gives you a little bit about our be smart esophageal cancer test. The key point is we just highlighted a press release in the in the last week or so. Got into a major journal. The reason the major journal was important is that is where the key opinion leaders in the industry study our clinical study and gave it a thumbs up. And said, hey. We are all in. This is a great test. It should be commercialized. Now that we got their good seal of approval, so to speak, can now work on commercialization as what is called the laboratory developed test or LDT. FDA decided that they were not going to oversee laboratory developed tests. We have cleared the FDA hurdle. Good to go. So I am really excited about this test. And let's let's move on. Our next opportunity would be our Nebula Genomics DNA complete. We completely turned the business around. George Church founded it. I am not going to do a lot on this. Except to say, that we completely cleaned up the business led led by Jason Karkus, He we shut down the laboratory. We cut out such a large percentage of our expenses and overhead. As I said, we shut down the lab. We have a highly Jason, had a highly efficient lab to do our testing now. Which makes our business a pre you know, it is primarily a direct to consumer business now. We went from a lifetime subscription to you buy a one year then you renew it the next year. We found that the conversion rates were virtually identical to the lifetime. And so by selling it one year, it means next year, most people renew. That is a that is a subscription. That is a revenue for us. That we do not have to pay anything for. We already have the data. We are already doing the reporting. We already have the IT. So the profit margin on the subscriptions that come in in year two, the subscription renewals, is probably, like, 95%. So we are roughly a breakeven business now, that on a pro form a basis, will be profitable. And now as we clean up our finances, we will be able to grow this business dramatically. Because we have one of the best reporting systems in the world. We have one of the biggest database in the world to leverage. You know, we tested in over a 130 countries. Over 60 over 60 or 70,000 whole genome sequencing. It is the equivalent of 150 million ancestry tests. Our database alone is is worth more than the mark market cap of our company, although we could not sell it by itself. For political reasons. Because you cannot sell somebody's data. But, of course, somebody could buy the company, what I want to do right now is build this business. So it gives you a little bit about our businesses, We have a dietary supplement business that we could potentially develop. We will we will see. I am trying to keep the business the our company as clean and mean as possible, as lean as possible. Not going too many different directions. I am not looking to go in more directions. Crown Medical collect a lot of money. Pay off our debt. Develop our esophageal cancer test, grow our nebula business, Our company could be worth 10 or 20 times worth trading right now. That is the opportunity. So that said, I will go to, you know, the investment highlights. Again, earlier this year, we completely restructured the company. Sold our a formalized manufacturing facility. Down our Nebula Genomics laboratory, We dramatically reduced headcount. We significantly reduced IT and related overhead. And we are now working on not just the reverse crypto treasury strategy, but we have another initiative that could be very exciting that recognizes the underlying value of our I promise you, if I do a deal like this, I am going to do this, because it is going to make all of us as shareholders a lot of money. Otherwise, there would be no reason to do it. So that is where we are at. Reviewed the Crown Medical Collections initiative. I am looking forward to when that cash flow starts. Once that cash flow starts, we are a different company. So if you are worried about the stock price now, we have shorts in there. You know, I I think we have a lot of shorts in our stock right now. Really sort of silly. And will that change as soon as the Crown Medical starts to flow? As I mentioned, we we did already get one small check. You know, it is not worth talking about. The point, is we have turned the corner. We have gotten over the last hurdle. With the bankruptcy courts. We went through BSmart. DNA complete, Nebula Genomics is well positioned. We do have potential our dietary supplements. But I want the cash flow if we are going to develop that business. And so now let's go to I have some other things that I want to mention. In fact, we will we will get to the questions. But before we get to the questions, I wanted to mention somebody talked about our working capital deficit. To be clear, that is an accounting item. When we bankrupted the lab subs, the accounting for those lab subs change. The assets and liabilities, the timing, change between what is current and what is noncurrent. It created this ridiculous amount of negative working capital. Obviously, it is ridiculous. We are losing tens of millions of dollars. So, obviously, that was an accounting. It is a balance sheet item. It is it is not affecting us in real terms. It just it is just accounting terms for bankrupting some. The other thing I will mention to you is that the a lot of the negatives in the quarter that is related to amortization and depreciation. Stock based compensation, You know? And for those of you you question whether I get stock options and that kind of thing, to be clear, for most of the year, I voluntarily and Jason did too. Deferred most of our salary. Just to help the company. I did not collect an interest rate on it. Alright? I did make one loan to the company earlier in the year that somebody questioned me about. To be clear, had I borrowed that money to make the loan to the company, just so I could get others to invest in the company and make them senior secured to my loan so that they would feel good. I did that to help the company. So, you know, people question, oh, you got a high interest rate on the loan. I number one, I borrowed the money. Number two, I put myself at risk. Number two, three, did that for the company. And number four, I I deferred a significant amount of my salary this year. Nobody is paying me to do that. Okay? So I am doing this all for the company. I am all in. I hope those that are listening are all in too. So hope that addresses that. I do want to get back one more time about the voting. We may do a reverse stock split. We may have to. But understand our stock price just went from trading $50.60 cents to 25¢. We have a market cap. I do not even know what the market cap is. It is around it is just over, like, $12 million or something like that. Let's see. Yes. It is, you know, some kind of number around $12 million. Where is the stock going if we do a reverse stock split? Well, you have to understand that sometimes with reverse stock splits, the stock price actually go up afterwards. Because the only reason when it is fully discounted before you do the reverse stock split and then all the shorts have to start to cover. Because there is no reason to be short anymore because reverse stock split happened. Also, you have to put it into context of the value of the company. With companies most companies, the reason why the stock prices may go down after the reverse stock split is because they were going down anyway. If a company is going bankrupt and they are going out of business, then sure, their stock price is going to go down. They are going to do reverse. The stock is going to continue down. See, it will happen all the time. But real companies like ours that have enormous underlying asset value they do not have to go down after the reverse stock split. In fact, if we do a and there is not a guarantee. If we do a reverse stock split, it is quite possible our stock goes up. I was talking to one large shareholder. Involved in a company. The stock symbol is o e s x. They did a reverse stocks when the stocks done nothing but go up afterwards. Even in during this this correction in the bull market over the last couple of months, stocks been doing nothing but going up. After the reverse stock split. So in our case, you know, we have a mark cap of $12 million. Our stock's just been cut in half. After filing the proxy. And we now have crossed the hurdle with Crown Medical With the collections, it is now visible. We can now see that the collections are actually going to start to happen. And so after the reverse, understand whatever the number of the reverse is, we are going to have the same market value. Your shares are still going to own the same percentage of the company. And if the Crown Medical starts to kick in, if the stock's anywhere near these prices, I will buy back stock and take it up dramatically higher than where it is now. So after the reverse stock split, whatever the equivalent is, I will take the stock up from there with buybacks. As enough you know, once enough cash comes in and we are paying off our debt. We have excess cash. And I should not say definitively I will do that, it would be a no brainer to do that if the stock's not undervalued. As I said, have a history last time around. When I did this. I sold the Goldie's brand. I did exactly the same thing. Your stock was 65¢. We sold the Caldi's brand, and I did two Dutch auctions. Exact same thing. So I do not I this is Deja, but I do not mind doing that again. Do not be so scared of a reverse. Now if you want to be scared of a reverse stock split when or stocks that 75¢ maybe, or 80¢ or a dollar. Oh, is he going to do a reverse or not? Or stocks? Trading under 30¢ a share. It has got a $12 million market cap. It is silly. So I just want to put it in that perspective. The other thing critically important, I am working on strategic deals besides the crypto treasury strategy. I am working on another deal. We have to maintain Nasdaq compliance the likelihood of doing a deal that is going to attract and increase the value of our company and make our shareholders money, going to be difficult to get a deal done if we are not Nasdaq compliant. So it would be silly not to be Nasdaq compliant. I need every person listening to this call please vote for the proxy. Otherwise, own the stock. What is the point of owning the stock? And then not voting to help the company do well? That is the point of voting. So please, please, please vote. Okay? And I am sorry I have to do this, but, you know, the voting ends at the end of the week. We are close, but we are not there yet. So every last year, it makes a difference. I feel like I am a politician now. That is it on the voting. That is it on talking about the reverse stock split. Let me just see Why do not I, turn it over to to questions? Actually, it is exactly 02:30, so that is when I normally turn it over to questions anyway. Noel, please, I will hand it off to you. Thank you all for your time. Noella Alexander-Young: Thank you very much, Ted, for the presentation. We will now begin the Q&A. Your first question is, based on your press release, it sounds like you are potentially working on two or more different major that could increase shareholder value. Can you clarify this? Ted William Karkus: Yeah. So and by the way, it is potentially more than two. We have the reverse crypto strategy. Understand crypt crypto so volatile right now and crypto treasury stocks that did reverse mergers are somewhat out of favor. There is no hurry to do something like that. But as I mentioned, though, if significant cash comes in when significant cash comes in from the Crown Medical Initiative, we could use that cash. That would be nondilutive. If we develop the crypto treasury strategy around that. Where we generate income, off of the crypto And I am telling you, there is no question. Is going up in the long run. It is not even question. But I am not I do not need to be a gambler with the company either, and I do not need to do a reverse crypto strategy right now. So we will we will see. That was on the table. But with crypto market where where it is right now, we will see. There is potentially a very attractive deal that we could do when crypto was higher. So but we will see. In the meantime, another and this is relatively recent has developed just do not want to talk more about it today, but I will be updating shareholders. If I do that deal, it will be very positive for the shareholders. Alright? And so we will see where it goes. I do not want to get out of line and say too much too soon. There is no guarantee. I am going to do the deal. But it is certainly interesting. It is something we are pursuing. Number three, now that we were published in the journal for our b smart esophageal cancer test, our scientists are being approached by a variety of companies, cancer testing companies, and others that want to either get involved, joint venture, acquire, whatever. Alright? So we have that going on. So we have that going on with the subsidiary, then I have the deals I just described going on with the whole company. So there is a lot of potential there. I am going to do what is best for the shareholders. Even though I got diluted with everybody else, I am still a large shareholder. I care about the value of our shares ultimately. For the question. What is the next one? Noella Alexander-Young: Thank you, Ted. Next, if you were asked, it looks like you made you a reverse stock split. If you do it, is it possible that the stock price will go up or down? Ted William Karkus: Exactly. So if, you know, if the stock price was a lot higher right now, could it have a little risk? I guess it would still be undervalued even if was double. Right? But with where the stock price is, what is the downside? Is it going to do? It is going to go from a $12 million cap to $11 million market cap? Then the Crown Medical, $20 million is going to come in, and I am going to buy back half the shares outstanding in the company. And my stock will be twice or three times worth trading on a on a split adjusted basis. This is all silly. A reverse stock split in and of itself is not something to be scared of. What is more to be scared of is if we were not Nasdaq compliant. We have a lot of value in the fact that we are a Nasdaq company I want to stay a Nasdaq company, and we will see what happens. Earlier in the year, if Crown Medical had kicked in earlier in the year, my guess is we might not have to do the reverse. We, you know, we might be trading around a dollar an hour more. It is quite possible or probable. That did not play out that way. But having said that, even in a dollar, we might have done a reverse. When we are talking about the reverse I am sorry. Crypto treasury strategy, they were thinking that they wanted a higher stock price, and they might want us to do a reverse anyway even if we did not need to. So I do not want to go more into it than that. But stock prices sometimes go up after the reverses. I gave you one example of that. I like to think ours would be one of them. If nothing else, all the shorts out there, you know, they would probably be running for the hills afterwards when they see there is you know, nobody left the seller, the market cap is so low. That is not a guarantee. I do not know what is going to happen. I can just tell you the reverse stock split in and of itself. Your percentage of share ownership does not change. The market value of the company at that moment does not change. And the upside from here for our market value is incredible. Thank you. Noella Alexander-Young: Thank you for the clarity, Ted. The next question is, from the recently released financial earnings reports and statements I see that M and A discussions unrelated to the crypto treasury strategy are being explored. Does this mean the crypto treasury strategy remains part of the company's strategic vision going forward? Ted William Karkus: Sure. So I think I just answered all of those questions. I do not think we need to spend too much time on that. Again, everything is possible. I only want to do something accretive for the shareholders. That is the goal. And I happen to have another deal that could be very accretive for the current shareholders, I think everybody would very I just do not like talking too much about it because it is premature. So but I just want you to know, though, we have to be Nasdaq compliant. That is the that is why everybody has to vote. Alright. Thank you. Noella Alexander-Young: Thank you, Ted. Your next question is, $100,000 in the till unable to use shares for cash how do you plan to pay employees and board going forward? Ted William Karkus: Sure. So amount of cash we have on hand right now is about the same amount of cash we have had on hand every month and every quarter all year long. Have multiple investors, large investors, that want to support us. With various types of funding up options. You know, we did a a $3.8 million debt deal once before. We we can always take out more debt. You know, there are we definitely have a number of options out there. People that want there are definitely large investors out there that see the underlying value. And I will use all potential financing strategies to support our company. Whether whether it is you know, debt or equity or combination or what have you, we are in really good shape from the point of view that we have such a strong underlying asset value. So financing until the Crown Medical comes in, that is not the issue. The issue is is is what form we take. Debt or equity. What the terms are, etcetera, etcetera, etcetera. Noella Alexander-Young: Thank you, Ted, for that response. Next, we And let me just add to that. Ted William Karkus: Whatever we do right now, once the Crown Medical comes in, even if we hypothetically issued shares, my goal would be to buy back all the shares. The stock price anywhere near stock price, I will buy back. I would not be afraid to buy back 10 or 20 or 30 or 50% of the shares outstanding in the entire company. And I I really do think that way. If we are a stock undervalued and the cash is coming in, so that all gets fixed as the cash comes in. And that is separate from the fact that, as I said, you know, our beeswort esophageal cancer test could be worth 10 times our market cap 12, you know, twelve months from now. Literally, or less nine month nine, twelve months from now. Just our esophageal cancer test alone could be worth 10 times the current market cap of our company. Think of that as a concept. You got Lucid as a $105,150,000,000. Market cap. Their test if you test positive on their test, you then have to the next step is to go get an endoscopy. They are not even competition. It is kinda like I I compare it to testing where you get the rapid antigen test, test positive on the rapid antigen test, the next step is to go get the higher, more accurate, you know, reading from the PCR test. Well, this is the same kind of thing. On their test, the next step is get an endoscopy, We make the endoscopy die diagnosis significantly more accurate. So and and they have a market cap, you know, We should be once we commercialize, we should have a significantly greater market cap than they do. And, again, just if we achieve their market cap, it would be more than 10 times the current value of our company. Thank you. Noella Alexander-Young: Thank you, Ted. Next, Vi was asking, how are you going to prevent delisting from stock exchange without a reverse stock split? What needs to happen to get the price above $1 for a month? Ted William Karkus: Sure. So first of all, it does not have to be above a month. It is for ten trading days. Number two, this deal I am working on, quite frankly, I could take the stock over a dollar very, very quickly. And number three, but I would like to have in my back pocket if we needed doing the reverse stock split. Which is why you have to vote. And number four, we need the vote because I need to give the other companies and bankers that I am working with confidence that we will remain on Nasdaq and be Nasdaq compliant. So we need to vote for that even if we do not do a reverse stocks. What we need to show we have the votes to do a reverse stock split if necessary. Otherwise, that could derail some of these potential deals. It could be great. So again, I do not I do not know how to emphasize this, strongly enough. Because I do not know the random people out there that own stock. But because if it is in a brokerage name, we do not get those lists or if we get the list, we do not get the contact information or you know, we you know, you have to book your shares. And so please do it through the brokerage firms. They typically will send you an email or you just go online. And you can vote very easily. Alright. Thank you. Noella Alexander-Young: Thank you, Ted. Your next question is, when will prophase go up stay up, and what might be the ceiling? Ted William Karkus: Think I have answered that question so many times. People are going to be upset with me if I answer it again. Noella Alexander-Young: Nope. I will move on to the next one. The stealing is the company could be worth 10 times where it is trading today. Eighteen months. Okay? And that is not the ceiling. Just you know, I was thinking about this because I was thinking about it for myself with all the shares that were issued in the last year and how I got diluted. And I was just thinking, you know, our esophageal cancer test in in three or four years would be you should be worth a billion dollars. So you know, easily, that that means that this like, a $20 even with a little more dilution, even if we have 50 million shares outstanding. A billion dollars means we would have a $20 stock price. We currently have a 26 at stock price, 27. I do not know what stock's trading today. Alright. Could you imagine that? We are trading under 30¢, so we could be at $20. And understand if if we do a reverse stock split, the ratio of where we are, you know, that potential percentage, it would still be the same. We do a reverse stock split. It does not change. The market cap the value of it will still go up by multiple of of 20 if we go to a billion dollar markup one day. Now that may sound like a pipe dream today, but by the same token, once before, I took over, I turned around a company that was 65¢ and went over $10 a year. Actually, it went over $13 a So, actually, that went up 20 times. So do not think that I cannot do the same thing with the company that we have now. Since the underlying assets of our company are much more valuable now. They were before. Noella Alexander-Young: Thank you for the clarity on that, Ted. The next question is, what is the accurate share count slash market cap of the company presently? Ted William Karkus: Sure. So, you have to go by the reported numbers. It is I believe there are $4,046,100,000.0 shares outstanding that is reported do not know what the stock price is today. So at 25 to 30¢, know, we are we are talking about around a $12 million market cap. Noella Alexander-Young: Thank you, Ted. Next, a viewer is asking, the share price keeps slipping despite shareholders' patience. When will management take decisive action to protect and grow shareholder value? And how do you plan to address the ongoing decline? Ted William Karkus: So I think I have already answered that question ad nauseam. At look. At the end the day, do not control the stock price. You know, it I I think shorts are having fun with it right now. I think it is silly. Any any portfolio manager out there, likes to invest in penny stocks, I do not see how they do not buy the stock right now. And having said that, the bottom line is you just have to be patient until cash flow starts coming in from Crown, Medical Initiative, or partner on our b smart esophageal cancer test, or we do a strategic initiative an m and a type transaction, whether that is a reverse merger or similar. That brings out the value in our company. Any of those things would drive our stock price significantly higher, in my opinion. Noella Alexander-Young: Thank you for that response. Next question. When will the company stop mentioning the possibility of collecting $25 million in accounts receivables? Ted William Karkus: I think that is a question out of frustration We did not anticipate it would take that long to bankrupt the lab sub and get going. But now we have done it. We crossed that hurdle. So however long it took it took But now we are in expedited litigation going forward. Crown is skipping pleadings. They are going right to meet and confer. They already have hundreds of insurance companies lined up. They are going right into meet and confers right now. And now all of a sudden, it is like a hockey stick. Going to start seeing some settlements. In a couple of months. Do not know the exact time frame, and then it is going to go like a hockey stick, I believe. It is just going to ramp up. We are going to have significant cash flow. We are going to be a different company once that happens. You want to wait for that to happen? You can wait for that to happen. Maybe the stock is you know, double or triple where it is now. You know, once you see the visibility of that happening. I mean, what where are we going on downside here? You know? It is kinda silly. Hope that answered your question. Thank you for that response, Ted. Noella Alexander-Young: Next question. Given the need for capital to fund BSmart, is it realistic to use a go it alone strategy with regards to BSmart? Does it make sense to consider partnering the asset? Ted William Karkus: That is a good question. So my thought is as some cash flow comes in from Crown, I do not ever want to be in this financial position again. It is not fun. Honestly, it has been the worst year of my life. In terms of managing a company. With the financial pressure I have been under. With the pressure the stock price has been under, So I have no intention of ever being in that type of situation again. I am not going to spend a lot of money developing our esophageal cancer test. The idea is to kick it off the ground, do sort of a grassroots told you we have we have some world class scientists and commercialization experts that we are working with. We are going to get more key opinion leaders involved. We are going to get networks to sign up. Like, if we find one decent sized physician network, we will get them taking you know, using our test. With the great results they are going to get. It then will spread like a hockey stick. As it spreads like a hockey stick, then the goal would be the joint venture. I look. I might be able to joint venture now. I do not know what they pay us. They might give us 25 or 50 million of cash. Plus a royalty. Would not be so bad. By the same token, they might give us a couple $100 million and a bigger royalty if I wait twelve months. So, you know, we will we will see. But there is interest now. Think that the interest is going to as we start penetrating the market even a little bit, all these other cancer testing companies that that have an esophageal cancer test, or a developing one are going to be very nervous. In fact, to be honest with you, I already know they are getting nervous because the day we published in the journal, that very day, one of them contacted us and said, hey. Let's talk. So we will we will see we will we will see where it all goes. No guarantees that I am going to do anything short term. I do not think it is necessary. But by the same token, I am not going to break the bank and spend a lot of money to develop this right now. It is just not necessary. Noella Alexander-Young: Thank you for that response, Ted. Next question. Do you anticipate that the recent weakness in virtual currencies provides an opportunity to the company's strategic initiatives given you have not yet purchased a significant amount of virtual currencies? Ted William Karkus: Yeah. So, obviously, you are talking about, the cryptocurrencies. But if we are not going to do a deal see, we were talking we have been talking to crypto asset managers where we would do sort of well, I do not want to go into details on it. If we do not do a deal like that, but instead we were just going to invest long term a crypto treasury strategy we have to wait until the Crown Medical collections come in, and I would want to pay off debt first. Get the company financially sound. And then if with excess capital, maybe put together a a long term strategy. But there is a lot to go before we would there is a lot to be done before we would go it alone. With that type of strategy. But for now, is it possible? Yes. It is always possible. Right now, also, the markets are not excited. If you are not the number one leader in a particular crypto, then struggling. So for instance you know? And even the ones that are the leaders are struggling from the point of view, you know, that when the crypto goes down in price, you know, the stock price is going down. In terms of a multiple to net asset value, if you go back at the beginning of the year, you know, they were trading at two or three times net asset value. Now they are trading at net net asset value. And if you are not one of the leaders who are often trading at a discount to net asset value. So, again, I pay attention to that. I am I am not going to do a deal for the sake of doing a deal. There is no reason. Have so much underlying value in our company. We have so much potential. That we can also go it alone. So or we can do a different type of deal that is not a crypto related deal. What I was trying to explain in my press release. It is not that we might not do a crypto related deal. That is not that is not our number one focus right now. We have better opportunities out there, we believe. Does not mean that that cannot change in the future. We believe we have better opportunities right now. Noella Alexander-Young: Thank you for clarifying that, Ted. Your next question is, any update with respect to linebacker there any potential value or future updates with regards to the line to linebacker expected? Ted William Karkus: Wow. That is an interesting question. That we have not been doing much with linebacker. I am not looking to break the bank on something that is so early stage. That in very early studies, has potential that was exciting to me. But that is very different from something that is a late stage ready to be commercialized. It is it is so want to say more about that. I am surprised somebody even asked that question. Let let's just leave it at that on on that topic for now. Noella Alexander-Young: Thank you for the response on the last head. Your next question is, has there been any insider stock purchases this year? Ted William Karkus: Have there been insider I do not know. That that would probably have to be you know, filed obviously and by insiders The one person that is really an insider is me. And, you know, the directors and quite frankly, I deferred a lot of my compensation It it did not put me in a great financial position to also be buying stock. And in fact, I loaned the money loan money to the company. So I I that was my way of supporting the company. And as far as the directors are concerned, we are the same thing. They are actually rather than taking cash compensation, they primarily and I do not want to speak out of turn around and know the exact number. They they took a lot of stock compensation or stock option compensation in lieu of some of their cash compensation. I I think that is putting their best foot forward and also showing support for the company and belief in the company. Noella Alexander-Young: Thank you, Ted, for that response. Your next question is, how many DNA test kits have been have you processed so far in 2025? Ted William Karkus: Oh, I do not know the number off the top of my head. I am not going to look that up now. But what I will tell you is since we have been on a tight budget, without us virtually doing any advertising at all, we have such a strong SEO presence that is called search engine optimization. It is you know, we have been in the business eight years. We did this the right way. We did a lot of great marketing. But we are frankly, right now, we are at a very tight budget, and I do not want to dilute shareholders unnecessarily to grow a business. So I am sort of laying low, until we get more capital in, but with virtually no advertising. We are still selling the product. We are selling the product in the beauty is it is, at a pro form a base, it is actually profitable now. We have restructured it that much, and we made it that clean. It is great business. For us to grow as soon as we get a little excess cap. I want excess capital to really grow that business. So, like, in a few months, I think we are really going to start growing the business in a nice way. Way. Noella Alexander-Young: You, Ted, for shedding some light on that. And I think we have time for one more question here. So the question is, do you think is the disconnect between the market's valuation of the company and the underlying assets? You have referenced the value of the underlying assets and the disconnect What do you think specifically is the main cause of this disconnect? Ted William Karkus: That is an excellent I was going to say I hope it is a good question. That is an excellent question. That is not in a snowball question either, but it is a really good one. I believe the disconnect is because we are tight on cash. And so every time I go, to potential investors, quite frankly, there are a lot of sleazy people in the investment world, and it is really disappointing. If I talk to three and potential investors, one of them is going to short the stock and then make me an offer a week later. You know, everybody knows that we are tight on cash. We have been tight on cash all year. That all changes and we are frankly we are a develop so we are development stage company tight on cash. It makes us an easy short target, especially if we go to investors and some of them want to fool around with the stock price. That will change as soon as the crowd medical starts flowing. That plus our stock price has been under a dollar. So so the stock's just been under pressure. But you got to understand, are you a trader? Or are you investor? If you are an investor, look at the underlying value. Even if there was a little more dilution, so what? Our market cap is so low. That once the Crown Medical starts to flow in, or even without the Crown Medical, If I do a deal for our b smart esophageal cancer dose, we will a block of cash up front. I will I will probably start buying back stock immediately. Our stock would explode on that if I do a deal like that. And separately, I am working on a potential deal right now. Again, it is it is preliminary. Do not want to talk about it more. But I the that disconnect will start to go away. Fact that there is a disconnect creates an opportunity for potential m and a strategist and bankers recognize that underlying value in that disconnect. So it actually creates an opportunity. And because it creates an opportunity, that is why we are getting inquiries. Both not only to me, but the scientists at be smart and esophageal cancer test, etcetera. Noella Alexander-Young: Excellent. Thank you very much, Ted, for all of your responses today. That concludes the Q&A session. Before we go, I will turn back the floor to Ted for final remarks. Ted William Karkus: Noel, thanks so much. Again, thank you, Renoir, hosting. Thank you to the shareholders. I know he said it six times today. I feel like a politician today. If you are a shareholder in the company, if you are an investor in the company and you do not quote the shares, then do not complain to me. If we have an issue because you did not vote your shares. So vote vote your shares. Alright? So that we have the flexibility to do what we need to do if we need to do it. It is not just the flexibility. For a reverse stock split. It is also based on potential deals we are working on The bankers are going to want to see that there is not a risk that we are always going to be Nasdaq compliant. It is possible we do a big deal. And the stock price will go over a dollar anyway. But whatever I am working on, we need you to vote the proxy in order to pass. We would not have put the proxy out there if we did not need to. There is no guarantee we are going to. We are not going to do a reverse stock split. But even if we do, they are quite frankly I think there is a good probability that our stock price goes up. After we do the reverse. Does not necessarily have to go down. And it is not a bad thing. Guarantees knock on wood, they remain Nasdaq compliant. Being Nasdaq compliant is is a value to the company. Look. If we got delisted, it is not going to change the value of the company. It is not going to change the value of what we are doing. And then when we go back above a buck, we do a deal. We will go back on Nasdaq again. But why go through all that? And at the same time, I am I am working on some deals that you know, some things that could be very, very exciting for the company. Where all the shareholders make a lot of money. So it is silly not to vote. I cannot stress that strongly enough. That, I appreciate everybody joining the call and listening to me today. Everything I say is from the heart. It is from living and breathing our company twenty four seven. I am a fighter I did this once before. You know, a dozen years ago. With the very same company when I inherited it. I say inherited, I did this I won a proxy contest, two years of litigation. So it was, you know, a serious fight. To win control of the company and find out I was in control of the company that was virtually going bankrupt, turned it around, You know, it took a number of years. So I have done it before. I can do it again. I am going to do it again. And we are in a similar position, but, again, the assets in the company are multiples of what they were the last time I did it. So I am going to do this. And if you guys are patient with me, I think that I can I and our company and not just me, it is Jason, He built the COVID testing business into a multi $100 million business? He is now cleaned up the Nebula Genomics business. And you know, we have these great businesses. And so I am just looking forward to the future. Do not have more to say than that. Everybody have a great day. Thanks for all your questions. Thanks for listening to the hour. Noel Noella Alexander-Young: Sorry. I cut you off there, Ted. Alrighty. Well, thank you everyone for joining us today for the ProPhase Labs, Inc. third quarter 2025 results. ProPhase Labs, Inc. is trading on the Nasdaq under the ticker symbol PRPH. The playback wave will be available on our website twenty four to forty eight hours after this presentation under the VNDR Loughby tab. Tuned for the next quarterly call, and see you next time.
Operator: Good day, and thank you for standing by. Welcome to the Dycom Industries, Inc. Third Quarter 2026 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' 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. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ms. Callie Tommaso, Dycom's Vice President of Investor Relations and Corporate Communications. Please go ahead. Callie Tommaso: Thank you, operator, and good morning, everyone. Welcome to Dycom Industries, Inc.'s Third Quarter Fiscal 2026 Results Conference Call. Joining me today are Dan Peyovich, our President and Chief Executive Officer, and Drew DeFerrari, our Chief Financial Officer. Earlier this morning, we released our fiscal 2026 third quarter results, along with certain outlook information. We also announced a definitive agreement to acquire Power Solutions, a premier data center electrical contractor in the Mid-Atlantic. Both press releases and accompanying materials are available in the Investor Relations section of our website. These materials, which we will discuss during today's call, include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our discussion and these statements reflect our expectations, assumptions, and beliefs regarding future events and are subject to risks and uncertainties that could cause actual results to differ materially. A detailed discussion of these risks and uncertainties is included in our filings with the SEC. Forward-looking statements are made as of today's date, and we undertake no obligation to update them. Additionally, we will reference certain non-GAAP financial measures during today's call. Explanations of these measures and reconciliations to their most directly comparable GAAP measures can be found in our press release and accompanying materials. With that, I will turn the call over to Dan Peyovich. Dan Peyovich: Good morning, everyone, and thank you for joining us. Today marks a pivotal moment for Dycom Industries, Inc. We are announcing both a record-setting third quarter that reinforces our leadership in telecommunications infrastructure and our agreement to acquire Power Solutions, which immediately positions Dycom Industries, Inc. at the heart of the explosive demand for digital and AI infrastructure. I will start by reviewing our third quarter results and then move to further discuss our pending acquisition. Our third quarter performance was exceptional. We delivered all-time record revenue of $1.45 billion, an increase of 14.1% compared to Q3 FY 2025. Adjusted EBITDA was $219 million, and EPS was $3.63, both setting new all-time highs. Adjusted EBITDA margin was 15.1%, a 169 basis point increase over the prior year, and our DSOs were 105 days, an improvement of fourteen days year over year. Our backlog was $8.2 billion, an all-time high with strong diversified bookings throughout the quarter. As a result of our strong performance, we are increasing the midpoint of our full-year revenue outlook, expecting revenue of $5.35 billion to $5.425 billion, representing a range of 13.8% to 15.4% total growth over the prior year. This outlook excludes any results from the pending acquisition, expected to close in our fiscal Q4, as the impact is dependent on the date of completion. Looking forward, telecommunications demand drivers have never been stronger. Fiber-to-home builds continue at a fever pitch and will further accelerate next year. The demand for fiber infrastructure to support data center growth continues to strengthen at an incredible rate. Our strong market position is validated by deepening engagement across our customer base. We are seeing robust activity from our long-standing traditional carrier partners, complemented by accelerating demand from the world's leading hyperscaler providers. We believe we are in the very early stages of a generational deployment of digital infrastructure, and we project that the construction of new outside plant data center networks will begin a significant ramp-up in calendar year 2026, leading to substantial growth throughout calendar 2027 and well into the future. Crucially, these are highly complex, large-scale builds that require specialized expertise. This complexity favors Dycom Industries, Inc., given our scale, national footprint, and sophisticated operational capabilities. We are exceptionally well-positioned to capitalize on what we estimate to be a $20 billion addressable market for outside plant data center network construction over the next five years. I want to emphasize that this significant $20 billion opportunity is separate and distinct from any potential opportunities related to our pending acquisition, which provides an even broader and more substantial foundation for our future growth. Our wireless work remains strong, with the current build programs going through calendar 2027, positioning us well for future equipment upgrades or densification. BEAD is close to becoming a reality, with revenue currently projected in Q2 of next fiscal year. Just yesterday, the NTIA announced it has approved final BEAD deployment plans for 15 states and three US territories, and one state, Louisiana, officially has access to its BEAD funding. NTIA approval is one of the last steps before states can start signing contracts and projects can get underway. $29.5 billion in total spending is expected from the states and territories based on preliminary subgrantee results, split between grants and subgrantee match amounts. Of that, $26 billion will be used to serve roughly two-thirds of total locations with fiber or HSC infrastructure, creating a large addressable market. And importantly, we are seeing the benefit of our positioning. We have already secured over half a billion dollars in verbal awards related to BEAD deployments, which is not yet reflected in our backlog. This speaks to our strong ability to capitalize on the significant spending on fiber and HSD networks over the next four-plus years. Lastly, underpinning it all, we continue to grow our service and maintenance business, which is a recurring and durable component of our annual revenue. Subsequent to the quarter, we executed additional service and maintenance agreements totaling over $500 million. While these agreements won't be in our backlog until next quarter, they demonstrate our ability to maintain our position as a service provider of choice while prioritizing profitable growth and shareholder return. Transitioning to our pending acquisition of Power Solutions, the telecommunications infrastructure space continues to evolve as hyperscalers and other large, data-driven technology companies drive the need for new and enhanced fiber networks to connect their data centers and data center campuses nationwide. These changes are creating new demand drivers around long-haul and middle-mile fiber networks and data center interconnects within campuses to address growing data usage, needed compute capacity, and the AI race. With these new demand drivers, we developed relationships with a new customer set: technology companies with significant CapEx commitments to meet their evolving needs. Analysts estimate that $6.7 trillion of CapEx will be cumulatively deployed in data center infrastructure globally from 2025 to 2030, including $100 billion for network infrastructure and $600 billion for labor. More than 40% of this spend will be deployed in the US, implying $240 billion of data center labor spent over the next five years alone. In a short time, we have extended our reach to capitalize on this, ultimately bringing fiber inside the fence and inside the data centers to the MeetMe room. Bringing Power Solutions into the Dycom Industries, Inc. family is the logical and critical next step. It enables us to immediately offer a comprehensive service that extends from the core network to the heart of the data hall, providing full electrical and low-voltage services throughout the data center. This is a significant milestone for Dycom Industries, Inc. that enhances our position and capability to address the fast-growing digital infrastructure market, extends our platform for long-term growth, and does so in a way that is immediately accretive to our financials. Power Solutions is one of the largest providers of mission-critical electrical infrastructure solutions for data centers and other vital industries in the Greater Washington DC, Maryland, and Virginia area. Referred to as the DMV, it constitutes the world's largest data center region. The acquisition will combine Power Solutions' leadership in electrical infrastructure with Dycom Industries, Inc.'s scale and expertise in fiber, putting us at the center of the powerful secular trends driving growth in digital infrastructure services and considerably enhancing our potential to generate meaningful long-term value creation for our customers and our shareholders. Let me briefly outline the transaction, and Drew will go into more detail. The total purchase price is $1.95 billion, consisting of approximately $293 million payable in Dycom common stock and the remainder of the consideration payable in cash, subject to customary closing and post-closing adjustments. We expect to close the transaction this fiscal year. The transaction is expected to be immediately accretive to our adjusted EBITDA margin and adjusted diluted EPS and improves free cash flow for the combined company. Our long-term fiscal disciplines are unchanged, and the combined business is anticipated to provide a clear path to delever to 2x net leverage in the next twelve to eighteen months. Power Solutions will further solidify Dycom Industries, Inc.'s long-term growth potential in four significant ways. First, it will expand our exposure to rapidly growing mission-critical data center demand by leveraging Power Solutions' deep expertise in electrical infrastructure for data center construction, which comprises over 90% of its revenue. This complements Dycom Industries, Inc.'s strong fiber network expertise and will enable us to capitalize on a substantial and critical infrastructure investment that is driving durable growth in the attractive DMV region and in the industry overall. Second, it will further diversify our services by adding Power Solutions' leading electrical contracting capabilities. Third, it will unlock significant opportunity to scale Power Solutions' operations and cross-sell services across digital infrastructure players, giving us the ability to expand our combined capabilities into additional targeted, high-growth regions and opportunities over time. And finally, it will add substantial skilled labor capacity, providing self-perform electrical contracting capabilities with a highly skilled workforce of over 2,800 employees, extending our capacity to execute large and complex projects. Now I'd like to take a moment to give you more color on Power Solutions. The company has established itself as one of the largest electrical contractors in the Greater DMV region. For more than twenty-five years, they have delivered high-quality execution and developed deep customer and end-user relationships. We share similar cultures. Like Dycom Industries, Inc., most of their operational leadership started their careers in the skilled trades, and their commitment to safety, quality, and operational excellence raises the bar with their customers. Their focus on and success in data center solutions is unique. As I mentioned, over 90% of their revenue year after year comes from data centers with repeat customers and end-users. They differentiate in their ability to scale and deliver the highest level of service in a highly complex, technical space. Power Solutions is a fantastic financial fit. They bring a track record of strong, profitable growth with an impressive 15% four-year revenue CAGR, and EBITDA margins consistently in the mid to high teens. With 2025 revenue expected to be approximately $1 billion, this is a high-quality, high-margin business that we expect to be immediately accretive to our performance. Power Solutions' current backlog is over $1 billion, solidifying their strong position in the DMV region. The DMV is the largest data center region in the world, representing 27% of total operational capacity in US markets today. The DMV is projected to capture 30% of US data center capacity currently under construction and planned, providing Dycom Industries, Inc. with substantial opportunities for growth in the world's fastest-growing data center region. In addition, data center infrastructure demand is poised for significant growth across the country, providing opportunities to further scale our enterprise. While AI-led demand for infrastructure CapEx is reaching all-time highs, it's important to recognize that data consumption has been rising annually for decades, and with it, the need for additional compute capacity, including new data centers and the digital infrastructure to connect them. Backed by persistent underlying drivers such as cloud migration, mobile usage, and the Internet of Things, this trend is projected to continue well into the next decade as industry participants predict non-AI-related data center construction will grow at a 16% CAGR through at least 2030. The expansion of Dycom Industries, Inc.'s business adds to our enterprise strength, furthering our relationships and expanding opportunities with the hyperscalers and other technology companies. Combining our vast telecommunications infrastructure services with Power Solutions' data center electrical expertise positions Dycom Industries, Inc. squarely in the center of the digital and AI infrastructure space. Finally, let's talk about execution. With the addition of Power Solutions' talented team of over 2,800 to our current team of over 16,100, we will have a combined highly skilled workforce of 19,000 people. This is a massive competitive differentiator that enables us to meet the growing needs across our collective customers. Dycom Industries, Inc.'s vast history of acquisitions means we've built a robust integration edge. The people, systems, and processes are already working to bring Power Solutions into our fold. Our time-tested approach preserves the culture, autonomy, and local leadership that make our acquired companies successful and applies Dycom Industries, Inc.'s scale, financial resources, and operational expertise to both deliver results and drive further growth opportunities. Let me close by saying that we have never been more excited about Dycom Industries, Inc.'s position and the opportunity set in front of us. Our diversified platform will be aligned to multiple attractive long-term growth vectors. We will benefit not only from the explosive demand for data center infrastructure and the fiber and electrical work that it requires but also see continued strong growth from our other telecommunications demand drivers. Our commitment to our telecommunications services and our carrier customers is unchanged and, in fact, is emboldened by our expanded platform with this transaction. Our strategy is clear, and we work every day to raise the bar for our customers and communities. We continue our focus on creating long-term value for our shareholders and providing long-term opportunities for our people. We are thrilled to add the Power Solutions brand to the Dycom Industries, Inc. family of companies and welcome their strong leadership and teammates. I'd like to thank all our Dycom Industries, Inc. team members for your commitment to delivering excellence every day as we pursue our vision to be the people connecting America. And now I'd like to turn the call over to Drew for a financial review and further details on the pending acquisition. Drew DeFerrari: Thanks, Dan, good morning, everyone. I echo the excitement about a record quarter and the pending acquisition of Power Solutions, which we expect to generate considerable long-term value for our shareholders. First, on the quarter, we are pleased that we outperformed the high end of our expectations for Q3, delivering solid top-line and adjusted EBITDA growth and margin expansion. Third-quarter total contract revenues of $1.452 billion grew 14.1% over Q3 of last year. Organic revenue grew 7.2%. Revenues were driven by continued execution of fiber-to-the-home programs, wireless activity, fiber infrastructure programs for hyperscalers, and maintenance and operations services. Adjusted EBITDA of $219.4 million increased 28.5% over Q3 '25, and we outperformed the high end of our expectations. Adjusted EBITDA was 15.1% of contract revenues, an increase of 169 basis points as a percentage of contract revenues over Q3 2025 as we performed well and continued to benefit from operating leverage. Net income was $106.4 million, and diluted EPS was $3.63 per share, also exceeding the high end of our expectations. We are pleased with the strength of our relationships and diversification across our customer base. AT&T and Lumen each exceeded 10% of total revenues for the quarter. AT&T revenue was $361.9 million, and Lumen revenue was $170.3 million. Customers exceeding 5% of total revenues for the quarter were BrightSpeed, Charter, Comcast, Frontier, and Verizon. Backlog at the end of Q3 was $8.22 billion, including $4.99 billion that is expected to be completed in the next twelve months. As Dan highlighted, after the end of the quarter, we executed additional service and maintenance agreements, both renewals of existing markets and expansion into new markets, that total over $500 million that will be reported in our Q4 backlog. Operating cash flows were strong at $220 million. The combined DSOs of accounts receivable and contract assets net improved to 105 days, a reduction of fourteen days over Q3 2025. We made great progress year over year, and strong cash flows remain a key focus area for the company. We are implementing a comprehensive ERP to upgrade and standardize our information technology systems. I am pleased to report that during Q3, we successfully completed the first phase of deployment across our business. We expect to complete additional phases during fiscal 2027, enabling further operational efficiencies and equipping our teams with the latest powerful technologies. We continue to observe strong demand across a diverse set of industry drivers, creating significant opportunities for our company. We have increased the midpoint of our revenue outlook for the year, and we expect our full-year fiscal 2026 revenue to range from $5.35 billion to $5.425 billion. Our outlook for Q4 reflects normal seasonal factors such as fewer available workdays due to the holidays, reduced daylight work hours, and winter weather conditions. For Q4, we expect contract revenues of $1.26 billion to $1.34 billion, adjusted EBITDA of $140 million to $155 million, and diluted EPS of $1.30 to $1.65 per share. Beginning in Q4, we expect to also report non-GAAP adjusted EPS, excluding the impact of intangible amortization expense. Non-GAAP adjusted EPS, excluding the after-tax impact of intangible amortization expense, is expected to range from $1.62 to $1.97 per share. Our outlook excludes any results from the pending acquisition and related financing. While we expect to close in our fiscal Q4, impacts are dependent on the timing of completion. Now moving to more detail on the pending acquisition. We are excited to bring Power Solutions into the Dycom Industries, Inc. family. The purchase price is $1.95 billion on a cash-free, debt-free basis and consists of approximately 1 million shares of Dycom common stock valued at approximately $293 million, and the remainder of the consideration is payable in cash, subject to customary closing and post-closing adjustments. We anticipate the transaction to close before the end of our fiscal year on January 31, 2026. The purchase price represents a multiple of approximately 9.7 times Power Solutions' trailing four quarters of adjusted EBITDA. The acquisition will be treated as an asset purchase for tax purposes and is expected to generate sizable tax-deductible intangible assets and goodwill. The estimated net present value of the future cash benefit of the tax amortization further reduces the implied multiple paid by over one time based on the trailing four quarters of adjusted EBITDA for an estimated net multiple of approximately 8.5 times. We believe the purchase price and related future tax benefits support meaningful value creation for our shareholders. We plan to fund the cash portion of the transaction with a mix of cash on hand, a committed $1 billion senior secured term loan A facility, and proceeds from a committed $700 million senior secured 364-day bridge loan facility. Pro forma net leverage is expected to be below three times at closing, and the free cash flow profile of the combined business is anticipated to provide a clear path to delever to approximately 2x net leverage in the next twelve to eighteen months, maintaining our financial flexibility for continued strategic growth. Total borrowings will be determined at closing, and the weighted average estimated interest rate is based on 6%. In the event we borrow and maintain outstanding the committed debt amount of $1.7 billion for the entirety of fiscal 2027, we estimate incremental cash interest expense of approximately $96 million and non-cash amortization of debt issuance cost of approximately $5 million for fiscal 2027. This transaction is directly aligned with Dycom Industries, Inc.'s capital allocation priorities. It deploys capital in a high-return enterprise that enhances our scale, capabilities, and exposure to rapidly growing data center demand. It supports disciplined capital allocation by acquiring a business with a strong balance sheet, bolsters free cash flow generation supporting continued high-return strategic investments, and extends Dycom Industries, Inc.'s long-standing customer partnerships, enabling comprehensive telecommunications and electrical infrastructure solutions. Power Solutions' annual revenue is expected to be approximately $1 billion for calendar 2025. The company's compounded annual revenue growth has been approximately 15% over the past four years, a trajectory that is expected to continue in calendar 2026. Total backlog for the company currently exceeds $1 billion, giving us confidence in their continued growth. The anticipated results of Power Solutions are expected to be immediately accretive to Dycom Industries, Inc.'s adjusted EBITDA margin and adjusted diluted EPS, excluding non-cash intangible amortization expense. Power Solutions has consistently delivered adjusted EBITDA margins in the mid to high teens, and we expect this level of profitability to be sustained in calendar 2026. We see opportunities for synergies over time, but we have not yet included any of these potential benefits in our outlook. As I mentioned earlier, the transaction is expected to generate sizable intangible assets that will be determined upon the closing of the transaction and amortized on an accelerated basis. Our preliminary estimate of non-cash amortization expense from the acquisition is approximately $185 million in fiscal 2027 and declines annually thereafter. Beginning in Q4, we expect to present non-GAAP adjusted EPS that will exclude intangible amortization expense. Our estimates of all of these expected results are preliminary and subject to change as we work to complete the transaction. The acquisition of Power Solutions positions Dycom Industries, Inc. for accelerated growth in digital and data center infrastructure services. We are honored to welcome Power Solutions employees to Dycom Industries, Inc., where together we will continue to be dedicated to serving customers and connecting America. This is a significant milestone for our company, and we are confident in our ability to execute our strategy as we seize the opportunities ahead. Operator, this concludes our prepared remarks. You may now open the call for questions. Operator: Thank you. The first question comes from the line of Frank Louthan with Raymond James and Associates. Your line is now open. Frank Louthan: Great. Thank you. Quickly, the fourteen-day improvement on the DSOs, is that a new normal there? Was something in the quarter that helped? And then looking forward, what do you think about the expansion of Power Solutions to Texas and other areas with some significant data center activity? What are your thoughts on kind of future growth plans for them with your scale? Thanks. Dan Peyovich: Good morning, Frank. As we talked about when we started the year, cash improvement was definitely a priority and something that we were focused on. And you've seen that improvement throughout quarter over quarter. Obviously, we're very pleased with the fourteen-day year-over-year improvement in DSOs. We've had significant efforts and strong disciplines that we've built in the business. We do feel good that we're in a much better place overall. It's not always going to be perfect, but we certainly like the range that we're in going forward. Shifting to Power Solutions, obviously, there's a lot to talk about there. A large part of this is really about adding a skilled workforce to what Dycom Industries, Inc. has today. Over the years, we've gotten closer and closer with the hyperscalers, closer and closer to the data centers. It was a couple of quarters ago we started talking about going inside the fence. This really is just that next natural step inside the fence, and now we're just crossing over the wall to bring skilled services to really meet the growing demands of the hyperscalers and the growing demands of data. I talked about it in the prepared remarks and just want to reiterate again, data consumption has been growing significantly for decades. That's nothing new. Data center growth has been nothing new for decades. That's continued. What we see around AI obviously is a huge influx and a huge inflection point, but there is this really built-in data center growth underneath it all. We see that on our side of the business with the telecommunications infrastructure, and we certainly see that on the power side as well. When you bring those together, and you are over that entirety of the skilled workforce, I would say it this way: the AI race runs straight through the skilled workforce. That's how we're positioning Dycom Industries, Inc. for our next ten years of growth, plus, and that's how we're positioning ourselves with our customers. Frank Louthan: Great. Thank you very much. Operator: Thank you. Our next question comes from the line of Sangita Jain with KeyBanc. Your line is now open. Sangita Jain: Great. Good morning. Thanks for taking my questions. So if I can ask one more on Power. Are there some anchor customers that Power has that you already have relationships with? And other opportunities will be new build, or is it more also retrofit O&M? Dan Peyovich: Primarily, they're contracted general contractors, so not customers that we have today. But the end users are very much aligned with the hyperscalers that we've moved inside the fence with and expanded capabilities and expanded what we're doing today. So certainly overlap in the end users. Pleased to get some customer diversification, of course, as well. A few things that are unique about Power Solutions. We've been looking at this space for some time. I think I've mentioned before, in my past career, I started on my first data center in 1998 and pretty much built them for over two decades. What you normally see with the electrical, whether it's electrical, mechanical, just a lot of these skilled workforces, is only going to be a portion and usually a much smaller portion. 25%, maybe 35% of their work is going to be data center specific. What really attracted us to Power Solutions, first and foremost, was the culture. This is a fantastic leadership team, many of whom came up through the trades, great cultural fit with Dycom Industries, Inc., talked about it being accretive across metrics. But importantly and uniquely, 90% of their revenue year over year has come from the data centers themselves. To your question, the majority of that is new data center builds, but they also do renewals as well. They go in and retrofit and upgrade data centers in addition to that. So we're excited about that concentration. They're also in the largest data center market in the world and certainly one of the largest electrical infrastructure providers in that market. It's projected to grow and really consume over 30% of the future growth in the US data centers. Positioned well for future growth, Sangita. Positioned well from how much data center work they do. And the scope and coverage across customers and across end users is also a positive. Sangita Jain: Great. And then can I ask one on BEAD? You said the NTIA approval was one of the last steps. What is the last step? And given that 15 states approved yesterday or the day before, like you mentioned, what is the likelihood that the revenue comes before fiscal second quarter for you guys? Dan Peyovich: So the last step is the actual funding that happens. And that did happen with Louisiana yesterday in the news. So exciting to see that progress. I think it affirms our Q2, and you heard in prepared remarks, you heard us talk about we have over half a billion verbal awards already. That number is increasing quite quickly, in fact. So we do feel good about starting to see revenue in Q2. Again, there is going to be a ramp to it. Not going to be all at once. Sangita Jain: Great. Thank you so much. Dan Peyovich: And expect to see awards, if not in this Q4, certainly in Q1. Operator: Thank you. Our next question comes from the line of Alex Waters with Bank of America. Your line is now open. Alex Waters: Hey, good morning, guys. Thanks so much for taking my question. Maybe just first off, Dan, you kind of hit on it in your prepared remarks, but with the $20 billion data center TAM that you guys gave, gosh, a couple of quarters ago, can you just talk about perhaps how additive this acquisition is to that? And then, secondly, just thinking about kind of the skilled labor force and synergies there between the existing Dycom Industries, Inc. labor base. Can you just talk about that too? Dan Peyovich: Happy to. All I said, there's been a lot of press from our customers that really reinforced the $20 billion addressable market that we talked about over the next five years. Specific to the outside plant, right? That's inside the fence work. It's long haul. It's middle mile. Completely separate and distinct from what we will see with Power Solutions joining the Dycom Industries, Inc. family. So that $20 billion we really believe is a conservative number and continues to grow, and we didn't mention it specifically because we had a lot to talk about. But we did have additional awards this quarter in that space as well. So excited there. This acquisition and the opportunity with Power Solutions, it just expands that in multiple ways. One, we have cross-sell opportunities with the hyperscalers. We can have a different level of conversation on how ultimately we need to meet the needs that they have, which everybody knows are significant. And really, in the most conservative estimates of what the AI race could yield, even in the most conservative estimates, we're talking about massive infrastructure. I would say that the companies that are going to succeed in the AI race are the ones that are positioned to deliver on that infrastructure, and we've set Dycom Industries, Inc. squarely in the center of that going forward. So the $20 billion, if you bring it into the data center side, so I mentioned they're in the largest market in the world. They're certainly the largest market in the US. Over 27% of total data center capacity right now is in the DMV. And the growth prospects in front of that are significant. There's a lot of different numbers out there about what that addressable market could be, Alex. I think the one that quoted in my prepared remarks is the one that we like. $240 billion on labor in the next five years in the US alone to meet that infrastructure needs. Obviously, that's a significant number. Again, that's going to be heavily weighted to the DMV market. So we think we're set up well. So the skilled workforce, again, this is what attracts us to Power Solutions, and this is where we differentiate overall. We have one of the largest distributed skilled workforces in the country. We're across all 50 states, meeting the needs across numerous customers, certainly our carrier customers, certainly the hyperscaler customers. This adds to that collective. Now, there's certainly a different skill set, right? They're going to come in and do the electrical components inside. But ultimately, when mobilizing a skilled workforce of this size to do projects of this kind of complexity and this kind of magnitude, how you manage that and how you do it are very, very similar. So we feel extremely comfortable about the match. We feel extremely comfortable about the discipline and the strategy that we have about continuing to build that workforce as we grow together. And again, just really excited to bring Power Solutions into the Dycom Industries, Inc. family and excited to get to spend more time as we look to grow the business collectively. Alex Waters: Perfect. Thanks, Dan. Operator: Thank you. Our next question comes from the line of Richard Cho with JP Morgan. Your line is now open. Richard Cho: Hi. I just have two questions. One regarding the fourth-quarter guidance. The revenue range is a little bit wider than previous quarters. Just wanted to get a sense of what the puts and takes there might be as you look into the fourth quarter. And then on Power Solutions, can you give a sense of what the contracts are like in terms of the billion dollars in backlog? Dan Peyovich: Absolutely. So on Q4 revenue range, coming into Q4, as you know, is a seasonal quarter for us. I've often talked about how if you think about the lower end of the range and higher end of the range in a normal quarter, looking at the speed of some of these programs. And I want to come back to fiber to the home and make sure that we get enough airtime. Fiber to the home programs continue to increase. You know, we've seen that. That's a large part of the outperformance that we had this quarter is the growth that we saw in fiber to home builds. And we see that increasing considerably as you look towards next year. Many of our customers continue to reiterate that growth, continue to reiterate what their plans to build are. So that's performing very well. That in large part is how fast those programs go, how quickly we move into that is how we think about the range at the top and the bottom and the midpoint. You know, we felt that we needed to add something in considering the seasonality. If you look at Q4, we've also got holidays that are midweek again this year, which we know from last year. We're going to have a lot of folks that are taking extended periods of time off. All that's factored in, so the range is just a little bit wider. But as you know, we did move the midpoint considerably. I think the second question is on what kind of how they contract. So, again, because over 90% of their work is in the data center space, what that means is they have dozens and dozens of data centers that they're working on at one time. They are typically going to be a relatively finite build over that work. They could be generally six or twelve months that they're spending doing work out in the field. And these are massive crew sizes that are coming into buildings over a very quick period of time. Highly sophisticated, highly complex work that Power Solutions, again, has proven time and time again that they really deliver at the highest level in their space. I would point to their 15% growth CAGR over the last four years and our confidence in being able to continue that next year. The contracts themselves, like I said, they're with the general contractors. So a little bit different from how we look at our work. And again, there's other synergies that we see in the business as we think about it. They're not going to have the same kind of seasonality. They are more capital light than the telecommunications business, where the equipment costs for us are more significant. So really more pieces that optimize Dycom Industries, Inc. as a whole going forward. Richard Cho: And following up on the kind of new markets for Power Solutions, you know, I think with the DMV, there's been a long history and steady demand, and it continues to see that. But as you look to new markets, I think there is some worry with some of these builds that some new markets are going to be long-term markets and others are going to maybe not have the same gravity and long-term strength that a DMV will. So, you know, Dallas and Atlanta and maybe certain markets seem that way, but there's others that are less certain or on that outcome. Can you give us a little sense of how you would think about expansion to new markets? Dan Peyovich: Yeah. And I think I missed that one of the earlier questions. So thanks for bringing it up again, Richard. The first thing I would say is all of this is centered around our strategy for long-term shareholder returns. As we think about all of these parts and pieces, they come together. As we think about the significant acquisition, we're thinking out multi, multi-years out into the outer decades about how this can be accretive and how it has strong value creation overall. Hopefully, people have seen we're not ones to move quickly and react to things. We want to be very thoughtful about how we grow that business and how we grow the business that we've been growing for some time now. As we look to other markets, there's a number of different factors. The first is Power Solutions is in the largest market, it's a proven market, it's got a large skilled workforce, and it's got huge growth opportunities, even if we just stay there. So we can continue to work with them to expand. We're going to bring our balance sheet behind. We're going to bring relationships with our equipment. And as I said, there are going to be other ways that we can leverage combined relationships, even if we just stay in that greater DMV space. At the same time, we will certainly look at other M&A opportunities on how we can leverage the whole of the enterprise, and that could include moving to new areas. Of course, we will factor in, you know, where that is in a growth cycle, how long that can continue to grow. As you know, there are many markets in the country that have been growing for a long time and have continued growth, maybe not as large as the DMV, but still significant opportunities. All of that is part of the strategic discussions that we've been under for some time and excited to continue to further that as we think forward. So I would just end it with great opportunities for organic growth, great opportunities for combined growth, bringing our customers together. And certainly, we'll be looking at M&A as well. Richard Cho: Yeah. Sorry to follow-up on it, but it was just something that I won't make. Operator: Thank you. Our next question comes from the line of Steven Fisher with UBS. Your line is now open. Steven Fisher with UBS. Your line is open. Please check your mute button. Steven Fisher: Thanks. Sorry. You cut out. I sure that was calling on me. So thank you for that. Appreciate it, and congrats on the deal here. Just, Dan, relative to the 90% of Power Solutions' revenues coming from data centers, I'm curious what that mix was, say, five years ago when the revenues were probably around $500 million. Was it still 90% in data centers then when we were sort of in a different stage of data center development? And if not, you know, what happened? What was the rest of the business then? What happened to it? Know, because I guess, obviously, today, it's great to have 90% be focused on data centers. And I know you view this data center opportunity as many of us do for many years, but just thinking about because you mentioned long-term shareholder value, what is this business set up to do beyond the data center market? Dan Peyovich: The key point around this is working in data centers is a highly complex, mission-critical environment. So it's a unique skill set. It requires training. It requires a sensitivity to both the speed and again, Steven, as you know, I spent a couple of decades in this space contracted to many electrical contractors. And we really understand how this whole space works collectively. But if you think about it, it's about how sophisticated they are to build and deliver on that work. To answer your question directly, I don't have the exact number on where they were three, five years ago, but, in a general term, they've been at 90-ish percent, certainly the majority of revenue for a long time in that space. And I think that's where they differentiate. Their ability to handle that complexity. You've heard me say many times that complexity favors Dycom Industries, Inc. It favors Power Solutions as well, and that's what attracted us to them. And we think that together, we're even better poised to address the growing needs of the customer set broadly. So it is unique, you think about electrical contractors, for sure. It's unique that they're so concentrated. That is absolutely a benefit and something that separates our ability as we look forward and certainly, again, made it very attractive for us when we started having conversations with Power Solutions. Steven Fisher: Great. And just maybe to talk about the $500 million of service and maintenance agreements that you talked about after the quarter. Can you just put maybe that into context a little bit? You're doing around $1 billion of new awards per quarter. Is the point here that it's, say, you know, 30% of awards on service is an indication of the importance and growing mix of service and maintenance, or is it that you're an indication that you're setting up for another strong quarter of bookings already in Q4, or is it both? Dan Peyovich: So a few points to make. One, please overall with our book to bill. We had significant service and maintenance awards within the backlog that we reported in the quarter as well. Call them out specifically, like I said, we kind of kept got a lot of things to talk about, and we have to pick. The reason we call this out twofold. One, to accentuate the importance of service and maintenance as we think about our business and think about how we move forward. Two, it really shows our scale and our ability to continue to be in front of this work with our customers. And how we can solve further growing needs as, you know, they install more fiber around the country. So it sets us up well for all of those things. I also want to point out, again, our backlog, our total backlog, different from a lot of the peer set or other competitors. Because of the nature of the timing of our agreements. We're just continuing to try and show that it's not always going to be perfectly timed to the quarter. Very pleased with the all-time high. I would certainly point to the next twelve months of $5 billion. Again, another all-time high. And really shows the overall momentum of the business. Yes, to answer your last question, definitely sets us up well for backlog as we think about coming into Q4. Wanted to point that out. But really, this is about cementing where we are in the service and maintenance space. Steven Fisher: Perfect. Thanks very much. Operator: Thank you. Our next question comes from the line of Adam Thalhimer with Thompson Davis. Your line is now open. Adam Thalhimer: Hey, good morning, guys. Congrats on the record results and the acquisition. Dan Peyovich: Thank you. Adam Thalhimer: First of all, on the organic business, is it too early to talk about fiscal 2027 and maybe broad strokes for revenue growth and margin improvement? Dan Peyovich: On the new business, you know, we gave an outlook for that. 15% growth based on their CAGR. So you have that side. We're not going to give you a lot of detail overall in the business yet. We will, of course, as we come towards the end of the year, just like we did last year. The point I made last quarter, and you saw that come through this quarter with the 7.2% organic growth. And of course, now that the Buck Wireless business that we did, that's fully in the business as we think about Q4. It's going to be strong organic growth to lead to get to the numbers that we showed for Q4. That sets us up very well coming into FY 2027, calendar 2026. So we're excited about how we're positioned there. We're excited about the diversification within the telecommunications business. How we are picking up already starting to talk about BEAD awards, how we are continuing to increase the amount of work that we're doing with hyperscalers and all middle mile and inside the fence opportunities. As we talked about, the wireless work is performing well. So, there's just all of those growth drivers continue to be strong, continue to we continue to capitalize on the opportunity set. You can see we're also improving margins as we go, and all that sets us up well looking into next year. Adam Thalhimer: Sounds good. And then, Dan, can you give a little bit more background on the acquisition? How did the discussion start with Power Solutions? Dan Peyovich: Yeah. It's our strategy, as I talked about, it's always been centered around long-term shareholder returns, long-term opportunities for our people. It would be no surprise to anybody I've been in the seat nearly a year that as we the seat, we did a top-down strategic review of the business and where we are and conversations we've been having for some time. Part of that has been, you know, as these hyperscale relationships have developed, as we've gotten closer and closer to the data centers, what is the next natural step? And this really made a lot of sense because we're already there. We're already on the campus. We're already working with the end users. We already have a skilled workforce doing highly complex work. This is just really a matter of crossing into the wall, crossing the wall, and moving into the data center itself. This is a space that we know and understand extremely well. We understand how the projects flow. We understand the landscape from a competitive set. So as we looked at different opportunities, you know, when we first met Power Solutions, it really came down to the culture and the relationships. That is so incredibly important to us, and that's really been the cornerstone of the success that we've had in the acquisitions we've done over the decades, and certainly, that we've done over the last few years as well. It comes down to culture. If you get the right fit, if you get the right mindset around how we can grow together and how we can lever further into growth together, that's where you really start to see the magic start to happen, so to speak. So again, incredibly impressed with the strength of the leadership team with Power Solutions. Incredibly impressed with everybody that we've met so far. They run a fantastic operation. They're going to fit extremely well with our existing subsidiaries. And really embolden us on how we think about growth in the next decade. Adam Thalhimer: Thanks, Dan. Operator: Thank you. Our next question comes from the line of Eric Luebchow with Wells Fargo. Your line is now open. Eric Luebchow: Great. Thanks for taking the question. So, Dan, as you think about kind of the landscape and the data center contracting space, I mean, could you maybe just talk a little bit about how concentrated it is? Is it still pretty fragmented? And do you see more opportunity there to do future M&A, maybe compare and contrast it to your traditional telecom business where you see more opportunity over time to gain scale? Dan Peyovich: Thanks, Eric. This acquisition for us really widens the aperture as we think about our place in digital infrastructure as we move forward. And as I said earlier, this puts us squarely in the middle of, and I want to be clear, it's not just about AI. There's a natural cadence. There's a natural growth that occurs on whether it's the telecommunications infrastructure or whether it's the data centers themselves. So we're stepping further into that. And believe that there's significant upside opportunity in addition. As I'm sure everybody has seen, there's been a number of acquisitions in this space. Again, Power Solutions is unique, and both the size that they have and the presence that they have in a very large region. The growth that they've had and the concentration in the data center, proven expertise that they have overall. But it is a continue to be a fragmented space. You know, there are not very many contractors, and against all this my past career, not a lot of contractors that are covering across data center markets or even the majority of data center markets. So there are opportunities out there. There are definitely opportunities to continue to think about that and how we move. There's opportunities for us to grow organically, you know, with our new business. There's also opportunity to continue on from an M&A front. So all of that is front and center to what we're thinking about. Excited to move into this. We're certainly focused on integration and have built a strong integration engine to get ahead of it. And looking towards that close, towards the end of the year, we will certainly come out and give a lot more insight on how we're thinking about the business and growth opportunities then. Eric Luebchow: Great. Thanks. And maybe just one follow-up for me. You touched on the BEAD program a little bit earlier. We've seen, I think, a vast majority of the awards have gone to fiber, and a lot of the capital will be fiber-related. Have you seen any of the BEAD awards go into your backlog at this point? I know you've talked about Q2 as kind of a starting point for revenue contributions, but just wondering if you've been having conversations and you're starting to see demand flow in already so that you can get started in Q2. Dan Peyovich: Yeah. So to date, two-thirds of the locations are going to be served by either fiber or HSE infrastructure. So we're excited about that. It really lined up well with how we've been thinking about it to date. That addressable market is probably going to be in the neighborhood of $20 billion to include the matches from the subgrantees. Significant spending to do over the four or five years. We are front and center there. We've been talking to the states for years. We've been talking to our customers for years. I mentioned in the prepared remarks, we have well over $500 million in verbal awards today. We don't have any in our backlog. But significant opportunities that now as the funding starts to flow that we hope to move from verbal into backlog for next quarter. Operator: Thank you, Dan. Thank you. Our next question comes from the line of Brent Thielman with D.A. Davidson and Company. Your line is now open. Brent Thielman: Great, thanks. Yes, had a question just on the margin progression. Mid to high teens is notable, Dan, but want to understand how those margins progressed over the last few years, what you think is sustainable. And I guess as a follow-up to that, can you sort of quantify the cash conversion cycle related to the acquisition, especially as we think about the business sort of driving deleveraging efforts? Dan Peyovich: Happy to. Happy to. On margin progression, so in that business, absolutely, they get operating leverage just as we do in the business. So growth certainly helps from a margin contribution. They've been strong margin for a long period of time, to find somebody that's accretive to our strong margin profile again, that we're very pleased with overall. We certainly believe that to be able to maintain strong margins, it's not always going to just like our business, not always going to be perfect. It depends on exactly how the projects stack. It depends on what the growth curve looks like. But that mid to high teens is a good range to think about. Certainly how we're thinking about next year and how we're thinking about the deal. On cash conversion cycle, again, this is a positive from a cash perspective for us. Their DSOs are typically in the 60 plus day range. So that will be a positive impact for overall. And again, strong operating cash. And from a free cash flow, they're not as capital intensive, as I mentioned. So really, when you look across the fundamentals and the deal really does come down to the fundamentals, fundamentals are strong all the way across the board. Brent Thielman: Okay. And maybe one more if I could. You know, your inside the fence strategy maybe you could argue, at least for the core Dycom Industries, Inc. business is kind of early days. I know starting from a relatively low point. Does this accelerate it? As you leverage these customer relationships that Power Solutions has such that you know, we could see some real revenue synergies with that strategy as you sort of combine the two companies? Dan Peyovich: Absolutely. Absolutely. Really, a cornerstone to how we thought about this acquisition. Those relationships have continued to build and stronger, and it's with more than one hyperscaler, I should be specific about that. But we continue to do more and more work. We are doing work in the same DMV region where Power Solutions operates. So, you absolutely can start talking about synergies. You can start talking about how can we collectively together provide more, even more value for the end users than we would apart. We can talk about what that means, for again, there's so much growth in that space that's out in front of hyperscalers. The question is who's going to be there to meet that? And I said before, the companies that are going to succeed in the AI race are the ones that are positioned to deliver on that infrastructure. We're already well-positioned, and that's why we've continued to move closer and closer and further and further inside the fence. This just takes us another step even further, right? Makes those relationships even stronger. And if you think about it from a long-term perspective, the opportunities just get much, much broader and deeper overall. Brent Thielman: Got it. Okay. Thank you. Operator: Thank you. Our next question comes from the line of Laura Maher with B. Riley Securities. Your line is now open. Laura Maher: Hi, good morning. Thanks for taking the question. My first question, Verizon recently announced potential large layoffs. Is this related to any kind of project that Dycom Industries, Inc. is involved with? Dan Peyovich: Honestly, we're following the news. Verizon's been a great customer for us for a long time. We continue to do a significant amount of work for them. We see that continuing overall. We haven't seen impacts for it yet on, you know, what their new CEO, and congrats, Dan, for taking the helm. We haven't seen anything on our side of the business, and we look forward to just continuing to partner with them to make sure that we can meet their needs and stay up front of their builds. Laura Maher: Okay. Great. Thanks. And then in regard to the latest fiber buildout, how much more sophisticated is this buildout in the support of the growth of AI versus the previous fiber buildout that was driven by the Internet? Dan Peyovich: Just so I'm sorry. You're talking about the work the Power Solutions does? Or... Laura Maher: No. Just the fiber work in general. Not necessarily Power Solutions. Dan Peyovich: Yeah. If you think about, and again, this I'll say it for, again, you know, really favors Dycom Industries, Inc. If you think about these long haul and middle mile routes, this high capacity, high density fiber bundles, they are more complex. They are more difficult to install. They require a lot more sophistication in how you're thinking about the work, planning the work, getting out for other work. That's where we specialize. That's where we differentiate. So it's been a positive for us. You know, we were really, I would say, first at bat, but certainly first inning. And getting out there to do that work. We've been out doing overbuilds now with Lumen for the bulk of the year. And so we really have a ton of experience and a ton of lessons there that position us well to continue that. And we continue to book further awards there across customers. We talked about calendar 2027 as really being a ramping period, but I don't want that to be mistaken. There's we're doing significant work today. I think there's going to be significant work next year. It's just when you think about new construction, that is not overbuilding existing conduits. New construction takes a while to get planned, to get permitted, and to really build that work plan itself for crew continuity and the flow of work. So excited about all that. It's going to continue to build over time and a fantastic driver to augment the other extremely busy drivers in the business. Laura Maher: Great. Thanks. Operator: Thank you. And I'm showing no further questions from our phone lines. I'd now like to turn the conference back over to Mr. Dan Peyovich for closing remarks. Dan Peyovich: Absolutely. I'd just like to again comment on the strength of the demand drivers in the telecommunications space. Obviously, with the acquisition announcement today, we spent a lot of time talking about that, but I want to make sure that we really recognize that these demand drivers continue to be strong, whether fiber to the home, now the rural is coming even stronger with BEAD work. Our service and maintenance continues to grow. We serve our customers well across the business. And excited to continue to do that. If we think about the acquisition, really, this just makes us stronger for all of our customers and widens the opportunity set across all of our customers to make sure that we can meet their needs because it's an active space. The amount of infrastructure that needs to get built in the coming years and in the coming decades is significant, as we talked about really generational level deployment. Excited and honored to be partnered with our customers and want to make sure that we can stay in front of all that. We think that this acquisition and all the work that we've been doing to make Dycom Industries, Inc. stronger, to become more efficient. Really, at the end of the day, it's about our customers. About serving them well, and serving our communities well. So thanks to them. Thanks to all of the Dycom Industries, Inc. employees for their hard work in continuing to differentiate us. And to our future Power Solutions partners, excited to get to the close and to welcome you officially to the family. Thank you all for joining the call today. I look forward to seeing you next quarter. Be safe, and be well. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Hamza Fodderwala: We are the Chargept of Enterprise. If you are using AI for generating code, you have to make sure you are free of any malicious code, any malware. At the same time, you have to make sure you are not leaking sensitive data to third parties. Prisma AI runtime functionality is not just protecting us against the prompt injection, data poisoning, jailbreaking attempts, but at the same time, all the older issues, the data leak prevention, the DLP, the malware detection and prevention, all those are still relevant. Palo Alto Networks, Inc. is providing the visibility to the customer about all usages of JN AI within their environment. Protecting what kind of data can lead to the LLM. Kind of data is coming back from the LLM, is it potentially bringing in malware? You need to work with a security vendor who can keep pace with the attackers. That's where you want to partner with a completely focused company like Palo Alto Networks, Inc. Palo Alto Networks, Inc. has the strongest solution in the market. Good day, everyone. Hamza Fodderwala: And welcome to Palo Alto Networks, Inc.'s first fiscal quarter 2026 earnings conference call. I am Hamza Fodderwala, senior vice president of investor relations and strategic finance. Please note that this call is being recorded today, Wednesday, November 19, 2025, at 01:30 PM Pacific time. With me on today's call to discuss our fiscal first quarter results are Nikesh Arora, our chairman and chief executive officer, and Dipak Golechha, our chief financial officer. Following our prepared remarks, Lee Klarich, our Chief Product and Technology Officer and Board member, will join us for the question and answer portion. You can find the press release and other key information to supplement today's discussion on our website at investors.paloaltonetworks.com. While there, click on the link for quarterly results to find the Q1 2026 supplemental information Q1 2026 earnings presentation. During the course of today's call, we will be making forward-looking statements and projections regarding the company's business operations and financial performance, as well as the company's pending acquisitions. These statements made today are subject to a number of risks and uncertainties that could cause our actual results to differ from these forward-looking statements. Please review our press release and recent SEC filings for a description of these risks and uncertainties. Assume no obligation to update any forward-looking statements made in the presentation today. The presentation contains non-GAAP financial measures key metrics relating to the company's past and future expected performance. Non-GAAP financial measures should not be considered a substitute for financial measures prepared in accordance with GAAP. The most directly comparable GAAP financial metrics and reconciliations are in the press release and the appendix of the investor presentation. Unless specifically otherwise noted, all results and comparisons are on a fiscal year-over-year basis. We also note that management is scheduled to participate in the UBS conference this quarter. I will now turn the call over to Nikesh. Nikesh Arora: Thank you, Hamza. Good afternoon, and thank you, everyone, for joining us for our earnings call today. As you can see, we had a strong start to the year in Q1. We exceeded expectations across every guided metric, demand across our core business remains robust, and customers continue to platformize with us. Year over year, RPO grew 24% and GSAR was up 29%, and total revenue was up 16%. We saw strength across our portfolio in SASE, XIM, software firewalls, and even some early traction in our AI security platform, Prisma Airs. Our top-line growth was complemented by continued improvement in profitability, achieving our second straight quarter of 30 plus percent operating margin. These results are a direct outcome of our strategy to delivering better security outcomes our platform is earning more and more the trust that used to be fragmented across dozens of point products. At the same time, the threat landscape continues to evolve faster than we expected because of AI. As many of you saw last week, with one of the major AI platforms, AI hackers, aren't a future threat They're here. Now. This is the first reported case of an AI agent autonomously conducting a large-scale nation-state cyber attack. The attacker was able to manipulate an agent to take steps on its own, with minimal human intervention. This is a turning point. Proof that attackers are already weaponizing AI agents at scale even more importantly, they're able to attack fast, and will be able to exfiltrate faster. AI is exposing the cracks in our enterprise architectures which do not have robust security. Patches are incomplete, platforms are missing, there is a plethora of point products across the enterprise. This gap is exactly where attackers thrive. They're testing how far they can exploit a model. They're running prompt injections, jailbreaks, model manipulation. And now we're seeing the next phase. Autonomous AI agents being leveraged into the attack chain. AI is here, and with it, AI attackers are here too. Our message to customers is clear. Real-time visibility and security are essential for infrastructure. This reality necessitates a paradigm shift in the industry, We must move away from today's fragmented security landscape and towards platformization. AI requires a seamless cyber data strategy. This platform approach allows security agents to be utilized effectively by the good guys to detect attacks, protect customers, and immediate security concerns. Fragmentation creates friction, which in turn causes latency, Latency is a critical enemy of real-time cybersecurity. This is the backdrop that informs our strategy as we go forward. Now let's get into the quarter. In Q1, platformization once again drove large deals across multiple industry verticals. This included US Federal, where we had a strong quarter and notable competitive wins. One example was a $33 million SASE deal with a US cabinet agency securing 60,000 seats. This agency displaced a major SASE incumbent as they needed a platform to provide unified visibility across both their firewall estate and remote endpoints. Another example was a $100 million deal with a large US telecom provider, This included an $85 million commitment to XIM which is our largest Ex I'm deal ever. This customer chose us to consolidate their disparate point products based on the ability of our platform to deliver materially faster mean time to respond. The common theme across these large transactions is clear. Customers are moving from managing vendor sprawl to demanding superior, demonstrable security outcomes through platformization. The natural place for customers to start their journey is network security, which remains our largest business. In Q1, we continue to see strength in our next-generation software form factors. SASE, had a phenomenal quarter. ARR grew 34% year over year, and surpassed $1.3 billion in Q1. Because the fastest growing SaaS provider at scale. We now have approximately 6,800 SASE customers including one-third of the Fortune 500, including leading technology companies like IBM and Oracle. Even though it's early days, we continue to see strong momentum with secure browsers. The arrival of AI and agentic browsers will expose security cracks on them focus the enterprise in ensuring widespread adoption of secure browsers. In Q1, we crossed seven and a half million browsers sold while our bookings nearly quadruple year over year. One more product which I'm getting more and more excited about recently is a shift I'm observing in our customers deploying more and more software firewalls. And it's beginning to show in our results. Product revenues grew 23% year over year, Today, nearly half of our product revenues are driven by the software form factor. We now have over 12,500 customers and maintained our leading market position in software firewalls. As AI transformation accelerates, growth in cloud workloads to software firewall provides essential runtime protection with new AI data center with its recent ability to step up and predict AI, expect continued momentum. Talking about predicting AI, let's talk for a bit about Prisma Airs. As I mentioned earlier, AI is moving faster than expected. This creates a critical moment for enterprise innovation. The reality is that while 78% of organizations are embracing AI, transformation, a staggering 94% still lack the necessary security guardrails presenting a massive risk. With our acquisition of ProtectAI now fully integrated, we introduced Prisma AIS 2.0 in Q1. The industry's most comprehensive end-to-end platform to secure AI protecting everything from autonomous agents to models that power And I'll predict here that AI agents will become a problematic insider threat not secured. Prisma AIRS is the essential circuit breaker layer to stop them. It denies deep model inspection, real-time agent defense against threats like prompt injection, and continuous autonomous AI red teaming in one platform. And once our acquisition of CyberArk closes, the addition of identity security will be critical to this mission. Providing the essential privileged controls to govern these new autonomous insider threats and prevent agent identity impersonation. Our commitment to AI security is driving new high-value partnerships. Including a collaboration with NVIDIA, to secure the AI factory with Prisma Airs on Bluefield, and tight integrations with platforms like Glean IBM, Factory, and ServiceNow and securing the exploding number of agentic AI workflows. Early customer traction is strong, reflecting the general market need. The number of AIS deals in Q1 more than doubled versus last quarter. We believe we are the furthest ahead in AI security with marquee customers signing up with Palo Alto Networks, Inc. As they move from traditional to AI workloads, we believe we are going to continue to be in the pole position. And the same way I surprised the world with this pace, I wanna talk about something else. That is going to become relevant from a technology shift and security perspective. Quantum. Quantum computing has seen significant innovations over last year. We're getting more and more optimistic on the arrival of quantum and expect it to be commercialized by 2029. As is widely known, quantum computing has the ability to break current encryption across technology stacks. Enterprises have less than five years to get their estates to quantum readiness. There is a fear some nation states will have quantum compute capability sooner than 2029. Since last month, our partner IBM announced they were able to run a key quantum error correction algorithm on commonly available chips. The US government and many other nations are emphasizing PQC or post-quantum cryptography to drive new cryptographic standards that are resistant to attacks from future large-scale quantum computers. To address this, we have launched and are going to be delivering a complete quantum-safe strategy. First, we help you discover. In August, we launched our new version of PanOS, 12.1 Orion, which provides a quantum readiness solution to give customers an automated inventory of their cryptographic risk. Second, we help you protect We launched our new fifth-generation firewalls which are optimized for quantum security. Third, we help you accelerate our platform The unique Cypher translation capability can make legacy systems quantum safe immediately even if the application itself cannot be upgraded. Beyond this, we have just announced that we're deepening our partnership with IBM to deliver the QuantumSave Readiness and Remediation service, a complete end-to-end solution for PQC migration. Now moving to Cortex with the is a pillar of our security operations center strategy. ExIME continued its incredible trajectory in Q1. We now have approximately 470 customers with the average customer paying over $1 million in ARR. This includes large referenceable customers in every major industry. The success is no coincidence. Xi'M was built for large-scale data processing. Organizing it normalizing it, making sense of it in real-time. Today, we're processing 15 petabytes of telemetry on a daily basis. The result is demonstrable security outcomes, Over 60% of our deployed ex Sion customers have reduced their MTTR or median time to respond from days or weeks down to minutes. I am also thrilled to announce the launch of Agentyx, this quarter. Agentyx brings powerful AI agents directly to the core of enterprise security challenge. In the future, the only effective countermeasure against Hacker AI will be our own AI agents. Purpose-built for advanced security detection and remediation. For years, the industry has struggled with two defining issues. Overwhelming alert fatigue and a massive global talent shortage. AgenTeq is our definitive answer. This is a leap beyond mere automation, this is true autonomy. The ability to use predefined agents or build custom agents to secure enterprise is a step change in how security will work in the future. We are fundamentally transforming security operations and optimization by deploying autonomous AI agents that deliver enhanced speed, superior efficiency, and greater control for security practitioners. Right out of the box, EgenTech leverages a broad integration ecosystem connecting with thousands of existing security and IT tools and third-party environments. It provides customers with an intelligent fully governed, and completely transparent teammate across the enterprise. Ready to operate on day one, AgenTex accelerates response, elevates quality, and frees up scarce human talent to focus on higher-order strategic work. Now shifting gears, I am pleased to announce our CyberArk integration plans remain fully on track and we're proud to have received overwhelming shareholder support for the acquisition which is now expected to close in fiscal Q3. Since our announcements in July, we've spent more time with the CyberArk team, we are even more excited about the growth opportunity and future product roadmap. This includes our vision of democratizing identity security across the enterprise and making identity the next platform for Palo Alto Networks, Inc. Anecdotally, our customers share in our enthusiasm, and the early feedback has been encouraging. As many of you saw, CyberArk's business continues to execute, achieving record net new ARR in their most recent quarter. You know, and even as we invest ahead of the curve, our long-term financial model remains intact. The scale of our platforms, and operating leverage in our business reinforces our confidence in achieving 40 plus percent free cash flow margins by FY '28, inclusive of both the pending and Chronosphere acquisitions. We are executing from a position of strength and we see a clear path to drive both innovation and financial discipline. Now let's talk about our new announcement. I'm sure all of you are wondering why Palo Alto Networks, Inc., who is in the midst of a large acquisition of CyberArk, would engage in an acquisition at the same time of Cronos Sphere. I think it's important to understand where we are in the AI cycle. The AI cycle is moving fast, There's never a day that goes by without significant announcements on investments in AI, data centers, AI infrastructure. This large surge towards building AI compute is causing a lot of the AI players to think about newer models for software stacks and infrastructure stacks in the future. The seventeen-year-old observability industry was not designed for the AI era. AI requires always-on comprehensive observability at gigawatt scale. The challenge so far has been that full observability is cost-prohibitive for the customer. Chronosphere is one of the fastest-growing software companies in history. The observability solution from CronosFair has already been deployed and has demonstrated scale at a large frontier model where they continue to move workloads across. Leading board on the cloud consumer platforms are applying full comprehensive observability, offering 99.9 plus percent availability to their customers. Chronosphere is able to deliver this capability at a third of the cost of other industry-leading solutions. Yes. A third. With $1.5 trillion of compute coming online over the next few years, there will be continued demand for next-generation observability led by Cronosphere. Really excited about the possibility of delivering remediation to the observability category by bringing together capabilities of CronosFair and our newly announced AgenTex platform. Chronosphere also recently had acquired a company called Calypta, a data pipeline provider. That was complementing their focus on observability and ensuring the right data got onto their observability platform. Calypta integrated with XIM will enable us to offer our Xi'M customers comprehensive security data pipelining capabilities in line with current industry trends. This acquisition perfectly aligns with our strategic playbook. We acquired the best technology, at an inflection point in the industry we invest in its development, utilize our go-to-market scale. To quickly deliver this game-changing innovation to our customers. Remember, this is barely 2.5% of our market cap. Which is consistent with our tuck-in strategy over the last seven years of acquiring companies. To summarize, we had a strong start there Our core business is firing on all cylinders, Platformization continues to take hold and overall demand is strong. Over the last years, we have shown our ability to scale billion-dollar plus ARR business in SASE and Cortex, Looking ahead, we think software firewalls is our hidden gem. And possibly the next billion-dollar opportunity. We maintain a relentless focus on innovation by tackling new challenges, in AI security and quantum, Finally, our ambitions continue to grow. This year, we'll be significantly expanding our opportunity in new markets, as we close the acquisition of CyberArk and Chronosphere, in both categories of identity and observability. Which we believe are in the midst of an inflection due to AI. We are less than 5% penetrated into a TAM, reaching nearly $300 billion in the next three years. As such, we are raising our expectations from $15 billion to $20 billion in ARR for FY '30. With that, I'll hand over the call to Deepak to review the quarterly results in detail. Dipak Golechha: Thank you, Nikesh, and good afternoon, everybody. We have an exciting opportunity ahead of us. We continue to execute with excellence and our TAM is expanding through the pending acquisitions of two category leaders in CyberArk and Cronosphere. Given that, I would like to provide some additional color around our acquisition of Cronosphere as well as an update on the CyberArk integration planning. Before moving into detail on our Q1 financial results and guidance. As Nikesh mentioned, we announced our intent to acquire Cronosphere for a total consideration of $3.35 billion in cash and replacement equity awards. Cronosphere's co-founders, Martin Mao and Rob Skillington, and their employees will join Palo Alto Networks, Inc. post-close. While Cronosphere does have significant ARR, relative to most of our other acquisitions, we view this transaction to be more in line with the tuck-in acquisitions that we have done over the past eight years. The business has just over 250 employees with a customer base focused on large AI and born-in-the-cloud enterprises. The momentum Cronosphere has achieved to reach over $160 million in ARR with triple-digit growth has been impressive. For that reason, we expect Cronosphere to remain largely standalone post-close and in the near term, enabling us to balance integration timelines for the pending CyberArk. Acquisition. We expect this transaction to close in the second half of our fiscal year 2026. On CyberArk, our integration planning is proceeding exceptionally well. Reflecting the strong collaborative spirit between our teams. We've had excellent cross-functional collaboration, at multiple levels, including dozens of integration planning workshops across various functions. We are firmly on track to hit the ground running post-deal close which we expect in fiscal Q3 subject to customary closing conditions. As you can tell from our Q1 results, we're pursuing these acquisitions from a position of strength. With that, let's dive deeper into the quarter. Remaining Performance Obligation, or RPO, grew 24% to $15.5 billion This metric is a key indicator of long-term revenue predictability and the scale of our committed business. Note that our RPO from Q1 last year included $68 million acquired from our QRadar acquisition which took place in that period. Our current RPO, which reflects near-term revenue realization stood at $6.9 billion representing 16% growth. Reflecting stability in both the quality of our RPO and customer commitments, the average new contract duration, remain consistent at approximately three years. NGS ARR ended the quarter at $5.85 billion achieving 29% growth and exceeding the high end of our guidance. Adjusting for the $74 million contribution from the QRadar acquisition, in the comparable prior period, our net new ARR in Q1 grew over 20% The momentum was broad-based with strength from software firewalls SASE, and XIAM. It is important to note that our NGS offerings drive all of our revenue line items, including product revenue, nearly half of which is from software over the last year, subscription revenue and a growing portion of our support revenue. Total revenue reached $2.47 billion representing 16% growth which exceeded the high end of our guided range. Product revenue grew 23% year over year, 44% of our trailing twelve-month product revenue came from software form factors an increase from 38% in the trailing twelve months ending Q1 2025. This acceleration is fueled by growth in our software firewalls and PanOS SD WAN, within product revenue. We continue to see stability in hardware appliances and early interest in our newly launched Gen five firewalls. Total services revenue grew 14% Within this, both subscription and support revenues grew 14%. Geographically, we saw broad-based strength across all major theaters, with Americas growing 14%, EMEA up 18%, and JPEG growing 22%. Having discussed our top-line strength, I'd like to take a moment to give an update on our platformizations in Q1. As Nikesh highlighted, platformization continues to take hold as customers look for a strategic security partner that can continually adapt and innovate with shifts in the cybersecurity threat landscape. Our ability to deliver best-in-class products through our unified platforms Prisma Rares and Quantum Security in Q1, for example, is a critical motivation for customers to platformize with us. We completed approximately 16 net new platformizations this quarter. This momentum was driven by strength in XIAM, where platformizations more than doubled year over year affirming that customers are actively moving towards simplicity, and integration to have real-time outcomes. We now have nearly 170 customers with NGS ARR over $5 million and 50 customers with NGS ARR over $10 million both growing about 50% year over year. These results reinforce our target of $20 billion in NGS ARR by fiscal year thirty inclusive of the pending CyberArk and CronSphere. Acquisitions. Moving down the income statement, our disciplined focus on profitability and operational leverage is clearly visible in the performance. Metrics we delivered. Total gross margin for the quarter was 76.9%, We delivered product gross margins of 80.2% an increase of 50 basis points year over year, and reflected a significant sequential improvement of 340 basis points compared to Q4 '25. The Services segment also demonstrated positive margin trajectory reaching 76.2%, which constitutes a sequential increase of 70 basis points. We continue to be pleased by the continued growth of our SaaS offerings and remain actively engaged in executing cloud cost efficiencies. We delivered an operating margin of 30.2%, achieving expansion of 140 basis points year over year and our second consecutive quarter above 30%. This strong expansion reflects not only improvements in gross margin, but critically our ability to drive sustained scale and efficiency across all of the OpEx line items. We continue to apply an AI-first lens to all of our processes and functions. Notably, we have been able to deploy AI in our global customer support organization to drive three consecutive quarters of case volume reduction. And reduce time to resolve for 11 consecutive quarters. As a direct outcome of this disciplined leverage, our diluted non-GAAP EPS reached $0.93 which exceeded the high end of our guidance. This execution provides the basis for strong adjusted free cash flow which came in at $1.7 billion up 17%. Our cash and cash equivalents at the end of the first quarter is now over $10 billion Finally, regarding capital allocation, our approach remains prudent. We did not repurchase any shares in Q1 Our buyback strategy remains opportunistic. We have $1 billion in share repurchase authorization remaining through December 2026. Ultimately, we remain focused on leveraging this efficiency to maximize long-term shareholder value. With that, I will move on to Q2 and fiscal 'twenty-six guidance. For the second fiscal quarter 2026, we expect NGS ARR to be in the range of $6.11 billion to $6.14 billion an increase of 28%. Remaining performance obligation of $15.75 to $15.85 billion an increase of 21% to 22%, revenue to be in the range of $2.57 to $2.59 billion an increase of 14% to 15%. And diluted non-GAAP EPS to be in the range of $0.93 or 0.95¢, an increase of 15 to 17%. For the fiscal year 2026, we expect NGS ARR in the range of $7 billion to $7.1 billion increase of 26% to 27% remaining performance obligation of $18.6 to $18.7 billion an increase of 17% to 18%, revenue to be in the range of $10.5 to $10.54 billion an increase of 14%, operating margins to be in the range of 29.5% to 30% diluted non-GAAP EPS to be in the range of $3.8 to 3.90. An increase of 14 to 17% and adjusted free cash flow margin in the range of 38% to 39%. As Nikesh mentioned earlier, we are also reiterating our 40% cost adjusted free cash flow margin target for fiscal year twenty twenty-eight inclusive of both CyberArk and Cronosphere. Furthermore, whilst we will provide more detailed guidance after closing the transaction, we expect to maintain an adjusted free cash flow margin of at least 37% for fiscal year twenty twenty-six inclusive of both CyberArk and Cronosphere depending upon timing of close. We've included our typical modeling points in the presentation for your review, but I would like to highlight a few now One, as we noted last quarter, we expect to we continue to expect our net new NGS ARR and revenue to be second half in Q4 weighted as we continue to platformize with our customers Two, we expect product revenue growth for Q2 to be approximately 17% to 18% and finally, we expect $130 million to $140 million in CapEx in Q2 twenty twenty-six, which is inclusive of a $90 million non-recurring real estate CapEx This $90 million will be removed from adjusted free cash flow in accordance with our typical treatment for these non-recurring items. With that, I will turn it over to Hamza for Q and A. Hamza Fodderwala: Okay, great. To allow for broad participation, I would ask that each analyst ask one question. With that, we'll start with Brad Zelnick from Deutsche Bank followed by Rob Owens from Piper Sandler. Brad Zelnick: Great. Thanks, Hamza. And You know, it's great to see Vintage Nikesh coming out strong in Q1 even after a blowout Q4. So congrats to you and the team. Nikesh Arora: Bolt position, Brad. First question. Brad Zelnick: I love it. I love it. Nikesh, 2026 is setting up as a perfect AI storm. Where every vendor has a story to tell, and it seems all roads lead back to identity. Where you clearly are in process of acquiring the best asset out there. But stepping back it's rare that the winner in one technology generation remains the winner in the next. So what is it that you're doing outside of smart M&A to disrupt yesterday's Palo Alto Networks, Inc. to ensure success into an AI and quantum future. Thank you. Nikesh Arora: Thank you, Brad. Well, I think there are enough examples in history of technology companies which have sustained multiple technology waves and continue to win. And I think you're seeing some of the multi-trillion dollar companies out there have been around for four, five, six, seven decades. So we hope we're one of those evergreen companies that persist and is able to execute on a similar trajectory. We are as you can see, we are very, very aware of the two biggest technology trends ahead of us, both AI and quantum. What's fascinating is the need for network inspection does not go away. From our perspective, AI and quantum are gonna drive a, loss loss more volume, So more as the more bits that fly around, the more they need to be inspected, which means need for bit inspection technologies is not gonna go away. Just the way the need for server hasn't gone away since the time servers were created. So I think we don't have a threat to our core business of bit inspection, which is how I broadly describe our network security business. And AI is driving more volumes. I was just just talking to the CEO of a large cloud service provider earlier today, and the conversation was about how they go deploy gigawatts of capacity in short order given that large sort of thrust towards building AI compute, and how do we make sure those bits are secured? So I guess we are going to see sustained demand over time from a network security perspective. If you couple that with the trend that AI is driving, is the idea that now data can be sensed real-time and actions can be taken quickly as we discussed the recent cyber attack. That was an attack based purely on online availability of data. And the ability of persistent access. From that perspective, we think the solution on the other side has to be a data-driven problem. Solution. And if you look at what we've been doing from an ex I'm perspective, we had four seventy customers three years ago, I remember you and I talking about Ex I'm as new product categories in the sock space, and your question to me was, makes you think you will succeed in a space you've never played in before? Well, Brad, we proved that we can get to close to 500 customers in a million ARR. I don't I don't think I know any company in recent history in cybersecurity which has an average ARR per customer of a million dollars. On a product category. So I think we've proven that we are able to execute the backups. And last but not the least, you know, give rate. Was like, don't underestimate quantum. Quantum is gonna break every key. Which means every piece of infrastructure that hasn't been upgraded has to be upgraded. And I just learned something the other day, which Lee taught me, is you know, you don't even have to have a quantum computer to start breaking keys. You can actually start storing data today and break it later. So you can imagine nation states getting forward and saying, let's just ingest the data, hold on to it, Nobody's paying attention. I've got the data. We'll crack it later. So I just think all these technology trends are in the right direction. We have products positioned in this category. And I'll tell you what, in three years from now, we'll look back and say, damn, that ConosWare acquisition was a very smart move. Because you need observability. If you want your stuff to work 99.9% the time, you need to know if something goes down ASAP. You can't know that if you don't have the data. And if you go back historically, the question's been the two largest category of data are security and observability. And that's where Splunk started, by the way. All we've done is we are now the new platform for security and observability once we close Chronosphere. Thanks, Brad, for the question. Brad Zelnick: Thank you. Hamza Fodderwala: Alright. Next, we have Rob Owens from Piper Sandler. Followed by Saket Kalia from Barclays. Rob Owens: Great. Thanks, Hamza. Good afternoon, everybody. Nikesh, just building on those comments, I wanted to touch on Chronosphere. And, you know, it has been challenging. I for a lot of vendors in security to get into observability. So we'd love to see or hear from you your perspective on number one, that convergence happening right now. And number two, I think Crotosphere has shown success with some of the largest AI native companies out there. Having two of the top five frontier models. Are there elements behind their product sets that are applicable to some of these other large AI natives that are that are growing rapidly that you think you can have success with. Thanks. Nikesh Arora: So, Rob, you know, I've me and the team, actually, it's a funny story. We actually found Chronosphere because we were looking around to see, oh my god, everybody's going in abstracting data pipelining and everybody's gonna have have a data pipelining capability in the future in the SIEM. And honestly, as a category, we think data pipelining is sort of an interim category, which is there because of you know, data inefficiency, but we don't think it has a sustainable future. So we kinda, like, walked away from data pipelining vendors, which I know that some of the industry has tried to ingest as part of their SIEM solutions. But when we looked harder, and we ran the Chronosphere, we discovered you know and it's very rarely when your engineering team comes back and says, these guys are good. Generally, engineers have too much pride to tell you somebody else is good. But our team came back and said, these guys are the best engineers we run into. Now to be able to scale observability when you're ingesting you know, petabytes of data at LM model scale and be able to not create latency, provide observability in that kind of environment at a cost which is a third. Look, by the right now, if you go talk to every customer, even we turn down our observability vendor because it's too expensive. At Palo Alto Networks, Inc. Like, can't afford to have real-time observability on this product platform because it's too expensive. The problem is you can't run financial services apps, you can't run large e-commerce businesses, you can't run large, you know, food delivery businesses without persistent observability. So what Colosfare has done has changed the observability model by a combination of open source and techniques where they can do scale sort of data observability at the right price. So we think every born-in-the-cloud company, every company that has a platform that requires customers to really access it seven by twenty-four, is a potential customer. And I think, again, it's gonna be another business like Xi, which we have an average year out of a million dollars at some point in time. Alright. Thank you. Hamza Fodderwala: Great. Next, we have Saket Kalia from Barclays followed by Matt Hedberg from RBC. Saket Kalia: Okay. Great. Guys. Thanks for taking my question here. Nikesh, it's interesting to see you sign larger and larger XIM deals. I think you called out an $85 million deal in the quarter. While at the same time, incumbents in this space are really struggling to grow. And in the past, you've talked about how ex I am It's like it. It makes sense. Nikesh Arora: Incumbents don't grow, we take market share, which means we grow, and they decline. That's how it works. Saket Kalia: Totally understood. But maybe from a spending perspective, maybe the question is, do you find that x is able to capture at least what those customers were spending on incumbents? Is there an opportunity to capture more because of that faster mean time to respond? Does that does that make sense? It makes sense, Saket. I think the way to think about it differently is we do capture at least what the incumbent is the customer is spending on the incumbent, But in the process of delivering next time, we're able to consolidate multiple products. So not only do we get the incumbent spend of the SIM provider, but you have, you know, UEBA, you have other carriers, maybe Lee. It's a good time for you to say something. Nikesh Arora: So ITDR, recent launches around email security, exposure management. So we're able to consolidate these sort of surrounding product categories back onto a single platform. So customer saves money, but we expand the overall footprint that we can deliver. Very helpful, thanks. Hamza Fodderwala: K. Next, we have Matt Hebert from RNC followed, followed by Tal Liani from Bank of America. Matt Hedberg: Thanks, Hamza. Congrats from me as well on the results. Obviously, a lot of really positive developments here. The $30 billion the $20 billion fiscal '30 NGS ARR target is obviously super impressive relative to the prior target that you'd outlined. Obviously, there's some talking sort of M&A assumptions in there. But I guess I'm curious, like, from a high level, Nikesh, what what are some of the biggest moving pieces that give you the confidence since you you talked about the prior target just last quarter to to raise it to such a significant margin. Nikesh Arora: Well, that's a great question, Matt. So first of all, as I said, our core business continues to show strength. And, you know, as every time you're doing forecasting, somebody says, oh, the law, large numbers are gonna start making these growth rates go down. But you know, as I mentioned, SASE continues to be strong at $1.3 billion in ARR. We're going faster than know, independent public companies which run SASE. So we feel that's a strong part of our business. Software firewalls, I think, is our hidden gem. You know, 50% of our product 44 plus percent of our product revenue is coming from software. I don't think software firewalls are gonna stop. As you put more and more cloud workloads out there, people are discovering they need a software firewall. We've been waiting for that trend. It's arrived. We are probably outside of the CSPs, the only large vendor in the software firewall. Space. So we feel strong that our core business will keep performing, which allows us to sustain our $7 billion target in FY twenty-six forward. If you take CyberArk, what we intend to do with it, we hope that business continues to transform from where they are to absorb more and more identity categories that we intend to do with them, I think Chronosphere, if you add all three of them up, that gets us very close. Will there be tuck-in between now and FY thirty? Sure. We will have tuck-ins. But as you've seen in the past, tuck-ins don't move the needles by billions of dollars. Tuck-ins move the needle by sustaining growth rates and giving you a few $100 million. But I think the the lion's share is gonna come from the three categories you've just outlined in our core business, identity, and in observability. Hamza Fodderwala: Right. Next, we have Tal Liani from Bank of America. Followed by Meta Marshall from Morgan Stanley. Tal Liani: Guys, two great acquisitions. Long term, very promising. The question is the transitory period What's the impact on dilution on margins or free cash flow margins? And then how long does it take to see the synergies the sum of parts is greater than two. Nikesh Arora: Yeah. I'm gonna let Deepak answer the precise questions, the numbers. As I said, cyber you know, Chronosphere, we will run independently. Martin and team's done a great job. We will provide, obviously, the services from the HR finance marketing people, which is great because they don't have a large team in doing that. Basically a bunch of really smart engineers and forward-deployed engineers as well as a few salespeople. So we're gonna give them some support by introducing the right in the right targeted fashion. But Martin is very capable. He will run the business with his team. We trust him to do that. We're just gonna provide the sort of the rocket fuel and him to go out and meet customers and execute on his plan. So kind of, it's a low because for us it's very important because all of our focus on integration perspective is on cyber. From a CyberArk perspective, you know, we, as I said, we've had some great meetings. We understand where it is. There'll be some you know, rational synergies on day one because we don't need certain things in duplicate. We think by the time we get to the end of this fiscal year, our fiscal year of FY '26, have a much better handle. We'll be able to align their sales quotas and their teams and territories around our plans. So that's where I think a little bit of reshaping will happen. But I'm let Deepak talk about specific w and and free cash flow mark. Yeah. So so I think, Tal, like, the the key part, just what what I said in my prepared remarks is, like, with both acquisitions, we believe that we'll be able to get back to the 40% free cash flow by '28. Your question is really about what in the in the interim And I specifically mentioned that we should be able to maintain at least 37% plus free cash flow margin even in the interim, like, you know, barring the the one-time costs I think just highlights the the the bottom of the floor. So we're we're pretty deep into at our scale, pretty deep into understanding how much we can do how fast, and it doesn't really move the needle as much as you think it might. Nikesh Arora: Between 37 to 40% over the next two years, and you know, 40 plus percent by 2028. Tal Liani: Okay. Thank you. Hamza Fodderwala: Thank you, Tal. Bye. Next, we have Meta Marshall from Morgan Stanley followed by Brian Essex from JPMorgan. Meta Marshall: Great. Thanks, and apologize for the voice. Great traction with XIM and Prisma this quarter. Just what inning are you seeing customers in in terms of AI adoption and is it different on AI for security versus kind of security for AI. Thanks. The look. It's still early innings on AI adoption. I mean, there's on one hand, what you see is this massive build-out of AI data centers and models and everything else. That's the leading indicator. But then when you start to look at enterprise adoption, there's you know, huge scale of production pilots and early deployments and things like that, and that's really just the tip of the spear of of what we think is coming. Having said that though, the security of that tends to be trailing that and and so the the recent attacks that we're seeing both of AI as well as AI launching attacks is obviously going to start driving more and more awareness of the importance really of trying to do both those things at the same time. It's what I see when I talk to to to customers is a growing desire for the production pilots of AI to be run-in in parallel to the production pilots of AI security so that they're moving in lockstep. And so that that's gonna require a bit more urgency, I think, on the security side to to be up up in lockstep with the IT deployment side. And that's that's starting to happen, but it's but it's still early. Nikesh Arora: Thanks. Alright. Hamza Fodderwala: Thank you, and, feel better, Meta. Next, we have, Brian Essex from JPMorgan followed by Joseph Gallo from Jefferies. Brian Essex: Thanks, Hamza, and, congrats on the results team. Yeah. I I wanted to circle back on Quantum. Saw the partnership with IBM on Quantum Safe Readiness. I guess question for Nikesh, are are customers focused on this yet? Is is this gonna require know, some evangelism on your part? Or will this be kind of like a y two k event where they wait till the end, you know, till the last minute to address their exposure? And then maybe for Lee, how do we think about the technology advantage that you have that gives you maybe a superior white right to win for you know, post-quantum readiness? Is it the depth of visibility that you have and into networks? Is it data protection, all the above? You know, how do how do you frame that out? Nikesh Arora: Hey, Stratham. Let's let's start with the the your your question on timing. So the there's a couple of things that are driving a level of urgency. One is as Nikesh was mentioning, this notion of harvest now, decrypt later is one of the concerns. So probably more nation-state level type attack, but collecting encrypted data and then waiting for quantum to be unreal in order to decrypt it later. And so there are certain types of data that will still be valuable you know, years into the future, and so that's that's one reason for urgency now. Second is it's it's not clear yet when quantum computers will be viable. And it's possible that they'll be you know, viable before people are currently expecting, and so there's a certain that that variability is is also factored in, and I'd say third is this is likely for a lot of organizations a multiyear effort. And so if they don't start now, they won't be ready two, three, four years from now. And so all of that is adding up to what I've noticed over the last let's say, six, nine months is a pretty significant inflection in the number of customers who are starting to talk about this and plan for this. From an urgency perspective. On the technical side, the look. Part of this is really just related to we started working on post-quantum several years ago. So we we did not wait to start working on this. We've had capabilities rolling out at the last few years with the biggest launch being a a few months ago with with Orion And that has put us in a very good position simply in terms of being ahead of many of the people out there to the our ability to to sort of see across hardware stack, software stack, SASE stacks, browser stacks now, gives us I think, probably the the the one of the largest footprints where we can leverage existing deployments to get that visibility. And to provide remediation versus having it all be net new. And, you know, the partnerships we announced are is is really pretty powerful because it allows us to work with others that can complement the the pieces that we already have. Brian Essex: And the only thing I will say to that, Brian, is, like, I understand you're you know, I used to be I used to be on side of the world when I was y two k. We're all trying to figure out which stocks to buy, which ones not to buy. But the good news is you know, in the Vitocator, like, you had to go and reset everything. There was no quick fix across the the enterprise. And in this case, yes, the long-term solution is to strengthen everything and make it more robust. In the short term, we actually have a solution where using techniques we can actually take existing legacy enterprise infrastructure and secure for Quantum. So as a customer's CIO, rather take the risk or would you just rather spend a few million dollars and say, I am quantum secure? Until I can upgrade my infrastructure? The answer is yeah. Cybersecurity is insurance anyway. So buy a little more insurance. Brian Essex: Are you seeing a compliance push yet, or or is that still on the horizon? Nikesh Arora: Early early stage of that, Brian. Early stages. It's it's coming. Yeah. Very helpful. Thank you. I appreciate it. Hamza Fodderwala: Thank you, Brian. Next, we have, Joe Gallo from Jefferies followed by Patrick Colo from Scotiabank. Joseph Gallo: Hey, guys. Thanks for the question. He made some architectural changes to the cloud security products earlier this year. Can you just update us on that? How's that received by customers? And any sense of how cloud security grew in 1Q versus 4Q? Nikesh Arora: Yeah. The so we made some some changes, Joe, as you noted, with the launch of Cortex Cloud early in the year. This this was made for a number of reasons. It In large part, we were seeing an increased need from customers to be able to secure the full life cycle of their cloud deployments. From from code to cloud deployments to runtime, even connected all the way all the way into the SOC. And so the that was that was the impetus behind this, and seen a lot of very positive feedback from customers in terms of aligning to their strategies as well. And then since then, we've been able to continue to drive further capabilities on that. Earlier this year, we announced ASPM. So this is basically allowing us to prevent application security issues from working away into production. And then most recently, we announced the new cloud security agents or CDR agent we're able to be 50% more efficient in protecting cloud workloads with that. And so we we continue to drive more and more innovation. Actually, the last one was with the launch of Agentyx. That is now natively available as part of Cortex Cloud as well. So we're we're even bringing agents to the cloud security mix to to help automate customer workflows in the cloud. Thank you, Joe. Yeah. Next, we have Josh Hilton from Wolfe Research followed by Patrick Cole from Scotiabank. Josh Hilton: Hey, guys. Can you hear me? Not sure if it's supposed to be me or Patrick. Nikesh Arora: Hey, Josh. Hamza Fodderwala: Go ahead, Josh. Josh Hilton: Hey, guys. I I just wanna follow-up on the first first question, from Brad. I do think that today, the current investor view is that identity security is the market that is best positioned to benefit in an agentic future. But, Nikesh, I think in response to his question, you did mention that AI is increasing volume. And inspection. So what I'm trying to understand is how should investors expect the volume of network traffic to change in an agentic future And what does that mean for the traditional firewall business and the SASE business? Nikesh Arora: The look. I think the the way to maybe think about it Josh, is the advent of AI is is just create an extraordinary increase in the amount of data both data concentration, but also movement of data. Right? So we're we're seeing environments now that are beyond any scale that we've ever seen before just in terms of the amount of data that's moving around For example, you think about how much training data has to be brought to bear to entrain one of these models, let alone all different models are being built and different versions of models. And so that that by itself is is creating a noticeable influx in in the amount of network traffic. But somewhat concentrated concentrated toward the the AI platforms themselves. The second part that comes with that, though, is as AI becomes more and more deployed across the enterprises, that will also drive a similar pattern, albeit maybe at a slightly smaller scale. And that's the part of what Nikesh was talking about both in terms of amount of data, but then that translates then to the reserve observability days, the visit the application criticality needs, and, of course, security on top of all of that. Yeah. I think just I think you probably are alluding the fact that we didn't we didn't expect explain the identity thing well enough. Look. Identity is a market The products were designed fifteen, twenty years ago. And with all respect, in our view, IAM is not identity security. It's hygiene and IT it's IT capabilities. Like, the fact that you have a badge doesn't make me secure. I have I have a badge to enter Palo Alto Networks, Inc. not security. That keeps track of the fact that I'm in the building. It doesn't stop me from doing anything bad that I wanted. So we believe true security in the world of identity happens when you start enacting privileged access type controls across identities. And our view with CyberArk is that the fact that why are only 500,000 people in the enterprise privileged when pretty much the remaining 15,000 people per auto could cause equal amount of damage to other ways using systems. So our view is in the future, almost every identity will get some version of privileged access management and CyberArk is the best platform from our perspective and asset in the industry to be able to leverage those capabilities. Now we have to do some joint product work which is not unlike the fact that Mike came to Palo Alto Networks, Inc., we had another security company with four subscriptions. Today, we have 10. And possibly, we'll have 15 by the time, you know, Underpinnings of what is the size and opportunity. But, yes, there's bunch of work that needs to be As Lee and I were joking, yes, we call it back to the future. Very helpful, I think. Hamza Fodderwala: Thank you, Josh. Next, we have Patrick Colwell from Scotiabank followed by Fatima Boolani from Citi. Patrick Colwell: Alright. Cheers, Hamza. My question is for Nikesh on Chronosphere. I mean, we know many of the VC backers, and I totally agree with your comments earlier that you know, you're acquiring a top-quality asset with a top know, with a toehold in a in a in a tier-one foundation model vendor. Okay. Nice. There's more than a tool already, but we're we're working on getting the whole But my question is The dark foot's about to get to get there, Patrick. foot in there. Well, we're looking forward to seeing that. Okay. So, I mean, maybe that I I guess, why has the advent of AI driven you to pull the trigger right now on the Conosphere deal? And then then and then I also, if I think about Chronosphere, the buyer is typically a dev. Or maybe a CIO. Which is quite different to your current buyer profile. So just talk me through your thinking of how you're gonna penetrate those new buyers. Nikesh Arora: So, Patrick, what's interesting is that let me ask you that in three different ways. One, the actual buyer for Cronosphere is very often the CIO or even the CEO. You know, I had a conversation as part of our diligence with the CEO of a financial fintech company, I said, hey. Have you heard of Chronosphere? He's like, yes. I said, are they good? He's like, yes. I said, how do you know them? He looked at me, stared at me now and said, you think I don't know my tech stack? So I mean, these guys understand. Remember, if you're you know, you're restaurant app goes down, your ride-hailing app goes down, every second is lost revenue. What observability does is make sure it keeps track of whether any element of that stack is decaying. Is any element showing latency? Is there any performance issues across that stack? So you need constant persistent observability. The problem is it's expensive. The current vendors charge a lot of money. For it. Now Tronosphere is able to figure out is how to do the same thing at a third of the cost. So it's a combination of open source stack. It's a combination of enterprise-grade features. But they're pumping large amounts of data. So the two biggest problems are scalability, and cost. They solve both problems. Now the the the cherry on the the cake or the icing on the cake is we plan to take what you find in observability marry that with the Gentex, and provide remediation agents, which haven't been done before. So if you can take that entire life cycle say, found a problem, saw the problem, built an agent, fixed the problem. Right? Now these agents will be built and partnership with customers because no customer shall allow us to independently reset their infrastructure, but they can now write capability on top of the platform. Saying, I found a problem. I'm automate it. I'm gonna build an 75% of my customer conversations are CIOs. And 10% are CEOs. So I know the buyer. And that's why Martin's gonna run the company. Listen, There are a 173 companies in the world which all need persistent observability. We know all of the names. We know exactly who's deployed. This is what Martin does for a living. We'll go one at a time and convince us as a platform to have. Each of those guys spends 5 or $10 million a year with us. We're home. Hamza Fodderwala: Thank you, Patrick. Next, we have Fatima Boolani from Citi. Followed by Gregg Moskowitz from Mizuho. Fatima Boolani: Thank you. Excuse me. Thank you for taking my questions. Nikesh, I was gonna ask you an out-of-the-box question in accordance with how out-of-the-box your thoughts around I would never expect anything else It's my brand now. So what I wanted to ask you, you really have kept hitting home the point around TCO scalability, cost efficiency as a conduit for this convergence of security and observability. Right? So in terms of the Cronosphere rationale, I wanted to ask you how much of the rationale there was for you to effectively modernize, insource, whatever terminology you wanna use to modernize or insource the underlying fabric of your cortex and ex cyan technology. Right? So you know, in in in the context of everything you and Lee have talked about in absolute explosion of data, an explosion of telemetry that's that's gonna be hitting your iron, basically, for for all your appliances. How much of the rationale for Conosphere was that, versus, you know, wanting to enter out right into a brand new market where you're gonna try to win budgets. Nikesh Arora: I think that the latter, not the former. And if you go back, and I'm sure you've asked the question, and many many of you guys have asked me the question. There's always been this sort of fantasy that observability and security will come together at some level. And I think this is what started when Splunk, half the data is used for observability, half the data is used for security. So it started there. But it never progressed past that. Most of the observability vendors were so caught up in trying to solve the observability problem that they dip their toes in security. And I always say, you know, if it was so easy to build security with 20 more engineers, then God bless you, why do we exist? The same thing applies to observability. Like, if you don't these guys are spent They're, like, 200 plus engineers. They've spent the last three years doing this and have proven scale in the market. So yes, it's a phenomenal adjacent TAM which gonna grow in double digits for the next five to ten years. And, yes, we want a part of that. And if you look at it from our ambition to get a $20 billion ARR, we're not to get there if customers are not spending a lot of their IT and cybersecurity spend with us. Now there is a connective tissue between data across enterprises, right? Over time, the best enterprises will have seamless data access across many of their data lakes whether it's the observable data lake, it's their security data lake, their IT data lake, because eventually you want agents to go and go figure out what's going on across multiple data lakes to solve their problem. And sometimes problems cross across multiple data lakes, right? You know, if something's down, application, maybe the firewall shut it down so firewall's in the security lake. So if you want this agentic capability across data lakes, all we're trying to do is we're trying to build the enterprise fabric with our customers so over time we can provide more and more capability. Mean think of what lease at an XIM. We're building more and more modules on top because we can write more software on top of the existing data. Why does my firewall have 15 subscriptions in 2030? Why does it have 10 today? Same data. Same data. How do I get quantum cryptography visibility? I watch network data. I watch network data from malware. I watch for URLs. I watch it for quantum. Jeez. So once you get the data right, you can build tremendous amount of software capability and one at time take out slivers of the industry. This is the third data platform in the enterprise. Which is observability. Once we get that data, imagine the amount of SRE activities and agents we can build over time. So I just think this is foundational to our ambition to be a very large tech company. And three to five years from now, we'll be sitting back and saying, oh my god, we get it. Now you put a foray into the observability space, you got access to production data from enterprises that allows you to keep them running at 99.9% of the You can see I'm excited about this. Hamza Fodderwala: Thank you, Fatima. And as promised, our last question will be Gregg Moskowitz from Mizuho. Alright. Thanks, Hamza. Nikesh, we continue to hear more and more adoption for your secure browser, certainly the data points you provided today back that up. But how pervasive can this become amongst your NetSec installed base? And how strong is the monetization opportunity associated with that? Nikesh Arora: So I think, Greg, just, you know, connecting it back to what I was talking to Fatima about I think browsers are gonna get more and more prevalent in the enterprise. And if you look historically, browsers have been a threat vector and they're not secure. Right? Pretty much companies use browser that come out of the box with the OSs. And there's a bunch of things like, you know, we did a test POC with a customer, 5,000 of their browsers were tested. We found 167 were compromised. Right? So there's a wild, wild west of browsers out there, I think it's gonna get worse. When AI browsers come out of the JENTI capability. So you have much more of a flood of all kinds of browsers in enterprise. But browser has become I'd say, 80 to 90% of the workspace for most white-collar workers. Even developers, you know, exclude the legacy guys, but percent, 90% of the work is being done in the browser. So Drowser does become a very strong entry point from a security tech perspective. It has both opportunities and challenges. The opportunities are far higher from a security perspective of the browser. So we just think the browser becomes an important part of the foundational fabric for us to deliver services in the future. Right? But we need to wait for its pervasiveness or its ubiquitousness in time And that's why, again, it's one of those foundational things. If I can get a 100 million browsers out there, which are secure, I can deliver all kinds of security capabilities with way higher than that. To that extent, I think the monetization opportunities sort of in the future at scale course, there is monetization today. We don't get the browser away for free. And effectively as fungible as an endpoint agent from a SASE perspective. So right now, we're very keen on deployment and adoption and ubiquity of the browser. It has obviously financial impact on our SASE numbers, so you'll see $1.2 billion. I think from a strategic perspective, the more we can get out there, the better security outcomes we can give them in the future. Gregg Moskowitz: Great. Thank you. Hamza Fodderwala: With that, we will conclude the Q&A portion of our call. I will now turn it back to Nikesh for his closing remarks. Nikesh Arora: Thank you again, everyone, for joining us today to discuss our results. And the opportunities ahead. I also wanna thank our partners, our employees, and everybody who contributed to these great outcomes for us in Q1. We continue to plot along for Q2 and beyond. And I just wanna reiterate, really excited that we are now able to establish a toehold or perhaps a footprint in the spaces of identity and observability in the future.
Operator: Good morning, and thank you for standing by. Currently, all of the participants are in listen only mode. After management's discussion, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to Michael Poliview, Please go ahead. Michael Polyviou: Thank you, Ella, and welcome to IceCure Medical's conference call to review the financial results as of and for the 9 months ended September 30, 2025, and provide an update on recent operational highlights. You may refer to the earnings press release that we issued earlier this morning. Participating on today's call are IceCure Medical CEO at Eyal Shamir; and the company's CFO, Ronen Tsimerman. Before we begin, I will now take a moment to read a statement of our forward-looking statements. This call and the question-and-answer session that follows it contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of so forth and intended to identify forward-looking statements. For example, we are using forward-looking statements in this presentation when we discuss but the FDA's marketing authorization process will drive meaningful growth for us and support broader access for patients. We believe the global interest following the FDA authorization will support international adoption the belief that ProSense will be the only [ cablation ] system cleared in the U.S. for blast cancer in the foreseeable future. The expectation that Terumo Corporation will submit regulatory applications for ProSense, in Japan in the first half the expectation that revenue and gross profits may continue to vary quarter-to-quarter as the company focused on building commercial scale sales and the belief that the company's cash, cash equivalents and short-term deposits, positions puts it in a stronger financial position to continue executing across regulatory, clinical and commercial initiatives. The forward-looking statements contained or implied during this call are subject to other risks and uncertainties, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the company's annual report on Form 20-F for the year ended December 31, 2024, filed with the Securities and Exchange Commission on March 27, 2025, which is available on the SEC's website at www.sec.gov. The company disclaims any intention or obligation, except as required by law, to update or revise any forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, November 19, 2025. In addition, during the course of this call, was because certain metrics that are non-GAAP measures and refer you to affiliation tables and other information about these non-GAAP measures included in the earnings press release that we issued earlier this morning. I will now turn the call over to IceCure Medical's CEO, Eyal Shamir. Eyal, please go ahead. Eyal Shamir: Thanks, Michael, and hello, everyone, and thank you for joining us today to review our results for the first 9 months of 2025. During the third quarter, we remained focused and executed a growth multiplying front, including commercial operations, technology, intellectual property and regulatory matters. In October, we announced the most significant milestone in IceCure history, those for when the FDA granted marketing authorization for our [indiscernible] system to treat low-risk breast cancer. This authorization validates the clinical research we have invested in over many years and positions IQ at the forefront of minimally invasive breast cancer care. As a reminder, the authorization is for women aged 70 and older, with tumors up to 1.5 centimeters or receiving aggrevant endocrine therapy, including women who are not eligible for surgery. The indication cover a population of roughly 46,000 women in the U.S. over 70 years of age diagnosed each year. Lusan estimated 88,000 patients who are not candidates or willing to go through surgery and patients that can be treated for palliative purposes. By addressing the needs of patients, we cannot choose not to undergo surgery. Persons offer an important alternative to treat cancer that was not previously available to those patients. Additionally, 10% of women are diagnosed with benign restaurants annually and of this approximately 63,000 U.S. women operated to remove the benign breast tumors VI surgery treatment, which called lumpectomy. Collectively, this is a significant addressable market for process of roughly 200,000 patients annually, representing a significant opportunity ahead for IceCure. The response to the FDA decision has been extremely encouraging. We are seeing growing interest from the U.S. clinicians, including breast surgeons, interventional agents and breast geologists, many of whom are requesting demonstration and installation. Our U.S. commercial team is focused on expanding process installation, freezing volume and utilization. We believe IPO is the well positioned at this time for reasons including the fact that the FDA marketing authorization established that any other company wishing to file for a 510(k) marketing authorization for different cryoablation system to treat breast cancer will be required to submit 5 years of follow-up data, use a liquid nitrogen-based system and use probe [indiscernible] engage. To our knowledge, no other company is currently conducting a breast cryoablation study in the U.S. Given this significant barrier to entry, we believe ProSense will be the only cryoablation cleared in the U.S. for breast cancer in the possible future. In the U.S., we have other 20 commercial sites using ProSense prior to the FDA marketing authorization. We expect the number of commercial site will increase organically in addition to the 30 clinical site plan for our upcoming post-market study. We have submitted the study design to the FDA for review and will provide an update when we receive the FDA approvals to move forward with the post-market study. As a reminder, the FDA approval to move -- sorry, as a reminder, the clinical site while treating study patients with the benefit of reimbursement will also be available for any appropriate patients sticking ProSense [indiscernible] commercially. We expect this rollout to drive meaningful growth in both clinical use and product adoption. ProSense currently benefits from a CPT 3 code covering approximately 3,800 [indiscernible] costs. This is expected to increase to just over $4,000 in early January 2026. This improvement, combined with the FDA authorization should support broader access for patients. Beyond the U.S., we are experiencing a high level of global interest from clinicians in response to the FDA decision in markets where ProSense is already approved for breast cancer. Just a few days ago, we added Switzerland to our growing list of countries in which ProSense has been approved. As our office in Israel, we are currently hosting a visit from a distinguished Brazilian medical delegation their visit encompass a clinical overview and a roundtable discussion featuring meeting with the key opinion leaders and presentations regarding ongoing clinical trial for breast [indiscernible]. The delegation, which includes 5 interventional [indiscernible] and breast [indiscernible] also observe live clinical cases in [indiscernible] and Bellingan medical centers in Israel. In Brazil, the largest health care market in Sout America, Rosen is approved for breast cancer as well as other indications. And we have a distribution agreement with EUR 6.6 million expected over the next 5 years. Furthermore, our global marketing and clinical team have been approached by numbers medical societies to ensure our participation is in upcoming conferences in 2026. European and Asian medical societies are specifically adding breast cancer cryoablation master classes with ProSense. On the innovation front, we continue to make strong progress. In September 2025, our net generation probation system received regulatory approval in Israel for breast cancer and other indications. We recently secured a notice of patent allowance for Accent and its [indiscernible] product in the U.S. and in Japan, further strengthen the intellectual property portfolio. ProSense continue to gain significant visibility and at leading medical conferences around the world. Since the beginning of the third quarter, it was featured at [indiscernible] 2025 the Japanese Breast Cancer Society Conference, the European Society of Breast Imaging Congress and the aptitude restake the lead in the breast cancer care full summit in New Orleans. In addition, we have partnered with Karig Hospital in Florence, Italy, and conducted a 2-day course of theoretical and hands-on training for physicians from across the globe, helping to broaden adoption and expertise for breast cancer carioablation. Finally, an ongoing clinical validation continues to reinforce the safety and the effectiveness of our technology. During and following the end of the third quarter alone 13 independent study in breast cancer world presented and published as well as encouraging data in lung cancer and endometriosis, further demonstrating the growth activity and clinical value of ProSense. In addition to the recent improvement in Switzerland, we are also advancing our global regulatory strategy with our partner in Japan, Terumo Corporation plans to submit a regulatory application for the ProSense in the treatment of breast cancer in the first half of 2026, marking an important step expanding access to ProSense in new international markets. In summary, we believe ITO is entering an exciting growth phase. We are implementing our sales and marketing strategy in the U.S. to target a patient population of about 200,000 women annually to drive and accelerate growth, we will continue to expand clinical evidence, improve reinvestments and enter new markets. We are confident in the path ahead for both patients and shareholders. I will now turn the call over to Ronen. Ronen Tsimerman: Thank you, Eyal. For the 9 months ended September 30, 2025, revenue was $2.1 million compared to $2.4 million for the same period in 2024. Revenue for the first 9 months of 2024 included $100,000 from our exclusive distribution agreement and other services with Terumo, our distributor in Japan while [indiscernible] revenue was booked during the first 9 months of 2025. We had $316,000 decrease in sales during the 9 months ended September 30, 2025 due to a decrease in sales in Japan, other territories in Asia and North America. Partially offset by an increase in sales in Latin America. As we have said in the past, we expect fluctuations in quarterly revenue as commercial activities ramp in the U.S. and globally following the FDA's marketing clearance for process in low-risk breast cancer. Gross profit for the 9 months ended September 30, 2025, was $626,000 compared to $134,000 in the prior year period. This resulted in a gross margin of 30% versus 43% in the same period in 2024. As we previously communicated, we expect gross profit may continue to rise quarter-to-quarter and the company focuses on building commercial scale sales. Overall, total operating expenses decreased to $11.5 million for the 9 months ended September 30, 2025 compared to $12.2 million a year ago. This reflects our efforts to optimize spending without sacrificing commercial or regulatory execution. Net loss for the 9 months ended September 30, 2025, was $10.8 million or $0.18 per share, relatively the same as net loss of $10 million or $0.22 for the same period last year. As of September 30, 2025, we had $10 million in cash, cash equivalents and short-term deposits compared to $7.6 million as of December 31, 2024. In July 2025, we completed a rights offering, which was approximately 2x oversubscribed, raising $10 million in gross proceeds to support commercialization of Process Systems. During the first 10 months of 2025, we raised approximately $5.87 million in net proceeds from the sales of 5.4 million ordinary share through a market offering facility, bringing our cash balance as of October 31, 2025, to $11.8 million. We believe this puts us in a stronger financial position to continue executing across our regulatory clinical and commercial initiatives. Operator, we will now open the call for Q&A. Operator: [Operator Instructions] The first question is from Anthony Vendetti of Maxim. Anthony Vendetti: Ronen. I just want to just find out where it's at with the FDA for approval of the post-market study, I know you're awaiting that final approval -- has there been any communication with them? Or you're just kind of in a wait-and-see mode? Ronen Tsimerman: As I described in my part, we submitted the protocol to the FDA, and we started interactive communication with them in order to finalize it. But the official protocol with all other elements already submitted to the FDA. Anthony Vendetti: Okay. So there's -- they haven't indicated or there's not necessarily an expected time line of when they'll officially sign off on it. But you've identified 30 sites and well, there's 30 sites that you need I believe in the last quarter, you said 20 have been identified. Can you give us an update on those numbers, please? Ronen Tsimerman: Yes, we have about 20 sites that identified, we are adding more of that, but it's mainly around the clinical protocol, the statistical analysis plan and the claim database. So we are working on all elements. And I believe that more or less by the end of the year, maybe the shutdown delay a bit but by the end of the year, very early next year, we will get the final approval. And then by summer '26, we will need to -- or maybe before, but not later than summer '26, we need to recruit the first patient, 20% to reach 80 patients by end of 2026. Anthony Vendetti: That certainly seems like a very easy hurdle. In this press release, you mentioned that there might be even more patients that could benefit from cryoablation because the ones that are low risk over 70. I think was -- we originally -- I think it was originally identified as around 46,000. But in this press release, you said there's 88,000 additional patients that could benefit as well as another 63,000 that could be treated for benign tumors as well. Is that new information? And maybe just elaborate on that, please. Ronen Tsimerman: Yes. So part, Anthony, if you remember, part of our grand letter authorization letter that we got from the FDA contain like 2 parts. One of them is a low-risk early stage for patients who are 70 and older up to 1.5 centimeter. This, as you mentioned, represent about 46,000 new patients every year in the U.S. And the second part, which is due also to the breakthrough device designation that I still got in 2021 is patients who are not eligible for surgery. It could be patients with comorbidities that they cannot take them to the overall and put them under general patients who are not willing to do surgeries, patients that maybe even they are in stage that it's less cable, but more as the palliation treatment, according all the evidence from sales and other evidence, we believe that the number is the 88,000 new patients every year in the U.S. for those who are surgical or not willing to do. And the benign breast tumors that now our new users that the most drive is, of course, breast cancer. But those hospitals clinic, breast surgeons and breasts seeing also younger patients, again, 1 million new patients every year, mainly from the age of 21 to 35, suffering from benign tumors and about 63,000 of them are surgically removed So we believe that part of this addressable market could be replaced by cryoablation as the minimally invasive because those younger patients both the image bikini line is extremely important for them from the outpatient facility fee. It's the same coverage, which in January will be about $4,000 -- and for that, we have a specific indication and also a specific even CPT1 code for benign breast tumors. So all of that giving us a potential addressable market of over 200,000 new patients every year just in the U.S. Operator: [Operator Instructions] There are no further questions at this time. I will turn the call over to Eyal Shamir for concluding remarks. Eyal Shamir: Thank you for joining our call today and for the great questions. We believe the FDA marketing authorization has dramatically changed our growth trajectory. We look forward to keeping you all updated as we continue to execute on our commercial rollout of poses in the U.S. and globally. As a great day, everyone and for those in the U.S. Have a happy Thanksgiving. Thank you. Operator: This concludes the IceCure Third Quarter 2025 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
Operator: Good morning, everyone. Welcome to Lowe's Companies' Third Quarter 2025 Earnings Conference Call. My name is Rob, and I'll be your operator for today's call. As a reminder, this conference is being recorded. I'll now turn the call over to Kate Pearlman, Vice President of Investor Relations and Treasurer. Kate Pearlman: Thank you, and good morning. Here with me today are Marvin Ellison, Chairman and Chief Executive Officer; Bill Boltz, our Executive Vice President, Merchandising; Joe McFarland, our Executive Vice President, Stores; and Brandon Sink, our Executive Vice President and Chief Financial Officer. I would like to remind you that our notice regarding forward-looking statements is included in our press release this morning, which can be found on Lowe's Investor Relations website. During this call, we will be making comments that are forward-looking, including our expectations for fiscal 2025. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings. Additionally, we'll be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found on the quarterly earnings section of our Investor Relations website. Now I'll turn the call over to Marvin. Marvin Ellison: Thank you, Kate, and good morning, everyone, and thank you for joining us today. Third quarter sales were $20.8 billion with comparable sales increasing 0.4% year-over-year despite a roughly 100 basis point headwind related to Hurricanes Helene and Milton. During the quarter, adjusted operating margin expanded approximately 10 basis points, leading to adjusted diluted earnings per share of $3.06, which is an increase of 6% versus last year. These results reflect continued operational discipline and strong execution across our perpetual productivity improvement or PPI initiatives. And auto sales results continue to be impacted by softer demand within an uncertain macro environment, we're encouraged to see improvement in DIY customer engagement and discretionary projects across many areas of the home. We're also pleased with our performance in the North and West divisions, which were not affected by storms in the prior year. And we're seeing strength across all 5 key initiatives within our 2025 Total Home strategy, which we launched at our Analyst and Investor Conference last year. Let me give you an update on the performance of our Total Home strategy, beginning with the small to medium Pro where we once again delivered growth this quarter. We're enhancing our Pro offering through our Pro extended aisle, which is a direct interface with our supplier systems. It allows our Pro sales associates to sell directly from their product catalogs with the suppliers opting fulfilling their orders directly to the job site. This expands our product assortment, inventory quantities and delivery capabilities for larger orders. Second, when it comes to accelerating online sales, we delivered online sales growth of 11.4% this quarter, driven by increased traffic and continued strong conversion. We're also continuing to enhance the online experience across lowes.com and our mobile app to make it simpler and faster for DIY and Pro customers to find all the products they need. Looking ahead, we're pleased with the ongoing build-out of our marketplace. This allows us to expand our product assortment to offer our customers everything they need for their homes across the price spectrum from value to premium without assuming the risk of owning the inventory. Third, we're leveraging our loyalty ecosystem to increase our customer preferences for Lowe's, so they choose us first and shop more often. In fact, our 30 million MyLowe's Rewards members shop twice as often and spend over 50% more than nonmembers. Through both our DIY and Pro loyalty programs, we're gaining deeper customer insights, which help us tailor more personalized value-enhancing offers through data-driven marketing. Fourth, we're really pleased with the strong results this quarter in Home Services, where we delivered double-digit comps. Later in the call, Joe will discuss the initiatives that are driving these gains. And the fifth and final initiative in our Total Home strategy is increasing space productivity. We made great progress optimizing our selling space, and Bill will provide details on a couple of key initiatives later in the call. Overall, I'm very pleased with the progress that we have delivered through our Total Home strategy and the strategic alignment we're driving across the organization. Let me now discuss the importance of generative AI to improve how we sell, how we shop and how we work. This is what we refer to as our AI framework. And as we continue to make strategic investments in our AI capabilities, we're already seeing tangible results. Our virtual assistants, Milo and Milo Companion, which are built on an open AI platform, are answering nearly 1 million questions per month about everything from product specs to project know-how to the status of a customer order. In fact, when our customers engage with Motlow online, the conversion rate more than doubles, which is clear evidence that AI is simplifying decision-making and driving sales. And when our associates use Milo Companion to help customers shopping in our stores, we're seeing customer satisfaction scores increase 200 basis points. And every interaction with our virtual assistant is feeding our proprietary models, allowing us to continually improve accuracy and build a durable advantage in home improvement expertise. Within our technology team, engineers are using AI tools for development and code review, leading to double-digit productivity gains and accelerating our speed to market. In fact, Lowe's has just been recognized by OpenAI with their $100 billion token Milestone Award as a reflection of the depth and breadth of AI adoption throughout the organization. Achieving this milestone places Lowe's in an elite tier of companies that are not just experimenting with AI, but operating at a true enterprise scale. Looking ahead, we have a detailed road map of several additional high-impact AI initiatives that will drive further enhancements to the Pro and DIY customer experience, both in-store and online. This will include our participation in agentic commerce so we can continue to meet our customers where and how they choose to shop. And we also anticipate incremental productivity gains as we leverage AI to drive operating efficiency across the enterprise. Now let me turn to our acquisition of Foundation Building Materials or FBM, which we completed in October. I'd like to begin by extending a warm welcome to the entire FBM team. As a reminder, FBM is a leading distributor in interior building products, including drywall, metal framing, insulation and selling systems. FBM's business mix is balanced evenly between commercial and residential. And while the housing market is currently under some pressure, we're pleased with the momentum we're seeing with FBM's commercial sales. Some recent highlights include several data center projects, a luxury 150-unit residential high-rise and medical facilities as FBM leverages a strong reputation for reliability and technical expertise to win these contracts. And when we consider the impact to Lowe's, this acquisition gives us a more comprehensive product portfolio, expands our revenue streams and further enhances our offering to our Pro customers. In fact, efforts are already underway to quickly connect FBM's product catalog to our Pro extended our and FBM customers will gain access to Lowe's as complementary products like tools, safety gear and fasteners, so they can more quickly and conveniently source everything they need for their jobs. FBM's 370 locations nationwide also strengthens our fulfillment capabilities, especially in high-density urban markets in California, the Northeast and the Midwest where Lowe's has less of a physical store presence. Our acquisition of FBM and Artisan Design grew our ADG creates a comprehensive interior solutions for our homebuilders with everything from drywall and insulation to doors, flooring, cabinets and appliances and I look forward to updating you on the progress we're making with both acquisitions in the future. Now let me transition to our view of the macro environment. Overall, the U.S. hormone remains healthy. balance sheets are strong and consumers continue to spend. However, affordability and uncertainty in the broader economy continue to weigh on consumer confidence particularly when it comes to larger discretionary purchases as borrowing costs have been elevated for longer than originally anticipated. Looking ahead, lower interest rates, including for home equity loans could begin to spur demand even as many homeowners remain reluctant to move and give up their historically low mortgage rates. This cycle is different from past housing slowdowns in a few important ways. First, homeowners today have record levels of equity roughly $400,000 on average. And at the same time, they are more likely to invest in the home they already own instead of giving up the low mortgage rate. This is referred to as the lock-in effect and could make home equity financing a more attractive solution. So while the near-term macro backdrop reflects an anxious consumer, the combination of strong fundamentals, substantial home equity and the potential for low rates ahead gives us confidence in the long-term health of the home improvement sector. And we remain confident that the continued execution of our Total Home strategy will position Lowe's win in the short and in the long term. Before I close, I'd like to wish all of our associates a blessed and safe holiday season. Our associates are our competitive advantage, and I appreciate all they do to make Lowe's a great company. And with that, I'll turn the call over to Bill. William Boltz: Thanks, Marvin, and good morning. This quarter, we delivered positive comps in 10 of our 14 merchandise divisions, and solid performance across both DIY and Pro despite lapping hurricane activity last year. Starting with home decor. We delivered positive comps in appliances, flooring, paint and kitchens and bath. We continue to strengthen our leadership position in appliances by providing customers with a value proposition that no other retailer in the industry can match. This includes the widest assortment of top brands and innovative products, all at a must-win price point. And by leveraging our market delivery network, we're the only retailer who can deliver and install major appliances in virtually every ZIP code in the U.S. next day. This capability is crucial for items like refrigerators or washing machines that often need to be replaced immediately. One example of our innovative product offering is an exclusive new Bosch hybrid tub dishwasher line available only at Lowe's. These models combine the quiet operation Bosch is known for, along with the durability of stainless steel, in the affordability of polymer. The result is a better clean and a better value with the most accessible price points in the industry. Turning to flooring. We saw a broad-based strength across soft services, vinyl and tile flooring. In carpet, customers are enthusiastic about the benefits of STAINMASTER PetProtect. Its lead defense backing helps prevent spills and pet accidents from seeping into the carpet pad or sub floor. STAINMASTER is the most trusted brand in carpet and it is exclusive to Lowe's. Touching on paint. We drove broad-based growth across stains, primers and paint, along with accessories and applicators. And we're excited to announce the launch of Sherwin-Williams Pro Block Quick Dry primers, an innovative product that block stains and provides outstanding coverage and drives in less than an hour. This new primer is available only at Lowe's and Sherwin-Williams locations, marking the first time that we have co-launched a product. This product provides Lowe's with true differentiation within the home center channel as we continue to build on our strong relationship with this key supplier. Lastly, in kitchens and bath, we recently completed a reset of our bathroom vanity showrooms and these new sets are delivering results ahead of our expectations. The updated showroom provides a much better shopping experience for both Pro and DIY customers because they can now see and interact with a larger number of products and the stock products are now much more accessible and readily available for quick take with. This is an important way we're driving space productivity and leveraging our larger stores as a competitive advantage. Turning now to Building Products. We drove positive comps across millwork, rough plumbing, lumber and electrical. We're supplementing our already robust in-store pro offering and building products with our Pro extended aisle. As Marvin mentioned, this initiative expands our product offering, increases our inventory depth and enhances our delivery capabilities. And in millwork and rough plumbing we've seen strong performance driven by higher installation sales in home services, which Joe will discuss shortly. Millwork is another area where we're seeing innovation like the Larson 60 MT storm door with magnetic technology that keeps the door closed. It offers both performance and curb appeal and it gives customers a reason to upgrade. Turning to hardlines. We delivered positive comps in lawn and garden, with particular strength in live goods and hardscapes. Customers were inspired by the outdoor vignettes that showcased everything they needed to build their vertical gardens, along with upgrading a mailbox display and more. And the mild weather gave customers more opportunities to tackle more outdoor projects which helped drive extended demand. We're also pleased with a strong start to the holiday season in our tools, trimetry and decor categories. Shifting gears to tools where we also delivered positive comps and we saw strong performance in hand tools and tool storage. Customers responded to our value offerings and improved assortments like the Cobalt 46-inch workstation available in a wide range of colors. During the quarter, we leaned into value and drove strong online engagement during our DEWALT days event supported by a homepage takeover and a compelling free tools battery offer. Now let me give you an update on one of our key Total Home strategy initiatives, increasing space productivity, which is all about driving incremental sales opportunities by optimizing our sales footprint. This quarter, we completed the rollout of our rural format in 150 additional stores, bringing the total to nearly 500. We're also on track to complete rollout of workwear and pet to more than 1,000 stores giving us an opportunity to drive these assortments beyond our rural stores. In line with our pet expansion, which is focused on grab-and-go items like toys and treats, we're pleased to announce our new private brand, Heart & Herd. It offers pet owners high-quality, value-priced products for dogs and cats, just in time for holiday gifting. And as part of our space productivity efforts, we've made significant progress on our SKU rationalization initiative designed to improve our inventory productivity. By the end of 2025, we're set to achieve our multiyear goal of reducing our in-store SKU count by 15%. As we head into the holiday season, we're delivering new exciting products, both in-store and online through our Black Friday buildup event. We're giving customers an early start on their holiday shopping with great deals, including several that are already available now. In closing, I'd like to thank our merchants, inventory and supply chain teams, along with our MST associates and our supplier partners for their continued efforts to deliver results for our customers ahead of the busy holiday season. And now I'll turn the call over to Joe. Joseph McFarland: Thank you, Bill, and good morning, everyone. Let me begin by recognizing our store and supply chain associates who show up every day with energy and commitment to serve our customers. quarter after quarter through changes and challenges, they've proven themselves to be our company's greatest asset. And that's why I'm particularly pleased to share that the investments we're making to support our frontline associates are truly paying off. New training programs are better equipping our store teams to sell complete customer projects, including featured seasonal products and services by enabling our associates to deliver more comprehensive solutions. These programs are boosting their knowledge, confidence and effectiveness at driving sales. And as Marvin mentioned, they can also rely on our AI-powered Milo companion for product details and for help answering customers' questions. add it all up, and we're empowering our associates with the tools they need to sell more effectively across all departments in the store. Additionally, a few weeks ago, we concluded our associate annual engagement survey a critical component of our proactive listing strategy, which supports our efforts to become the employer of choice in retail. Scores across the key measures of engagement and associate well-being as well as leadership effectiveness have all continued to improve, and our 95% participation rate continues to be industry-leading. All told, our better train and highly engaged associates are elevating the Lowe's shopping experience, which is reflected in improved customer satisfaction scores for both the DIY and Pro. To focus now on the Pro, enrollments in our MyLowe's Pro Rewards program continue to grow as our core small to medium Pro customers experience firsthand the benefits of our easier-to-use loyalty platform which allows them to start earning rewards immediately and achieve higher rewards with lower levels of spending. We're also pleased to see PROS taking advantage of our enhanced digital capabilities as they shift to more shopping online. And looking ahead, we're encouraged that our recent Pro survey overall sentiment improved for small to medium Pros as they remain confident in their job prospects and report stable backlogs. Shifting now to performance in Home Services this quarter. We're pleased with our double-digit growth in this key initiative within our Total Home strategy. The team delivered broad-based strength across a number of product categories. including windows and doors, HVAC, water heaters, kitchens and bath and window treatments. These strong results were driven in part by tech-enabled solutions, which have enhanced the experience of customers, installers and associates alike. For our customers, we've accelerated the process from inquiry to complete installation by providing intuitive solutions for scheduling, quoting and payment. These enhancements have transformed what was a time-consuming process by removing friction and pain points along the customer journey. Turning now to our focus on operating efficiency. I'd like to thank our asset protection teams for continuing to deliver one of the best inventory shrink results in big box retail. Despite the challenging environment, these results are driven by a combination of outstanding leadership in industry-leading technology. We also focus this year on a number of perpetual productivity improvements or PPI initiatives in our stores including our front-end transformation, streamlining our BOPIS fulfillment and the freight flow optimization. And we're already working on our PPI road map for 2026 for store operations as we leverage AI-enabled solutions to further enhance the customer experience while also driving labor productivity. Before I close, let me take a moment to discuss one of our new initiatives to support veterans. As part of our long-standing commitment to the military community and the support of our objective to deliver 10 million square feet of impact in 2025. As a marine who served in combat, I'm particularly proud to share that in partnership with Building Homes for Heroes, and our hometown of Mooresville, North Carolina, we've just broken ground on Freedom Hill. This first-of-its-kind community will provide mortgage-free housing and support services for up to 15 households of injured veterans and first responders. As the executive sponsor of Lowe's philanthropic support of our military communities, it will be an honor for me to see lives changed through this initiative. With that, let me turn the call over to Brandon. Brandon Sink: Thank you, Joe, and good morning. Starting with our third quarter results. We generated GAAP diluted earnings per share of $2.88. In the quarter, we closed on our acquisition of Foundation Building Materials or FBM. We recognized $105 million in pretax transaction costs, including the fees associated with $9 billion in bridge financing. To finance the $8.8 billion purchase price, we issued $5 billion of bonds with a competitive weighted average coupon of 4.38% and borrowed $2 billion under a 3-year term loan. Given our better-than-expected cash flow generation, we financed the remaining $1.8 billion with cash on hand. We also recognized $24 million in non-GAAP adjustments associated with Artisan Design Group, or ADG. And keep in mind that in the third quarter of last year, we recorded a pretax gain of $54 million associated with the 2022 sale of our Canadian retail business. Excluding these impacts, we delivered adjusted diluted earnings per share of $3.06, exceeding our expectations. This is a 6% increase compared to adjusted diluted earnings per share in the prior year quarter. My comments from this point forward will include certain non-GAAP comparisons that exclude these impacts where applicable. Third quarter sales were $20.8 billion with comparable sales up driven by DIY engagement across project-related categories as well as another quarter of growth in Pro, online and appliances. As Marvin mentioned, we also lapped storm-related demand which was a roughly 100 basis point headwind to sales this quarter. While we continue to manage through an uncertain macro environment, we are pleased that we delivered positive comps in 10 of 14 product categories. Monthly comps were up 2.5% in August, up 0.9% in September and down 2.6% in October when storm-related demand was most concentrated last year. For the quarter, comparable average ticket increased 3.4%, driven by ongoing strength in Pro and appliances, mix shift into larger ticket purchases and modest price increases while comparable transactions declined 3%. Gross margin was 34.2% in the quarter, up 50 basis points as we cycle a number of storm-related pressures in the prior year. We also saw improvements in credit revenue and better sell-through of inventory as we drive our SKU rationalization efforts. Adjusted SG&A was 19.6% of sales, deleveraging 36 basis points as we cycled lower bonus attainment in the prior year and also invested in sales driving actions. Adjusted operating margin rate of 12.4% was up 10 basis points versus prior year and the adjusted effective tax rate of 24% was in line with prior year results. Inventory ended Q3 at $17.2 billion, down approximately $400 million versus prior year. The net decrease also reflects the inclusion of inventory from recent acquisitions of approximately $600 million and higher tariffs. These results were driven by several inventory productivity initiatives across the company as we leverage advanced AI inventory solutions to enhance our demand planning, allocation and replenishment while also driving our SKU rationalization efforts. ADG operating results were accretive to EPS on a non-GAAP basis for the third quarter and pressured operating margin by approximately 15 basis points, in line with expectations. Turning now to capital allocation. In Q3, we generated $687 million in operating cash flow, inclusive of the payment of federal and state taxes of roughly $900 million that have been deferred under a provision related to Hurricane Helene. Capital expenditures totaled $597 million as we continue to invest in our strategic growth imperatives. In the quarter, we paid $673 million in dividends at $1.20 per share. Adjusted debt to EBITDAR was 3.36x at the end of the quarter after we repaid $1.75 billion in debt maturities and borrowed $7 billion to finance the acquisition of FBM. The structure of this financing in conjunction with the timing of our existing bond maturities will allow for steady deleverage to our 2.75x target, which is expected by mid-2027. We ended the quarter with $621 million of cash and cash equivalents and delivered a return on invested capital of 26.1%. Turning to our financial outlook which we are updating to include our year-to-date results and our expectations for FBM. We are seeing a cautious consumer amid ongoing uncertainty in the macro environment and the timing of an inflection in the home improvement in housing markets remains unclear. We're now expecting comp sales to be roughly flat for the year, which is at the bottom end of our previous guidance. When we include FBM sales of approximately $1.3 billion in the fourth quarter, we are expecting sales of approximately $86 billion for the year. We also now expect full year adjusted operating margin of approximately 12.1%, which includes 20 basis points of dilution from FBM and ADG. We're expecting adjusted diluted earnings per share of approximately $12.25, which represents a 2% growth over the prior year. Please note that this includes the impact of FBM, which is roughly neutral to adjusted EPS, and we expect capital expenditures of up to $2.5 billion for the year. On an annualized basis, we expect FBM and ADG to negatively impact consolidated adjusted operating margin by approximately 50 basis points. We are already working collaboratively with the FBM and ADG teams on cross-selling opportunities as we expand the offering for our Pro customers. We've also begun the efforts to extract cost synergies and from our overlapping areas of spend. Taken together, we remain confident that there are compelling long-term EBITDA synergies from both revenue growth and lower operating expense. These investments in our Pro growth initiative, along with the other investments in our Total Home strategy will position us to capitalize on the expected recovery in housing and home improvement and continue to deliver long-term sales growth and shareholder value. And with that, we will open it up for your questions. Question & Answer Session Operator: [Operator Instructions] Our first question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers: So my first question is about just how you're thinking about the trend in the business in light of the performance that you've seen over the past 6 months and a harder compare and then into '26. So you noted that quarter-to-date is positive. Is there anything you could elaborate on that? And is the flat guide for the fourth quarter simply just like, hey, there's uncertainty and there's a harder compare. And then as you think to '26, if the home improvement market is flat to slightly down this year and you're putting up a flat comp. If you take a look at the sum total of everything a little bit of lower rates, a little bit of replacement cycle, a little bit of innovation and what you're doing on the self-help side, should your sort of -- should the market and should Lowe's comp accelerate in '26 relative to '25? Marvin Ellison: Chris, this is Marvin. Bill and I will talk about November then we'll let Brandon share a tiny bit about how we think about '26 because as you can respect, we're not going to get into a ton of detail about that until our February call, we'll provide guidance for the year. Relative to November, look, we're very pleased with the positive comp performance to start the quarter in spite of storm overlaps from last year. we've seen improvements in the top line since exiting October. And we just believe that some of the key elements of our toll strategy are working and we're excited about November because there are some great things on tap. So I'm going to let Bill talk a bit about November, but also talk about appliances, which we think is really key to our performance, not only for the quarter, but what we're seeing in November. William Boltz: Yes. Thanks, Marvin. And Chris, we're excited about kind of the early start to the quarter, obviously, coming off of October. Strength for us really broad-based across the store, but particular strength within our seasonal categories, holiday, trimer tools, appliances and other gift-related businesses that are getting off to an early start. Our stores look great. We're starting to see live trees show up now. Poinsettia is showing up now as we get ready for next week. And we're seeing some early excitement around some key areas of the store. So whether it's by now and installed by the holidays within our flooring and cooking areas or you look at cobalt and some of the strength that we're seeing there with some new products in workstations, the buy and get offers within our tool business, driven by DEWALT, Craftsman Cobalt. We've got just a lot of strength going on right now that we'll carry into next week with Black Friday. So we're excited about how things are progressing. And in our appliance business, we've had really since last year, 4 straight quarters now of comp growth and unit growth, which is telling us the health of that business and that consumer responding to the offers and the innovation and the new products that the team has put up. Brandon Sink: And Chris, this is Brandon. I think when I step back and look at the totality of the year, we're now 3 quarters of the way through, obviously, navigating a lot of factors, a very choppy macro. But when I look at just the trends of the business, I think a lot for us to be cautiously optimistic about as we look ahead to '26. We're seeing acceleration on 1-year comps when you exclude storm-related activity for Q3 and what's implied in our Q4, also 2-year comps accelerating nicely as we've moved through the year. ongoing strength in Pro online. Bill just spoke to appliances, some early signs of life in our home services business, which is really positive. We cited broad-based performance across categories with 10 or 14 categories, geographies broad-based, really excited about FBM and ADG as we start the integration efforts. And obviously, just really pleased with the bottom line performance and the ongoing operational discipline that the company and has been able to show. So please through 3 quarters. And as we look ahead into 2026, as Marvin mentioned, we'll have more to come in February, but those are early thoughts. Christopher Horvers: And then on a related question, I mean, kitchen and bath, I think you said it was positive looking back, it seems like you'd have to go all the way back to 1Q '23. What's changed there? And as you think about it, Marvin, you've talked about like we have a lot of big ticket. We have a line remodel, the kitchen bath, the appliances. And when we sort of need lower rates to improve that sort of big-ticket remodel category, but you are seeing signs of life. So is there sort of a misperception around sort of how remodel-oriented you are amongst investors or how do you think about maybe that category showing signs that it will inflect to the positive? . Marvin Ellison: So Chris, I think it's 2 things. I'll take the first part, and I'll let Bill just talk about some of the work in resets and new products. I really believe that this is more about lowest taking share in this space. If you can go back to 2018 at our first Alison Investor Conference, I presented how we were managing this installed business with binders and whiteboards. And it's taken us a while, candidly, to get this business digitize with a technology platform that makes this entire process easy for the associate, the installer and most importantly, the customer. We think now we have a best-in-class tech stack for this space. We have central selling and so what you're looking at outside of kitchen and bath, which Bill will speak to, you see in categories like windows and doors in HVAC and water heaters. These are more replacement categories for customers who are living in the oldest housing stock in the history of the U.S., but because we have a better go-to-market strategy. Bill's teams given this great pricing. Brandon seems given us a great credit portfolio we're taking share in this area. But we're also seeing, to your point, signs of life in areas that make us cautiously optimistic that maybe there are brighter days ahead, and I let Bill talk about some of those categories. William Boltz: Yes. So Chris, I'll mention in my prepared remarks that during the quarter, we had completed our vanity reset across the stores. And that's one of the nice bright spots driven -- driving our kitchen and bath business. But we're also seeing broad-based strength, toilets, bathing, faucets, disposed of kitchen sinks, bath repair. So it's really kind of broad-based across the categories. We're excited about that. But it really boils down to the strength. I think we're also seeing within our central selling organization where the store associates take the lead. We get -- turn it over to our central selling team, and they're helping to close the deal on a kitchen cabinet. -- the strength of what Joe's team is doing in the store to take good care of the customer. There's just a lot of things that are adding up to the strength of the kitchen and bath business, but those are just a few highlights. Operator: Our next question is from the line of Zack Fadem with Wells Fargo. Zachary Fadem: I wanted to follow up on your comments around improving pro survey sentiment. And I'm curious if there's any extra color you can talk through in terms of how that's trended through the year? To what extent do you think this is a good leading indicator for your business? And then what do you think is driving the recent improvement? Marvin Ellison: So Zack, thanks for the question. Just to hit it at a high level, our small to medium pro business remains very stable. And roughly 75% of our Pros are very confident in their job prospects. And also, this segment of the Pro consumer continues to work on smaller ticket repair and maintenance projects, and that's been very consistent with what we've been saying all year long. So when we look at our Pros, when we talk to our Pros, they feel very confident in their business. They feel confident in their access to credit and even feel a little more confident about their ability to hire and attract labor. So we feel great about what our pros are telling us. And let me hand over to Joe to just talk about some of the things we're doing in the store to drive this continued growth and, in my opinion, market share gain with the specific customer segment. Joseph McFarland: Well, thanks for the question. And we're really pleased with the flywheel effect that we're seeing from the Transform Pro offering. And when you think about where we've been headed with the loyalty through MyLowe's Pro Rewards, a relaunch there, we have just a wonderful enhanced digital experience that pro extended aisle we have made investments in fulfillment. The last 3 years, our inventory investments are really beginning to pay off. The order modifications of fulfillment flexibility in the in-store experience. So we're excited to see this flywheel effect all come together with the great product offerings that we have. And we have good confidence that when this does bounce back, we're well positioned to capture the share. Marvin Ellison: And Zack, the only thing I'll add to that, I mentioned in my prepared comments that we're in the process of adding FBM to our Pro extended aisle platform. That's going to be a huge deal for us because it is very challenging for us today to fulfill a large order of something, let's say, dry wall to a customer job site and do it efficiently. We now are working to just transition that entire fulfillment process to a company that's best-in-class that's FBM. And so we think this is going to be great for FBM is going to be great for Lowe's, but more important, it's going to be great for the customer. So again, we see this as a sustainable growth strategy, and we feel great about the work we've done thus far. Zachary Fadem: Appreciate that. And I know we aren't guiding for '26 yet, but since the model is different with FBM and ADG, could we talk through early margin scenarios in both a status quo environment as well as the scenario where perhaps we see some benefits from tax stimulus and low rates? Brandon Sink: Yes, I'll just hit briefly what we're looking at in terms of margins on the FBM and ADG transactions. When you look at taken in isolation, I mentioned in my remarks, we're roughly 20 basis points on 2025. So that's coming roughly split from FBM and 10 ADG. And then when you look at as we wrap the year for 2026. That's going to be 50 basis points on the year. So I think 30 basis points of wrap into 2026. And the majority of that 50 basis points when you think of 2026 is going to be weighted towards gross margin on that. So I'm not going to get into any more details as it relates to base business or run rate, but that's just some early views of geography and impact from the transactions in '26. Operator: Our next question is from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: I wanted to ask to put the macro hat on again, there's a -- I don't know if it's a bear case, but there's a housing scenario that it just stays in this trading water position for a longer you have new prices that are lower than existing homes and the age of homeowners is pushing close to 40 years old. So I think affordability is the issue. It sounds like you may reject that premise, Marvin, given some of the bright spots, but I wanted to hear how you react to it. Marvin Ellison: No, Simeon, it's a good question. So I'll give you my thoughts, and I'll let Brandon provide any additional comments. The way we see it is this. I think that mortgage rates obviously are elevated longer than any of us anticipated. But the one thing that's different, as I said in my prepared comments is the fact that you have a healthy homeowner financially, and you have $33 trillion in equity that is in the system. And we think where between $11 billion to $13 billion, $1 trillion of that is capable. So we think the lock-in effect is real because at some point, customers are going to be looking at these sub-3% 30-year fixed mortgage rates. They like the neighborhood that they live in. They have excess equity in their home, and we think HELOCs are going to become the next opportunity for us to drive discretionary remodel big-ticket projects. So we think that is a strong possibility in the future. Now we're not going to try to time it. We're not going to try to build it in our forecast. I think that would be reckless. But we do think that, that is a very plausible hypothesis that takes you away from the bear case. So I'll pass it over to Brandon to see if he has any... Brandon Sink: Simeon, I'll add, as Marvin mentioned, the mortgage rates, we're looking at those remaining elevated at least as of now 6% to 6.5% tied more to the longer-term yields, and that's continuing to pressure both existing home sales and new home starts. And I think as we start to look ahead into 2026, we're not anticipating meaningful near-term improvement there. But we are potentially excited about what could happen with the 50 basis points of rate cuts from the Fed here over the last 18 months, the consensus would suggest we're going to see more -- we've seen these HELOC rates go from neighborhood of 10% to 12% down to 8% to 10%. And that's creating, I think, some opportunity as we look at project backlog, when we look at the data about $50 billion of products that have been delayed or deferred with the equity now with the potential to be a significant funding mechanism. And if we do see further near-term rate reductions that could act ongoing as an additional stimulus. So we're investing in the business through our Total Home strategy to be prepared for that type of environment and excited about the potential upside related to that into 2026. Simeon Gutman: Okay. And my follow-up, it's on the medium to larger Pro. Can you, Marvin, set up what Lowe's strategy is there. We've talked about the pieces of it. Will you keep supply chain separate? Are there categories that you think are essential to addressing that customer, whether it's an existing home remodel or even a new homebuilder and will you cross-sell that customer using the rest of the Lowe's asset base? . Marvin Ellison: Yes. So Simeon, I would say we feel great about the current strategy with the smaller medium pro is working. We've had quarter-over-quarter growth. We think it hinges on our MyLowe's Pro rewards loyalty platform. It's resonating well where our customers we think it hinges well on the products that Bill's team brings to the table every day, and that was a huge gap in deficit for us 7 years ago, and that is no longer the case. We also think it's important that we maintain a very competitive credit portfolio. We have a best-in-class, 5% off every day for our Lowe's credit cardholders, and that also extends to the Pro customer that resonates exceptionally well. And we have every intention on leveraging FBM for fulfillment in every intention on taking the roughly 40 million FBM Pro customers and getting them connected to complementary projects, product and projects at Lowe's. But we see a very specific void in the marketplace for serving the small to medium pro. That's why we've been so intentional about focusing on that customer. And we think we can focus on that customer in the brick-and-mortar stores and Lowes.com. And we can have a very robust strategy and platform with FBM and ADG and we can do both concurrently. One of the reasons we talk about the importance of FBM's commercial business is because it's countercyclical. When housing is down, that commercial business tends to outperform, and that's what we're seeing right now. So overall, we think we can do both and the data has proven that we have a very effective strategy with the small and medium product. Operator: Our next question is from the line of Kate McShane with Goldman Sachs. Katharine McShane: We wanted to ask a little bit more about the marketplace, just in terms of like what the initial performance has been, what you've seen with regards to seller onboarding product expansion and customer adoption? And just when you expect to scale this platform to a point where it could start to contribute more meaningfully to margin? Marvin Ellison: No. Kate, thank you for the question. We are really excited about the launch of our marketplace. The caveat is really early. And so we're not going to get into a lot of conversation relative to performance other than to say if exceeding expectations relative to financial performance, exceeding expectations relative to the number of sellers and the quality of sellers. So every seller that we've approached and we are literally looking at 4-star plus rated sellers are required to get on this platform. And we again had great adoption with Merkel's technology, and they actually awarded Lowe's as the fastest launch partner they've ever had. So we were able to get that done quickly and we feel incredibly excited. And one of the unique characteristics that we have is at virtually everything purchase as a marketplace item can be returned in a physical low store because Joe his team partnered with technology some years back to create the technology rails to make that happen. So it creates incredible convenience for the customer when they need to return something. And again, I'll let Bill talk about how the merchants are playing a role to make sure that we have a really balanced approach to how we're thinking about this. William Boltz: Thanks, Marvin. And Kate, the only thing I would add is, obviously, early, but we're learning a lot as we progress with marketplace. We're finding that it's an opportunity to expand programs that our current vendors are providing in our stores to provide stuff that would be found on Lowes.com. And we're also entering and finding new products, products that Quite honestly, we didn't think that could be available on Lowes.com that now is available and the consumers are engaging and buying them. So we're excited about that learning and what that can do. But at the forefront of when we put this together based on being a closed system, is that we wanted it to complement what we were doing with what's happening inside of our stores, and that's exactly what we're seeing early on here. Operator: Our next question is from the line of Seth Sigman with Barclays. Seth Sigman: I wanted to ask about operating leverage going forward. You've been delivering really strong operating margin improvement this year on pretty low comps. I guess it's been mostly driven by gross margin this year. So how do you think about the sustainability of gross margin as the primary driver of that? Or does the composition of margin expansion change over time? And then I guess, in general, if you could speak to how you are thinking about the leverage point in the business? That would be helpful. Brandon Sink: Sure, Seth. This is Brandon. Thanks for the question. I think as it relates to margin, very focused at this point on delivering the 12.1% operating margin that we communicated as part of our guide. And just as a reminder, ex the dilution from the acquisitions, that's at 12.3% consistent with the flat bottom end of our range that we communicated at the beginning of the year. So the team has done a really great job balancing flow through the balance between gross margin, SG&A, managing the tariff pressure that we've been dealing with. And honestly, the PPI initiatives continuing to deliver $1 billion split roughly between SG&A and gross margin, that has been the primary driver in our ability to deliver a softer sales. I think as we look ahead into 2026, a few things I would highlight we're continuing to look at FEM and ADG what we think housing and commercial markets are going to be looking like in the business performance there in '26. I mentioned earlier, new home starts both single-family and multifamily remain under pressure, but confident with these businesses that we can gain share in a down market, we're going to also mention the nice balance that we have on the commercial side. So looking at that and how that impacts the margin profile in the '26. And then the last thing I'll mention, just as we continue to look at tariffs, those ramp here in Q3, we're expecting that also to continue ramping in Q4 and the wrap to affect the first half of the year. So managing through that and trying to understand how that impacts both sales margin and operating margin going forward. So all that will be waived. We'll look at that in terms of our previous rule of thumb, and we'll have more on that as we get into our call in February for 2026. Simeon Gutman: Okay. Got it. That's helpful. And then just I guess a related follow-up would be on the gross margin specifically. The gains this quarter really stepped up. Can you just unpack that a little bit more? Are there any timing consideration? I mean you mentioned tariffs starting to flow through, was there a benefit from raising prices relative to the cost coming through? Or anything else you can tell us about the mix dynamics that seem to be supportive this quarter? Brandon Sink: I would say, Seth, on Q3 margin, really nothing related to pricing or tariffs. I would say they're that's playing out very much in line with our expectations just in terms of estimating when the cost is going to be flowing through margin. The great work that Bill and team have done on the merchandising side with our suppliers. It really is the themes that I outlined in my remarks. We're lapping storm pressure from last year. So that is serving as a benefit this year. The credit portfolio to a outperformed our expectations on better-than-expected losses. And then Bill referenced the SKU rationalization initiative. We've seen really good sell-through results thus far on the inventory that we're exiting there. That really was the core of the composition of the 50 basis points that we saw in Q3. Operator: Our next question is from the line of Greg Melich with Evercore ISI. Gregory Melich: I'd love to follow up on the traffic and ticket breakdown. If you look at the ticket expansion, it's accelerated like each quarter this year, how much of that 150 bps of acceleration is related to some of the early tariffs going through? How much of it is mix? And how sort of the basket evolving in terms of items in it and the size? Brandon Sink: Yes, Greg, I can speak to ticket and transaction. So when we look at ticket growth, it's really similar when we look at Q3 performance as to what we've seen in previous quarters in terms of the drivers. So the strength in our Pro business, also appliances, I will reference that in Q3, we did have some modest price increases. When we look at like-for-like inflation, again, modest. It's very consistent with our expectations and also the year-to-date trends that we've seen as we continue to watch tariffs move through the system. The offset is transactions, and that has been pressured by the lower DIY demand. But I'll also call out the bulk of the 100 basis points of storm-related pressure with the DIY is affecting the transaction. So that's really the driver of the offset when we look at Q3. And then I think when we look ahead to a lot of those same drivers are expected from Pro appliances. There will be some modest like-for-like inflation. Just as a reminder, we also have 100 basis points of hurricane pressure that we're cycling in that will also pressure comps and pressure DIY transactions in Q4. Gregory Melich: Got it. And then maybe just a clarification on before. The 50 bps is the full annualized effect on the margins of the 2 acquisitions, right? So we have like basically 15 bps that show up this year and then 35 bps next year. Brandon Sink: So yes, I [indiscernible] Greg, it's 20 on the year for 2025 and then 30% of wrap for a total annualized run rate into 2026 of 50 basis points. Gregory Melich: Got it. And if I take the guide for 4Q, it seems like margins should be down around 60 bps, and it's fair to say that's the 2 of those sort of rolling in. Brandon Sink: Yes, I would say when you isolate Q4, the bulk of the operating margin decrease is going to be driven by layering in the transactions. We have $1.3 billion of sales for that will pressure operating margin or diluted down as well as ADG. So that's driving the bulk of the change in Q4. . Operator: Next question is from the line of [indiscernible] with Bernstein. Zhihan Ma: I wanted to ask about the SBM ADG integration that you're doing. Can you just help us understand to what extent you're maybe onboarding ADG on to SBM ERP system, how does that integration work in the near term? Marvin Ellison: Thank you for the question. It's early days. So the first rule that we have is to do no harm to the performance of either business platform, including loads. But we are in the early stages of the integration. The big advantage we have is FBM's current IT platform is the same platform that we are transitioning ADG 2. That is not by accident. And also, it's an existing platform that we have in our Lowe's Pro supply businesses. So we feel like we're going to have the ability to accelerate the IT integration between the companies. But as you can respect, we're in the early stages of that, but we feel really good about the plan. We feel really good about the timetable, and we have the best IT team in retail working on it. So I'm very confident we'll be able to make it happen. Zhihan Ma: Great. And then just a longer-term follow-up. You mentioned the plan to deleverage to the 2.75 by '27 is the longer-term plan to resume share buybacks by then? Or should we expect additional acquisitions from here? Brandon Sink: Yes. I would say, Gian, still very focused on the integration activities. As Marvin mentioned, that's going to be our focus here over the next 2 years. We're pausing share repo and very much expect to get back down to that 2.75x leverage target by 2027. So that's our focus. FBM is going to continue to run their existing play in the meantime, expanding through greenfield expansion, organic growth. And there could be potentially some small tuck-in M&A, but that would only be what we could self-fund with additional cash flow. So I think that's the best way to think about how we're going to be operating here over the next 2 years. . Operator: Our last question comes from the line of Robby Ohmes with Bank of America. . Robert Ohmes: Just 2 follow-ups. Just on the fourth quarter when you -- the way you're planning it for seasonal and given a little bit more probably tariff prices coming through. Any changes in the timing of promos? Are you doing any promos earlier related to holiday and things like that? William Boltz: No, Robby. I mean the promotional cadence remains relatively consistent to prior years. We started the quarter off with kind of the early pre-Black Friday type stuff that we've been doing. Obviously, Black Friday next week. And then post Black Friday, when you get into Cyber Monday events for dot-com and then you get into that leading up to the holiday time frame. We've got offers out there for both the Mylos Rewards members as well as our -- all of our consumers, both online and in-store, so relatively consistent. . Robert Ohmes: That's helpful. And then just a follow-up. On flooring and the strength you guys are seeing there, you guys called out soft surfaces. Is there trade down going on? How do you think you're doing relative to industry? Is there something changing in flooring? Or is it all -- is it something about your positioning in good, better, best? Or maybe a little more color there. . William Boltz: Yes. It's nice to be able to give a shout out to the flooring team and all the work that they've been doing. Last quarter, we announced the acquisition and being able to get Dow Tile into our assortment. So that's starting to roll in now. But specifically, the soft surface, it's really the strength of Stainmaster and we've called that out as one of our strongest brands, and now we've got leak defense being able to be offered. So that is not a trade down, that's a trade-up offering in the assortment. But I think the team has done a really nice job of offering value out there every single day. And I'd stack our soft surface offer out there every single day against what's going on in the marketplace. And then you could go into luxury vinyl, you can go into resilient hybrid and they go into hard surface tile and the teams have offers out there every single day to close that consumer that's now making the decision to do a flooring project. Marvin Ellison: Robby, I would just add that the investments we've continued to make in our services business flooring was one of our first to go central selling, where we remove that complexity of the design from the store. We shortened the time to close the customer and take them off the market. And so I think all in all the products the service level, we're really seeing some green shoots. Kate Pearlman: Thank you all for joining us today. We look forward to speaking with you on our fourth quarter earnings call in February. Thank you. Operator: This concludes the Lowe's third quarter 2025 earnings call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to The TJX Companies, Inc. Third Quarter Fiscal 2026 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press star 1. This conference call is being recorded, 11/19/2025. I would now like to turn the conference over to Mr. Ernie Herrman, Chief Executive Officer and President of The TJX Companies, Inc. Please go ahead, sir. Thanks, Courtney. Ernie Herrman: Before we begin, Deb has some opening comments. Operator: Thank you, Ernie, and good morning. Today's call is being recorded and includes forward-looking statements. Deb McConnell: About our results and plans. These statements are subject to risks and uncertainties that could cause the actual results to vary materially from these statements, including among others, the factors identified in our filings with the SEC. Please review our press release for a cautionary statement regarding forward-looking statements as well as the full Safe Harbor statements included in the Investors section of our website, tjx.com. We have also detailed the impact of foreign exchange on our consolidated results and our international divisions in today's press release and in the Investors section of tjx.com along with reconciliations to non-GAAP measures we discuss. Thank you. And now I'll turn it back over to Ernie. Ernie Herrman: Good morning. Joining me and Deb on the call is John. I'd like to start by thanking our global associates for working together to deliver our shoppers an exciting assortment of merchandise at excellent values every day. I truly appreciate their continued hard work and dedication to The TJX Companies, Inc. Moving to our third quarter performance, I am extremely pleased that comp sales, profitability, and earnings per share were all well above our plan. Our overall comp sales increase of 5% was driven by strong comp sales growth across each of our divisions. Clearly, our value proposition continued to resonate with consumers in The United States, Canada, Europe, and Australia. And we are confident that we gain market share across each of these geographies. With our above-plan results in the third quarter, we are raising our full-year guidance for sales and profitability. John will detail our results and guidance in a few minutes. As to the fourth quarter, we are off to a strong start and as always, we'll strive to beat our plans. I am very excited about the initiatives we have underway for the holiday season. We are convinced that we will keep attracting shoppers to our retail banners. Availability of quality branded merchandise has been exceptional and we are in an excellent position to flow a fresh assortment of goods to our stores and online. We feel great about the strength of our business and are confident that our flexibility, wide customer demographic, and focus on value will continue to be a tremendous advantage. I'll talk more about our fourth quarter opportunities in a moment, but first, I'll turn the call over to John to cover our third quarter results in more detail. Thanks, Ernie. I also add my gratitude to all of our associates for their continued hard work and commitment to The TJX Companies, Inc. John Klinger: Now I'll share some additional details on the third quarter. As Ernie mentioned, our consolidated comp sales growth of 5% came in well above our plan. This was driven by a combination of a higher average basket and an increase in customer transactions. Further, we saw strong comp increases in both our apparel and home categories. Third quarter pre-tax profit margin of 12.7% was up 40 basis points versus last year and well above our plan. Gross margin increased 100 basis points versus last year. This was due to an increase in merchandise margin, primarily driven by lower freight costs, expense efficiencies, and expense leverage on sales. Importantly, we are very pleased with our mitigation strategies which allowed us to offset all the tariff pressure we saw in the third quarter. SG&A increased 60 basis points versus last year. This was due to incremental store wage payroll costs, a contribution to the TJX Foundation, and higher incentive compensation accruals. Net interest income negatively impacted pre-tax profit margin by 10 basis points versus last year. Third quarter diluted earnings per share of $1.28 increased 12% versus last year and was also well above our expectations. Lastly, we are extremely pleased with our third quarter pre-tax profit margin came in 60 basis points above the high end of our plan. In the third quarter, merchandise margin was stronger than we expected driven by lower freight costs, and we saw a benefit from expense leverage on the above-plan sales. Further, with our above-plan results, we had higher incentive compensation accruals and made a contribution to the TJX Foundation. Now to the third quarter divisional performance. At Marmaxx, comp sales grew by an outstanding 6% with strong increases in both our apparel and home businesses. It was also great to see strength in our store performance across all regions and income demographics, which speaks to the broad-based appeal of our values. The comp increase was driven by a higher average and growth in customer transactions. Marmaxx's segment profit margin was 14.9%, up 60 basis points versus last year. We were also pleased with the results at our Sierra stores and U.S. e-commerce businesses which we report as part of this division. We are extremely pleased with Marmaxx's momentum and continue to see terrific opportunities for our largest division to grow its footprint and capture additional market share. At HomeGoods, we continue to see very strong sales momentum with comp sales up 5%. Segment profit margin improved to 13.5%, up 120 basis points versus last year. With our highly differentiated mix of home fashions from around the world, at our HomeGoods and HomeSense banners we are confident that consumers will continue to be drawn to our stores. Further, we see a significant opportunity to further grow our store base and attract more customers which we believe will allow us to capture a bigger piece of the U.S. home market. TJX Canada's comp sales increased an outstanding 8%. Segment profit margin on a constant currency basis was 14.9%, down 20 basis points versus last year. Which was driven by unfavorable transactional foreign exchange. As the leading off-price retailer in Canada, our Winners, HomeSense, and Marshalls banners have excellent brand awareness and strong customer loyalty. We believe our position as a top value retailer in Canada sets us up very well to continue our growth in this country for many years to come. At TJX International, comp sales grew 3% with increases in both Europe and Australia. Segment profit margin on a constant currency basis increased to 9.2%, up a very strong 190 basis points versus last year. Ernie Herrman: We are convinced that we will continue to gain market share across John Klinger: both Europe and Australia. Looking ahead, we're excited about our growth plans in our existing countries and our planned entry into Spain in 2026. Moving to inventory. Balance sheet inventory was up 12% and inventory on a per-store basis was up 8% versus last year as we've been buying into the excellent opportunities for quality branded merchandise we've been seeing in the marketplace. Availability of quality merchandise has been terrific. And we are strongly positioned to flow fresh assortments for our stores and online this holiday season. As to capital allocation, we continue to reinvest in the growth of the business while returning $1.1 billion to shareholders through our buyback and dividend programs in the third quarter. Now I'll turn it back to Ernie. Ernie Herrman: Thank you, John. Now I'd like to highlight some of the opportunities that we see to drive sales and transactions in the fourth quarter. First, I am convinced that our retail banners will be a shopping destination for value-conscious shoppers this holiday season. As always, we believe consumers will see compelling values throughout the store every time they visit us. We see this as a major differentiator as our customers can shop our excellent values every day and not have to wait for sales, or promotional days like they do for many other retailers. Second, we believe we are strongly positioned to be a top destination for gifts. With the excellent availability of merchandise we have been seeing, we are confident that we will have a very exciting assortment of gifts this holiday season. Importantly, we plan to have gifting options across good, better, and best brands so our shoppers can find something for everyone on their list. At prices that fit their budget. Additionally, after the holidays, we will remain focused on being a gifting destination year-round. Next, we will be flowing fresh selections to our stores and online multiple times a week throughout the holiday season. We believe this differentiates us from many other major retailers as our ever-changing mix of merchandise allows shoppers to see a new assortment every time they visit. Further, we believe this may encourage shoppers to visit our stores more frequently to see what's new. I am also excited about our post-holiday initiatives to transition our stores to the categories and trends that we believe consumers want. John Klinger: Lastly, Ernie Herrman: we are excited about our holiday marketing campaigns. We recently launched our campaigns across a variety of media channels with an emphasis on digital. At every division, we believe our campaigns position us as a destination for holiday decor and inspiring gifts at terrific values. John Klinger: Further, Ernie Herrman: we are targeting a wide consumer demographic to emphasize that our values are available to all shoppers, to all our shoppers every day. We believe our campaigns will keep our retail brands top of mind and may encourage cross-shopping of our banners and attract new customers this holiday season. John Klinger: Now I'd like Ernie Herrman: to quickly summarize the key reasons why I am so confident that we are in an excellent position to continue our global growth and increase market share over the short and long term. First, we're convinced that consumers will continue to seek out value. Our value proposition of brand, fashion, quality, and price sets us apart from many other retailers and has served us extremely well through many kinds of retail and economic environments over the course of our nearly fifty-year history. Second, we successfully operate stores across a very wide customer demographic. We curate each of our stores individually to appeal to shoppers across various income and age demographics. Further, we continue to see our customer growth driven by both attracting and retaining shoppers across age groups. Next, we are confident that the flexibility of our buying, planning, and allocation, store formats, systems, and supply chain will continue to be a key advantage. Operator: Fourth, Ernie Herrman: we still see significant store growth ahead with a long-term store target of 7,000 stores just for our current countries and Spain. Additionally, with our joint venture in Mexico and investment in The Middle East, we have further expanded our off-price reach around the world. All of this gives us great confidence that we have a tremendous opportunity to capture additional market share globally. Operator: Fifth, Ernie Herrman: I am extremely confident that there will be more than enough quality branded inventory in the marketplace to support our growth plans. As a growing retailer around the world, vendors can use our nearly 5,200 stores as a way to clear excess inventory, grow their business, and introduce their brands to new consumers. Next, we are convinced that the appeal of in-store shopping is here to stay. We see our treasure hunt shopping experience as an important advantage and believe it will continue to resonate with consumers. Further, we make it very easy for our customers to shop our banners by locating our stores in convenient, easy-to-access locations, and offering them the ability to shop multiple categories across our store very quickly. Most importantly, I truly believe the depth of off-price knowledge and expertise within The TJX Companies, Inc. is unmatched. We have many leaders across the company with decades of off-price experience who are laser-focused on driving the current business at a very high level while also teaching and developing the next generation of TJX leaders. We also have a very deep bench which gives us the ability to rotate talent between divisions and geographies. Finally, I am so proud of our culture. Which I believe has been a major contributor to our long history of strong performance. Summing up, we are extremely pleased with the overall performance of The TJX Companies, Inc. in the third quarter and the momentum of the business entering the holiday season. I am so proud of the continued execution of our teams around the world and their relentless focus on our value commitment to our shoppers. We remain convinced that we have significant opportunities for growth and believe we can continue to capture market share around the world for many years to come. Finally, I am pleased to share that during the third quarter, we published our 2025 Global Corporate Responsibility Report. The report covers our ongoing work across four key areas: workplace, communities, environmental sustainability, and responsible sourcing. We invite you to learn more by visiting our website tjx.com. Now I'll turn the call back to John to cover our fourth quarter and full-year guidance. And then we'll open it up for questions. John Klinger: John? Thanks again, Ernie. I'll start with our fourth quarter guidance where we are planning overall comp sales to increase 2% to 3%, consolidated sales to be in the range of $17.1 billion to $17.3 billion, pre-tax profit margin to be in the range of 11.7% to 11.8%, up 10 to 20 basis points versus last year's 11.6%. Gross margin to be in the range of 30.5% to 30.6%, flat to up 10 basis points versus last year. SG&A to be in the range of 18.9%, which would be 30 basis points favorable versus last year. We're assuming net interest income of $26 million which we expect to delever fourth quarter pretax profit margin by 10 basis points. Our fourth quarter guidance also assumes a tax rate of 25.4% and a weighted average share count of 1.12 billion shares. Based on these assumptions, we expect fourth quarter diluted earnings per share to be in the range of $1.33 to $1.36, up 8% to 11% versus last year's $1.23. Moving to the full year. We now expect overall comp sales to increase by 4%. We are increasing our full-year consolidated sales guidance to a range of $59.7 billion to $59.9 billion. This increase reflects the flow-through of the above-plan sales in the third quarter. We are increasing our full-year pre-tax profit margin guidance to 11.6%, up 10 basis points versus last year's 11.5%. Moving to gross margin, we now expect it to be 30.9%, up 30 basis points versus last year's 30.6%. We now expect full-year SG&A to be 19.5%, a 10 basis points unfavorable versus last year. We're assuming net interest income of $111 million which we expect to delever fiscal 2026 pretax profit margin by 10 basis points. Our full-year guidance assumes a tax rate of 24.5% and a weighted average share count of approximately 1.13 billion shares. As a result of these assumptions, we're increasing our full-year diluted earnings per share to be in the range of $4.63 to $4.66, up 9% versus last year's diluted earnings per share of $4.26. In terms of tariffs, we're assuming that the current level of tariffs on imports into The US will stay in place for the remainder of the year. As such, our guidance assumes that we will be able to continue to offset the tariff pressure on our business in the fourth quarter. In closing, I want to reiterate Ernie's confidence in our plans for the remainder of the year and our long-term opportunities going forward. I want to emphasize that we remain in an excellent position to continue to invest in the growth of our company while simultaneously returning cash to our shareholders. Now we're happy to take your questions. As a reminder, please limit your questions to one per person so we can answer as many questions as we can. Thanks and now we'll open it up to questions. Operator: Thank you. To join the queue, press 1. Our first question comes from Brooke Roach from Goldman Sachs. Good morning and thank you for taking our question. Ernie, I'd love to hear a little bit more about what gives you confidence in continuing to deliver the comp momentum as we come up into a tough compare for the holiday season. John Klinger: And then Operator: can you also give a little bit of commentary on what the benefit was to comp in the quarter from AUR and pricing growth and what your plans are for pricing and price gaps as you deliver value into the holiday season. Thank you. Ernie Herrman: Sure, Brooke. Well, in the comp momentum, you can see we've been kind of building momentum for a bit now, right? It's going back a number of months. I think when you look around the board here, at the opportunity to deliver a shopping experience and merchandise, that is branded at tremendous value across good, better, and best. And then you look at the lack of that customer mission being serviced really by anybody else around us. Nobody is really doing that. So, and I'm talking good, better, best, branded. At tremendous value. In a shopping environment, which I think over the last decade has become more important to consumers in terms of not only the merchandise but our shopping environment is very pleasant. Our associates are very accommodating. They're happy. We're providing, I think, an overall pleasant, exciting treasure hunt shopping experience. Even if they're running for treasure hunt. Our consumers, and we have data on this, really enjoy shopping. It's a very positive experience. And contrast that with what's happening around us, And I think ultimately that's why our formula just bodes well in terms of confidence in our comp momentum. Yeah. John, did you want to jump in? Yeah. I mean, just to give you some color on the cadence and the build of the comp. John Klinger: So the cadence in the quarter was very consistent by month, which was really nice to see. As to transactions, and basket, both transactions and basket were up with basket driving a little bit more of the comp within And within basket, ticket was the driver. Ernie Herrman: Does that help you, Brooke, with that part of that question? Deb McConnell: Yes. Very helpful. Thank you. Ernie Herrman: Yes. But you had kind of a third part which I believe was around the you know, the pricing gap, which, you know, it's on what John is getting at. But clearly, another component is our merchants are so driven by keeping a gap on our retail against the out the door We've talked about that many times. And I think that's what speaks to the third question you were getting at is, we will continue to shop aggressively competition, which by the way is clearly all retail, whether it's online, whether it's brick and mortar, at mass market, discount, or department stores or specialty, And then we will ensure, as we always do, that our out the door retail retail is below their, promotional retailer promotional retails. And we'll continue to do that regardless, you know, and that's where it gets down to item and SKU and that, you know, our teams are so good at staying laser-focused on executing that. So, that, by the way, I guess you could argue another component of being confident in our continued momentum. Operator: Thank you, Ernie. John Klinger: You're welcome, Brooke. Operator: Our next question comes from Paul Lejuez from Citi. Ernie Herrman: Hey, thanks guys. Just a John Klinger: follow-up on the traffic and ticket. I'm curious if if it was mix that drove the basket. When you think about the higher people? So I will Ernie Herrman: Sorry, Paul. That didn't come. Can you, repeat that first part? Paul Lejuez: Sure. I'm curious. If it was mix that drove the basket. In terms of higher AUR, higher ticket. Or are you seeing true true price increases? Based on what's happening in the competitive landscape? Are you seeing that opportunity to take prices higher across the assortment because others are doing the same? And then I'm also just curious if you could talk about the income demographic comment. I think you said consistent performance. Was curious if you were referring to The United States specifically, or if you could maybe talk about income demographics in other geographies as well, any differences that you're seeing? Ernie Herrman: Sure. Yeah. Paul Lejuez: So when you break down the ticket, John Klinger: it was a bit more of the price versus the mix. That drove that. Don't know if Ernie, do you want to expand on that? Yeah, sure. Yeah, Paul, I think it was Ernie Herrman: combination, but I think a little bit more was due to, yes, some of the pricing, that's gone up, as selectively throughout as other prices have gone up around us. I think you've seen many reports about other retailers talking about having made some price adjustments on certain items, categories Again, we and some of those cases have followed suit. Based on what we've had to pay. In retail. But again, I go back to what I had said to Brooke at the end of that question, her third question, is we are extremely diligent on making sure we're providing in some cases, at least as good a value as we were prior. In fact, our value perception scores, which we are always monitoring, extremely strong. Of course, one would probably guess that when you look at sales, you would say that if the value perception wasn't strong, we probably wouldn't be doing these pump sales. Paul Lejuez: So I think as John said, that was probably the chunk Ernie Herrman: of the reason. But merchandise mix does certainly impact Again, I wanted to emphasize we do not top down drive the retail ticket. We're insisting on the right value. And then our down at the buyer and level, the ones that really determine where the retail should be. Right. There's a John Klinger: a good part of our mix that you know, we're not buying, you know, the same thing over and over Yeah. When when we look at ticket, we're really looking at, it within the department. And so sometimes it can be a little challenging to read. Paul Lejuez: But Ernie Herrman: But Getting back to your income demographics, John Klinger: the vast majority of our geographies, it was it was close. I mean, it's both income demographics that we kind of break it down and how we look at it, we're very, very close. But it was the lower income demographic that was driving the comp in the majority of our geographies. Paul Lejuez: Got it. Thank you, guys. Good luck. Ernie Herrman: Which Paul brings up know, because you hear you're I'm sure all of you have heard many different reports on in some cases articles about the upper end or luxury retail driving some of the, you know, again, I always emphasize the strength in our business model is that we're have a balanced approach. Right. Where we have all we try to appeal to all ages and all in condemn And we never veer off that mission really for times like this and times when things get better or times where people are struggling. We want to appeal to all income demographics. Which is why we're seeing consistent across all the income demographic bands we look at. Paul Lejuez: All right. Just as a follow-up, is that unusual that it would be the lower income demos that are outperforming at the same time that you're seeing ticket go higher? John Klinger: No. It's been like that for the last number of quarters. I mean, because really for quite a long time, we've been seeing strong across all income demographics that sometimes it'll tip one way or the other. That's what we're seeing is just a tipping of of it rather than a trend. Ernie Herrman: It's not a long term trend, yeah. Yeah, so and Paul, we have Paul Lejuez: we have Ernie Herrman: and when John says the strength, you know, all the income demos are healthy. It's just that one's nudging a little bit In other words, a lot of we we are happy with the all the different income groups. That one's just nudged up a bit. In the in the recent. Paul Lejuez: Broadcast. Thanks, Gus. Welcome. Operator: Our next question comes from Alex Straton from Morgan Stanley. Deb McConnell: Great. Thanks so much. I've got one for John and then maybe one for Ernie. Alex Straton: So John, just on the gross margin guidance for the fourth quarter, can you talk about what changes to make that year over year expansion a little bit less than what we've seen in the last couple of quarters? And then for Ernie, a bigger picture question. A lot of discussion around AI disintermediation in retail. Especially with the use of personal digital shoppers. So I'm just wondering how you think about what these developments mean for TJ and what your broader kind of AI strategy might be more generally? Thanks so much. Ernie Herrman: Yes. Go ahead, John. So John Klinger: on the gross margin for the fourth quarter, the reason why is it's really how we are handling our shrink accrual for the year. Because we had a favorable shrink came in last year, so we're up against the adjustment in the fourth quarter that that brought the shrink rate down from our plan. So we have favorable shrink comparison to last year for Q1, Q2, Q3. And in Q4, we're up against a negative comparison last year. Does that make sense? Or I'm sorry. We're up against the positive adjustment last year, this year, which creates a negative compare Paul Lejuez: Is that good, Alex, on that? Yeah. Alex Straton: Yep. It is. Thank you. Okay. Paul Lejuez: So and on the, yeah, the bigger picture AI question, which of course Ernie Herrman: no topic is highlighted more than AI and the world we're in today. Our teams are all over this from a couple's perspectives. But let me emphasize that we're doing it in a TJX approach manner. In terms of where would it dovetail into helping us without us swinging a pendulum and doing something that could be counterproductive. So we are pretty aggressively evaluating and testing and deploying AI really across our business to help us work more efficiently and enhance and augment really the work our associates are doing. So you had mentioned I think, some example, but areas we would look at it right now testing is enhancing our fraud detection and security. There are aspects to that that could work out well. In store analytics, really helping with that process. Enhancing customer service. I'll give you another one. HR, where I think we're going to get some really big benefit. Is in some HR processes. Where there's a lot of information that could be somewhat cumbersome. As big as we are today, I think that's going to help streamline a lot of a lot of work for some of our HR associates there. Enhancing customer service, I think I mentioned. Marketing, a recent discussion we just had is marketing optimization. This is something going on around us. And we are taking a look. It's really at the beginning to see what processes there would benefit from us implementing AI. So we are can't tell you details, but we are taking a hard look and we'll be testing some services there. To see if we can move that further. Obviously it goes without saying we'd be looking at supporting buying and planning in a way, again, in a way that's still allows our merchants to function with the secret sauce that we do not want to be impacted by AI if that's not appropriate. So we're always very careful with that. But of course, we wanna be aware of it and look at it. And then helping IT teams deliver and operate more efficiently that would was one of the first places we were looking at this a number of years ago. And the last thing here, Alex, I would say is are also, the teams are really terrific and are I give our IT area credit that they're always looking at what are other people doing with AI. So that we're always aware competitively speaking so that we don't get blindsided on something we should have been looking at and somebody else is. So that's probably a little more info than you needed. But I think that kind of explains to you we're on John Klinger: Part of that last comment that I already made, you know, have established cross functional governance that process that just ensures that we are thoughtfully proceeding on looking at AI. Alex Straton: Great. Thanks so much. Good luck. Ernie Herrman: Thank you. Operator: Our next question comes from Matthew Boss from JPMorgan. Paul Lejuez: Thanks and congrats on a nice quarter. John Klinger: Thanks, Matt. Thanks, Matt. Paul Lejuez: So Ernie Herrman: Ernie, could you elaborate on just on the overall acceleration Matthew Boss: at Marmaxx, new customer acquisition, relative to expanded basket from your existing core And and if you could elaborate on the strong start to the fourth quarter, have you seen any softening in business or just opportunities that, that you see for holiday this year? Paul Lejuez: So Ernie Herrman: you're you're you're laying it up for me here, Matt. It's a new Always early. John Klinger: Yeah. I appreciate it. Now the new customer Ernie Herrman: acquisition, clearly, we're it's funny. We just talked about this a week ago, I do it my marketing team in the analysis group there. We're clearly capturing new customers consistently and above the balance that we did before. We're getting equal equal momentum from that as well as our infrequent and frequent customer spending. I think we have I give the Marmaxx team credit on just really terrific execution. They have right now, if you look in the store, a very balanced mix across all the families of business. And that's one reason I think we're capturing the market share we're capturing, which is apparel has kicked in. By the way, we sometimes talk when weather has been against us. I would tell you right now weather has helped us recently. So, that certainly is a plus in Marmaxx on certain categories. But when you look at our apparel and non-apparel business there, it's healthy across the board. So yeah, I think you start to touch on this, Matt. There is no area that's really lagging too much. Otherwise, by the way, we wouldn't it's hard to have Marmaxx run a six comp if we did have a high liability department that wasn't performing. So that's been you know, really strong. Their inventory position, now you go to kind of the root of what's going on and why I have the continued confidence back a little bit back to Brooke's first question is the availability in the market is just, I've used this before, the off the charts. I didn't use it in the script, but it's off the charts. So we have so much availability across the brands in many categories. And some more availability in some of the categories that we haven't seen in a while. So I think that is going to bode well for our next quarter. And when you're consumer right now, given the lack of excitement at retail around us, that's making them very open to trying us. Which is why, you know, we have really strong holiday marketing campaigns set up that really talks to our value leadership over next couple of months. And that's why I mentioned on the script, we're so excited about the different marketing creatives, which are really aimed at keeping us top of mind with consumers and are encouraging consumers that haven't tried us to try us for the first time. And that's why I think the new customer and infrequent customers in customers that may have shopped us a year ago and haven't been back That's what our marketing is aimed at, taking advantage in this environment. John Klinger: And then I'll just reiterate what Ernie has said upfront. John Klinger: Earlier in the call that we continue fund payroll appropriately in the stores We continue to invest in remodels in the stores. We've got fixtures that make it easier for customers to shop the stores Operator: Thanks. Good morning. Ernie, are there any categories Morning. Ernie, are there any categories or customer demographics where raising prices has been less successful? And how quickly can you pivot if you see pushback to some of this price over the holidays? David: Yes, great question. We we Ernie Herrman: actually I won't say what it is. We have one category, only one, you know all the categories we have, where we weren't happy. We pivoted back and brought the retails right back to where they were pre the adjustment. Other than that, would say we're 95% successful on the pricing strategy. Again, we don't lead the pricing strategy. We wait for the market around us. So even on that one category, what must my guess is our competitors on that category probably had to adjust their retails too, because we only went up when their retails were going up. And then we found out if it wasn't good for us, there's there's no way it was good for them. So, no, other than the one I'm thinking about, we have been successful across the board Having said that, just on some we've had couple of items. I'll hear it from a couple of the merchants where we tried this one and this one SKU, even though it was in a category where it's worked across the board. We might have a SKU that didn't work because it might just not, it might be bumping up against something or whatever. In our own mix. Because sometimes they have to compete in our own mix And even the pricing, if it went up around us, and we try to take it up because it went up around us it's still hanging with our other goods. Sometimes it doesn't work. So But absolutely, Lorraine, 95% success And very few, we're very careful on it. Which is why not only do we judge it off the actual hard data where we watch selling by SKU, every week. We also use our value perception scores. We keep a constant pulse on that. And the speed at which we turn our inventory gives us the flexibility to react quickly. Great point, John. Yep. Yep. Thank you, guys. Good question, Lorraine. Yeah? Operator: Our next question comes from Ike Boruchow from Wells Fargo. Hey, good morning guys. Congrats Ernie Herrman: Two from me. Similar to Lorraine's question, Ernie, Deb McConnell: are there categories that you've intentionally deemphasized or pushed harder because of tariffs because you look at the economics of each category. Just kind of curious how you think about that. And then, look, clearly, business is not seeing any issues. But you know, very high level, I'm sure you guys have tons of KPIs or markers you look at to kind of judge The U. S. Consumer Is there anything that you've seen over the past couple months kind of going into holiday that at all shows you that The US consumer is under some level of pressure. I think it's still a debate at this point. Just kind of curious how you guys view that at a high level. Ernie Herrman: Sure, Ike. On the first one, the d, you know, the d deemphasizing category, so to speak, if we were running into a tariff We have done that to a little degree. What's happened though, the cycle tends to come back because when they're imported like that, eventually their other accounts kind of back up And so if people back off enough, again, we're not not the importer. So we're able to negotiate through the third party. And we just might have a lag. We don't consciously deem deemphasize over the long term. We just might take what's called our internal sales and inventory plans. They're called ladder plans. We might take those down for a couple of months, but then the market cycles back. We've seen that happen in numerous times. Because you know, we're not ready to take a big price increase if the vendors are coming to own a category if we can't show the great value. So it kind of works its way through the system. So a great question That's in those cases, and yes, we have done it in a couple of cases, we just wait for the cycle to come back to us in a couple of months. Tariffs overall, I mean, we we don't really get different data than what all of you get. We can see that prices have been going up across many retailers and many categories. And it's been talked about as either it's been done or they're looking at doing it. And I would, my barometer for our other retailers struggling a little is the fact that the availability of merchandise across the board is so high across good, better and best that would lead us to believe that other retailers are struggling with some of the impact of the tariffs, I guess. So but again, we don't get any outright. That's just a pulse from what we what we see in the market. Yep. Deb McConnell: Very helpful. Thanks. Operator: You're welcome. Our next question comes from Michael Binetti from Evercore ISI. Deb McConnell: Hey guys, great quarter. Thanks for taking our questions here. Ernie Herrman: I had a couple on the margin. First, on the gross margin, John Klinger: So in third quarter, you'd I think you'd started the guidance at about five to 15 basis points of improvement on a two to three comp. You obviously beat it by a lot. Sounds like freight was a key upside driver. So a couple of questions on that. Just since the shrink dynamic should be kind of contained to fourth quarter, does that freight benefit roll off in fourth quarter? Could you talk a little bit about what's driving freight, if that's something that could contribute after fourth quarter? Secondly, I'm also curious if there was a mismatch of any kind in the quarter between tariff costs and pricing, also what that dynamic looks like in fourth quarter. Sounds like you expect to offset tariffs. But I'm wondering if that if the tariff headwind does get tougher in fourth quarter. And then finally, just on I guess, the pretax margins more broadly, are there any early signals of margin headwinds we should keep in mind as we look at our models for next year, either across the company or at the Marmaxx or HomeGoods divisions. Deb McConnell: Yeah. So Michael, just on the freight piece. So for for freight, it was a combination of favorable ocean rates and efficiencies that we Ernie Herrman: we implemented as far as movement of our merchandise. Deb McConnell: And that's really what drove that freight piece. John Klinger: And then as far as tariffs go, Deb McConnell: I mean, q '2, Q3, Q4, I mean, John Klinger: tariffs are pretty consistent as far as Deb McConnell: what we're seeing. We have every confidence that we can do exactly what we did in the second and third quarter in the fourth. So as I said in my Ernie Herrman: closing comments, Deb McConnell: we are very confident in our ability to continue to navigate the tariff environment. John Klinger: Is that freight dynamic something you think continues after fourth quarter? Or is that something that's just contained? It's really up to the freight Deb McConnell: the ocean freights providers. I mean, John Klinger: if they start taking ships off Ernie Herrman: off offline and try to John Klinger: decrease the surplus or availability, I mean, it's hard for me to answer that. Deb McConnell: It's asking me to look into the future. Can say that what we've been seeing in the John Klinger: third quarter is that we did see a savings in the ocean freight container rate. Okay, so it sounds like it's more related to SPOT than contracts. A little less visibility. And then any other new, headwinds to think about as we look at the models next year? Operator: No. Deb McConnell: Yeah. The what I'm I'm not prepared to talk about next year right now. John Klinger: We're still in the process of Ernie Herrman: of pulling our plans together. Okay. Best of luck in the holidays, guys. Thanks a lot. Thank you. John Klinger: Our next Operator: question comes from Cory Tarlow from Jefferies. Ernie Herrman: Great. Thanks and good morning. Ernie, you commented on the value perception scores Curious how you think about your value gaps today versus historically, within the context of what you've seen from competitors and then also kind of the shape of the comp throughout the year. Given your comp was initially driven very much by traffic to start the year. Deb McConnell: Mhmm. And sort of the commentary has felt Ernie Herrman: a way that it's evolved John Klinger: to be a little bit more driven by price, Ernie Herrman: but not so much so that it's eroded your value gaps is what it I think is is the point, but curious to get your perspective on that. Thanks so much. Yeah, Corey, spot on. That you summed that up, very balanced is the way we would look at. The value gap today, by the way, I would tell you has improved from where it was even a couple of years ago in terms of a couple of things. I still believe part of the value equation, which is kind of evolved, over the last number of years, is the shopping environment that we provide to go along with the merchandise is creating I think an even larger value gap. Between us and the other retailers. And I think if you look at our shopping in our store versus other off pricers or other specialty stores or department stores or larger discount stores. I think you would find a very efficient, clean, organized and then treasure hunt all at the same time. Combined with believe the perceptions are spot on where our values have even improved out the door retail versus others. The gap has improved. So across the board, I would say we have improved there versus historic comparisons on terms of total value The shape of the, I think you were asking about the shape of the comp and that being driven, it would have been a little bit more transactions you were feeling, but part of this is the retail. It was only I think it was only HomeGoods where the right Well, home goods was essentially flat. Right? And the others were still up. Yeah. So that's why I said your comment was spot on where it's kind of an in between, and we're feeling really good about it. Because again, I think there is major value gap between us and everybody else. And as John said, we've had we've had these pricing things, but clearly it does not impact any value per perception at all. Deb McConnell: Exactly. Again, driving a five comp and being strong across Ernie Herrman: every Yes, every bond. Our division. Yes. Deb McConnell: It was was, you know, really positive to see. Ernie Herrman: I would throw in a bigot. Now you can appreciate that this hasn't come up yet, but my biggest challenge, for this organization is when you have such strong sales momentum, which keeps getting better is for us to not get over our skis and buy too much too soon. So I think we've talked about that before, even a year ago. One reason we are delivering the year we're having is keeping a lot of liquidity. And our merchants are able to be very entrepreneurial and very on their buying. And that's when we provide the most exciting value branded off price closeout goods to the consumer. And so that continues to be a focus is to make sure with all this availability that's out there, and combined with our strong sales, we just need to fight urge to buy too much too soon. Know what I mean, Corey? That would probably be our biggest challenge right now because that's the number one way we still can continue to drive our sales. And profitable sales. Yeah, certainly. That makes a lot of sense. And then I just had a quick follow-up for John. You mentioned in Q4 that SG&A was, 30 basis points I believe, favorable or expected to be. Could you just unpack that for us a little bit? Thanks so much, and and best of luck. Yeah, sure. So it's it's gonna be a combination of incentive accrual favorability versus last year and expense savings. So last year we adjusted our our incentive accruals in the fourth quarter So we're comparing to that. So Deb McConnell: have a year over year favorability there. Okay, great. Thank you and best of luck. Ernie Herrman: Thank you. Operator: Our next question comes from Jay Sole from UBS. Ernie Herrman: Great. Thank you so much. Deb McConnell: Ernie, my question is if you just take a step back and think about this has been a year with an unprecedented level of tariffs. And you're talking about availability of inventory. I think you just said it was off the charts. Ernie Herrman: Does it surprise you at all Deb McConnell: that in the year when you would think people would be making less product, importing less product, that you have seen someone should go availability. And if it does, you know, how do you explain it? Ernie Herrman: Yeah. No. Great question, Jay. I have to tell you, yeah, a little surprise on the degree to which the availability is there. Because to your point, back when I go back in the spring, when all of this was just starting to evolve, and we get you know, we there were some categories where by the way, some categories back then, we wouldn't have worried about availability, only because they're they wouldn't have been impacted as much by the tariff. It would have been a more moderate tariff. And then there are others where we might have expected a little less availability. And so, a little bit. We always thought they'd be good availability. Remember, you're never gonna hear from me. A concern about not having enough goods across the board. Maybe in a category at the but you're never gonna hear a concern, even with tariffs. About us not having enough goods the way the model works. And the way, by the way, and the way we have we have seasoned pros in all of these areas in merchandising and planning that can bob and weave to dynamics out there. But yes, to your point, I think the degree to this, how do I explain it? I think part of the reason you explained it is you have public companies that are retailers that still have to bring in, whether it's the e com players, that still have to bring in goods. They're not shutting down their websites. So they're having to buy goods eventually. Maybe they've massaged it and moved from one category or less with one brand or more with another because of the tariffs, but still creates excess inventories. It is still a down the supply chain when things slow up at retail, again, they're public. They just, they can't afford to have a 20% decrease. In their So they're not cutting their spending. Do you know what I mean there, Jay? They can't cut their ordering as a extreme as the tariffs would maybe tell them they do. So I think what happens is they might be less bring in less units but they're gonna bring in the dollars that equate given the tariff. And then if those sales don't materialize, we still end up with the extra supply of closeouts. And that's what I think is, as well as I think retail across the board has been a little choppy and that's creating the excess inventory. So the yeah. Interesting dynamic. Again, this is where I like to give credit to our teams because bottom up the teams assess in each area how much because we buy in a few different ways. So they know how to weigh their core flow is coming from with certain vendors, and yet all the opportunistic side. We wouldn't be in this really good inventory position. We'll still be in liquidity if our teams weren't so good at executing. At that level. So that's where, again, very proud of what they've done in this environment. As you said, very challenging year. Got it. Thank you so much. Thank you. Operator: Our next question comes from Adrienne Yih from Barclays. Good morning. Let me add my congratulations. Ernie, we've been in the store throughout the quarter. And I was wondering I mean, they're extraordinarily long lines. I was wondering if you had been seeing sort of earlier cadence to the holiday shopping behavior and or promotionality Obviously, Walmart pulled forward their Black Friday. Just wondering what you're seeing there and if you expect a shift in the holiday season And then, John, for you on you've done a ton of work on supply chain and transfer transportation logistics over the past couple of years. Outside of the freight tailwind, are you expecting to see sort of a longer term go forward positive impact And does that change the leverage point of on gross margin? Thank you. Ernie Herrman: Questions, Adrienne. Yeah, no, we haven't we don't believe there's necessarily a perp on our part, there's no purposeful shift to thinking we're doing earlier. Again, as we've said, we're off to a strong start. We like the way we're positioned in November. Already. Which obviously indicated we were happy with our traffic, and you've been witnessing it evidently. I think what's also happening is I didn't get to talk about this earlier, but we, every year, our Q4, as you've seen, has been one of our steadiest performing quarters where we have become more of a gift giving destination. And I think that's at the root of it. I think all of the we've also talked about this. The social media, the the coolness of shopping at The TJX Companies, Inc. store, whether it's Marshall's or Sierra or HomeGoods or TJ Maxx, you probably I don't know if you see them. A lot of our reusable bags show up with shoppers that bring them to their supermarkets because we've made such an impact on consumers. And they find us to be a desirable place to show their brand. So I think as they've gotten acclimated and more desirable to shop our brand, I think that makes them think of us more for gift giving than ever before. Which is also a reason I think you're you're seeing that. It's nothing that we purposely did for an event per se or a timing thing. I think it's the nature of the brand equity and the coolness factor that we've developed over the last handful of years. That's yielding a little bit of an earlier earlier shop of us in November. John Klinger: Okay, thanks. Yeah. And so Deb McConnell: getting to the second part of your question, Ernie Herrman: I mean, of all, the leverage point we still see again, just repeating on a three to four comp, Deb McConnell: with no outsized expense increases. We still anticipate being flat to John Klinger: 10 basis points. That's not changing. We don't see that changing right now. As far as the supply chain goes, Deb McConnell: I mean certainly with Ernie Herrman: a higher ticket, we just have to, we Deb McConnell: we were more efficient in our operational areas. There's less units to move to hit the same top line. But, you know, Ernie Herrman: in addition to that, we're always looking for ways to increase the Paul Lejuez: efficiency of our facilities. And John Klinger: looking to Paul Lejuez: rather than open up a new facility as sales go up, which we still have to do. But where we can, if we can expand a facility to increase the capacity, that certainly is something we always look to do as well. Operator: Fantastic. Best of luck for holiday and see you in December. Ernie Herrman: Thanks. Thank you. Operator: Our last question comes from Mark Alschwager from Baird. Great. Good morning. Thanks for taking my question. Paul Lejuez: First, on segment margins, the delta between HomeGoods and Marmaxx is the narrowest we've seen in some time. Just talk about the key drivers to narrowing that gap and whether you expect that convergence to continue? Deb McConnell: Thank you. Paul Lejuez: I mean, so I mean, both divisions are performing, you know, doing outstanding job at driving both the top and bottom line. Certainly some of the freight benefits that we've seen over time, I mean, because of the size and nature of the product have benefited HomeGoods a little bit more. But look, we're very pleased with with both of our US divisions. Both our US segments. But nothing more to add. It's just driving the top line. I mean home goods has been very consistent at driving that top line. And and that's one of the biggest levers we have to increase the pre tax profit. Ernie Herrman: Yeah, Mark, I think I would jump up. Mark, just adding a little flavor to the merchandising to what John was saying is they've also they're constantly creating newness of vendors there. And And always super fast turning business, as you know. And so I think they've been, you know, they're very in terms of the merchandise vendor content. I think has been able to help them on their merchandise margins, which probably is also a big benefit terms of their operating income getting a little closer. To Marmaxx. Paul Lejuez: Excellent. Best of luck this holiday. Ernie Herrman: Thank you. Thanks. I'd like to at this point thank you all for joining us today. We look forward to updating you again on our fourth quarter earnings call in February. You everybody. Operator: That concludes today's conference. Thank you for participating. You may disconnect at this time.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Third Quarter Earnings Release Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will invite you to participate in a question and answer session. At the close of prepared remarks, we will open the queue for the Q and A session. As a reminder, this conference is being recorded Wednesday, November 19, 2025. I would now like to turn the conference over to Mr. John Holbert, Vice President, Investor Relations. Please go ahead, sir. John Hulbert: Good morning, everyone, and thank you for joining us on our third quarter 2025 earnings conference call. On the line with me today are Brian Cornell, Chair and Chief Executive Officer; Michael Fiddelke;, Chief operating Officer; Rick Gomez, Chief Commercial Officer; and Jim Lee, Chief Financial Officer. In a few minutes, Brian, Michael, Rick and Jim will provide their insights on our third quarter performance and outlook for the rest of the year. Following their remarks, we'll open the phone lines for a question-and-answer session. This morning, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Jim and I will be available to answer your follow-up questions. And finally, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in this morning's earnings press release and in our most recently filed 10-K. Also in these remarks, we refer to non-GAAP financial measures, including adjusted earnings per share. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which is posted on our Investor Relations website. With that, I'll turn it over to Brian to kick things off. Brian? Brian Cornell: Thanks, John, and good morning, everyone. This is my final earnings call as Target's CEO, and I plan to keep my comments brief this morning. but I wanted to take a moment to thank all of you for your ongoing engagement and support over the last 11 years. It's been the highlight of my career to lead this great company and our business has undergone many important changes since I arrived in 2014. We entered into an innovative partnership with CVS to run our pharmacy business. We changed our operating model in food and beverage, paving the way for explosive growth in that part of the business. We invested in our product design, development and sourcing capabilities and launched several new billion dollar owned brands. We pioneered the Stores & Subs model for digital fulfillment, remodeled well over 1,000 of our existing stores and added nearly 200 net new locations in the U.S. All told, this year's top line is expected to be well over $30 billion higher than the year I arrived. In that 2014 fiscal year, GAAP and adjusted EPS both came in around $4 a share. And the upper end of this year's expected range for adjusted EPS is double that number. I am proud that our team could deliver this top and bottom line growth while building a solid foundation of operating capabilities, including one of the nation's largest [indiscernible] programs and Target Circle and a rapidly growing retail media business in Randell. That said, our business has not been performing up to its potential over the last few years. And I am singularly focused on supporting Michael and the entire leadership team as they make changes to the way we work, enhancing our merchandising authority, our retail experience and investing in technology to accelerate our business. In the call today, you'll hear how the team is working quickly to get the company back to profitable growth. And while we're not there, yes, I'm confident we're on the right path and Michael is the right person to lead the next chapter of Target's growth. So with that, I want to thank all of you for your participation today and for your thoughtful engagement over the years. And finally, I want to thank the entire Target team. It has been a privilege to work with you in support of this great brand. Now I'll turn the call and today's Q&A over to Michael. Michael Fiddelke: Thanks, Brian, and good morning, everyone. We have high but achievable aspirations for Target's future, and we're acting with urgency to make the changes and investments to position Target for sustainable and profitable growth over time. While our third quarter performance came in as expected, we're far from satisfied with our current results, and we won't be satisfied until we're operating at our full potential. To get there, we've set 3 distinct but highly interrelated priorities for our team. First, we must solidify our design-led merchandising authority leading with incredible product in a way that is distinctly target. Second, as a retailer that believes that the shopping experience is every bit as important as the products we sell, we need to offer a more consistently elevated experience across our stores and digital platforms. And third, we need to more fully use technology to improve our speed, guest experience and efficiency throughout the business. Together, these priorities are in service of one goal, getting back to sustainable growth as quickly as possible. They guide every decision we make, and I want to spend a few minutes to help clarify what these priorities are, why each matters and share some of our progress to date. Before I expand on these priorities, I want to pause and acknowledge our recent restructuring headquarters, in which we eliminated approximately 1,800 roles or about 8% of our headquarters footprint, a difficult but necessary step forward. While Jim will walk through some financial aspects of this decision, I want to make it clear that this move wasn't about cutting costs. Instead, by removing layers that have added complexity to the way we work, we're aiming to work with greater agility making it clear [indiscernible] decisions and empowering our team to operate with greater authority and speed in support of our strategy. So let's discuss how we're making progress in solidifying our merchandising authority and elevating our shopping experience. And you'll also see the critical role that enhanced technology is playing in support of both, helping us progress quickly, efficiently in industry-leading ways. We are a design-led company. And that starts with our authority and merchandising. Our ability to build a unique assortment of the right, stylish on-trend products at incredible value that's so central to who we are and key to our differentiation and future growth. At Target, we believe that offering an assortment that's distinctly ours is essential to maintaining our merchandising authority with our guests. Not every category plays the same role towards these efforts, but together, they create an assortment and experience that feels unmistakably target. A great example is the transformation of our hardlines business into FUN 101 an evolution in bringing greater cultural relevance, style authority and trend-right energy to the assortment, reinforcing what makes shopping at Target so special. And while we have much more change in FUN 101 to come, it builds our confidence to see the categories that have seen the greatest change driving some of the strong sales performance already. Rick will have more details to share later. And within each category, merchandising authority means staying incredibly close to our guests by knowing what they want next, reacting to, predicting and even setting new trends and tech will play a critical role in helping us get there. We're enhancing our capabilities by equipping our teams with new tools that provide them with AI-enabled consumer insights at their fingertips. Our merchants now have real-time access to advanced data from what is currently trending on social media to which products and styles are resonating with consumers at Target and across the industry today, to what future trends our guests are most likely to care about, helping our team forecast needs, anticipate trends and buy both smarter and faster. New tools also include our recently developed target trend brain, our new internal creative platform, which uses Gen AI technology to help our teams identify and react to emerging trends faster and predict future trends. By leveraging AI to capture color, material, style and product details in applying consumer research and our brand principles, we can deliver unique and on-trend products to our guests faster than ever before. To further enhance our speed to market, we've also created synthetic audiences, AI-driven models that simulate real consumer populations to preview how different groups could respond to campaigns and products before they ever launch. This allows our marketing and design teams to test, learn and refine products, promotions and messaging with incredible speed and efficiency. And while you'll see us continue to accelerate our use of technology, it's our talented team that brings this work to life, and we are investing intentionally in our team and how we approach our work. We're redefining roles throughout the cross-functional team that supports our assortment planning and buying decisions, what we call our merchant roundtable to better equip our teams to make bolder decisions even faster. I'm also excited to share we welcome new leaders to the team in areas like our home business to bring new ways of thinking and accelerate change in the signature category. These steps forward are examples of how we're solidifying our design-led merchandising authority by using people, process and technology to drive greater levels of newness and differentiation across our entire assortment more quickly reacting to emerging trends and amplifying these trends faster than ever before. Let's turn now to our team's efforts to elevate the guest shopping experience, both in stores and digital, a great guest experience means a lot of things, but it starts with a warm, friendly and helpful team. In stores, we're making changes to give our team members more time to focus on what matters most, spending time helping our guests. Through enhanced digital tools, we're reducing time devoted to backroom tasks through more efficient truck unloading and stocking. Every hour we save is being reinvested to allow more guest interaction with a focus on friendliness and service that makes target. An elevated shopping experience also means consistently finding the products you want to need every time you shop. This holiday season, we're using our expertise and deep consumer knowledge in a new gene E-powered gift finder available on our website and our app, allowing guests to ask questions on the app and help them find the perfect gift this holiday season by simply asking something as generic as what is a good present for my mother in law, to something more specific like I have a 5-year-old son that loves Dynasores? What gifts are available for under $20? Our app will provide recommendations or ask clarifying questions to quickly and easily help guests find the right presence for every person on their holiday shopping list. For guest shopping in our stores and online, we're also investing resources to ensure we have the right product in the right place at the right time all year long. This includes modernizing the technology that forecasts, orders and positions our inventory, using machine learning to optimize flow from supplier to shelf. It's helping us move inventory more efficiently, improve reliability for everyday frequently purchased items and further improve in-stocks. We've coupled these tech enhancements with process improvements some great root cause problem solving by the team and clear measurements that show where we have the most room to improve. All in, we've seen meaningful progress on this front. In fact, this past quarter, the on-shelf availability of our 5,000 top items, the ones for which being in stock is most important to our guests and which represent 30% of our total unit sales saw a more than 150 basis point improvement compared to this time last year. But even with this meaningful progress, I want to emphasize that we have much more room to improve and we're not slowing down. An elevated store experience also means meeting our guests when, where and how they want to shop. To do this, we're reconfiguring the role each of our stores plays within a market to optimize fulfillment speed and capabilities and in the process also better supporting the in-store shopping experience. Our pilot in the Chicago market has demonstrated the effectiveness of new operating models that govern each location's mix of in-store and digital fulfillment, helping to improve the guest experience and operational performance at each store at the same time. For those stores with high foot traffic volume, reducing their mix of brown box fulfillment, allowing those teams to spend more time interacting with in-store guests. For lower volume stores in the same market with big back rooms that are perfectly suited to ship product, we're pushing more digital fulfillment volume their way. And, of course, more labor hours to support this work, creating economies of scale in a more optimized workload for each node within a market. With the changes we've made, we're getting guests the products they want faster than ever while reducing average fulfillment costs. As a reminder, we already reached around 80% of the U.S. population with same-day delivery powered by Target Circle 360, where sales grew more than 35% again this past quarter, and around 99% of the U.S. population is already eligible for 2-day shipping. And now with our evolving market fulfillment strategy that includes expanding these learnings to an additional 35 markets, more than half of the U.S. is eligible for next-day shipping, and we expect to meaningfully expand that reach in the coming year. Elevating experience also means staying ahead of new ways our guests want to shop. We're leading in the next wave of digital engagement by partnering with the world's biggest Gin AI platforms, through an initiative we call conversational curation. Building on the apps for chat GPT experience previewed in early October, we're curating the shopping experience directly from the guest's own conversation. Guests tell us what they want or even what they're trying to solve for, and open AI will offer personalized recommendations. Through this partnership, we expect to be one of the first retailers on Open AI platforms to offer the purchase of multiple items in a single transaction, offer fresh food products on the platform, and the ability to choose drive up and pick up fulfillment options in addition to the conventional shipping options offered by others. Finally, I'd like to touch on important investments that will drive both merchandising authority and an elevated experience. Our investments in new stores, store remodels and chain-wide category changes aimed at providing greater inspiration in joy for our guests every time they shop. Our new larger-format stores are outpacing our initial sales expectations and continue to be a strong source of growth. Given current real estate opportunities, we expect to continue opening these bigger boxes in more and more markets across the U.S. Additionally, we're formulating plans for next year that will bring greater changes to key floor pads throughout the store, which will accelerate both our merchandising authority and our experience. To support this change, we'll be increasing our CapEx plans for next fiscal year, spending about $5 billion, about $1 billion more than this year to bring the latest and greatest of target to new and existing markets. Rick and Jim will have more to share on this in a moment. So now before I get ready to pass things over to Rick, I want to thank the Target team, you power our progress, and it is together as a team that will write Target's next chapter. While we're not yet where we want to be, we're making change to lay the foundation for a stronger, faster and more innovative target, one that's grounded in our purpose, fueled by our team and focused on growth. I'm proud of the progress we've made and confident in the opportunities ahead. And to those of you listening this morning, if you leave having heard nothing else, I'd leave you with the following thoughts. We are not satisfied with our current results and are relentless in our pursuit of returning to growth. Our 3 priorities around merchandising, experience and technology have us on the right path. And we know what needs to be done and are actively making progress towards being the best version of ourselves for our guests, our team and our stakeholders. With that, I'll turn the call over to Rick to share more about our third quarter performance and all we have planned for this holiday season. Richard Gomez: Thanks, Michael, and good morning, everyone. Our third quarter results underscore that we still have work to do but they also show us that the actions we're taking are the right ones for our guests and for our business. We're focused on improving performance, particularly in discretionary categories, listening closely to our guests and moving with greater agility to bring them the newness and affordability they expect from Target. In Q3, results were in line with expectations and similar to second quarter performance, with the exception of Q2 benefiting from the Nintendo Switch 2 launch, Q3 comp sales were down 2.7%, reflecting continued softness in discretionary categories like home and apparel, partially offset by growth in food and beverage and FUN 101. Digital comparable sales grew 2.4%, fueled by more than 35% growth in same-day delivery, powered by Target Circle 360 and continued growth in Drive-Up. We saw the strongest sales around seasonal moments like back to school, back to college and Halloween, highlighting once again the importance of these holidays to our business. Across categories, one theme is clear. Our guests continue to respond to newness and style-forward assortments. FUN 101 delivered another quarter of growth led by a nearly 10% comp in toys and double-digit growth in music, video games and our expanded selection of sporting equipment. All categories where we've invested in unique to target assortments that are clearly resonating. Food & Beverage also delivered another quarter of comp growth with notable strength in beverages, which were up nearly 7% in Q3 as guests leaned into our trend forward health and wellness assortment from prebiotic sodas to better-for-you energy drinks, we also saw strength in candy categories, particularly as the Halloween holiday approached. While apparel comps were down 5%, we delivered meaningful growth in denim and sleepwear categories, driven by style, forward newness, that helped to offset softness across the portfolio. This tells us that while there is still plenty of work to do, where we have made our biggest bets in terms of on-trend, design-led newness, consumers are reacting positively giving us confidence in our approach and the path ahead. Turning to the consumer. Many of the themes remain largely consistent with what we shared in prior quarters. Guest ARE choiceful stretching budgets and prioritizing value, they're spending it matters most, especially in food, essentials and beauty, while looking for trend-right deals in discretionary categories. They want quality and price to coexist, something we do particularly well through our balance of must-have national brands, our exclusive owned brand portfolio and our curation of emerging brands. As part of our work to solidify our merchandising authority, we will continue to elevate our assortment to lead with trend while always considering affordability and value. As we approach the holidays, we know consumers remain cautious Sentiment is at a 3-year low amid concerns about jobs, affordability and tariffs. Yet they remain emotionally motivated. They want to celebrate with loved ones without overspending. Our job is to help them do just that. Given our focus on affordability, we recently lowered prices on thousands of everyday food and essential items to help families further manage their budgets. And for the next major holiday around the corner, our Thanksgiving meal deal this year is one of our most affordable yet, feeding a family of 4 for less than $20 with Good & Gather Turkey at just $0.79 per pound as well as potatoes, staffing and other seasonal sides for less than $5. And while we are, of course, standing tall for the traditional Thanksgiving Fair, guests are also embracing new food trends like Good & Gather seasonal empanadas, gourmet host gifts from Marks & Spencer, Stonewall Kitchen, Sugarfina, and Hearth and Hand with Magnolia Table and new to target brands like Little Spoon, everyday dose and protein pop. As a percentage of our total Food & Beverage sales, we are selling twice the volume of new products compared to the industry, a sign that our trend bets are paying off. We're also accelerating newness in women's apparel, leaning into lux fabrics and trending athleisure at affordable prices. Inspired by our sourcing trip to the Swiss Alps, our latest Cashmerlike sweater start at just $30 and deliver the on-trend casual yet chic Opreski look. [indiscernible] at leisure fans, JoyLab is launching new patterns and fabrications in mid-December, earlier than ever this year. Perfect for gifting are those New Year fitness goals. In holiday decor, we're offering upscale and festive design at unbeatable prices from contemporary collections to nostalgic Christmas Classics, we have styles for every home. Ornaments start at $1, $3 and $5 price points, with holiday throws at $10 in Reeves and Fo greenery at $12, bringing incredible design and quality within reach. And once the tree is trimmed, it's time to think about what goes under it. As I've shared before, trading cards have been a huge trend that we have been leaning into. And this holiday season, we will be offering new product drops nearly every week, including Pokemon, MAGIC: THE GATHERING, NFL, MLB and WNBA cards. This includes highly anticipated exclusives, already hitting shelves and continuing to be released throughout December as well. This year, we've also expanded our assortment of affordable and on-trend toys, including thousands under $20 with many starting at just $5. As the #1 market share player for LEGO, we are partnering with this iconic brand to offer exclusive to target sets starting at just $10. And for Barbie fans of all ages, we're offering 2 exclusive Barbie collaborations with Joanna Gaines, a collectible doll and her perfectly designed townhouse to live in. All in, we are introducing 20,000 new items into this year's holiday assortment, twice as many as last year, with over half exclusive to Target. Before turning it over to Jim, I want to share how Michael's new enterprise priorities are taking shape across our commercial organization. In partnership with the Enterprise Acceleration Office, we've been modernizing how our cross-functional teams support all buying decisions at Target, what we refer to as our merchant roundtable. To clarify roles, streamline accountability and empower teams to make bold data-driven decisions allowing us to move faster and infuse newness into assortments more frequently. But not all newness is created equal. It isn't just about offering new products for the sake of newness. It's about leaning into the emerging trends in culturally relevant moments. When we do, this is when we see the strongest reaction from our guests. For the perfect example, look no further than our Stranger Things 5 assortment. We have the largest assortment of exclusive products in retail in the U.S. along with throwback marketing campaigns that transport guests back to the 1980s Nostalgia. Plus, we're dropping new items into the assortment every week to align with the new episode releases. This is yet another example of the incredible work we are doing to reimagine our hardlines assortment into FUN 101, a year-round celebration of culture, trend and style, served up in an only target way. And next year, we're planning to take these learnings and make bold investments to transform the in-store shopping experience and assortment. In fact, we already have plans to introduce more changes to our stores than we have in any year in the past decade. We will have far more details to share at our Financial Community Meeting this spring. With that, I'll turn the call over to Jim to walk through our third quarter financial results and updated expectations for the balance of the year. James Lee: Thanks, Rick. Our financial results in Q3 were in line with our expectations as our team continues to focus on what we can control and manage the business with discipline, despite continued softness on the top line, volatility in weekly and monthly trends, and uncertainty in the external environment. Third quarter net sales were 1.5% lower than a year ago, slightly better than our year-to-date performance, but about 60 basis points softer than in Q2. Category sales trends were relatively consistent between Q2 and Q3, with the exception of hardlines, where we saw continued growth but at a slower pace, following an outsized boost from the launch of the Nintendo Switch 2 in the second quarter. Across our selling channels, comp sales in our stores were down about 4%, while comparable digital sales grew 2.4% on top of nearly 11% a year ago. Within our first-party digital sales, we saw mid-single-digit growth in our same-day services, led by more than 35% growth in same-day delivery. Beyond our first-party digital platform, we saw a significant step up to nearly 50% growth in GMV of our Target Plus marketplace and mid-teens growth in Roundel ad sales, demonstrating the breadth and growing relevance of our digital ecosystem. Top line results during the quarter were quite volatile with net sales close to flat in August and October and down about 4% in September. This pattern reinforces many of the consumer themes we've been highlighting for some time. as guests shopped around back-to-school and back to college in August and around Halloween in October, but pulled back in September in between those key seasons. In addition, September apparel sales were hampered by unusually warm weather across the country while October benefited from the response to our most recent Target Circle week as consumers continue to focus on value. On the gross margin line, our Q3 rate of 28.2% was about 10 basis points lower than last year. Among the drivers, we saw about 1 percentage point of pressure in merchandising, reflecting the impact of higher markdowns. This pressure was offset by about 70 basis points of favorability from lower inventory shrink versus last year. In addition, we saw about 20 basis points of favorability from supply chain and digital fulfillment as the benefit of higher productivity and the lapping of last year's supply chain challenges was partially offset by the deleveraging impact of lower sales. Regarding our outlook for inventory shrink. Consistent with our prior commentary, we expect that shrink improvements will account for approximately 80 to 90 basis points of gross margin rate favorability for the full year. This would bring it fully back down to pre-pandemic levels, marking a dramatic turnaround over the last 2 years. One other note, our Q3 ending inventory was about 2% lower than a year ago. This is in line with recent trends in our Q4 sales outlook and reflects growth in our frequency businesses that was more than offset by lower levels in our discretionary businesses. Moving back to our third quarter P&L. Our SG&A expense rate of 21.9% was about 60 basis points higher than a year ago. However, this rate reflected about 60 basis points of impact from onetime business transformation costs. Excluding these costs, our third quarter SG&A expense rate was approximately flat to last year. On the bottom line, our business delivered third quarter GAAP EPS of $1.51 compared with $1.85 a year ago. Adjusted EPS, which excluded business transformation costs was $1.78 in the third quarter, about 4% lower than a year ago. While this is far short of where we aspire to be over time, it is solid profit performance in a quarter where our top line was down more than 1% and reflects stronger relative performance versus the first half of the year, consistent with our prior commentary. I'll turn now to capital deployment and reiterate our priorities, which we've consistently followed for decades. First, we look to fully invest in our business in projects that meet our strategic and financial criteria. Second, we look to support the dividend and build on our record of more than 50 years of consecutive annual increases. And finally, we look to deploy any excess cash beyond those first 2 uses to repurchase shares over time within the limits of our middle A credit ratings. Regarding our first priority, we've invested about $2.8 billion in capital expenditures so far this year and continue to expect full year CapEx of around $4 billion. Regarding the second priority, we paid $518 million in dividends in Q3, which was $2 million higher than last year as a 1.8% increase in the per share dividend was mostly offset by a lower average share count. Regarding the last priority, we deployed just over $150 million to repurchase our shares in the third quarter, following a pause in Q2. While we ended the quarter with a healthy cash position and expect to have continued capacity within the limits of our middle A ratings, we'll continue to exercise caution in our repurchase program in the face of continued uncertainty in the external environment. Now I want to turn to our outlook for the fourth quarter and the full year. While our Q3 results were consistent with our expectations, we've continued to see a high degree of volatility in our business. In addition, we're mindful of the challenges facing consumers as exemplified by recent declines in consumer confidence. As such, while our top line expectations for Q4 are in line with our prior guidance and recent performance, we've narrowed our full year EPS ranges and moved our adjusted EPS range to the bottom half of the prior range. With that as context, on the top line for the fourth quarter, we're continuing to expect a low single-digit decline in our comparable sales. in line with our year-to-date performance. On the adjusted EPS line, our updated range is from $7 to $8 for the full year. The expected range for GAAP EPS is about $0.70 higher than for adjusted EPS reflecting the benefit of the first quarter litigation settlement, partially offset by business transformation costs. Against the backdrop of a very difficult environment, I am proud of the team's hard work this year to navigate a very high level of complexity including their work to mitigate the impact of tariffs and navigate challenging consumer conditions. Over the past several months, we've also been hard at work to drive prioritization and outline key investments to return Target back to sustainable growth. Looking ahead to next year, we expect to ramp up our capital spending meaningfully in support of our store experience and remodel program, a step-up in technology and digital fulfillment capabilities and investment in new stores. Our current plan envisions 2026 CapEx dollars increasing by approximately 25% or $1 billion versus 2025. In addition, we are planning to leverage a continuous pipeline of productivity initiatives and approximately $180 million of expected annualized savings from our recent business transformation efforts to invest in key areas in support of our 3 strategic priorities. We will share more details on our plans for 2026 and beyond at our financial community meeting in March. While we know there's much more work to do, I'm confident that we are rapidly moving in the right direction and positioning our business to get back to sustainable, profitable growth in the years ahead. With that, I'll turn the call back over to Michael. Michael Fiddelke: Thanks, Jim. Before Rick, Jim and I take your questions, I want to emphasize some of what you've heard from us today and to underscore where we're headed as a team. There is no question that this is a period of transformation for Target. The environment around us continues to evolve, whether it's shifting consumer demand, changing competitor dynamics or broader macroeconomic pressures. But let me be clear, we are not waiting for conditions to improve. We are driving the change ourselves right now. We are taking bold decisive steps to reshape how we work and reignite growth with urgency, focus and confidence in who we are and who we can be. We know what makes Target special, an unmatched merchandising authority and the ability to create joy through an elevated and inspiring guest experience all enabled by the power of technology to amplify both speed and connection across every part of our business. These are more than ideas on a page. They are the pillars of our strategy, shaping every decision we make, and they are coming to life right now across the company. We're hard at work to simplify how we work to make faster, smarter decisions. We're laser-focused on strengthening our foundation in our supply chain, our stores, our digital experience and our technology capabilities. We're relentlessly striving toward greater authority in merchandising by combining data-driven insight with a design leadership and creative spark that makes target. And together, these actions are paving the way for what comes next, a return to sustainable profitable growth. While many out there have questions about where we'll go next, we are confident we're on the right path. That's because we're building from a strong foundation, a brand that guests love, a culture that's resilient and a team that's united behind a shared mission to help all families discover the joy of everyday life. As we look ahead, we're not just talking about getting back to growth. We're talking about building a stronger, more innovative target that's ready to lead in the next era of retail, one that moves faster, connects deeper and stands taller in the hearts and minds of our guests. And to our investors, partners and the financial community, thank you for your continued engagement. And if you're frustrated with our recent performance, we are too, and our entire team is working incredibly hard to return to growth and live up to our full potential. Finally, in the spirit of thinking and working differently, I'm excited to share that this year's financial community meeting will take place right here in Minneapolis on March 3. It will be a peak behind the curtain to help bring to life what we've talked about today in a more tangible way, providing a first-hand look at how we're evolving our assortment and technology, all in service of returning to growth. We look forward to seeing you all in Minneapolis this spring, and we'll be sending out more information very soon. And now we'll move to Q&A. Rick, Jim and I will be happy to take your questions. Question & Answer Session Operator: Our first question comes from Simeon Gutman with Morgan Stanley. Simeon Gutman: And Brian, best of luck. My question, Michael, for you, I think in 2016 or '17, there was a reset of margin during a prior investment phase that helped reposition Target for the next several years. At this stage, I guess can we rule that out, how have you thought about taking maybe a deeper investment in, I guess, margin in order to reinvest? Or should we now assume that -- this is the plan, it goes forward, and there doesn't need to be one? Michael Fiddelke: Yes. Thanks for the question, Simeon. We've got a pretty big Q4 holiday season that we'll get through before we unpack the specifics for next year. But what I can tell you is we're committed to making the right investments to get the outcomes we want when it comes to leading with merchandising authority and elevating the experience. We also have a lot from which to draw on there. The team is doing a wonderful job of finding efficiency within the business and changing some of how we work to reinvest. I mean, an example of that is some of what we found in elevating the store experience, we've taken a lot from our fulfillment market tests in Chicago. And as a reminder, that's about changing kind of how we organize stores against the work to be done. We found that making some stores round box shipping specialists because they've got the capacity, they've got the big back room. They might be a little lower volume in general, let them ship that brown box product so that we can free up our busiest in-stores our busiest in-store guest experiences to focus on serving that in-store guests. And so changes like that, we've seen good results in. We're rolling out some of the learnings from that test to 35 more markets here before the year is out. And that's the type of change we believe can fuel the step-up in experience that we want. And so we're excited about doing the work to get better outcomes when it comes to leading with merchandising authority and elevating the guest experience, and we feel like we're on the right path. The other thing I might add is you heard us describe our capital investments for next year. And that's putting capital to work and direct support to the priorities that we've laid out. And like we always have, we chase returns. And so the places where we're excited to step up investment are places where we expect really strong returns. That starts with investments in our stores, and those come in a couple of forms. You've heard us talk about the strength of our new store pipeline. That pipeline continues to be as strong as ever. It's been just a delight to watch the new store openings this year, especially those bigger boxes that continue to outperform our expectations. And there's nothing more fun than walking a brand newly opened store in a market that maybe didn't have a target or didn't have a target close to that neighborhood and to see the response in the community when we open a store. And that response is great on the faces and voices of those guests, and it's also great in terms of the incremental sales it provides and the high returns we see in those new stores. The second place where you'll see us continue to lean in is in store remodels and refreshing the existing fleet of stores. And while we've been talking about that for several years, we've been hard at work, as Brian even touched on in his opening remarks of remodeling the chain, that work isn't yet finished, and we want to make sure that we're investing in some of the stores that when we bring our latest and greatest store experience we see a reliable strong response from guests. We continue to see strong sales lifts that justify the investment in those remodels. And so for the stores that haven't yet seen a remodel, we think it's imperative that we bring our latest and greatest thinking. That's a direct investment in the store experience itself back to the strategy. And the merchandising authority because when we do a remodel, we reallocate the space up to our latest and greatest thinking by strategy, and that helps the merchandising drive some of that sales lift. And then importantly, technology will continue to be an area of focus for investment. We know the power of technology to help the humans and the humans that we focus on most there are obviously our guests and our team. And so wherever we can lean in and use technology. And again, it generates returns when we make things more delightful for our guests and the way technology can help with personalization on the app or help us get product to their doorstep faster and then for our team where we can allow the process-focused work of the team to get a boost from technology that frees up our store teams to better serve guests. And so there's a lot of examples within that CapEx investment. But at its core, or does it directly support the areas of focus within the strategy and do we like the returns. And then the answer to those 2 questions is yes, you're going to see us invest. Simeon Gutman: The quick follow-up, and you partially addressed it. I wanted to ask about the gaps and capabilities. You mentioned the different focus is merchandising experience. what are the most urgent gaps and capabilities? And then what are you most excited about, meaning things that can get addressed in the near term? Michael Fiddelke: And the things that I'm most excited about are some of the places where we're seeing momentum already. Take, for example, the work that we're doing in FUN 101. That's a perfect representation of us bringing real focused strategy to the categories that we used to call hard lines to say, what categories are what we do -- are the things that we do uniquely well, best positioned, how do we bring style and culture and design leadership to those categories. And so we've made more change in those categories. And we see response in those categories. It's good to see categories like toys is running an almost 10% increase in Q3. It's good to see the places where we've applied focus moving in the right direction. I think the same is true on experience. The work we're doing to create a consistently elevated experience, we like the trajectory there. That starts with the basic being in stock as part of a great guest experience, and we're seeing real meaningful progress from the team's incredible work to move the needle in the right direction there. And while on that front. We're not yet satisfied. We're not yet where we want to be. We like the direction of travel a lot. And so we'll continue to do the work and apply the focus to get improvement in the direction that we want there. Rick, I don't know if you want to add anything on the product side for some of the places where we've got changed and where we're seeing a strong guest response. Richard Gomez: Yes. I mean I can -- well, how about this. I'll talk a little bit about some of the capabilities that were the question addressed about which capabilities do we want to -- are a priority for us to evolve? And I want to highlight merchant -- roundtable evolution because it is so important to having those right products that are going to deliver the growth. And it is a cross-functional team that we've had in place. But if you think about the decisions that we made a couple of weeks ago to reduce the footprint in HQ, a big part of that was around simplifying the organization so we could make decisions faster. The next step in that is to outline how we're going to work differently, clarify roles written responsibilities, clarify decision-making. That's the work the team is doing now. And then what I'm really excited about is in adding in the automation and the technology so the team could spend less time doing the analysis and spend more time being creative coming up with those new ideas that are going to meet consumer needs and fuel growth like what we're doing in FUN 101. Michael Fiddelke: To build on Rich's last point there. I think the role that technology plays -- the technology will play is going to be incredibly important across the enterprise, but a huge shout out specifically to the pace at which Pratt and team are moving. I like the acceleration of the path forward in technology. I think you can see that in some of the AI examples that we shared today, but you can also see that in some of the core foundation base that we know we have work to do to make sure our teams have all the tools at their fingertips to build the right assortment, segment in that assortment, use technology more powerfully to automate how product moves through our supply chain. And so that continues to be a key area of focus for us. But the urgency with which we're moving that work along gives me a lot of confidence. Operator: Our next question comes from Corey Tarlowe Jefferies. . Corey Tarlowe: Great. And I wanted to ask on the level of investment that you're stepping up in the business in terms of the $5 billion for next year in CapEx. How do you think about the key levels or the key areas in which you will be investing? And then how do you think about whether or not that's the right level or if more may be needed to improve results to a greater magnitude across the business? Michael Fiddelke: Yes. Great question, Corey. And I think about it in 2 ways, and this is a conversation that Jim and I have regularly with input across the team, obviously. But it's 2 things. One is it starts with a focused strategy, investments needs to follow the path that we think drives the most growth for Target, and that starts with clarity on the strategy. And the second is we chase returns. And so the places where we're excited to step up investment are places where we expect really strong returns. That starts with investments in our stores, and those come in a couple of forms. You've heard us talk about the strength of our new store pipeline. That pipeline continues to be as strong as ever. It's been just a delight to watch the new store openings this year, especially those bigger boxes that continue to outperform our expectations. And there's nothing more fun than walking a brand newly opened store in a market that maybe didn't have a target or didn't have a target close to that neighborhood and to see the response in the community when we open a store. And that response is great on the faces and voices of those guests, and it's also great in terms of the incremental sales it provides and the high returns we see in those new stores. The second place where you'll see us continue to lean in is in store remodels and refreshing the existing fleet of stores. And while we've been talking about that for several years, we've been hard at work, as Brian even touched on in his opening remarks of remodeling the chain, that work isn't yet finished, and we want to make sure that we're investing in some of the stores that when we bring our latest and greatest store experience we see a reliable strong response from guests. We continue to see strong sales lifts that justify the investment in those remodels. And so for the stores that haven't yet seen a remodel, we think it's imperative that we bring our latest and greatest thinking. That's a direct investment in the store experience itself back to the strategy. And the merchandising authority because when we do a remodel, we reallocate the space up to our latest and greatest thinking by strategy, and that helps the merchandising drive some of that sales lift. And then importantly, technology will continue to be an area of focus for investment. We know the power of technology to help the humans and the humans that we focus on most there are obviously our guests and our team. And so wherever we can lean in and use technology. And again, it generates returns when we make things more delightful for our guests and the way technology can help with personalization on the app or help us get product to their doorstep faster and then for our team where we can allow the process-focused work of the team to get a boost from technology that frees up our store teams to better serve guests. And so there's a lot of examples within that CapEx investment. But at its core, or does it directly support the areas of focus within the strategy and do we like the returns. And then the answer to those 2 questions is yes, you're going to see us invest. Corey Tarlowe: Corey, if I can add just one more thing on top of that. When we add new stores, the added benefit for us is that we continue to build out our fulfillment footprint and capability and allows us to also expand our national digital reach as well, so that at a benefit of new stores. Corey Tarlowe: Great. And then I just have a quick follow-up to Michael. On your comments on change, I just wanted to double click on that, that word specifically, and the quotient and the multitude of change that you're thinking about making as we head into 2026 and the benefits that you're seeing from lowering prices on key frequency categories. And how you're thinking about the opportunity to cut further costs potentially because we did talk about investing in agility in terms of SG&A? So curious about how you think about the ability for the business to change today and how you're building for the future in that regard? Michael Fiddelke: And Corey, if I zoom out change is going to be incredibly important. And you've heard us say quite plainly, we're not satisfied with our performance over the last few years. While the third quarter came in as expected, you're not going to get a ton of satisfaction for us until that's accompanied by the growth that comes with a positive comp. And so we've got to do the work. There's no shortcut. And that means driving change to get different outcomes. We're starting all of that change with really clear priorities. We know how Target is best positioned to uniquely win. And when we lead with great product, when we're design-led and differentiated and we pair that with an excellent experience, that's what's driven Target's strength in the best of times before, and we think the modern version of that can get the growth outcomes that we want. And so that does mean doing the work. That means doing the work to make changes like we are in FUN 101 to get different outcomes on the merchandising side. That means making the right investments and driving the change so that, that experience can be great in every store, every day in stores and online, but we're doing the work and a huge credit to the team that you can see the progress of that work in ways that get us excited about what's to come even within those third quarter results because we can see where we've focused and made change. We're getting some of the outcomes that we want. And so next year, we'll be about expanding upon that to bring more of those wins across the business at greater scale. Operator: Our next question comes from Joe Feldman with Telsey Vicari Group. Joseph Feldman: I wanted to drill in a little bit more there on some of the changes. When you're talking about the in-store changes for next year. Are there any examples you can give us? I know you mentioned there are key pads within the store maybe. I'm assuming like the FUN 101, but broadening it out, maybe you could share a few examples. Michael Fiddelke: I'd be happy to share a few examples. Let me start with FUN 101 because we talk about it as a success story, and we are delivering growth, but it's just beginning. We still have more changes to make to FUN 101 to truly make that a family destination that's full of style, trend, design, pop culture. So you're going to see those changes come to life in '26. The other area that we're making some changes is in home. Home has been a challenged business for us. We are making changes to the product to elevate the style of the product but then we're also changing the store experience to facilitate more discovery to facilitate more inspiration and really stand tall for what will be a revamped a reinvented threshold brand. So those are some of the -- we're making changes. Obviously, our contract with Ulta Beauty ends August '26. So teams are working really hard and coming up with some great ideas for how we will expand our assortment and then how we'll also elevate the experience. We'll be able to share more specifics on that at the Financial Community Meeting. And we're making some changes in Baby. We think baby strategically is a really important category for us. We have historically done very well there. It's an acquisition kind of category, we bring people into Target and it starts kind of along several years of loyalty as their children grow up. But we have an opportunity to make that space a little bit more inviting, a little more inspiration and also bring more gifting into it. So those are just some headlines of what we're looking at. We'll be in a much better position at financial community meeting to share more specifics on those plans. But I got to tell you, I am really excited about these changes. And I think as we said in the prepared remarks, this is the most change we have made to the store floor pad in 10 years. So we're -- it's a lot of work, but we're really excited about it. Joseph Feldman: That's great. That was helpful. And then just a quick follow-up. With regard to the -- your Target Circle card, can you talk maybe about some opportunities there? It feels like it's been declining the penetration of Target Circle Card, I guess, has been declining a little bit. And I'm just curious as to if you have any reasons as to why that may be and what you can do to kind of recapture some of those customers, maybe where they've gone otherwise. Edward Decker: Sure. I'd be happy to talk about Target Circle. What we love about Target Circle is it's huge size. It's one of the biggest loyalty programs in the country. And now with Target Circle 360, we have a membership component to it. And what's really exciting about that is it's really helping to fuel our same-day delivery. Target Circle fueled a 35 comp growth in same-day delivery this past quarter, which is really encouraging. The conversations that we're having is now at, how do we continue to innovate and evolve on the platform. and things that we are looking at and trying or early access events with Target Circle 360. We did that this past October with Target Circle week, and it was really well received. So we'll be doing a lot more of that this holiday season. And the last point I would make is we're really excited to have the first-party data that we get through Target Circle and be able to leverage that for personalization, particularly through this holiday season. So that will be one of the tools in the toolbox that we'll be using. Michael Fiddelke: And Joe, if I can just build on the question also specifically on card. If you're referring to what you see in the results from profit sharing, we did see lower spend, a little bit lower penetration and overall lower balances in the card program. But what's important is what Rich has highlighted is that when you think about our whole loyalty program holistically across Circle 360 and the card program, and we're very pleased with the results we're seeing so far. Where we do have an opportunity, Joe, is to use where Rick started with that big base of target circle. It's a better on-ramp to folks for whom a circle card makes a lot of sense. And so that's a place where we haven't yet achieved our potential. And so making sure that we because we can know a guest and circle so well, that means we should be positioned to know which of them at the right point in time would most like a circle part too. And we've got work to do on that front. We haven't tapped into that to the degree that we would have hoped. And so you'll see that be an area of focus going forward for us. Operator: Our next question comes from Mike Baker with D.A. Davidson. Michael Baker: I think you said -- correct me if I'm wrong, but October flat, yet you're guiding to down low single digits to the fourth quarter. Is that indicative of a little bit of a slowdown post Halloween? And I guess, as a follow-up to that, a pretty wide range in terms of EPS for the fourth quarter. Can you talk about what you're expecting in terms of margins within that fourth quarter range and how you get to the low end versus the high end, et cetera? Michael Fiddelke: Yes. I'm happy to start, Mike, and Jim, feel free to add on. If you look at -- while the quarter came in where we expected it overall, we definitely did see volatility by month in Q3. And so that factors in to how we're thinking about our expectations, but we feel good that we've got the business positioned well heading into fourth quarter. We feel like our top line and bottom line guidance is prudent based on the volatility that we saw in Q3. And we start the quarter in a really good place, something we haven't unpacked as much yet. So I'll touch on it briefly is that inventory is in a great place as we step into the fourth quarter. on the balance sheet, it's down 2%. It's up in our frequency categories, which makes sense given the investments that we're making there and stronger inventory reliability and in-stocks and it's appropriately down, I think, in an appropriately cautious position in the discretionary categories. And so we start the quarter where we would want to be positioned from an inventory perspective, and we feel like it's the prudent place to be. Jim, feel free to add as we're thinking about profit for the fourth quarter or how we've reflected Q3 trends into that view. James Lee: Yes, Mike. And if I build up on that, I mean if you take a step back and look at Q3, obviously, we faced a pretty dynamic environment. And as our gross margins and percentage-wise was broadly flat, we're pleased with the performance, and that's in line with expectations and a big thank you to the team to manage and navigate and move quickly with agility to meet the needs of consumers and understand where things are heading. We expect that dynamic to continue in Q4. We do expect a continued volatile environment, which is why there's a little bit still, I guess, a wider range in place because we want to make sure we are -- we have the ability to react quickly to change this new environment that will represent the range that we're looking at. Michael Fiddelke: Only build I might have, and Rick, feel free to chime in here as -- we don't have a perfect crystal ball for exactly how it's going to play out by day or by week in Q4. But the thing we feel really good about is how we'll show up for the guests. You've -- we've touched a little bit on some of the questions on making sure that we meet the guests where they're at. And for us, that's always a couple of things because there's a couple of ingredients of how guests view value. It's the combination of great prices, and you heard us invest in 3,000 price cuts across Food & Beverage and Essentials we're really excited about a Thanksgiving meal for 4 under $20 as we step into Thanksgiving here right around the corner. And for Target, it's also pairing that great price with incredible product. And so I'm just as excited about the 20,000 new items that we'll have this coming fourth quarter, twice as many as last year as I am about the great pricing guests will find on those items. And so it's that combination for us that matters so much. And on that front, we feel really good about what guests are going to find as they travel the site and the store and the holiday season. Operator: Our next question comes from Kate McShane with Goldman Sachs. Katharine McShane: We wanted to drill down a little bit more on your commentary around inventory and in stocks. Is there any way you can kind of talk to how you feel about the inventory position going into holiday, how it looks versus last year? And just how you see the cadence of in-stocks improving over time. Michael Fiddelke: Yes, Kate, as I think about inventory broadly, we touched on a little bit of that, and Mike's question a second ago, but I do think it's important to spend a moment on in-stocks. And I would expect because being in stock matters so much to our guests, that's a topic you see us come back to over and over and over again in all of these earnings calls to come because it matters so much. If you've trusted us with a trip to the store, we can't let you down by being out of stock and we haven't been good enough over the last several years on that front. And so we're laser focused on improving that. And a huge credit to the team for the progress that we've seen so far. I can dimensionalize that just a little bit more here in a second. But I also want to emphasize that work is not done. The bar for the consumer for our guests is higher than ever before on that front. And so you're going to see us continue to lean in to make progress over time. Where we've started is with a really acute focus on those most frequently purchased items, where if we're out of stock, it hurts more, if you're a guess, and we've let you down. And so you heard in my remarks, the focus on our top items. So think of those as the 5,000 most frequently purchased items. They account for about 30% of our unit sales. And so a big piece of what guests are finding and buying every day at Target. And as the team has leaned in to make progress on that subset of items, it comes in a whole bunch of ways. It comes with embracing the use of technology to help us forecast better and being more in stock that way. It comes with us having a better view of how we're really performing. We've described it before. We've changed some of the measures we use for in-stocks that give us a clearer mirror than ever before where we're doing great and where we're falling down. And that's been really helpful because it's told us Okay, we might be okay on average in some places, but we're not good enough at the end of the day or we have a shortfall on weekends that we need to address. And so teams have been hard at work in moving the needle there. And on the measures that we move, you heard me describe a 150 basis point improvement in Q3. If you're not close to the work, it's maybe tough to appreciate how big that progress is. But what I like is that better year-over-year improvement in Q3, performance versus last year than we saw in Q2, which was better than we saw in Q1. And that trajectory gets me really excited that we're doing the right work to get a different outcome. And if we can keep that progress up and I have a ton of confidence that, that's exactly what we'll do. We'll be more and more in stock as we move through 2026 than we were in 2025. Operator: Our last question will come from Michael Lasser with UBS. Michael Lasser: You just outlined a lot of the progress that you're making on key operational metrics such as in-stocks and speed to market, yet we really haven't seen it trend ally to an overall improvement in the performance of the business. So the obvious question is, why not? And what -- as outsiders, is a reasonable time frame for holding the team accountable for showing that progress? Michael Fiddelke: Yes. Thanks for the question, Michael. Here's what I'd say. We're not satisfied with the top line performance of the business, even as it's come in as we expected in Q3. And so we're doing the work with urgency. As a team, our focus is to get back to growth. And we know that won't happen overnight, but we know what the path is. We're focused on making progress. We see momentum where we're making that investment a huge credit to the team to do the work that's going to get that outcome over time. And so we'll unpack more what our expectations for next year look like when we get to the financial community meeting in March. But I feel really good that we've got a team focused on doing the work now that will lead to growth over time. And rest assured, we are tackling that work with urgency. Michael Lasser: Okay. My follow-up question is -- if I could just add one more on... Joseph Feldman: Go ahead. Michael Lasser: Very much, Michael. I appreciate it. And I will add my best wishes to Brian. You've already outlined the $1 billion of incremental for next year, perhaps there might be some incremental operating investments that could take down the profitability a bit next year. How amongst those guardrails are you thinking about the commitment to the dividend and the importance of that to your certain shareholders moving forward? Michael Fiddelke: Well, and Jim, feel free to pile on to this one if you'd like. You've heard us describe our support and strong support over time of the dividend, Michael, you shouldn't expect anything to change there. We've been consistent in our capital priorities for as far back as I can remember in my 23 years here. And it starts with making the right investments in the business. The $5 billion we'll put to work next year. We're really excited. We'll generate the returns and the growth that warrant that level of investment. The dividend is always the second priority, and I think our track record speaks for itself in terms of our support of the dividend and share repurchases with what's left piece that we'll always adjust as appropriate, but the dividend sits second in that priority list for a reason. Thanks, Michael. That brings us to the end of today's call. Thanks, everyone, for your questions and engagement.
Operator: Welcome to the Williams-Sonoma, Inc. Third Quarter Fiscal 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead. Jeremy Brooks: Good morning and thank you for joining our third quarter earnings call. I'm here today with Laura Alber, our Chief Executive Officer, Jeff Howie, our Chief Financial Officer, and Sameer Hassan, our Chief Technology and Digital Officer. Before we get started, I would like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our updated guidance for fiscal 2025 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for, and should be read together with, our GAAP results. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. Now, I'd like to turn the call over to Laura. Laura Alber: Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you about our third quarter. First, I'd like to take a moment to thank our team for their continued hard work. Everyone at Williams-Sonoma, Inc. has been focused on our key three priorities this year, which are returning to growth, elevating customer service, and driving earnings. That focus continues to drive our results. We are proud to deliver strong results in 2025, with an accelerating positive top-line comp and continued outperformance in our profitability. In Q3, comp came in above expectations at 4%, driven by another quarter of positive comps across all of our brands. We continue to deliver on the bottom line despite the substantial tariff headwinds. Our operating margin came in at 17%, expanding 10 basis points with earnings per share of $1.96, growing 5% year over year. We are encouraged by our continued strong year-to-date performance through Q3 and are confident in our outlook for Q4. Therefore, we are reiterating our outlook for the full-year comparable brand revenue growth to be in the range of 2% to 5%. We are raising our bottom-line guidance 40 basis points to an operating margin of 17.8% to 18.1% versus 17.4% to 17.8%. We drove this improvement in performance despite continued geopolitical uncertainty and no substantive improvement in the housing market. We continue to gain market share and outperform the industry, which declined again in Q3. Our continued strong results reflect the power of our operating model, industry-leading channel experiences, and strong portfolio of brands. We continue to see exceptional performance in our retail channel, which ran a positive 8.5% comp in Q3. Retail continues to benefit from an improved in-store experience with more inventory availability, enhanced design services and events, and the opening of 14 beautiful newly remodeled or repositioned stores so far this year, with seven more to come in Q4. This investment is paying off with almost all of them beating the performance of the prior location. Our stores serve as brand billboards, and we believe a refreshed store improves customer perception of our brands. As we move into 2025, I want to highlight the specific progress we made on our three key priorities. Starting with growth, our core brands continue to deliver strong results from positive momentum in Furniture. Our focus on innovation has driven strong and improving Furniture comps. Additionally, we are focused on incremental growth categories like Pottery Barn dorm, and 9% quarter with strength in both trade and contract. Our emerging brands Rejuvenation, Mark and Graham, and Greenrow continue to perform exceptionally well. Together, they delivered a double-digit comp, and we're excited to have recently opened our thirteenth Rejuvenation store in Salt Lake City. This year, we're also very proud of our improvements in customer service. We are committed to flawless execution, delivering orders on time, damage-free every time. We're proud that this year we have record metrics. We're focusing on furthering our improvements through fewer split shipments and faster fulfillment. Finally, our third key priority, driving earnings. Focus on revenue growth, elevating customer service, and maintaining cost discipline has delivered strong earnings with our year-to-date earnings per share growing 5% in a very tough tariff environment. Also in Q3, we used AI as a key business driver to accelerate our strategy. Across our portfolio, AI-powered chat experiences are now live for all brands, providing customer service delivery support, and product guidance. These agents are improving speed, consistency, and satisfaction, and we are now resolving over 60% of chats without human assistance, reducing handle times from twenty-three minutes to just five. Another notable milestone this quarter was the launch of Olive, our new AI culinary and shopping companion for the Williams-Sonoma brand. Olive helps customers plan, cook, and shop with confidence, combining our culinary authority with cutting-edge technology to create a differentiated experience. What makes Williams-Sonoma, Inc. unique is how AI can amplify our differentiated foundation with our proprietary data, our vertical integration from design to delivery, our multichannel engagement, and our expertise in home design in the culinary space. Our strong balance sheet coupled with our tech capabilities allows us to apply AI in ways that can drive real scalable impact for our business that others cannot. Looking ahead, we see opportunities to drive down costs and drive up sales with AI, and our early results are reinforcing that confidence. We're using AI to enhance what we do best, guiding customers through shopping and design decisions. Additionally, AI is driving improvements in productivity and empowering associates with tools to amplify their creativity and expertise. Now I'd like to update you on tariffs. Since we last spoke, there have been notable changes in tariffs, such as a new tariff on some furniture, including imported upholstery, kitchen cabinets, and bath vanities. Now, the 20% additional China tariff is down from 30%. Net-net, these changes are a push to our current estimated impact. As we look forward to the future, predictability in the tariff environment and a reduction in the India tariff would certainly be a positive for us. In the meantime, we continue to be actively and aggressively mitigating what we can with our previously discussed six-point plan. To remind you, first, we are obtaining cost concessions from our vendors. Second, we are resourcing goods to get the best cost for our customers. Third, we're identifying further supply chain efficiency. Fourth, we are controlling costs. Fifth, we are expanding our Made in The USA assortment production and partnerships, and last, we are taking select price increases with a focus on maintaining competitive pricing. Now let's review our brands. Pottery Barn ran a positive 1.3% comp in Q3. We are pleased with the improvement we saw in large ticket items, including furniture, upholstery, and lighting. Our Pottery Barn stores continued to outperform, led by our standout design crew services and our increased Take It Home Today assortment. Our strategy of focusing on improving retail inventory availability, refreshing product assortments, and enhancing design services is working. We have opened six beautiful new remodeled or repositioned Pottery Barn stores so far this year, with three more to come in Q4. Finally, across the brand, we continue a major change that we have made all year, which is to substantially reduce promotions in Pottery Barn. Now I'd like to talk to you about our Pottery Barn children's business, which ran a 4.4% comp in Q3. We saw acceleration in furniture, fueled by successful new product launches, continued growth in collaborations, and back-to-school and dorm was a particular highlight in the quarter. Laura Alber: In fact, back-to-school delivered double-digit growth, an acceleration from Q2. Our brands have become a destination for high-quality study solutions, durable backpacks, and on-trend dorm decor. Additionally, our enhanced dorm design tools and pick-up near campus options have been important for gaining share in a very fragmented market. Now let's review West Elm. West Elm ran a positive 3.3% comp in Q3. We continue to make progress against the brand's four key pillars: product, brand heat, channel excellence, and operational efficiencies. Throughout the year, West Elm has brought in new successful collections in both furniture and non-furniture where the brand was previously underdeveloped. West Elm has significantly shifted the composition of their sales towards new products. The cumulative effect of new introductions since the fall of last year continues to produce results. Retail in West Elm was also a highlight due to improved in-stocks and more new furniture and more new fabrics displayed on the retail floor. We've opened two beautiful new remodeled or repositioned West Elm stores so far this year, with one more to come in Q4. To remind everyone, we have 119 stores in West Elm, and based on results, we are looking forward to returning to retail unit growth in this brand. As you can hear, we are quite excited by the momentum at West Elm. Now let's review the Williams-Sonoma brand, which continues to fire on all fronts and ran a positive 7.3% comp in Q3. Williams-Sonoma remains focused on premium quality products that are expertly crafted, combining style and functionality. In Q3, we celebrated many successful culinary stories, from the food and flavors of Spain to authentic Indian flavors through a collaboration with Palak Patel, founder of the Chutney Life. We also recently launched a wicked collection featuring a limited edition Le Creuset Dutch oven inspired by Elphaba and Glinda. As we continue to connect our customers to the world's best chefs and products, we are seeing great traction with in-store events. Across the country, we hosted 42 in-store book signing events in Q3. We welcomed the fans of celebrities and celebrity chefs like Neil Patrick Harris, Dave Burkah, and Melissa King into our stores for amazing cooking demos and cookbook signings. Finally, we've opened six beautiful new remodeled or repositioned Williams-Sonoma stores so far this year, with two more to come in Q4. Now I'd like to update you on B2B, which grew 9% in Q3, with both trade and contract delivering strong comps. Leveraging our design expertise and commercial-grade product assortment, we've built a strong and growing client base across multiple industries. Our B2B offering remains a powerful differentiator, and we are seeing continued momentum. Our biggest success story in Q3 was an increase in commercial workspace wins, including projects with Google, WeWork, TurboTax, and PayPal. Q4 brings the ramp-up of our growing corporate gifting program, including our leading assortment of quality giftables that can be customized with logos and company branding. Jeff Howie: We're also a destination for seasonal favorites that make the perfect client and employee holiday gift. If any of you need help. Now I'd like to update you on our emerging brands. With our proven ability to incubate and scale brands in-house, we are confident in the continued growth of our concepts and their ability to deliver profitability to our results. Rejuvenation delivered strong double-digit comps in the quarter, continuing an upward trajectory fueled by product innovation and category expansion. Our high-quality product offer and proprietary designs are resonating with customers. Both channels are performing well, and we continue to open new retail locations to drive brand awareness. This quarter, we expanded our Rejuvenation store count to 13, with the opening of two new storefronts, one in Nashville and one in Salt Lake City. The brand also saw strong performance from its first-ever lighting collaboration. Mark and Graham delivered its best Q3 in brand history, driven by successful new categories M and G Kids, and Bark and Graham, as well as continued growth in personalized corporate gifting. As we head into the peak gifting season, the brand is well-positioned with thoughtful, personalized gifts for all occasions. I'm also excited to talk about our newest brand, Green Row, which delivered strong growth this quarter. In Q3, we launched the largest holiday collection to date with handcrafted decor and gifts made from upcycled and natural materials. The brand's colorful and unique products have had a great response, and the product line is incredibly beautiful in person. Therefore, we believe retail stores are the next leg of growth at Green Row and are looking to test a few store locations as soon as possible. Finally, I'd like to share one highlight in our global business. In the UK, we broadened our brand presence to launch a Pottery Barn online and the opening of a pop-up store in our West Elm Tottenham Court Road in London. So far, we're quite pleased with the performance of Pottery Barn in this new market. In summary, we're pleased with our execution and continued outperformance in Q3, marked by accelerating positive comps and strong profitability. Across the company, we remain dedicated to enhancing our channel experiences and strengthening our brand. Each and every day, we prioritize innovation, product design, and exceptional customer service. These are the qualities that set us apart in a fragmented industry and position us to capture additional market share. We see tremendous opportunity to continue to lead our industry as we execute on our vision to own the home and the places where our customers work, stay, and play. As we enter the final quarter of the year, we're filled with optimism for a strong finish. This holiday season, we're ready to showcase our best across our stores and online. From all of us, we wish you and your family a joyful Thanksgiving next week and a happy holiday season. Before I hand things over to Jeff, I want to take another minute to express our thanks to our team, our vendors, and all of our partners for their ongoing dedication and contribution to our company's success. We appreciate everything they do. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail. Jeff Howie: Thank you, Laura. And good morning, everyone. Our results this quarter reflect Williams-Sonoma, Inc.'s competitive advantages in the home furnishings industry, including the following: the strength of our multi-brand portfolio across different categories, aesthetics, and price points; our size and scale providing the ability to drive market share gains as we maximize white space opportunities; the competitive advantage of our multichannel platform serving customers where they choose to shop, online, in-store, or business-to-business; our focus on customer service and full-price selling creating efficiency and cost savings across our supply chain; and finally, the power of our operating model to deliver highly profitable earnings. Our headlines for this quarter demonstrate these competitive advantages. We delivered positive comps for the fourth straight quarter. Furniture and non-furniture categories both ran positive comps, reflecting strength across all categories of our offering. White space opportunities, such as dorm, West Elm Kids, and Rejuvenation, grew double digits. Retail, e-commerce, and business-to-business all drove positive comps. Our supply chain team achieved best-ever results across nearly all customer service metrics while simultaneously improving efficiency and reducing costs. Despite the headwinds from tariffs, we drove operating margin expansion of 10 basis points to 17% and EPS growth of 5% to $1.96 per share. Our results this quarter would not be possible without the team we have at Williams-Sonoma, Inc. I'd like to thank our talented, dedicated team for delivering these outstanding results. Jeff Howie: Now, let's dive into the numbers. I'll start with our Q3 results and then update guidance for fiscal year 2025. Q3 net revenue finished at $1.88 billion for a positive 4% comp. All brands delivered positive comps, driven by positive comps in both our furniture and non-furniture categories. We gained market share in the quarter, even as we increased our penetration of full-price selling. From a channel perspective, both channels delivered positive comps, with retail up 8.5% comp and e-commerce up 1.9% comp. Moving down the income statement, gross margin exceeded our expectations, coming in at 46.1%, seventy basis points higher than last year. Higher merchandise margins and supply chain efficiencies drove this gross margin improvement, offset by slightly higher occupancy costs. Merchandise margins delivered 60 basis points of our gross margin improvement, exceeding our expectations. Three factors contributed to this improvement in merchandise margins. First, the impact from tariffs is taking longer than anticipated to flow through to our gross margin. This is due to the delayed effective dates of the tariffs and our aggressive front-loading of inventory before tariff effective dates. Jeff Howie: Second, we are seeing margin upside from our six-point tariff mitigation plan, including price increases as well as strong consumer response to our full-price product offering. Finally, lower inbound transportation costs are helping offset tariff costs. Supply chain efficiencies added 30 basis points to our gross margin. Our focus on customer service and in-stock ready-to-sell inventory is delivering tangible margin improvement from lower accommodations, damages, replacements, and out-of-market shipping expense. Occupancy costs were up 5.9% and were 20 basis points higher year over year. This was because of our retail outperformance and the higher occupancy costs in that channel. To recap, our gross margin results this quarter exceeded our expectations. Our tariff mitigation efforts more than offset the headwinds from tariffs in the third quarter. Turning now to SG&A, our Q3 SG&A ran at 29.1% of revenues, 60 basis points higher than last year. Employment expense deleveraged 50 basis points due to higher incentive compensation from our strong results year to date. We continue to manage variable employment costs across our stores, distribution centers, and customer care centers in line with top-line trends. Advertising expenses were 20 basis points higher year over year. Our in-house marketing team continues to test and optimize into different levels of spend. During the quarter, we increased our investment in digital advertising. After testing, and proprietary in-house analytics models indicated we could scale efficiently. The higher spend drove an acceleration in year-over-year site traffic and improved revenue per visit. Our in-house marketing team's ability to test, scale, and optimize across our portfolio of brands is a competitive advantage in the home furnishings industry. Finally, general expenses leveraged 10 basis points. On the bottom line, our earnings exceeded our expectations. Despite the tariff headwinds, our operating margin of 17% was 10 basis points above last year. Diluted earnings per share grew 5% year over year to $1.96. On the balance sheet, we ended the quarter with a cash balance of $885 million with no outstanding debt. We generated $316 million in operating cash flow during the quarter and invested $68 million in capital expenditures supporting our long-term growth. During the quarter, we returned $347 million to our shareholders. We did this through $267 million in stock repurchases and $80 million in dividends. Merchandise inventories stood at $1.5 billion, up 9.6% to last year. Our inventory includes $48 million of incremental tariff costs recorded in inventory as well as $30 million of a strategic pull forward of receipts and lower tariff rates than in effect today. Without this incremental $78 million, our inventory level would be in line with our sales trend. Jeff Howie: Overall, our inventory level and composition are well-positioned to support our upcoming holiday season. Summing up our Q3, we're proud to have delivered strong results even as we navigated a challenging tariff environment and historically low housing turnover. Now let's turn to our guidance for fiscal year 2025. First, some housekeeping. In 2024, we recorded a $49 million out-of-period adjustment related to prior year's freight accrual. This benefited fiscal year 2024 operating margin results by approximately 70 basis points. Our guidance for fiscal year 2025 uses our fiscal year 2024 results without the out-of-period adjustment as a comparable basis. Additionally, fiscal year 2024 was a fifty-three-week year for Williams-Sonoma, Inc. In fiscal year 2025, we will report comps on a fifty-two-week versus fifty-two-week comparable basis. All other year-over-year compares will be fifty-two weeks versus fifty-three weeks. On full-year 2024 results, the additional week contributed 150 basis points to revenue growth and 20 basis points to operating margin. The discrete impact of the additional week on just Q4 2024 was five to ten basis points to revenue growth and 60 basis points to operating margin. Jeff Howie: Now our guidance. Given our strong Q3 results and our outlook for Q4, we are updating our fiscal year 2025 guidance. On the top line, we are reiterating our fiscal year 2025 net revenue guidance. We expect full-year 2025 comps to be in the range of positive 2% to positive 5%, with total net revenues in the range of positive 0.5% to positive 3.5% due to the fifty-third-week impact from last year. Our guidance continues to assume no meaningful changes in the macroeconomic environment, interest rates, or housing turnover. Our guide reflects the continued strength in our business, strong customer response to our product lineup, and continued traction across our growth initiatives. On the bottom line, we are raising our full-year operating margin guidance by forty basis points to a range of 17.8% to 18.1%. This means that despite the tariff headwinds, we are now guiding the midpoint of our fiscal year 2025 operating margin to be approximately 20 basis points above last year when excluding the fifty-third-week impact. Our higher operating margin guide reflects both the strong results we have delivered year to date and the expectation that tariffs will have a greater impact on our margins in Q4. Our updated guidance reflects all the tariffs in place as of this call. This includes the new Section 232 tariffs on furniture, the revised 20% additional China tariffs, the 50% India tariff, the 20% Vietnam tariff, and an average 18% tariff on the rest of the world, as well as the 50% steel and aluminum tariffs, and the 50% copper tariff. In fact, our incremental tariff rate has more than doubled from 14% earlier this year to 29% today, inclusive of all the tariffs I just mentioned. We believe the strength of our operating model combined with the six-point mitigation plan Laura outlined enables us to mitigate a large portion of these tariffs, which is embedded in our guidance. It's important to note the tariff policy has been volatile and subject to multiple revisions. It's hard to say where tariffs will ultimately land and what impact they will have on our business. Our guidance reflects our best estimates of the impact based upon the tariffs in place as of this call. Also today, we are providing some further inputs for modeling purposes. We now expect our full-year interest income to be approximately $35 million and our full-year effective tax rate to be approximately 26%. Turning now to capital allocation. Our plans for fiscal year 2025 continue to prioritize funding our business operations and investing in long-term growth. We expect to spend between $250 million and $275 million on capital expenditures in fiscal year 2025. We are investing 85% of this capital spend in our e-commerce channel, retail optimization, and supply chain efficiency. We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases. For dividends, we will continue to pay our quarterly dividend of $0.66 per share, which is a 16% increase year over year. We are proud to say that fiscal year 2025 is the sixteenth consecutive year of increased dividend payouts. For share repurchases, we announced today that our Board of Directors approved an additional $1 billion share repurchase authorization, bringing our total authorization to approximately $1.6 billion. We remain committed to opportunistically repurchasing our stock to provide returns to our shareholders. As we look forward to 2026, we will balance our long-term growth potential with the tariff and macroeconomic landscape, and we will provide guidance in March. As we look further into the future beyond 2026, we are reiterating our long-term guidance of mid to high single-digit revenue growth with operating margins in the mid to high teens. Wrapping up Laura's and my comments, we delivered another quarter of strong results despite the headwinds from tariff policy and historically low housing turnover. Our focus remains on our three key priorities: returning to growth, elevating our world-class customer service, and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder growth for these five reasons: our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital-first but not digital-only channel strategy, the ongoing strength of our growth initiatives, and the resilience of our fortress balance sheet. With that, I'll open the call for questions. Operator: Thank you. We will now begin the question and answer session. Your first question comes from the line of Max Rakhlenko from TD Cowen. Your line is open. Max Rakhlenko: Great. Thanks a lot and congrats on the nice quarter. So first, can you just discuss the elasticity that you're seeing in the business as you selectively increase prices? And how we should think about the impact to comps, from transactions versus ticket in 3Q? Laura Alber: Thanks, Zach. Good morning. We look at prices constantly across our brands, across categories, and with our competition. And, you know, we sell a wide range of products, so there's not one quick answer to elasticity. Because in some, there's room to take up prices. In other cases, you need to take down prices based on what the market is doing. This is why we're so focused on innovation and bringing new innovative and exclusive products to market because that gives us better pricing power. Also, I would say that pricing is not just about the product itself, but also the service and the experience. We have been really, really focused, as you know, on improving our service, which has been a huge driver of our op margin, which I'm sure we'll talk a lot about today. But that's a big deal, especially if you come up against the holiday season. It's a big deal for customers deciding where to buy their gifts, especially large ticket items. They want to buy gifts from people they trust, they can return things to, and they're going to stand behind their product quality. They can get instructions about how to use, you know, that expensive espresso machine. So, you know, it's not just one metric, and it's not just one category. And, you know, it's going to be different depending on the product you asked me about. Max Rakhlenko: Got it. Thanks a lot, Laura. And then, Jeff, you noted that it's taken longer for tariffs to flow through. Just how should we consider the impacts of tariffs over the next several quarters as it does sound like 4Q will see a pickup? And then just any guideposts on modeling for the next several quarters? Jeff Howie: Yeah. Good morning, Matt. Thanks. Yes, let me explain why the tariffs are taking longer to flow through. I think it's important to unpack that. And first, it's really due to the delayed effective dates. For example, the August 7 reciprocal tariff, which applies in most countries like China and Vietnam, etcetera, had an exception for goods that were on the water that had to be received before October 5. Another example is with the India tariffs that were effective on August 27, there was an exception for goods in the water to be received before September 17. So this means that these tariffs will not start being applied to new receipts until mid to late third quarter. And then on top of that, we aggressively front-loaded receipts to bring in inventory at lower tariff rates than are in effect today. So the combination of these two really advantaged us in Q3. As we look to Q4, we've certainly said that the tariffs will have a larger impact upon our margin, and that is embedded in our guidance. As we look beyond Q4, it's a little early to talk about '26. There is a lot that could change between now and then, especially with the tariff landscape. So we'll save that conversation for March. Operator: Your next question comes from the line of Zach Fadem from Wells Fargo. Your line is open. Zach Fadem: Good morning. Could we start with your take on broader category performance from Q2 to Q3 and whether you saw underlying improvement there? And then just curious, stepping back, how you would frame the improvement we've seen in furnishings in your category relative to some of the broader macro and pressures that we've seen in home improvement and other bigger ticket categories? Laura Alber: Thanks, Zach. We're really pleased with our continuing improvement across quarters and brands, and in particular, the West Elm increase in comps is really exciting for us to see because we expected it to happen. And there's nothing more fulfilling when you see a strategy come to fruition. And I still think there's a lot of room left to go in West Elm as they build out certain categories and the seasonal assortments. We've been continuing to improve our in-store experiences, and that's been really helping. But in terms of the broader merchandise categories across brands, we have been aware, as everyone is, that the housing market has not recovered. And that is really most correlated with furniture. And to be able to improve our furniture comps without a significant improvement in housing is a really strong sign. We love that because a furniture collection that we introduced in the season this year, we can build upon for next year with new piece types and also better inventory stocking positions. The continuation of our furniture strength is very important to the short term and the longer term. In the holiday seasons, the categories that are exciting. We saw storm pick up from Q2 to Q3. Back to school, you know, is the broader category for that. It was a strong season and really, really a good season for us. The Halloween product categories were strong. Autumnal and Thanksgiving. Also, you know, we're not done with Thanksgiving yet, obviously, but we're close. So we've been pleased with our results there. It's too early to comment about holiday. We're actually on the call a week earlier than we were last year. So for those wondering, those of you who are wondering about the lack of comments there, it's just a little bit too early to comment. But based on what we've seen with the other seasonal holidays, we can see that that's a competitive advantage for us. You know, there's not many other people out there that have the assortment that allows customers to really decorate and entertain for the holidays, and especially at this time of year, it's a real strength of the traffic driver for us. Operator: Your next question comes from the line of Cristina Fernandez from Telsey Advisory Group. Your line is open. Cristina Fernandez: Hi, good morning. So I want to follow up a little bit on that last comment on holiday. If you look at the implied Q4 revenue guidance, it's pretty wide. So could you comment on the low end versus high end and your ability to continue this comp trend as you face a more difficult year-over-year comparison? Laura Alber: Thank you, Cristina. Holiday is the last season, and then it includes January. We are really focused on very price solid. This has been an important part of our margin profile all year and the improvements that you've seen. Amazingly, we've had great success in our margin improvement even with the tariffs on top of everything. As we go into the holiday season, we continue to have opportunities from a year-over-year perspective in pulling back on promotions. Jeff Howie: We're focused on right price selling, and hope to have fewer promotions than last year. Hence the wide range of comp performance. That's one piece of it. The second is when you look at the multiyear numbers, we're mindful of our strong holiday last year. Operator: Your next question comes from the line of Peter Benedict from Baird. Your line is open. Peter Benedict: Hey guys. Thanks for taking the question. I guess two, one would be the market seems to be really concerned about how you're going to be able to digest these tariffs as they ultimately come through. Despite your ability to do so to date. I think expectations next year for operating margins to be lower in the first half of the year. But maybe Jeff, I'm not asking for specific guidance, but just how should we think about the ability of the business to just even maintain operating margins in the face of what you know about tariffs as they sit today. That's my first question. And then my second question would be around unit growth. Laura, it sounded like maybe a little bit more of an offensive posture. There, particularly around West Elm. We know that in aggregate, your units have been kind of coming down. Are you signaling a change there? Should we be thinking about I'm just thinking about the magnitude of unit growth we might expect as we look out on the horizon. Thank you. Jeff Howie: Good morning, Peter. So where is the operating margin going? That's a great question. But if we look beyond our current guidance, that's not really a question we're going to answer today. It's too early to start discussing 2026 guidance. Our focus is on the holiday season delivering Q4. The real reason here is the tariff landscape has been incredibly volatile. Just look at what's happened over the past several quarters. Every quarter, there's been new tariffs, repeal tariffs, everything is changing. There's a lot of uncertainty on this front. I would point out that India is one of our largest sources of goods, and where that tariff is going, which is currently at 50%, is an open question. We also have the Supreme Court decision on I.E. EPA tariffs pending. We'll see where that goes. So it's a little hard to understand beyond our current guidance and beyond this year in Q4 where the tariff landscape is going to impact us. We believe that our six-point mitigation plan that Laura and I have been articulating all year combined with the power of our operating model, will allow us to offset a large portion of the tariffs. But the ultimate amount depends upon where the tariffs ultimately land. What we're really focused on is delivering the current quarter, and everything we know about our ability to offset the current tariffs is embedded within our guidance. In terms of your second question, Peter, where is unit growth going? Look, we've been saying all along that we have done an incredible job, and I want to complement our entire organization regarding our retail repositioning strategy. There's been multiple legs of the strategy. There's been closing underperforming stores, which I think everyone knows we've closed about 17% of our stores since 2019. About repositioning stores, from some of the tired indoor malls to more vibrant lifestyle centers. It's also been about opening new stores. We see opportunity for new store growth, particularly in the West Elm brand, with Rejuvenation, with Greenrow potentially. There's a lot of opportunity for us to continue to grow stores. In terms of where overall store count growth is going, as we've been saying all year, it will be mid-single-digit closures this year. I think we're not necessarily guiding 26%, but I don't think we'll see a substantial change in the overall store count as we look towards 2026. There's still more room to go on our repositioning strategy, but there's also white space opportunity to infill, and there's some great new locations that we're working on that will come online in 2026 and in 2027. Operator: Your next question comes from the line of Christopher Horvers from JPMorgan. Your line is open. Christopher Horvers: Thanks. Good morning. So two quick ones. So I guess playing devil's advocate on the compare in the fourth quarter, Laura, furniture pull forwards behind you, there's a lot of momentum around self-help initiatives and obviously there's a tick of pricing coming through here. So you think about where we are in the cycle particularly with housing not helpful you know, why couldn't the growth rate just stay at the growth rate considering where we are? And then a quick one on gross margin, understanding there were some shifts on timing, but asking the question another way, did the drivers in terms of the fourth quarter in terms of the expected tariff headwind versus the expected benefit from the mitigation strategies? Did you change those at all in your outlook? Thanks very much. Laura Alber: Yeah. Hey. Go forward. First, I don't want to see that. I don't see any reason to believe we've seen pull forward of anything for that matter. We absolutely could be at the same cost, if not higher. We have a wide range. I was just explaining the differences of why you know, you might look at it and say it's a little bit lower than where you've been. It's very important that, you know, we don't play the promotional game. A key aspect of our strategy. At the same time, we're going to have great deals for Black Friday. We have great deals right now for early Black Friday. We bought into them. We have vendor partnerships on them. But we're not going to have as much. We hope we're not going to have as many needs to promote as we did last year. That's the only hesitation on the comp side. In terms of the tariff impact in Q4, it's sizably more than Q4 because the way that the cost flows through every single quarter. We did a fantastic job. Great success with everything planned in Q3 and throughout the year, and we will continue to do that. In fact, you know, it's amazing to see new opportunities that we're finding in supply chain. Supply chain has been just a tremendous positive this year in delivering up margins. What's great about it, as you know, is it means the customer is getting their product delivered more smoothly and on time and without damage. That's all good for the brand. It's fantastic for the P&L on the op margin side and the supply chain savings. There's still room, you know, if you look at Q4, there's more to go there. We're really optimistic about our ACDC, which is our new PC that came up last year and honestly, we're doing better than we have done with that, and that could be that could really help us, especially because, you know, the calendar this year for Christmas, similar to last year, pretty tight. So we want to be able to ship it late and ship perfectly and not disappoint anyone. That's why people come to us and shop online later with us like they do Amazon and others because they trust us to deliver before Christmas. There's a lot of really good things happening, but in terms of the impact of tariffs, you know, please don't get ahead of us on Q4. In terms of the margin. Because the tariffs are going to have a greater impact as you can see in our guidance and the implied Q4 guidance, than they did in Q3. If you look at our op margin ex-tariff, it's expanding. For all those that are, you know, worried about this, just realize that this goes into the base and we're done with it and we move forward. It's about outperforming our competition and continuing to deliver for our shareholders and most importantly, for our customers. Getting them incredibly beautiful, well-designed, high-quality products at the best price in the market. Operator: Your next question comes from the line of Jonathan Matuszewski from Jefferies. Your line is open. Jonathan Matuszewski: Great. Good morning. I had one question, one follow-up. The first question was just on the consumer. You mentioned a better response to full-price selling. It seems like what you planned for. So just from like a strategy perspective here, how does that minimal elasticity kind of inform your customer targeting efforts going forward? Is what you're seeing giving you more confidence to target a higher-end consumer, a higher-income consumer more in the future than in the past? Are there strategies in place to do that? That's my first question. Laura Alber: That's a great question. You know, we're lucky where we sit. But we love all our customers. So we're going to give them the best price. You know, if it's the first apartment, first baby, or just their fifth house. We do see when we look at our two tax toes owning a home, that we haven't covered the real super high end at scale yet. It's not surprising to me that the origination is doing so well. Know, why we have this great growth? It's expensive. It's absolutely gorgeous. High-quality product, I hope that you've all visited a store, bought products, or seen it in someone's house because when you see it, you understand why you're really growing that business and why we believe so strongly it's their next billion-dollar brand. That sits at the high end. Green Brook sits at the high end. We haven't talked about Alexis Dining. But we're seeing that it's a new aesthetic. It's very, very original. That is not in the marketplace and it is entirely green product and people care about that. At least that customer cares about that. And so that's at the highest. We see that we can have retail stores in that brand, which tells me it's bigger than you might think. Then there's Lance on the home. Which we continue to see as an opportunity for us into the future. But don't, you know, mistake the importance of us also covering, you know, the upper middle customer, the Pottery Barn, the West Elm, and making sure that also those brands are so appealing people trade into them. You know, if I can decorate your house, more beautifully, and more affordably than the high end wouldn't you come to us? By the way, we'll do the whole thing for you. We'll set it up. I think you'll see that we can do it for a fraction of the price of what other people do and have it be super interesting and gorgeous. So we're going after all those pieces. There's opportunity right across that tic-tac-toe bar from what we define as our value customer, which is different than the market all the way to the high-end consumer. Operator: Your next question comes from a line of Simeon Gutman from Morgan Stanley. Your line is open. Simeon Gutman: Hey, Laura. Hey, Jeff. Can I ask on tariffs again? The six-point plan seems to be beneficial and it sounds like the elasticities aren't awful. What's the chance that we get to the fourth quarter or even the first quarter as this inventory turns? That the impacts are going to be a lot more minimal than we think. I'm just trying to size up the conviction that we haven't seen anything yet. If some of this Aipa stuff gets, I don't know, invalidated, do you suspect that industry prices go back down? Or do you think retail prices, especially ones that have already changed, they're just going to hold? Laura Alber: First of all, I just want to say that the last thing I want you to think is that we're immune to tariffs. We've done a really great job of offsetting them so far, but the amount that they hit us in Q4 is slightly different than it was in Q3. So just that's why look at our guidance, please. Understand the impact. I even, you know, there's other tariffs. I'm not focused on that. We're focused on how we get the current tariff environment the greatest value to our consumers. Where should we be pricing things and where should we be moving things? So I wouldn't spend a lot of time worrying about that. I think it's just one more thing that could change and be kind of distracting in the short term. You know, there's also really good things that like, the India tariff is repealed that or reduced by half, that would be great for us. You know, all that is backdrop that affects the entire industry. Once it's in, and it's rolled through on a yearly basis, we're done with it. So I just as I said, just to recap, please don't think that we are moving Q4 and beyond. We will offset as much as we possibly can. We've done a better job than anything we even thought we could do. In offsetting all of it this quarter. But we have a few things going on in Q4 that I want to make sure Jeff reminds you in his prepared remarks. I'll let him remind you again about the fifty-third week. Jeff Howie: Yeah. I mean, a couple of other things that I want to highlight too, Simeon, is and as Laura said, don't get ahead of us there. We did have improvement in our merchandise margins, particularly against what we expected in Q3. But it goes back to the timing factor that I talked about I think, the first question. The effective dates were delayed for all the tariffs. As we get to Q4, there will be a substantially larger impact on our operating margin than there was in Q3. Our guidance embeds in there our best estimates of what that impact is, inclusive of all of our tariff mitigation efforts. So I can't say it any other way other than we do not expect a repeat of Q3 and Q4, which is what our guidance is. In terms of the fifty-third week, I do want to remind everyone that this is a fifty-third week for Williams. We are coming up against a fifty-third week for Williams-Sonoma, Inc. On the year, it was worth 150 basis points to revenue growth and 20 basis points to operating margin. But in Q4 where the fifty-third week comes into play, it had a pretty big impact at five to ten basis points of revenue growth and 60 basis points of operating margin growth. So just on that, the fifty-third week and those 60 basis points, we would be down normally on a year-over-year thirteen-week sorry, yeah, thirteen-week to thirteen-week comparison. Operator: Your next question comes from the line of Steven Zaccone from Citigroup. Your line is open. Steven Zaccone: Great. Good morning. Thanks very much for taking my question. I wanted to ask on Pottery Barn. Because the business decelerated a little bit there on the two-year stack. It's actually lagging the rest of the segments of the business. You referenced some pullback in promotions. Can you just talk about what's new this year? Because I think that's been a strategy for the past couple of years. When you think about the performance of that business, what are you seeing from a competitive perspective? Any sort of kind of trade down from the consumer and do you have some of these earlier questions around pricing, is there anything to call out from a pricing perspective competitive-wise? Laura Alber: Pottery Barn's Furniture has improved. We haven't seen that yet. Pottery Barn's Furniture, this year, especially on the multi-year stack, and that's been good to see. They did have more promotions to reduce out of their base than you might have expected. So we continue to work on that, and there's still opportunity. Operator: Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open. Chuck Grom: Hey, thanks very much. Just Laura, just bigger picture, a lot of people have asked about tariffs. I want to ask a little bit about category growth and how you see sustainability moving into 2026? Probably speaking, a lot of your peers are doing better. Do you think that continues? And then one more near term, just cadence throughout the quarter. Some of your peers have had a lot of volatility. Anything you want to highlight for us? Anything you want to speak to so far in November? Thank you. Laura Alber: Yeah, you know, we don't talk about the month. Sunday is I do want to talk about excitement we have as we look forward. We have not seen a house in regard. Like the worst housing market in the last four years. And, you know, and that is a big deal. Now there's really not a lot of great finds, but it's getting better quickly. But there are some green shoots. I personally am very optimistic about housing next year. That'd be a big change for us if that happens because we know that when you move, you buy a lot. When you refresh your house, and we've been very good at getting the remodeler and the redecorator to come to us, but we're excited to be ready with a much more powerful furniture supply chain than we ever had before. When those sales come to us. We know that when that turns and you see upside again, it's a really big deal. Some people don't think you're going to be ready for it. But the things we've done to really improve our supply chain are so strategic. I believe and I've always believed that the person that owns the furniture network is the one who wins the whole thing. That is where we've been focused and continue to build and have all sorts of tech projects in play to make that happen. You can see it in our numbers this year. How much improvement year on year. I read through last year's script, and it's funny when you read it because we were talking about all the supply chain improvements then. I think if you'd ask me, I wouldn't expect it that we would have this much more. Yet we still have more, and that's what's exciting when you think about the power of our operating model, and it's a multi-brand, multi-channel company. Where this could go in the future as for insured coverage. Operator: Your next question comes from the line of Michael Lasser from UBS. Your line is open. Michael Lasser: Good morning. Thank you so much for taking my question. Laura, of the interpretations of some of your comments over the last hour is that Williams-Sonoma has gone through this significant change where it's reduced promotion, improved its profitability, while it's been able to drive consistent sales growth. Now it may be at the point at which it can no longer lower promotional activity without it having some impact on the sales. Is that the right interpretation of what has been said on this call? Second, was the magnitude of the benefit to your margin in the third quarter from selling older lower-cost inventory at new higher price equal to or greater than it might have been in the second quarter, such that we should think about these not repeating in 2026, understanding you're not providing any guidance on 2026 at this point. Thank you very much. Laura Alber: In terms of your first question, I mean, you took some liberty there going. I think, you know, what I'm saying is that key strategies for our company continue to work. Then a focus on innovative process design, high quality, high service, and a regular price business. Investing in our brands, investing in our tech staff, our supply chain, to deliver great operating margins. But I will remind you, our key, our first initiative this year was to return to growth. I kept joking. It's one, two, and three, return to growth. We are obsessed with where we can grow, what brands it is, which categories it is, and how we outperform. So do not mistake that that is where our head is and what we're driving towards. On the second question, I'll hand it to Jeff. Jeff Howie: Yeah, Michael. Honestly, I'm not tracking with you on the question because actually, margin expansion year over year in Q2 was 200 gross margin was 220 points. There's only 70 basis points in Q3. With the difference of course being the impact of the tariffs. So not sure I understood your question but there was a greater impact of the tariffs in Q3. While certainly, we have our mitigation efforts the tariff impact will increase sequentially quarter over quarter every year this year. As we said on the call, it will have an impact on us in Q4 in a much more substantial way than it did in prior quarters this year. Operator: Your next question, and this will be the final question, comes from the line of Oliver Wintermantel from Evercore ISI. Your line is open. Oliver Wintermantel: Thanks very much guys. Yes, I think the message on gross margin in 4Q came across. I just want to focus on SG&A. You guys have lowered general expenses for the last several quarters. Especially in 4Q, I think there was 80 basis points in incentive comp headwind and advertising was also up a headwind of 30 basis points in the fourth quarter. So maybe could you talk a little bit about SG&A moving parts into the fourth quarter, how you expect that to shake out? Thank you. Jeff Howie: Yes, Oliver. I mean, as you know, we don't guide to specific lines. We guide the top line and the bottom line. Because it gives us the flexibility to pull different levers as we see results come in. In Q3, our higher employment expense was really almost entirely attributable to higher incentive compensation due to our strong performance year to date. Then as I explained in our prepared remarks, advertising deleveraged about 20 basis points because we saw some opportunities. During Q3 to spend some additional advertising in the digital space. One of our competitive advantages is our in-house marketing team that has the ability across our portfolio of brands to test, scale, and optimize our spend. They saw some opportunity to spend in Q3 that gave us great returns. Drove incremental traffic to the web and higher revenue per visit, and so we leaned into that. As we think about Q4, we don't guide the specific lines, but our approach is always the same as we're looking to control our SG&A, but where we see opportunities are going to give us a good return on investment, we will, of course, lean into those. But it all depends upon the overall macro. Laura Alber: I thought that it might be worth studying on a minute even though we're a couple of minutes past the hour. I'm talking about our SG&A reductions due to our AI initiatives. Because, you know, if you're joking earlier that we have a fixed point mitigation plan for tariffs, but I think maybe we should launch our seventh as AI because we're seeing some really exciting results both on the sales side and also on market time. Let me make a few comments about that before we close the call. Sameer Hassan: Sure. Thank you, Laura. Like Laura mentioned earlier, in Q3, we are seeing really, really impactful results. She shared a couple of the data points around our customer service automation, She shared our launch of Olive, our AI agent customer facing. If you haven't used that, I really encourage you to go on the Williams-Sonoma site. Today. It's super helpful for planning for the holidays and is driving sales, driving engagement, driving loyalty. It's really exciting. We're already just on the topic of SG&A, we're already seeing payroll costs where automation absorbs AI automation absorbs repeatable work. Reduced vendor costs when we streamline external spend, and we're also seeing the same tech grow the top line. In supply chain, we're cutting out-of-market shipments, improving routes, lowering damages replacements, trimming shipping costs, inventory, we're using AI to raise in-stock rates on key items, all the stuff supports conversion. It's driving down costs, but it's also driving the top line. Digital guided journeys, better content coverage, all of this is driving SG&A leverage, it's all of it's driving reduced costs, but it's also driving demand leverage, which is really exciting to see it impact both on the cost side as well as the top line side. So we really see this compounding benefit as we head into 2026. I'm really excited about the continued impact we're seeing from our roadmap. Operator: And we have reached the end of our question and session. I will now turn the call back over to Laura Alber for closing remarks. Laura Alber: Yes. Thank you all for joining us today. As I said earlier, wish you all a very happy Thanksgiving. With your families. Hopefully, you get a chance to stop by our stores and do some shopping. Look forward to talking to you in the New Year. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Universal Technical Institute Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Matt Kempton, Vice President, Corporate Finance and Investor Relations. Please go ahead. Hello, and welcome to Universal Technical Institute's fiscal fourth Quarter and Full Year 2025 Earnings Call. Matt Kempton: Joining me today are our CEO, Jerome Grant, and CFO, Bruce Schuman. Following our prepared remarks, we will open the call for your questions. A replay of this call, its transcript, and our investor presentation will be archived on the Investor Relations section of our website at investor.uti.edu, along with our earnings release, issued earlier today and furnished to the SEC. During this call, we may make comments that contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which by their nature, address matters that are in the future and are uncertain. These statements reflect management's current beliefs and are subject to a number of factors that may cause actual results to differ materially from those statements. These factors include, but are not limited to, those discussed in our earnings release and SEC filings. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We do not intend to update these forward-looking statements as a result of new information or future developments except as required by law. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of fiscal 2024. The information presented today also includes non-GAAP financial measures. These should be viewed in addition to and not as a substitute for the company's reported results prepared in accordance with US GAAP. All non-GAAP financial measures referenced in today's call are reconciled in our earnings press release to the most directly comparable GAAP measure. For more information regarding definitions of our non-GAAP measures, please see our earnings release, financial supplement, and investor presentation. With that, I will turn the call over to Jerome Grant, CEO of Universal Technical Institute, for his prepared remarks. Jerome? Jerome Grant: Thank you, Matt. Good afternoon, everyone, and thank you for joining us. We launched our North Star strategy in 2020 with a focus on growth, diversification, and optimization. The first phase of the strategy successfully concluded with the close of fiscal year 2024. In that first phase, we saw our student population more than double, from 10,000 to over 22,000. Revenue grew from just over $300 million to $733 million, and adjusted EBITDA increased from $14 million to $103 million. All of this was accomplished while improving student outcomes and employer satisfaction. Fiscal 2025 marked the first year of the next phase of our North Star strategy, a year that demonstrated the strength of our strategy, the depth of our execution, and capitalized on the momentum we built as a diversified, growth-oriented education company. We entered the first year of our North Star Strategy phase two with high expectations, and we delivered results that exceeded such expectations. Revenue surpassed our twice-raised guidance range, reaching $836 million or 14% year-over-year growth. To reiterate, we raised our top-line guidance twice throughout the first half of the year, and raised the lower end of our range in the last quarter. So the beat today isn't just against our original forecast. It's against numbers we already raised intra-year. Our baseline adjusted EBITDA for the year was $133 million before incurring strategic growth investments of $6.5 million, netting us a reported adjusted EBITDA number of $126.5 million. As important, average full-time active students rose more than 10%, with new student starts increasing nearly 11% year-over-year. These results underscore both the resiliency of demand for skilled trades healthcare careers, and the effectiveness of our multidivisional model. In just a few minutes, Bruce will delve further into the details of our Q4 and full fiscal year 2025 performance. Operationally, fiscal 2025 was equally strong. Once again, we executed at a high level on all three pillars of our growth diversification, and optimization strategy. As committed, we successfully launched 19 new programs across our two divisions, extending our reach into fast-growing sectors and expanding access for students nationwide. These included nine full-length programs, eight within UTI and one within Concord, along with 10 shorter cash pay courses designed to serve working adults and regional employers seeking rapid training options. We also further enhanced our operational foundation, aligning brands, streamlining marketing admissions, and optimizing our campuses, such as the UTI Dallas campus and Concord, Denver location. Together, these initiatives have delivered meaningful efficiency gains while enabling us to scale faster and smarter in the future. This first year of the second phase of our North Star strategy proved that our platform works, our transformation is durable, and that we are ready for the next chapter of UTI's evolution. Exactly as we drew it up years ago. With an outstanding year of execution laying the foundation, we are set up to deliver strong growth over the next four years. Frankly, we couldn't be in a better position to kick off fiscal 2026, which will be the true inflection point for our continued growth as accelerated by our North Star strategy. Jerome Grant: As we transition our focus to 2026, I'd like to take a moment to express my gratitude to our team, our students, and our partners around the country. Without all of you, none of these successes would be possible. As we now enter fiscal 2026, our operational priorities are clear. Expand our campus footprint, launch new programs at scale, and continue to grow our student base while maintaining quality performance discipline. We are on track to open three new campuses during fiscal 2026. First, the Heartland Dental co-branded campus in Fort Myers, Florida, which expands Concord's healthcare reach and will serve as a model for future co-branded opportunities, is set to open next week. The UTI Atlantic campus is a comprehensive greenfield site that will serve one of the nation's fastest-growing metropolitan areas and support programs in automotive, diesel, skilled trades, and aviation technologies. The UTI San Antonio campus, which is our first skilled trades and aviation-focused location, adds capacity in a state where demand for technical education continues to significantly outpace supply. Alongside those openings, now that the path is clear to execute Concord's growth strategy, we expect to launch approximately 20 new programs across our two divisions in fiscal 2026, which is significantly more than previously planned. These additions are tightly aligned with employer demand and will build on the success of our fiscal 2025 North Star phase two rollout. Financially, we expect revenue for fiscal year 2026 to be between $905 million and $915 million, representing approximately a 9% year-over-year growth at the midpoint. I want to be deliberate here. Without our planned growth investments this year, our baseline adjusted EBITDA guidance is expected to be north of $150 million, yet as we will be including approximately $40 million in planned growth as part of our now accelerated growth timeline, we project that we will be printing adjusted EBITDA between $100 million and $119 million. To you, our investors, the scale of these growth investments should not come as a surprise, as we've been signaling our advantageous position to accelerate our growth throughout the past year. These investments represent the front-loaded expenses of launching campuses, hiring faculty, and building capacity for long-term scale. To move on, new student starts are expected to range between 31,500 and 33,000. This near double-digit growth is driven by healthy demand trends, expanding program capacity, and an improved marketing and admissions ecosystem that's producing higher quality leads and better conversion rates. In short, fiscal 2026 will be a year of investment, expansion, and activation. We're taking the platform we've built over the last three years and moving it fully into growth mode. While these investments, as we've outlined in the past, will temporarily moderate our reported margins, they're essential to establishing the next level of scale. We've often said that UTI's growth story is not linear, and that remains true. Fiscal 2026 and 2027 are our build years. The returns begin ramping quite rapidly in fiscal 2028 and beyond. Years two through five of our North Star phase two represent the next chapter of UTI's transformation, focused on accelerating growth, expanding access, and scaling impact. And to remind everyone here, thanks to our diligent execution and new level of collaboration, we're actually one year ahead of schedule. This gives us an additional year to build momentum and execute. As a result, this means that operationally over the next several years, we now plan to open a minimum of two new campuses and up to five new campuses annually, as well as launching approximately 20 new programs annually across both UTI and Concord divisions, depending on regulatory approvals. With respect to campus locations, I'm sure you all read our recent announcement outlining the first three campuses we plan to launch in 2027. As our 2027 plans continue to evolve, you'll hear more from us. The programs we launch will continue to target areas of national workforce shortage from nursing and dental hygiene to diesel, renewable energy, and advanced manufacturing, reinforcing UTI's position as a leader in closing America's skill gap. We expect the financial impact of these initiatives to compound steadily and show strong momentum by the end of fiscal 2029. As previously noted, revenue growth should continue to average about 10% over this time period. Strategic operating and capital investment should be relatively consistent between 2026 and 2029, enabling margin expansion to begin slowly in 2027 before ramping more rapidly in 2028, and especially 2029. As a result of this acceleration, we now anticipate generating more than $1.2 billion in annual revenue and approaching $220 million adjusted EBITDA in fiscal 2029. This rapid expansion in the last two years of the phase is driven by both maturity of our campuses and program replications launched in 2026 and 2027. Please refer to our investor deck for more details. To put that scale into perspective, by the end of fiscal year 2029, we now expect our revenue to nearly double and our adjusted EBITDA to be more than double what they were in 2024. Phase two is not just an extension of our growth story, but a transformation of our scale, reach, and impact. And it sets the stage for what comes next. Even by 2029, we won't have made more than a dent in America's skilled workforce gap, which means there's still an enormous runway in front of us. As Ford CEO just last weekend noted, the industry is struggling to fill thousands of high-paying technician roles, underscoring how substantial the demand remains. So as I look ahead, I couldn't be more confident in where we're headed. We're executing from the strongest operational and financial position in our company's history, and we're building something that's designed to endure, thrive, and grow well past 2029. In fact, we're already starting to think about 2030 and beyond. Building on that durable, repeatable growth engine that we've created. That could mean continuing our organic expansion, accelerating structured B2B partnerships with employers, the military, and state workforce initiatives, including opportunities around AI-enabled training and automation, or even pursuing strategic acquisitions that broaden our reach into new geographies and product sets. We have the platform, the balance sheet, and the team to do all of it. With that, I'll turn the call over to Bruce, our CFO, to review our fiscal 2025 financials and provide you with further details on our guidance. Bruce Schuman: Thank you, Jerome. Fiscal 2025 was another year of exceptional growth. We met or surpassed all of our raised top-line guidance metrics for the year, demonstrating the scalability of our model and giving us a solid foundation to accelerate the next phase of our North Star strategy. In the fourth quarter, total average full-time active students grew 8.1% year-over-year to 25,049, while total new student starts increased 5.4% to 12,109. For the full year, average full-time active students increased 10.5% to 24,618, and new student starts increased 10.8% to 29,793, coming in on the upper end of our raised guidance range. The Concord division drove a 14.5% increase in both average full-time active students and new student starts for fiscal 2025. These increases are a result of continued marketing and admissions investments and robust demand for Concord's programs. The UTI division generated an 8% increase year-over-year in average full-time active students for the full year, and new student starts grew 7.9%. The growth in average full-time active students reflects the sustained demand for the skilled trades and the eight new programs launched throughout the year. Turning to our financial performance, fourth-quarter revenue on a consolidated basis increased 13.3% to $222.4 million. Concord contributed $77.8 million, an increase of 18.2% over the prior year quarter, while the UTI division contributed $144.6 million, an increase of 10.8% over the prior year quarter. For the full year, consolidated revenue grew 14% to $835.6 million, exceeding the upper end of our guidance range, which as Jerome mentioned, we raised multiple times throughout the year. Concord contributed $293.8 million, an increase of 19.3% over the prior year, while the UTI division contributed $541.8 million, representing an 11.4% increase over the prior year. Bruce Schuman: Shifting to profitability, consolidated net income for the fourth quarter was $18.8 million or $0.34 per diluted share, and $63 million or $1.15 per diluted share for the full year. Adjusted EBITDA for the fourth quarter was $36.8 million and $126.5 million for the full year. Full-year net income and earnings per share exceeded the upper end of our guidance range, and adjusted EBITDA was in the middle of our projected range. These results included over $6 million in growth related to new program launches and new campus build-outs. At the end of the year, we had 54.4 million shares outstanding. Total available liquidity at the end of the quarter was $254.5 million, including $41.8 million of short-term investments, and $85.4 million of remaining capacity on our revolving credit facility. Bruce Schuman: Fiscal 2025 cash flow from operating activities was $97.3 million, and capital expenditures were $42 million. Regarding free cash flow, due to the Department of Education strategy to intensify the verification process for students, cash disbursements were temporarily delayed. The result of these timing impacts was that our fiscal 2025 adjusted free cash flow was $56 million, slightly below our expectations. We expect the remainder of these impacts and delayed accounts receivable to be worked through within the next few months. Looking forward, our results in fiscal 2025 give us real confidence in the road ahead. We finished the year with strong momentum across both divisions due to the ongoing demand for education in the skilled trades. Fiscal 2026 is about turning the momentum we've driven by our first year of North Star Phase two into measurable expansion through disciplined execution. Bruce Schuman: Starting with revenue, we expect to generate between $905 million and $915 million for fiscal 2026, or approximately 9% year-over-year growth at the midpoint. For the first three quarters, we expect mid to high single-digit revenue growth with Q2 being the lowest. Q4 is anticipated to be the highest growth quarter in the low double-digit range. Total new student starts are expected to range between 31,500 and 33,000. For the first quarter, we expect low single-digit growth, then low to mid double-digit growth in Q2, and mid to high single-digit growth in the remaining quarters. For fiscal 2026 net income, we expect a range of $40 million to $45 million and diluted earnings per share ranging between $0.71 and $0.80. While revenue will be up every quarter as noted, as we begin to make our significant growth investments this year, net income growth will be strongly negative for the first two quarters, improving slightly though still negative in Q3, turning positive to low double-digit growth in Q4. As a point of clarity, we've seen no impact in our first quarter due to the recently resolved government shutdown. We expect our full-year baseline adjusted EBITDA to exceed $150 million, and our SEC reported adjusted EBITDA to range from $114 million to $119 million. Embedded in this guidance and bridging from that baseline to our reported adjusted EBITDA is approximately $40 million in growth investments, primarily related to the following two items. Bruce Schuman: The first is campus expansions, which includes the preopening and launch costs for the three new campuses opening in fiscal 2026, and preparatory work for even more campuses opening in fiscal 2027. The second item is program development, which includes faculty recruitment and educational tools needed for 20 plus new programs opening in fiscal year 2026, with more coming the year after. In terms of the quarterly profile for the year for adjusted EBITDA, similar to net income, as we begin to make our significant growth investments this year, growth will be strongly negative for the first two quarters with high single-digit growth expected in Q3 and significantly stronger growth in Q4. As a reminder, growth investments are not added back when calculating our adjusted EBITDA. Bruce Schuman: These are investments we've been building a plan for and signaling throughout the year and are not previously unaccounted for impacts. We will be deliberately and strategically reinvesting more heavily beginning in fiscal 2026, to position the company for accelerated returns in the coming years. As a result, we expect to see marginal growth in adjusted EBITDA beginning in fiscal 2027, which will begin to accelerate more significantly in 2028 and even further into 2029 as our array of new campuses and programs ramp and yield higher returns. We anticipate 2026 full-year adjusted free cash flow to range between $20 million and $25 million, which assumes approximately $100 million in CapEx spend, consistent with our multiyear plan to support campus growth and modernization. We expect the bulk of our cash generation and year-over-year growth to materialize in the fourth quarter, consistent with our historical cadence. I want to reiterate what we expect to deliver at the conclusion of this next phase. As a result of North Star phase two, we expect to achieve more than $1.2 billion in revenue, equating to roughly a 10% compound annual revenue growth rate, and to approach $220 million in adjusted EBITDA by fiscal 2029. Driving these results will be approximately $100 million total CapEx invested in new campuses and program expansions each year. These investments will fuel our next wave of growth and position us to deliver stronger returns, higher margins, and a diversified, durable, and repeatable growth engine over time. We remain confident in our ability to fund this growth strategy from cash on hand and cash generated from operations in the coming years. Again, we're thrilled with what the team has delivered in 2025 and are excited for 2026 and how this inflection point for the company will drive even stronger growth in the years to come. In addition to this earnings call transcript, we encourage everyone to review our press release, financial supplement, investor presentation, and upcoming 10-K filing. These materials include the latest updates on our consolidated and segment results, strategic initiatives, and guidance. Thank you to our students, team, partners, and investors for their ongoing support. I'd now like to turn the call over to the operator for Q&A. Operator? Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Jasper Bibb with Truist. Please go ahead. Jasper Bibb: Yes, thanks. It's Jasper Bibb with Truist. Just hoping you could give a little bit more detail on what you're expecting for start growth in 2026 between the UTI and Concord segments. Should we expect the start growth to be relatively even between the two segments or maybe is there a differential there? Bruce Schuman: Yeah. Hey, Jasper. We're like we said on the call, we're expecting roughly about an 8%, eight to 9% start growth for '26. It's gonna be very similar in kind of profile to this year, and, you know, we're investing to make sure we can make that happen and feel good about the growth for starts in '26. And is that gonna be a very similar segment profile to on your question too as we saw in '25. It's going to be a very similar profile per segment. Jasper Bibb: Okay. No. That makes sense. I just wanna clarify something from the press release. Was this comment about as much as five campus openings annually, but between the two divisions or on a combined basis? I guess my question is I don't think there'd be a scenario where you do, like, 10 campus openings in a year, but just wanna make sure I understood the point. Jerome Grant: Yeah. No. Just to clarify, it means between the two divisions. You know, we had previously said that we would likely open two to three, and now it'll be somewhere between two and five per year. Jasper Bibb: Okay. Understood. Last one for me. You mentioned the cash impact of the Department of Ed's ID verification measures, which makes sense. Just hoping you could comment on if you've seen any productivity impact on the front end. Bringing on new students. Is that taking longer? Is there additional processes they're making you go through as part of that program? Bruce Schuman: Yeah. Thanks, Jasper. No. We've seen no impact at all on the front end. This was simply a temporary, you know, as the department kind of increased their focus on verifications, you know, legal status, that type of thing. Just basically getting through that backlog caused a little bit of a slowdown in cash collection, but it was temporary. Frankly, we're already seeing it kind of come back to normal here as we start the quarter. So we don't think it's gonna be a long-term drag or anything like that on free cash flow. Jasper Bibb: Okay. Great. Thank you, guys. Operator: The next question is from Mike Grondahl with Northland Securities. Please go ahead. Mike Grondahl: Congrats on a nice quarter. Could you talk a little bit about how your high school recruiting efforts went? Kinda compared to your expectations? Jerome Grant: Sure. You know, Mike, you know, I've talked a lot. I always want them to go better. I think they went about where we expected them to. We didn't add high school resources this last year. We will for 2026. We chose to put sort of the additional strategic investment in Concord. We saw an opportunity to significantly ramp the Concord enrollment, specifically around the higher value clinical courses this year. And so as we were balancing, you know, additional strategic investment rather than adding resources in the high school for UTI, we put more money into Concord. Also, with the program launches that we've got at UTI, which, you know, are highly concentrated in the skilled trades, we're seeing that the skilled trades tend to appeal more to the adult population. And so tilt a little more investments in marketing to the adult population this year as well. Now as we're opening new campuses, Atlanta, San Antonio, and move forward, there'll be more of a balance between high school and adult, and so that's why we're adding more resources into the high school channel for 2026. Mike Grondahl: Got it. Got it. And then can you talk a little bit about tuition increases kind of embedded in your 2026? And how are you thinking about pricing power? You know, with demand as strong as it is? What's kinda your current thinking there? Jerome Grant: Well, number one, we assume somewhere between a two and a 3% price increase. It varies by program and by market in some instances. But, you know, our numbers assume somewhere between a 2-3%. And, you know, when you think about pricing, you know, when inflation spiked in 2022 and 2023, people were saying, well, why don't you take a 10% price increase? And the way you have to look at it is really around student funding. You know? There wasn't a significant increase in Pell Grants and student loan qualifications at that time frame, which means, you know, every dollar above that 2 or 3% that we have, it really adds to the gap that the student has to pay out of their own pocket. Right? So there isn't unlimited upside pricing power to be able to do that. Should there be a significant increase in student funding, we might be able to see a little bit more in pricing. And, you know, in some areas where the demand is high and we may be, you know, seeing really stiff demand, we may see a little more. But on average, it's gonna average between 2-3%. Mike Grondahl: Got it. And then maybe lastly, how will you choose between at least two and up to five? Are you help us think through the low end and the high end of that range? Jerome Grant: Yeah. I mean, the low end's conservative. You know, one of the things we already said was you could pretty much count on us for launching two UTI campuses a year. And that was prior to Concord's growth restrictions falling by the wayside and us getting into the game with them as well. So, you know, we hold open the opportunity in the years to come that we could slow it down a little bit. But right now, the opportunity is so great. I mean, the demand is so high for what we're doing in many geographies around the country that, you know, we've announced our first three campuses for 2027. Yep. You know, we had hoped to be able to get a Concord campus or two open in '26, but due to, you know, accreditor approval, real estate and building and things like that, it likely won't be until '27. We announced two of those. We've announced the first campus for 2027 for UTI in Salt Lake City, and, frankly, we're working on more. So, you know, we wanna make sure that we're moving both prudently but aggressively to solve this problem out there. Mike Grondahl: Perfect. Thank you. Hey. Take care, guys. Operator: Again, if you have a question, please press 1. The next question is from Griffin Boss with B. Riley. Please go ahead. Griffin Boss: Hi, good afternoon, everyone. Thanks for taking my questions. So I'll just start off for Bruce. Near the end of your prepared remarks, you talked about expectations for marginal growth in adjusted EBITDA starting in 2027. Can you just clarify here for me, is that implying marginal growth over 2026 numbers? Or marginal growth over what you did in '25? Bruce Schuman: Yeah. Thanks, Griffin. Yes. To be clear, that's marginal growth over '26 numbers. We've always said '26, '27, are really our investment years. You're gonna kinda see this dip, which you're seeing here in our '26 guide. We're not giving a specific '27 guide, obviously, but you'll start to see some marginal EBITDA growth in '27, and then it will really take off in '28, '29. That's when you'll start to see the return from these new campuses and investments really pay off and add to the bottom line. Griffin Boss: Understood. Yeah. That's what I thought. Just wanted to make sure I had it correct. And then just shifting to the CapEx cadence going forward, Bruce, you also talked about that. I missed specifically what you said, but I did wanna just discuss what happened in '25. Obviously, that came talked about free cash flow and, you know, CapEx came in below what you had expected as well. Is that is the gap there, the delta, that also just because of the Department of Ed and the cash collections coming in, you kind of tempered your CapEx spend this year? And then along those same lines, should we expect 2026 CapEx to be that much greater? The you know, it was it was about what, 13? Bruce Schuman: On an accrued basis, it was actually closer to 54, almost right on our guide. Cash, we didn't quite, you know, hit it. It was about $42 million on a cash basis. So really, it was a it's a timing issue. It's accruals, and we're seeing that, you know, it just it really happened toward the end of the year as we really pushed our teams to get that CapEx spent and stay on schedule. Griffin Boss: Okay. Okay. Got it. Understood. And then last one for me, just on the three new campuses that you guys announced yesterday, that's you know, the growth is great to be. Is there anything you can you just remind us maybe or tell us kinda what how you look at, you know, revenue potential would be different? Can campuses once they've scaled. You talked in the past about, you know, UTI's Atlanta maybe, I think, if I remember correctly, $45 million revenue contribution when it's scaled, and then San Antonio for UTI is $23 million. So is there anything you can just talk about with across these Concord campuses and UTI Salt Lake, expectations when you reach these scaled student numbers you talked about? Jerome Grant: So first of all, from Salt Lake, it's Jerome here, Griffin. Thanks for the question. Salt Lake City is gonna we think it's gonna behave a lot like Atlanta. It's a full comprehensive campus, transportation skilled trades, and energy. Aviation on that campus. So we think, you know, you're talking about 12, 1,300 students in the $40 to $45 million range at peak. That's our current version of the optimized campus. And, again, we're never satisfied with this notion of optimization. We'll keep looking for more, whether it's new programs or new ways to teach. So Salt Lake City is gonna behave a lot like Atlanta. Now these, you know, these are the first Concord campuses that are coming to market. And, generally speaking, what we're looking at at Concord is a full line of the Concord offerings on each of the campuses, which tends to come somewhere in the neighborhood of 600 students, slightly less revenue per student, and so you're looking at about $20 to $25 million in revenue. And, you know, again, we'll continue to look at our program offerings there and see what we can fit in beyond that. But, you know, we don't have a variable model in terms of Concord that we're putting out because the demand in the healthcare space and in the dental space is just so high. Everywhere. That, you know, it's hard to find a market where you would look at it and say, you know, I'm not gonna put dental in there, or I'm not gonna put radiology tech in, or some of the clinical courses is that, you know, we're going to market with full, comprehensive healthcare programs in all of ours. And like I said, we wanted to get the news out that we've signed our leases in Salt Lake City and Houston and Atlanta for Concord, and we're continuing to work on more locations, whether at the end of '27 or '28, we're working on those right now. And then, Griffin, just to add one thing to underscore what Jerome said, you are exactly right that full campus in Salt Lake City, those are typically $40 to $45 million revenue campuses, you know, IRR is north of 30%, return on capital north of 30%. So just wanted to answer that question. You are correct in the revenue expectations. Griffin Boss: Awesome. Great. Thanks, Jerome. Thanks, Bruce. Appreciate all the color. Thank you. Operator: The next question is from Raj Sharma with Texas Capital. Please go ahead. Raj Sharma: Hi. Good afternoon. So thank you for taking my questions again. Congratulations on a solid beat again. I wanted to ask you about the start that you starts projected for '26. I think that you've already prob you've already addressed a part of it. You said the start split would be equivalent in UTI and Concord. Any sort of breakdown amongst young adults, high schoolers, military veteran that you see that you're contemplating for fiscal 2026 and then how much of your starts is going to be new campuses and programs? I'm trying to get a sense of what your same store starts throughout this for 2026. Jerome Grant: Yeah. Well, there's a couple dynamics at play as we continue to diversify the UTI campuses, to be, you know, a full line of transportation, skilled trades, and energy, the student population tends to be getting a little older. Right? And that doesn't mean that we're not gonna add resources in the high schools. We absolutely are because we're opening new campuses. We need people in new locations. We need to intensify our efforts in places like, you know, as we open in Atlanta and San Antonio and as we get ready for Salt Lake City. So we will be adding resources in the high school. But the skilled trades tend to appeal to an older audience. You know, kids in high school tend to know about fixing cars. They don't know about wind energy. They don't tend to know about HVAC and welding and the like. And so they tend to really gravitate towards the areas, whereas people who've been out in the world for a couple of years, 19, 20, 21, 22-year-olds, often gravitate towards the skilled trades, which is balancing out the population now on the UTI campus. The other factor that's at play or the other aspects that are at play is that the skilled trades also tend to attract people who are more local. And give us more opportunity to dig deeper into the local market. And as we've said over the past, you know, the local student tends to start faster, tends to make a decision faster, tends to get going. Whereas someone who has to relocate has to find somewhere to live, and there's a longer timeline. And so what we're seeing is shorter timelines from contract start, and we're seeing higher show rates out of the local population. So, you know, these are all things that are helping both our revenue and our margin improve. Raj Sharma: Got it. Thank you. Also, I wanted to get a sense of what the employment trends across programs. Have you seen any sort of a slowdown or, you know, and even geographically speaking, you seeing a consistent employment at graduation mark that you have seen in the past? Like, has that changed? Jerome Grant: Yep. If anything, it's intensifying. I mean, we're continuing to get more B2B inquiries around government contracts that have been signed around airplane building, shipbuilding, data centers. Our industrial maintenance technology courses are doing quite well because of the number of areas that are being built in there. So if anything, we're seeing the demand intensify. On the transportation side, I mean, you heard the CEO of Ford just last week. He's got 5,000 openings he can't fill. Right? He's offering upwards of $120,000 to try to get these folks. And so, you know, there's no slowing down in the transportation business at all. Raj Sharma: Fantastic. And then just on, you know, just a hypothetical question. You know, there's been a talk in the Department of Education totally getting disbanded. Dismantled, any sort of impacts on you on the approvals, on FAFSA, that you foresee, or do you think that it would just be given out, you know, to the different divisions, different departments of the government? Jerome Grant: Yeah. I think with great question. Thanks for asking. I know that news came out yesterday, obviously, and this is something that, frankly, this administration, who's been, you know, dramatically more collaborative with us over the tenure in office, has been foreshadowing since they took over. And to put a point on your question, there really are two essential pieces of the Department of Education that are most relevant to us. One being the entity or, frankly, the bank that administers Title IV funding. That's something that's perpetually funded. It's self-contained. It wasn't part of the announcement yesterday. What we've seen is fast flows are now moving, you know, quite well. There isn't, you know, all the glitches they had with the new electronic FAFSA, etcetera, seem to be behind them, and we're seeing that progress quite well. If that were to be picked up as a chunk and moved over to another department within the government, you know, we don't anticipate that we would see any real disruption along those lines. And then the other entity is really what you started with, was the entity of approvals. And that was announced that the intention was to move pick that up and move it over under the Department of Labor. Same group of people, same leadership, etcetera, but under the auspices of the Department of Labor. What I can tell you now is that our approval process is far more streamlined, much less friction, and much more collaborative than it has ever been since I've been with this company for the last eight years. You know, the agreements are moving quite rapidly. I'm signing new PPA agreements, you know, five in the last week as we think about renewals and new campuses and new programs, etcetera. And so, you know, we're quite pleased with the collaboration we're seeing from Washington and the lines of communications we've even started to open with the Department of Labor around how we might be able to solve these huge labor problems in the US. So, so far, the two entities we see are working out quite well. Raj Sharma: Great. Fantastic. Thank you for taking the questions. Again, congratulations and good luck. Talk to you soon. Jerome Grant: Thank you. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Jerome Grant for any closing remarks. Jerome Grant: Thank you, operator. Really appreciate it. I'd like to thank everyone who attended today. Big day in the market for people reporting, so we like that you prioritized us. As always, Bruce, Matt, and I are available to follow up with any questions. We encourage once again, as we always have, people to visit our campuses. You really gotta see what we're doing, especially the new ones that we'll be opening in Atlanta, San Antonio, and the Concord Heartland campus down in Florida. If you're interested, please give us a call. So we look forward to speaking with you again when we report our first fiscal quarter 26, which will be sometime in February. Until then, I'd like to wish you all a very happy holiday season. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Agora, Inc. Third Quarter 2025 Financial Results Conference Call. You need to press star 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. The company's earnings results press release, earnings presentation, SEC filings, and the replay of today's call can be found on its IR website at investor.agora.io. Joining me today are Tony Zhao, founder, chairman, and CEO and Jim Burwand, the company's CFO. During this time, the company will make forward-looking statements about its future financial performance and future events and trends. These statements are only predictions that are based on what the company believes today, and the actual results may differ materially. These forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that could affect the company's financial results and the performance of its business, which the company has discussed in detail in its filing with the SEC, including today's earnings press release and risk factors and other information contained in the final prospectus relating to its initial public offering. Agora, Inc. remains under no obligation to update any forward-looking statements the company may make on today's call. With that, let me turn the call over to Tony Zhao. Please go ahead. Tony Zhao: Thanks, operator, and welcome everyone to our earnings call. I'll first review our operating results from the past quarter. We are pleased to report our fourth consecutive quarter of GAAP profitability in Q3, supported by double-digit revenue growth and expanding margins. Total revenue in Q3 reached $35.4 million, up 12% year-over-year. Our GAAP net profit for the quarter was $2.7 million, with a GAAP net margin of 7.8%. We expect our revenue and net profit to continue growing on a quarter-over-quarter basis. As you can see, our core real-time engagement business is rebounding strongly and is on track to deliver its first full-year revenue growth since the pandemic, providing a stable, profitable foundation for us. At the same time, we are significantly increasing our investment in conversational AI. Voice-based human-machine interaction is not new, yet most conversational AI solutions today still disappoint users. Why? Because building voice agents that can converse naturally with a human is just hard. Just a few months ago, Greylock Partners, a leading venture capital firm, published a blog post titled 'Voice Agents: Easy to Use, Hard to Build.' They know that the core challenge behind the simplicity users expect lies in immense complexity—system abstraction, real-time audio processing, latency management, and compliance requirements. Consider the issue of background noise and multiple speakers. Just two of the many technical challenges. In real-world settings, like a busy home, office, or car, clean audio is the exception, not the norm. A voice agent must accurately isolate a user's voice from overlapping speech and ambient sound. Without this, transcription becomes unreliable. Intent is misunderstood, and the agent's reasoning falters, undermining the whole interaction. Furthermore, as Andrew Kaposi has pointed out, there is often a significant gap between a working demo and a production-ready product. Conversational AI is no exception. For instance, in our discussion with customers and prospects, many have expressed frustration with the reliability and scalability of current solutions, especially when users are distributed across geographies or when concurrent usage is high. Our investment in conversational AI is specifically aimed at addressing these challenges. Recently, we launched our conversational AI engine 2.0. It integrates over a decade of advanced audio research and development, including AI-powered noise suppression, acoustic echo cancellation, proprietary audio codecs, and adaptation across thousands of device types to ensure that AI hears and speaks with consistent clarity. In addition, the engine also tackles core interaction challenges: selective attention, turn-taking, interruption handling, emotion detection, and natural conversational flow. In short, we're not just providing the transmission pipeline for voice and video; we're building the behavioral intelligence that powers truly responsive human-like conversational AI agents. To help developers build voice agents more easily, we announced our conversational AI studio at our recent Conva AI and RTE conference in late October, which allows developers to create, configure, and deploy voice agents through a zero-code interface. Complementing this, our conversational AI benchmark and orchestration platform allow developers to evaluate, mix, match, and optimize both our proprietary and third-party modules, so they can identify the best-performing combination for their specific use case. Our open-source time framework, designed for building voice agents, continues to gain traction in the developer community. Recognized for its high-concurrency architecture and deep cross-platform integration, it has been adopted by multiple cloud providers and major enterprises for their agent orchestration platforms. All these products are backed by our global distributed real-time assurance cloud. Over the past several months, we've expanded this infrastructure to cover key regions across North America, South America, Europe, and Asia, ensuring consistent latency, reliability, and performance, even under high concurrency and varying network conditions. Early adoption from customers around the world has been encouraging, and our pipeline of use cases and prospects continues to grow as we head into the next quarter. Our recent Convert AI and RTE conference attracted more than 3,000 on-site attendees, a record for us, and made it the largest gathering focused on conversational AI technology globally. Our customers and developers are deploying our conversational AI solutions to build voice agents for outbound marketing, inbound customer service, tutoring, and among many other applications. Smart toy manufacturers are also integrating our technology, enabling AI-powered companionship and learning experiences. In conclusion, the convergence of advanced AI models and robust real-time infrastructure is unlocking a new era of possibilities. Backed by proven scalability, deep technology expertise, and a forward-looking product suite, we're well-positioned to empower this next chapter, enabling truly human-like, reliable, and scalable voice agents. With that, let me turn things over to Jingbo Wang, who will review our financial results. Jingbo Wang: Thank you, Tony. Hello, everyone. Let me start by first reviewing the financial results for 2025 and then I will discuss the outlook for the fourth quarter. Total revenues for the third quarter reached $35.4 million, up 12% year over year, representing our third consecutive quarter of double-digit organic growth. If we look at the two business divisions, our core revenues reached $18.2 million in Q3, 15.9% year-over-year growth and flat quarter over quarter. The strong year-over-year growth reflects our successful market penetration and a growing adoption in verticals such as live shopping. Shunghwa revenues, reached RMB 122,400,000 in Q3, up 8.4% year over year and 6% sequentially, driven by continuous business expansion and adoption in key verticals such as social, entertainment, and IoT. Dollar-based network retention rate is 108% for Agora and 90% for Shunghu, marking the fourth consecutive quarter of improvement for both businesses. Gross margin for the third quarter was 66%, slightly decreased 0.7% year over year and 0.8% sequentially. Moving on to expenses, R&D expenses were $13.8 million in Q3, decreased 52.8% year over year. R&D expenses represented 39.1% of total revenues in the quarter, compared to 92.7% in Q3 last year. Sales and marketing expenses were $6.5 million in Q3, decreased 5.6% year over year. Sales and marketing expenses represented 18.3% of total revenues in the quarter compared to 21.7% in Q3 last year. G&A expenses were $5 million in Q3, decreased 48.4% year over year. G&A expenses represented 14.1% of total revenues in the quarter compared to 30.8% in Q3 last year. Moving on to the bottom line, we delivered net income of $2.7 million in Q3, representing a 7.8% net income margin. This result represents a significant improvement from last year and marks our fourth consecutive quarter of GAAP profitability. Based on our current business momentum and visibility into the fourth quarter, we expect net income to grow sequentially compared to Q3. Now turning to cash flow, operating cash flow was $700,000 in Q3, compared to negative $4.6 million last year. Moving on to the balance sheet, we ended Q3 with $374.3 million in cash, cash equivalents, deposits, and financial products issued by banks. Net cash outflow in the quarter was mainly due to a share repurchase of $4.8 million. In the third quarter, we repurchased 5.2 million ordinary shares, or 1.3 million ADS, representing 1.4% of our outstanding shares at the beginning of the quarter. Since our board approved the share repurchase program in February 2022, we have repurchased $132.1 million worth of shares through September 30, 2025. The share repurchase program demonstrates our dedication to returning value to our shareholders balanced with our ability to continue investing in strategic growth opportunities. Now turning to guidance for 2025, we currently expect total revenues to be between $37 million and $38 million, compared to $34.5 million in the fourth quarter last year, representing year-over-year growth rate of 77.2% to 10.1%. This outlook reflects our current and preliminary views on the market and operational conditions, which are subject to change. In closing, I would like to express my gratitude to our outstanding team in Agora and Shiwa. Our sustained double-digit revenue growth and profit expansion are a direct reflection of your hard work and strategic focus. For our shareholders, thank you for your continued trust. We remain focused on executing our roadmap to build a durable, market-leading company at the forefront of AI innovation. Thank you all for joining today's call. Let's open it up for questions. Operator: Thank you very much. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. The first question comes from the line of Harry Zwing from Bank of America. Please go ahead. Harry Zwing: Thanks management for taking my question. Congratulations on another quarter of double-digit growth and solid guidance for the full quarter this year. I have three questions. First, regarding the demand outlook, could management elaborate on the key trends in both domestic and international markets for the coming quarters, and what are the key downstream sectors that are driving the demand growth? Second question is regarding the AI application. Can management share the latest update on the drive for meaningful revenue contribution development of AI? And lastly, on the profitability outlook, can management share the profitability outlook for both the fourth quarter this year and also FY '26, at the operating profit level and the net profit level? Thanks. Tony Zhao: Alright. I'll take the first two questions, and Jim will take the last one. So for the demand in China, the overall demand recovery trend continues. With a stabilized regulatory environment, demand from social entertainment and education customers rebounded and gradually goes up. Demand from IoT and digital transformation customers is experiencing rapid growth. In the US and international markets, live commerce demand continued its rapid growth and other verticals generally show growth as well. The overall growth rate is slightly faster than in China. As to the AI demand and the trend, before I answer the question, I want to first clarify the difference between voice AI and conversational AI. We are actually focused on conversational AI, which is very related to our real-time engagement business, and it means real-time human-AI voice interaction. On the other hand, voice AI is a much broader concept. It includes both real-time conversation and non-real-time functionalities such as audio recognition and generation. Non-real-time use cases are actually much broader, and non-real-time audio recognition and generation are much easier to achieve usability and find practical use cases. In the past two years, audio generation or text-to-speech has been widely used in non-real-time content production. For example, most of the short video clips people watch today use AI-generated voiceover. These have been growing in the last two years in social media and a lot of other markets. However, when we move to real-time conversation, the complexity of the technology makes the whole experience much more challenging, as I stated in the opening remark, and it takes longer to mature and gain adoption. In conversational AI applications, currently, there are three use cases that have progressed to a more advanced stage, namely call centers, education, and companionship toys. For these use cases, we already see some customers have moved from proof of concept phase to real-world production. Given the vast scale and potential usage of these verticals, we expect the success of these customers will drive further adoption. We already have customers in production today, but usage is still ramping up. We expect to see some sizable conversational AI revenue in the first half of next year, and ConvaAI will become a meaningful revenue contributor towards the end of next year. Jingbo Wang: Okay. For the third question, for Q4 this year, given that Q4 is normally a strong season for us, we expect to achieve GAAP operating profit breakeven in Q4. Therefore, the GAAP net profit will further grow on top of the Q3 level. For next year, our target is to achieve GAAP operating profit for the full year of 2026. GAAP net profit is expected to show a big improvement over 2025. In terms of the GAAP net profit, there will be some level of uncertainty due to the potential interest rate cut, but under the current forecast, we expect year-over-year net income improvement over 2025 as well. Operator: Thank you. Just a moment for our next question, please. The next question comes from Rachel Hahn from CICC. Please go ahead. Rachel Hahn: Thank you for taking my questions. Can you hear me? Tony Zhao: Yes. Rachel Hahn: Hi, this is Rachel Hahn from CICC. First of all, congrats on the solid growth this quarter, and especially the continued improvement in profitability. I have two questions. First, I noticed that our third-quarter revenue came in slightly above the midpoint of the guidance range. Could you give us more color on what drove this solid performance? And my second question is on the AI side, which downstream applications are showing the strongest momentum so far? In particular, how is the adoption trend for AI companionship toys, and when should we expect these use cases to start contributing to your financial results? Thank you. Jingbo Wang: Okay, I'll take the first question. As Tony mentioned in the earlier question, for Q3, we saw pretty strong demand from US and international markets as well as the China market. In the US international market, live commerce continued to grow very strongly, especially in more developed markets. Other verticals, such as social and fintech, are also growing pretty well. In China, in Q3, first of all, we had the summer vacation in Q3, which is generally a strong season for social apps and education apps. In addition, the IoT sector, including smart cameras, smart wearable devices like watches, and smart toys, is experiencing very rapid growth. Tony Zhao: For the AI use cases side, there is quite a strong pipeline of customers and prospects for call centers, including outbound marketing and inbound customer services. For AI companionship toys, we see strong momentum from our customer RoboPong. Their sales and usage numbers are quite impressive. They also started to charge end-user monthly subscription fees, which we believe is a more healthy and sustainable business model and also a breakthrough in similar kinds of toys. A couple of other toy manufacturers are also in the process of integrating our solutions. We expect to see them coming to the market in the next few months. Rachel Hahn: Thank you. Okay, thank you for your detailed answers. I wish our company continued growth and success. Jingbo Wang: Thank you. Operator: Our next question comes from Yu Xing from China Security. Please go ahead. Yu Xing: Hi, management, thanks for taking my question, and congrats on the strong execution this quarter. My first question is related to AI usage. Could you share the sequential growth trend for AI-related usage? Looking at our current customer pipeline, when could we see signs of a meaningful scale for these AI applications? My second question relates to potential strategy extension. We could see some CDN vendors expanding into edge GPU inference and security. Given our R&D infrastructure, could we foresee a similar path to maybe offer or cross-sell edge-side inference or security features? Tony Zhao: Conversational AI usage increased by more than 150% quarter over quarter, so it's quite fast. Although, as I mentioned, voice AI has matured for years already, conversational AI is still at an early stage. We do see a strong pipeline of customers and prospects and believe we are not far from broader adoption and proliferation of voice agents. For your second question, we are not a CDN company, but we do have a global distributed network and a large number of data centers distributed across every major region. It's a good question. In fact, we have opportunities that are similar but from a different perspective. Specifically, we are targeting real-time inference services for conversational AI. This is what we build for our product. This inference service needs to connect with multiple distributed ASR, TTS, large language model services, as well as our self-developed and deployed modules in different locations. This kind of capability is a must to support the core process in a way that it has to be wire-load latency, so that the real-time nature of the interaction could be enabled. Such an infrastructure service is of great value to any agent that requires ultra-low latency or real-time inference. This is also an opportunity we could expand in the future. Yu Xing: Okay, thank you. That's very helpful. Operator: Thank you. Just a reminder, to ask a question, please press 11 on your telephone keypad. Jingbo Wang: Thank you. Operator: There are no further questions. That concludes today's Q&A session. Thank you, everybody, for attending the company's call today. As a reminder, the recording and the earnings release will be available on the company's website at investor.agora.io. If there are any other questions, please feel free to email the company. Thank you.
Operator: Thank you for standing by, and welcome to the Australian Agricultural Company Limited FY '26 Half Year Results Release. [Operator Instructions] I would now like to hand the conference over to Mr. Dave Harris, MD and CEO. Please go ahead. David Harris: Thank you. Good morning, and welcome to the Australian Agricultural Company's Half Year Presentation for the financial year 2026. I'm Dave Harris, Managing Director and CEO of AACo. And joining me on the call today is our Chief Financial Officer, Glen Steedman. Before we begin, AACo properties are the traditional homes of many First Nations peoples, and we acknowledge them and offer our respects to the elders, past and present. We recognize their culture and honor their deep connection to the land, waters, animals and skies, especially across the places where we have lived and worked for our 2 centuries of operation. As a food and agricultural company, there is much to learn from their approach to community and their knowledge and care for country. Our presentation today will follow the regular format. I'll start our presentation and then hand over to Glen to run through the financial performance in more detail before I close with some information about the current market conditions. And with that, let's begin our presentation on Slide 5. Australian agricultural company's history and its operations are well documented. We have been many things to many people over 2 centuries of operation. To some, we are an iconic pastoral company. To others, we represent innovation in cattle and genetics. And our connection to others is through feedlots, farming or processing. To many, we are sustainability and nature. And to our customers and chefs here and globally, we are world-class Wagyu. Through our integrated supply chain, we are all of those things and more. We manage our properties and value chain with a workforce of more than 450 people on our stations, in our head office and in our key global markets. And we take a nature-led approach, implementing farming practices that aim to balance human needs, the needs of our cattle and the needs of our ecosystems in our care. We are proud of our legacy and the opportunity we had to recognize that with you last year. We are equally proud of who we are today and the direction we are heading in through our next period of growth. This is AACo, and we are reimagining Australian agriculture to share with the world. That is our purpose. We first shared that purpose with you 6 months ago, alongside our vision, our values and our new strategic focus areas, all of which you will find as we turn to Slide 6. Our vision complements our purpose. We aspire to be the leading food and agricultural company, delivering nature-led solutions at scale. That is one of the ways we can reimagine Australian agriculture. We see sustainable beef production as one of the solutions to climate change, and we are actively pursuing the ability to demonstrate that through a holistic nature-based approach to sustainability. As we chase this endeavor, we are discovering, creating and building scalable innovations and beginning to share them with our industry and others here in Australia and globally. Our values, be curious, be generous and to own your impact are helping drive the culture within our company. In isolation, each value can help bring out the best in individual employees and in combination, they become a powerful tool that will bring out the best in our business. Striving for excellence will help AACo deliver on its new strategic focus areas. We unveiled these to you during our full year results in May. Better beef as we constantly seek to improve our genetics and accelerate our ability to grow revenue, margin and brand equity unlocking the value of the land, where we aim to leverage our world-class pastoral properties and assets to pursue new opportunities and revenue streams and partner and invest, which will drive our approach to innovation, building relationships with partners to solve problems and embed future value, building on our market-leading position. I'm pleased to say that we made progress in each of these focus areas, which I'll share with you shortly. Before that, though, as we turn to Slide 7, I wanted to acknowledge all of our shareholders and express the pride that I take in leading the Australian agricultural company. The Board and the management team are energized by the work we do each day and the vision and purpose that we are working towards. No year is without its challenges, but we face them together using the experiences of the recent and the not so recent past to help us achieve the best possible outcomes in each circumstance. The values that we have and the culture we are continuing to grow are supported through what we call the One AA approach, one team working towards the same common goal. With that approach and with a genuine understanding and appreciation across the supply chain, we are moving forward, progressing our strategy, and we are delivering outcomes for the business. In fact, as you'll see shortly, the operating profit in the first half of FY '26 is our best yet. It's an outcome that we are proud of though as always, we celebrate with a degree of caution. Perhaps the 2 constants over our more than 200 years of history are that nothing stays the same and that progress is always hard earned. Still, our teams here in Australia and around the world should be commended for how they have delivered in this period. And on that note, let's take a closer look at some of the financial and strategy highlights on Slide 8. Total revenue for the first half of FY '26 is $232.9 million, an increase of close to 20% versus the prior period. The growth was influenced by an increase in average beef prices that I'll talk more about shortly, along with an intentional and tactical program of earlier life cattle sales. AACo's live sales took place in the second half last year, but we strategically undertook a large portion of them in the first half of FY '26 to capitalize on a trio of ideal conditions, good cattle productivity, increased demand and strong cattle prices. While some of those settings are dictated by the market, AACo controls the biggest factor in achieving good live sales results, and that is the condition of our cattle. Pleasingly, AACo has achieved excellent productivity outcomes in recent periods through a combination of station-based cattle management activities and the company's nature-led sustainability program, which is improving land condition across many of our properties. With resilient paddocks that are producing quality feed, we have put ourselves in the best position to breed and grow the best quality cattle. And we have been building that resilience over several years through our nature-led program. It's given us better control and the ability to make decisions like choosing the time of those live sales, demonstrating the different avenues we can take to achieve consistent positive outcomes and create long-term value. The cattle sales also helped drive AACo's operating profit of $39.8 million for the period. As I mentioned, that is AACo's best half year operating profit result and is almost double the prior period. While used in slightly different forms elsewhere, AACo first introduced the operating profit metric into our business in 2019. The aim was to more clearly identify outcomes and progress from the day-to-day operational decisions that are being made across the business. It does this by removing the areas where we have limited or no control, such as herd valuations. 2019 was also around the time we further increased our emphasis on branded Wagyu. In the years that followed, we completed the move from being primarily a cattle company that also has some Wagyu brands to being a branded beef company that produces high-quality beef and cattle along a sophisticated integrated supply chain. Our Better Beef strategic focus area is the next stage of this evolution. AACo made targeted investments under this pillar in the first half of the year that you can see near the top right-hand slide under the heading Progress against strategic focus areas. One of the aims of the Better Beef program of work is to further improve our overall genetic profile of AACo's herd by increasing the proportion of Wagyu animals. Doing so is expected to result in both immediate gains and long-term value creation through improvements in production efficiency and overall quality. It will also increase the number of animals that are better suited to AACo's premium brands and high-paying markets. We also made another investment in the Goonoo property near Emerald in Central Queensland, boosting its production capacity by an additional 10%. The work will further enable the consistent year-round supply and the high quality, which underpins AACo's Wagyu branded beef sales. AACo progressed the delivery of its landscape carbon project at [indiscernible] Station in Central Queensland with the installation of the infrastructure that will help facilitate the generation of future Australian carbon credit units, or ACCUs. The company has received its first set of ecological condition scores for its highest value ecosystems after being granted registration with the organization known as Accounting for Nature. We first announced this project alongside the release of our sustainability framework in 2021 and have updated you on the extensive baselining work in the sustainability and annual reports since then. This brings to a close the first stage of that multiyear program. The scores and the framework will now be used internally to measure and inform AACo's science-based nature-led approach and track improvements in the ecosystem condition of our properties. Both projects are being delivered under the unlocking the value of the land program and are also examples of AACo's holistic nature-based approach to sustainability. As part of our partner and invest program, AACo is happy to announce investments in Appian, a carbon insetting company that operates the world's first carbon marketplace for livestock. Under this pillar, AACo is seeking opportunities with companies and initiatives that involve new technologies or measures that will help solve problems for the company and industry as well as create value over the long term. As you can see, we have made good progress against our strategic focus areas in the 6 months since we first shared them with you. Whilst we are only at the beginning of this next period in the company's already substantial history, I'm proud of what we have achieved against our priorities. The financial contributions we made to begin delivering in those areas are in line with the company's long-term approach of reinvesting back into the business. Pleasingly, core free cash flow improved $19.5 million versus the prior period to $7.7 million. Shareholders would recall that we've previously reported operating cash flow as one of our key performance indicators. That was appropriate through the previous period when the company's focus was almost exclusively on branded beef. However, we're of the view that core free cash flow is better suited to AACo's new strategic direction where investments into the business are made across multiple priorities in addition to normal business-as-usual activities. This metric will better highlight the combined outcome of our operating performance and strategic investments. In the first half, the core free cash flow result was driven by our overall performance, less those investments I've just taken you through. The long-term outcomes of the better Beef focus area will be seen through our commercial activities and the progress we are making in our global markets. I'll share more about that with you now as we turn to Slide 10. AACo was able to navigate fluctuating market conditions to achieve positive beef sales results. Whilst consumer sentiment was challenged by cost of living concerns, overall global beef supply and demand market factors were favorable. Premium beef prices improved in AACo's key markets compared to the prior period. and trim and commodity pricing was also strong, particularly in the U.S. and general retail. Overall, the average beef sales price per kilogram increased 7% on the prior period to $18.62. This was a major contributor to a 3% overall increase in average sales value across AACo's brands despite 4% lower volumes through the period. The results once again demonstrate the strength of our distribution network and partnerships and the strategic approach that we take to allocating products across our global markets to maximize value. Targeted marketing and other commercial activities supported the brands this period from launching a global chef Advocate program aimed at enhancing the knowledge of our Wagyu beef to dynamic pop-up experiences that take consumers on the sensory journey. We'll take a closer look at how each brand contributed to our success as we turn to Slide 11. As our most exclusive Wagyu brand, Westholme continues to be served in some of the world's best restaurants. Despite sitting at the top end of market globally, high-end foodservice isn't immune from the challenges and the cost of living pressures that I just mentioned impacted conditions in some markets this period. AACo's approach to product allocation and strong distribution relationships are important in these conditions, and we were able to use these tactical responses in the first half. Launching in Mexico and expanding into the Middle East opened the brand to new customers and new opportunities. And the launch of a new product here in Europe that we call PUA supported the brand's overall performance. Highly evolved global media and marketing strategies were deployed to continue exposing the brand to new customers, including chefs. And we were able to achieve increased menu presence and market penetration through scaling up value-added products like burgers in the U.S. On Slide 12, the Darling Downs brand benefited from improving market conditions, particularly in Korea. The brand is already an Australian brand success story with more than 20 years history in Korea and thriving as a household name in that market. Far from being content or complacent though, we continue to pursue growth in this region and elsewhere. Our Beyond Taste campaign that included the Sensory Maze experience I mentioned earlier is an example of how we're increasing brand awareness in Korea. The oversupply of local hanwoo beef that we spoke to you about in FY '25 began to ease in this period, helping reduce the price pressures we were experiencing. The Darling Downs brand grew beyond Korea as well, securing placements with 5 new retail groups across key Asian markets. Through these and other activities, the brand improved its performance in the second quarter, and we hope to continue that momentum into the second half of the year. Moving on to Slide 13 and 1824. The brand that we relaunched in January last year, recognizing and celebrating our 200 years of history. 1824 captures demand in markets and from consumers outside of Westholme and Darling Downs. It plays a key role in our brand portfolio, enjoying pride of place in more mainstream food service and butcher channels. It also has a more focused tighter set of markets, which enable it to play that complementary role without impacting price opportunities. The brand continues its positive growth. In just a short time, 1824 has already regained a loyal following, establishing itself with consistent supply and quality that is being sought after by distributors. There is strong demand within Australian market and opportunities to expand into the U.K. and to the Middle East. And with that, I'll now hand over to Glen, who will take you through our financial performance in more detail. Glen Steedman: Thank you, Dave, and good morning, everyone. It's a pleasure to be with you to share our financial performance for the first half of 2026. As shown by the performance highlights on Slide 15, we have delivered an excellent set of results this period whilst making progress against our strategy. Metrics along the top of this slide, operating profit, beef sales price and core free cash flow are some of our primary financial metrics we use to monitor our performance. Statutory profit and net tangible assets are secondary, given they incorporate an unrealized fair value movement on the market value of our [indiscernible]. Our first half operating profit of $39.8 million is the highest result achieved for a half since this measure was introduced, which has nearly doubled on the prior period. This was driven by our strong beef and cattle sales performance. Average sales prices were high for both beef and cattle sales with higher half 1 volumes for cattle sales underpinning this growth. Average sales prices for Wagyu Beef were up 7%, driven by global market allocation, capitalizing on opportunities across our brand portfolio. Our Better Beef program is targeted at growing revenue, margin and brand equity. And we have proven our ability to grow through uncertain market conditions, including the changes in tariffs, global trade policies and impacted markets during this period. Core free cash flow is a primary metric we use to determine how we are performing as a business. This represents free cash flow less in-year strategic investments made as we reinvest to deliver on priority areas. We believe this is an important measure as it highlights the underlying cash performance of the business and provides transparency on strategic investments we are making. As I'll touch on in the cash flow slide, we achieved a core free cash flow of $7.7 million, which was up $19.5 million on the prior period. Our statutory profit and net tangible assets improved primarily due to higher market prices of our cattle with the $82.2 million statutory net profit after tax, up $58.6 million versus the prior period and net tangible assets up 6%. Whilst the fluctuations in the mark-to-market value of the herd are largely unrealized and outside of our control, we're able to capitalize on market opportunities for our live cattle sales during this half and the higher sales revenue also contributed to favorable statutory performance. Cost control and supply chain efficiencies resulted in a stable cost of production, which is particularly notable given the higher inflationary environment. I'll now take you through the drivers of our performance in some detail as we walk through our profit and loss, balance sheet and cash flow. Moving to Slide 16. As Dave mentioned earlier, we are pleased to have delivered a total sales revenue of $232.9 million, representing a 19% increase on the prior period. This growth was achieved through strong sales execution across both beef and cattle and strategically higher volumes of cattle sold. Our Wagyu beef sales revenue was up 3% with 7% higher average sales prices on 4% lower volumes. There's significant value in the partnerships we have continued to nurture and grow in key markets across the world, enabling our teams to allocate profit to maximize price and ultimately grow margins, which underpins our favorable performance. We look forward to further development under our Better Beef strategy as we continue to invest in ways that can provide sustainable growth. During this first half, we further displayed the strength of our integrated supply chain and decision-making by executing on cattle sales. In doing so, we've been able to capitalize on increased demand and higher prices for live cattle, growing total cattle sales revenue by 71% from the prior period. This result was made possible through good productivity outcomes driven by improved land condition and station-based management activities, achieving 20% higher prices compared to the prior period. Importantly, the overall herd size remains in line with the 2025 year-end position with our herd well positioned to generate future value. Our beef and cattle sales results delivered a gross margin of $76.4 million, up 55% on the prior period. We have continued to invest in our brand and capabilities during this period, which supported our overall performance. The delivery of our $39.8 million operating profit is one we can all be proud of as we look to the future of continued momentum and strategic focus for success. Now turning to Slide 17. Our cash flow for the first half further tells the story of our strong sales results with reinvestment back into the business to progress our strategy. As mentioned earlier, core free cash flow is an important measure of our business performance, highlighting the underlying cash performance of the business. The difference between free cash flow and core free cash flow is the strategic investments we have made in year. We were pleased to achieve a core free cash inflow of $7.7 million, up $19.5 million on the prior period. Key cash outflows during the period were made in service of our strategy and included enhancing the genetics of our herd, improved 10% production capacity at our Goonoo property, infrastructure to enable the generation of future ACCUs from the [indiscernible] soil and carbon project and building alternative revenue streams through our Gulf cropping. These investments have supported -- been supported by access to capital under our refinanced debt facilities as well as higher receipts from sales revenue. Through our enhancements and investments in new infrastructure, we are making tangible progress against our strategic priorities. It's pleasing that whilst our strategy refresh is relatively new, we have been able to execute on meaningful components of this already. Moving to Slide 18. Our balance sheet strength continues to grow, underpinned by our world-class assets. The key movements on our balance sheet from year-end was predominantly livestock, which improved in value by $123.3 million. This was largely due to a $94.7 million unrealized fair value gain on the herd driven by higher market prices. The herd size remains materially unchanged with continued improvement in overall condition and quality, which is a focus of our strategy. As announced to the ASX in August, we were pleased to share that we successfully refinanced our club debt facility with our banking partners, securing an additional $80 million in borrowing capacity on more favorable terms. Securing additional capacity allows us to continue to actively pursue opportunities under our strategic focus areas and add further value into our business. I'll now hand back to Dave to take you through the outlook for our operating environment and provide closing remarks. David Harris: Thanks, Glenn. Now let's move to Slide 19. AACo's operating environment remains active heading into the second half, both within its supply chain and globally. Cost of living concerns and a downturn in high-end food service are being experienced in some key regions. However, market reports suggest a continued tightening of global beef supply will balance out these price pressures, and AACo will continue to manage evolving circumstances through its global distribution network. Lower live cattle trading volumes are expected in the second half after sales were initiated in the first period as we shared with you earlier. Our properties are well positioned as we enter the traditional wet season. They are increasingly resilient following several years of work to establish and embed our sustainable stocking and land management strategies. Through our sustainability program, we have intentionally moved away from more volatile seasonal business models. We anticipate having more control over how we manage our supply chain, which allows better long-term planning and produces better outcomes for our properties and our cattle. It also allows us to respond more appropriately when market challenges arise or when there is instability, which appears to be increasingly the case in recent years. On that note, we welcome the announcement this week of the tariffs being removed from Australian beef entering the U.S. It's an important market for AACO and Australian beef more generally, and we support the removal of barriers that could improve opportunities for us in any region. Our focus for a number of years has been on creating desirable premium brands as well as distribution network and routes to market that can help us withstand individual market pressures. Our brands have a growing presence in North America when combined with factors such as the prolonged herd liquidation there, we remain positive about that market, and we look forward to continuing to build our presence there. I would like to thank you for joining us on the call today and thank the Board and the management team here at AACo. Strong results like we saw in this period can only be achieved through hard work and dedication. A record half year operating profit is testament to the important role each person across the business plays in the success of our operations and to the course we have set ourselves on through our new business focus areas. We've made pleasing progress against our strategy, setting the company up for sustainable growth. We look forward to the future with optimism, with purpose and a drive to succeed. That's the end of today's presentation, and we're now happy to take questions. Thank you. Operator: [Operator Instructions] Your first question today is from Eric [indiscernible] and there's a webcast question. This reads, David, your predecessor marked that with adequate rain, AAC has the best grass factory. Can you comment on the recent rainfall on the AAC land masses and how it has benefited the cost of operations? David Harris: Thanks for the question there, Eric. Yes, there has certainly been a start -- a bit of a start to the early wet season in the north. The majority of our Central Queensland properties have also had really good rain, which has been helpful. I think that's a soft start for us, which is great. Obviously, we need that rain to continue. The last couple of years, we've had little starts like this, which then dried up and last year's rainfall was actually considerably later than normal with the majority of rainfall received in March last wet season. In relation to cost of production, I've been really happy with how we've been able to manage cost of production over the last 2 or 3 years now where we're largely flat. Over this first half period, you'll note it's actually down 1% on the prior comparative. But if we look at full year periods over the last 2 or 3 years, we've remained relatively flat from a cost of production perspective. I think something to take into account when I talk about building a resilient business model and that sustainable long-term stocking rate that we talk to is a lot of that work and that theory is put into place actually in the difficult years, not the good years. And so what we're trying to do there by breeding -- building this resilient business model is so that in the droughts and the tough years, which I'm sure won't be too far around the corner now that we've had a couple of good ones. That, that's actually when these programs come into play and we're not forced sellers and we're not forced into moving cattle around or spending a lot of money on excessive lick and supplement feeding programs. And so whilst I'm extremely happy with us being able to hold cost of production flat, whilst we're also evolving the herd to be slightly more Wagyu and slightly more from an intensive feeding program that have higher cost of productions, but that's also more higher-value product. So to hold it flat, I think, is an excellent outcome. And where I really look for this resilient business model to play out will be actually in the more difficult years than these good years. So I hope that helps and answers that question for you. Operator: Your next question is from John [indiscernible]. This reads, the first half result appears to be significantly enhanced by the mark-to-market and the value of livestock. This is, of course, not a recurring item and follows a particularly favorable period of broad beef price increases. In the absence of this, the company would have made a loss. It appears difficult to see how the company can achieve a return commensurate with assets employed given the long-term strategies have not really achieved significant results. Is this perspective wrong? Glen Steedman: Thanks for the question. I'll take that one, Dave. So we do use operating profit as our key measure of determining our profitability because the unrealized gains or losses on our cattle do distort our results from year-to-year. So some years like this one, there can be large profits and other years, there can be significant losses caused by that mark-to-market movement. So what operating profit basically does is it allocates the cost to the cattle as they move through the supply chain. So when you get to the end of the supply chain, the cost that they absorbed is offset against the revenue to get a true feel for the profitability of those animals that go through. We don't sell the majority of our cattle through the typical market process. So those unreal -- those market values that are assigned at different periods in time don't really represent the true value of that livestock to our organization. So for us, the operating profit is the best metric. We've introduced the core free cash flow metric as well to give greater transparency to the market, just so they can see what we're investing into the future and also how the business actually performs on an underlying basis without those investments occurring. So we hope that provides greater transparency, and that's a key measure that we're going to continue to monitor ourselves against. Operator: You have another question from John Dicks. This reads, how do you see the removal of U.S. tariffs on beef impacting AAC? David Harris: Yes. Thanks for the question. Look, I think as I mentioned in the presentation today, North America is a really important market for us as a business. I think it will obviously help all beef export businesses in Australia into the U.S. and help with pricing there. I think it's probably fair to say that we need to have a global outlook on this piece as well. And so whilst Australia's exports to the U.S. have reduced by 10%. There was a point in time where it was actually a competitive advantage against some of other exporting nations. And so in this situation where we may have lost 10, other nations have actually had more significant reductions. So for example, I believe Brazil is still at sort of 40%, but they were up in the 70s. And so other nations have had significant reductions as well. Largely, I think it's positive, but we have probably lost some competitiveness against other exporting nations into the U.S. But the North American market is a really strong one for us. And like I said in the presentation, we focus on the things in our control. So we focus on our brands, and we focus on being desired by the chefs and the consumers in North America and so that we can get to the top of the list and be a really desired product there. We've put a lot of effort in North America from a commercial brand marketing side of the business. And I think what stands us in good stead over there is our sophisticated distribution network that lets us get all the way around that country to some really amazing consumers and distributors. And so I think it will continue to be a very significant market for AACo. Operator: [Operator Instructions] Your next question comes from Lindsay Stubs. This reads why doesn't the company pay a dividend to its shareholders? Does the company have any franking credits? Is it likely the company will ever pay a dividend? David Harris: Thanks for the question, Lindsay. That's a question for the Board. But I can confirm that last year, there were no dividends declared or paid in that half year '26, and there are no franking credits. What I'm focused on from a management perspective is how we reinvest back in the business and how we build the business to be a more profitable business for the future. And so at the moment, what we're trying to do is illustrate to shareholders the value that we think we can deliver for the business by reinvesting back into it. We've just delivered the greatest or the largest half year result in recent history for the business. And so I'd like to think that, that's starting to build trust with shareholders about our capacity to reinvest back in the business and build returns. Operator: Thank you. There are no further questions on the webcast or on the phone line at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect. David Harris: Thank you.
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