加载中...
共找到 39,806 条相关资讯
Operator: Good day, and welcome to eGain Corporation Fiscal 2026 First Quarter Financial Results Call. All participants will be in a listen-only mode. 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 Jim Byers, Pondell Wilkinson, Investor Relations. Please go ahead. Jim Byers: Thank you, Operator, good afternoon, everyone. Welcome to eGain Corporation's Fiscal 2026 First Quarter Financial Results Conference Call. On the call today are eGain Corporation's Chief Executive Officer, Ashu Roy, and Chief Financial Officer, Eric Smith. Jim Byers: Before we begin, I would like to remind everyone that during this call, management will make certain forward-looking statements which convey management's expectations, beliefs, plans, and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate, or similar expressions. Forward-looking statements are protected by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects. Information on various factors that could affect eGain Corporation's results are detailed in the company's reports filed with the Securities and Exchange Commission. eGain Corporation is making these statements as of today, 11/12/2026, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call. In addition to GAAP results, we will also discuss certain non-GAAP financial measures such as non-GAAP operating income. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. eGain Corporation's earnings press release can be found by clicking the press release link on the Investor Relations page of eGain Corporation's website at egain.com. Along with the earnings release, we will also post an updated investor presentation to the Investor Relations page of eGain Corporation's website. And lastly, a phone replay of this conference call will be available for one week. And now with that said, I'd like to turn the call over to eGain Corporation's CEO, Ashu Roy. Ashu Roy: Thank you, Jim, and good afternoon, everyone. We are off to a good start to our fiscal year with strong first-quarter results across the board and ahead of consensus. Our total revenue was up 8% year over year. Our SaaS revenue was up 10% year over year, and our AI knowledge line of product business, the ARR for it, was up 23% year over year. So, we are making progress in the right direction in this exciting space of AI knowledge that we are now firmly leading. Turning to business highlights, let me share a couple of notable new logo wins in the quarter. So, first, we signed up one of New York's largest insurers, health insurers. They serve 2,000,000 members roughly. This company saw the critical gap in their business operation where lack of trusted knowledge that was available to all their employees and clinical staff was hurting compliance. They were struggling with their knowledge content fragmented across silos. Some were SharePoint, some were Confluence, and then many other repositories. So, following an extensive process RFP and so on, they selected us to centralize the knowledge across the business for 8,000 users. Now, what's interesting to us is within one hundred days, they've gone live with our solution. With a powerful scalable AI experience that aligns perfectly with their mission to deliver great healthcare to New Yorkers. Another one which is quite interesting is a multinational energy company that we recently won. They serve over 20,000,000 customers across gas and electricity. This company, they've set up an ambitious goal to achieve what top quartile CSAT ranking because that would enable them to compete for millions of pounds of government incentives. A key challenge for them as part of this is replacing outdated knowledge experience for something that is spread across thousands of different documents, PowerPoint, SharePoints, Word documents, and so, they're replacing that with eGain Corporation. A modern solution to support the contact center, their field agents, and their service engineers. Again, this client went live within one hundred days. We're already live now with our AI knowledge solution. They internally call it GWAC. Ashu Roy: WATT. A fitting name for a knowledge tool in an energy company. On the expansion front, we are seeing a nice pattern where existing knowledge clients are increasingly coming to us to add the AI agent products to leverage the trusted knowledge they have in their knowledge base. And either go into their contact center to assist the agents or in some cases, extend it into customer self-service directly. So for example, one of our branded manufacturing clients, last quarter decided to expand their core knowledge implementation now into customer self-service. This is a leading manufacturer of premium bicycles. And what we have been able to now do is produce a lot of their inbound contact center volume and they can drive a lot more growth without increasing the cost of service. So, this combination of AI and knowledge is really working for our customers now, and we are seeing more and more of them starting to drive that expansion and build out of agentic capabilities on top of trusted knowledge infrastructure from us. The other thing, just looking at exciting stuff we have announced recently, is we made a whole bunch of new product announcements at our Solve 25 event last month. It was very successful while we held it in Chicago. About half a dozen of our global 2,000 clients have shared success stories, which pretty much a common theme. And that was the power of trusted knowledge and agentic AI working hand in hand. To deliver both contact center improvements in performance as well as self-service improvements. The three new capabilities that we announced at the event incidentally, that's our biggest product announcement ever, where we have announced three new capabilities. So that's sort of testimonial to great work that our team has been doing for the last year and a half. In this area of AI knowledge. So, the first product we announced was more a process that we have now translated into a product. And this was our what used to be called the eGain Corporation knowledge method. The knowledge method was our way, our proprietary way of building out and maintaining enterprise knowledge in a very efficient way for our business clients. And, what we've been able to do is to apply AI to that and develop what we are now calling the eGain Corporation AI knowledge method. This includes comprehensive AI-powered knowledge intelligence, content orchestration, and answer synthesis capabilities. All that put together with expert in the loop to ensure that quality and compliance are always front and center. With these automation capabilities, we are confident that we can accelerate most knowledge management tasks by a factor of 10. And also reduce customer implementation time by two to 3x. In fact, when I mentioned the other two clients earlier, they were benefiting from some of the early usage of this capability of AI knowledge methods. Our attendees at the conference were simply delighted with this because for the longest time knowledge management has been a great ROI but the investment required has been a lot of manual labor. Now, with automating that with our AI capabilities, that just creates a lot of energy around knowledge and the priority businesses are able to put onto knowledge automation not knowledge management. The next product we announced was the second version of eGain Corporation AI agent. And so, we it's a breakthrough approach we have taken now to enhance the first version to automate conversations in customer service. And what we're doing there is we are combining hybrid AI with inbound expert assurance. Where needed. And by doing that, we can deliver nontrivial use cases which involve transactions, which involve decisions that are compliance oriented to customers using AI and automation. That's something which we have seen as a big gap in the industry. Where a lot of agentic solutions that are out there now talk about in automation, but really when we see the automation in practice, it's all around very trivial use cases. Because these agentic AI solutions will occasionally make mistakes. And so you need to have a hybrid AI approach where you combine deterministic reasoning with model reasoning. You do that intelligently and with compliance in mind. And that's what we have implemented in AI agent too. Finally, we announced the eGain Corporation Composer, which is our first product targeting developers. It's a modular AI knowledge platform for developers that leverages trusted knowledge sources to power agentic automation. And so now what we're doing is these developers can now mix and match the components we have on our platform. Including the Knowledge Hub, the retrieval engine, the agentic flows, and the user experiences. So they can decide to configure what we already have or they can decide to develop their own components and plug them in to meet specific needs using our extensive APIs and SDKs and connectors we announced as part of the Composer. Solution. Over the last couple of years, we've been working with many enterprise AI teams in our clientele. And what we have seen is a common pattern where these AI teams are looking to deploy the same sort of reliable trusted knowledge powered agentic capabilities increasingly. That we are doing in the customer service groups and CX groups wanna do it outside of those groups. But in order to do that, they need more flexibility. They wanna use the common knowledge architecture and infrastructure but they also want the ability to develop their own agent declared on top of it. And the composer offering allows them to do just that. So we've seen some good interest from our existing customers around Composer, and some new partner interest in that in the short period of time that we have announced it. Very exciting for us. Looking at the third aspect, which is, again, very interesting now. For us is the team and how we are adding some key talent as we are growing the business. And investing on top of this product-led growth plan that we have put in place. So, couple of new hires I want to highlight. We did a press release around John Copeland, who is our new VP of Marketing. He comes in from ServiceNow. And before that, he was with Adobe and eBay and McKinsey. He's leading a marketing effort. Our Solve event last month was his public introduction to the eGain Corporation stage. The next person that I wanna mention and I'm very happy to have him on board is because Aliwal Vikas has joined as our VP of product marketing. He comes to us from the AWS AI team. And before that, he was with Intel and Broadcom and a host of other technology-heavy companies. He brings deep experience on the product development, the product management, and now leading product marketing. So eGain Corporation, his first mandate is to drive the GTM for our new Composer product. As I mentioned, we are targeting developers and partners. We're looking for a composable platform to operationalize their AI solutions built on trusted knowledge. And finally, we're very happy to have Gautam Garg who's joined us as the VP of Finance. He has joined Eric's team and comes to us from VTIS, which is a respected investment bank and before that with Oracle in a variety of roles starting in engineering and moving on to business and product. So, Eric, I know is quite excited about having him on the team. And looking to further automate our finance and operations as we drive our growth plans. With a lot going on, just to conclude, we are pleased with our first-quarter financial performance. And what I see as growing market momentum. Our recent product introductions are resonating in the marketplace, the three we talked about. So, that's the time we are now investing and building out the team. And so, we are excited to expand our leadership team with the hires that I just mentioned. With that, I'll hand it over to Eric. Our CFO, provide more detail on the financials. Eric? Eric Smith: Thanks, Ashu. And thanks, everyone, for joining us today. Before I begin, I want to mention that we are again using slides to support our earnings call. We believe this will provide helpful context and make it easier for you to follow our results and outlook. In addition to the webcast, you can find the slides in the Investor Relations section of our website and the updated investor presentation. As Ashu noted, we are off to a good start to our fiscal year. With revenue and ARR growth year over year, expanded margins, increased profitability, and strong cash flow from operations. Let me share more details about our financial results for Q1 before discussing our outlook and guidance for Q2 for fiscal 2026. Looking at our revenue, total revenue for the first quarter was $23.5 million, reaching the high end of our guidance and increasing 8% year over year. SaaS revenue increased by 10% year over year and accounted for 93% of total revenue versus 91% of total revenue in 2025. Looking at non-GAAP gross profits and gross margins, total gross margin for the quarter was 76%, up 600 basis points from 70% a year ago. SaaS gross margin for the quarter was 81%, up from 77% a year ago. Total gross margin expansion was driven by SaaS gross margin expansion plus a greater shift towards SaaS versus professional services revenue. Notably, SaaS gross margin expansion was primarily driven by our product enhancements that enabled more cost-efficient deployments and delivered operational efficiencies within our cloud and customer support teams. Now turning to our operations, non-GAAP operating costs for the first quarter were down 9% year over year as we have streamlined and realigned our business operations because of automation and the continued shift towards a product net sales model. Notably, we have redeployed these cost savings into R&D, which reflects our ongoing focus on growth and product innovation. Looking at our bottom line, our GAAP net income includes a million warrant expense recorded as a one-time stock-based charge during the quarter. As we mentioned on our last call, this expense relates to the warrant we issued to JPMorgan in August as part of the strategic agreement that includes the appointment of a senior JPMC executive as a Board observer. Non-GAAP net income was $4.7 million or $0.17 per share. Up significantly from non-GAAP net income of $1.3 million or $0.04 per share in the year-ago quarter. Adjusted EBITDA margin for the quarter was 21% exceeding our guidance and up from 6% in the year-ago quarter. Turning to our balance sheet and cash flows. For the first quarter, we generated strong cash flow from operations of $10.4 million or 44% operating cash flow margin. Compared to $1 million or 4% operating cash flow margin in the year-ago quarter. This was ahead of our internal target due to better-than-expected cash collection efforts in the quarter. During the quarter, we bought back $1.5 million in stock at an average price of $6.38 per share. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the quarter was $70.9 million, up from $62.9 million as of 06/30/2025. Now turning to our customer metrics. I've broken out the ARR AI knowledge metrics from the total metrics to highlight the momentum in our AI knowledge business. Looking at ARR, SaaS ARR for knowledge customers increased 23% year over year while SaaS ARR for all customers increased 8% year over year. Turning to our net retention rates, LTM dollar-based SaaS net retention for knowledge customers was 104% up from 103% a year ago while net retention for all customers was 102%. Up from 90% a year ago. Our LTM dollar-based SaaS net expansion rate was 119% for our knowledge customers and 110% for all our other customers. All customers. Looking at remaining performance obligations, total RPO increased 23% year over year and our short-term RPO of $58 million was up 7% year over year. Now turning to our guidance. For the 2026, we expect total revenue of between $22.3 million to $22.8 million. The sequential decline is primarily due to an approximate $600,000 reduction in revenue from our messaging platform business, which as we've mentioned on our last call, we will be sunsetting over the next year. Furthermore, the recent government shutdown has introduced delays and near-term uncertainty for certain professional services engagements with some of our government customers. Turning to the bottom line. For Q2, we expect GAAP net income of million to $1.7 million or $0.04 to $0.06 per share which includes stock-based compensation expense of approximately $700,000. We expect non-GAAP net income of $1.9 million to $2.4 million or $0.07 to $0.08 per share and adjusted EBITDA of $2.7 million to $3.2 million or a margin of 12% to 14%. Looking at our full fiscal year ended 06/30/2026, we expect total revenue to be between $90.5 million and $92 million representing a return to growth for the year. GAAP net income of $3.5 million to $5 million or $0.12 to $0.17 per share. This includes stock-based compensation expense of approximately $3.4 million and the warrant expense of approximately $1.4 million. Non-GAAP net income of $8.3 million to $9.8 million or $0.29 to $0.34 per share and adjusted EBITDA of $10.4 million to $11.9 million or a margin of 11% to 13%. Looking at our diluted weighted average shares outstanding with the recent stock price movement, we now expect approximately 28.8 million shares for both the second quarter and full year. This expected increase in outstanding shares has a 1% impact on our EPS guidance. For FY '26. In conclusion, we are off to a good start to the year with solid results that beat consensus across the board. Customers and partners are responding enthusiastically to our expanded suite of AI enabling knowledge solutions and we are well-positioned to build on this momentum and drive sustainable growth and profitability going forward. Finally, on the IR front, eGain Corporation will be meeting with investors at the fourteenth Annual ROTH Technology Conference in New York City on November 19. We look forward to seeing some of you there in person. With that, I'd like to open the call for questions. Operator? Operator: Thank you. We will now begin the question and answer session. And your first question today will come from Richard Baldry with ROTH Capital. Please go ahead. Richard Baldry: Thanks. It looks like sales trends are sort of firming up and but by contrast to the actual dollar spent on sales and marketing in the quarter stepped down sort of sequentially and year over year. Can you talk about what your strategy is there, whether you think that it might be time to start investing there more aggressively, or, you know, do you feel that you have the capacity you need to address the opportunities that are starting to come? Ashu Roy: Yeah. So two things. One, there's just a summer slowdown with marketing spend. So, for example, for this current quarter, again, things will go up. Right, because the marketing spend is going up. Second, to your point about building out capacity, I think right now, people-wise, we have good capacity because we are driving, as we mentioned, sort of a product-led sales motion with much more solution expertise-oriented pipeline execution. And so, that is working well for us. But, we do think that in the second half of this fiscal year, we will step up the sales hiring investment as well. Richard Baldry: And it looks like, you know, AgenTic, you know, AI agents starting to highly proliferate them, be generous. But none of them you know, because it seems like integrating a GenAI engine with some of that functionality is okay, easy enough, but they don't seem to have access to the data behind it. So do you think that the proliferation of those I think of as almost dumb agents, actually, helps you, or does it commoditize that segment enough that it'll push more people to try to have to work with partners like yourself to make them specifically intelligent on a customer-by-customer basis? Ashu Roy: I believe so. I believe so. I think that's what we are seeing. We are seeing people playing with AI, agentic AI, and then we are seeing them talking to us after that. And so, to your point, if you wanna do something serious, you need to make sure that you're not feeding a garbage that you're connecting into really critical data systems to solve nontrivial experiences and use cases. That's where we are coming in. And we are seeing that even with our existing customers. They have their large companies, they have lots of AI teams that are developing cute little prototypes on the side. But they all are coming back to us to say, okay, we need to connect to your knowledge back end. So it's gonna be exciting for us. Richard Baldry: And last for me, if you look at the composer product, you know, it's a new set of targets you're going after with developers. How complete is that, you know, for them to pull in to be able to work with not only the different components that you can bring to the table, but, you know, can they integrate with a variety of GenAI engines, or is it specific to a few you've tuned it for? And how difficult would it be to sort of pop in different AI engines on top of your system? Thanks. Ashu Roy: Yeah. Great question. So to your point, this is the first version. So by definition, it's not most comprehensive. But what we have going for us, I believe, is two things. One, we have the trusted knowledge back end and making that available very easily for people to plug into whatever agentic solution they are building. So that we have made it very easy with our APIs and SDKs. So, for example, we will plug into OpenAI's development environment or Azure Copilot development environment. It says people are building agentic workflows in other places, We are providing a connector into those work environments so that they can use those use our APIs to get the trusted knowledge. So that is point one. The second is we are also your earlier the second part of your question. So We are enabling it within what we call the bring your own model architecture. So if an enterprise says, no, we are gonna use cloud and not use OpenAI, that's fine. We are making it possible for people to plug in their choice model into our platform. To do AI stuff. So those are the two things that we have done to make it easy for people to start consuming right away. Richard Baldry: Great. I thought it was my last question, but I'll try to sneak in one more. You've got a pretty big cash balance now and it went up pretty substantially in the quarter despite some buybacks. Can you talk about strategically what you really think that's deployed against? Is it a more aggressive buyback? Is it, you know, tuck-in acquisitions, to expand your capabilities? In this knowledge management, you know, agentic world. How do we think about that asset? Thanks. Eric Smith: Eric, you want to talk to that? Sure. I mean, I think we'll obviously continue to look at the buyback. I mean, as we disclosed in the last call, we had increased that capacity. So that certainly still continues to be one avenue. But I think to your point of sort of exploring tuck-in acquisitions or inorganic, it's something that we're always open to, but for sure is not our primary focus. But I think more importantly, just having that ability to continue to invest in the business as well. It's something that gives us that comfort with that process. We don't have any distraction around the viability of the business. So you know, those are the items that I would highlight. Richard Baldry: Great. Thanks. Congrats on a good quarter. Ashu Roy: Thank you. Operator: Next question will come from Jeff Van Rhee with Craig Hallum. Please go ahead. Vijay Homan: Hi, this is Vijay Homan on for Jeff Van Rhee. First from me, just last quarter you talked about a pipeline of several 7 figure knowledge hub opportunities kind of an increasing pilot conversion rate. I was wondering if you could just give us an update on those opportunities and what you're seeing in those sales cycles. Ashu Roy: Yes. So I think the progress is good. Progress is I'd say, you know, these large opportunities take time to mature. And so what we are seeing is steady progress. So I'm quite pleased with that. Because with large opportunity, sometimes they stall along the way. I'm not seeing that I'm seeing steady progression. So, I'm quite excited and I also see more engagement on the partner side. We are seeing more interest from partners who are starting to see this area as a viable category to add value. So those are two things that are quite exciting for us. First, the pipeline progression and second, starting to see some good partner activity. Vijay Homan: Got it. Appreciate that. And then next one, I know the intent was for the for JPMorgan to deploy by the late fall. I was just wondering how that deployment is going and any other updates on that rollout or learnings would be helpful. Thanks. Ashu Roy: Yes. So, yes. I'm happy to report that they have gone live with what the first phase plan was and we are actively working the next phase. So I think it's gone to plan, which is great. As I think I've mentioned earlier, we deployed their first phase in half the time that we had originally discussed and agreed with them on. Know? So it's pretty exciting for us. The speed of getting these projects live and used is, to me, a barometer of the interest and priority that enterprises start to place on these kinds of technologies. Vijay Homan: Got it. Thanks for the color and I'll leave it there. Operator: Seeing no further questions, this will conclude our question and answer session. I would like to turn the conference back over to management for any closing remarks. Eric Smith: Thanks, Operator, and thanks, everybody, for participating and look forward to updating you with our Q2 results. Thank you. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Aqua Metals Q3 2025 Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rob Fink, Investor Relations. Thank you, Rob. You may begin. Rob Fink: Thank you, operator, and thank you, everybody, for joining. Earlier today, Aqua Metals issued a press release providing an operational update and discussing financial results for the third quarter ended September 30, 2025. This release is available on the Investor Relations section of the company's website at aquametals.com. Hosting the call today are Stephen Cotton, President and Chief Executive Officer, and Eric West, Chief Financial Officer. Before we begin, I would like to remind participants that during this call, management will be making forward-looking statements. Please refer to the company's report on Form 10-Q that was filed today, November 12, for a summary of the forward-looking statements and the risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. Aqua Metals cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by law. As a reminder, after the formal remarks, we'll be taking questions. We'll take as many questions as we can fit in and as time is allowed. And with that, I'd like to turn the call over to Stephen Cotton. Stephen, the call is yours. Stephen Cotton: Thanks, everyone, and welcome to our Q3 update. This past quarter and the subsequent weeks represent a meaningful strengthening of Aqua Metals. We advanced our technology, expanded commercial pathways across both battery and emerging critical mineral supply chains, and strengthened our balance sheet with $17.1 million in new funding. I want to start there. Combined with our disciplined operating approach, this capital provides Aqua Metals multiple quarters of strategic runway and flexibility. Eric will speak more to the details, but it's important to note this was a proactive raise, not a reactive one. Capital raised from a position of strength and strategic momentum. We brought in capital proactively to accelerate the plan and strengthen our strategic footing. And we believe that decision positions us exceptionally well as we move towards full commercialization. On the technology front, Q3 marked continued validation of the AquaRefining platform. We successfully processed one metric ton of lithium iron phosphate or LFP cathode scrap at pilot scale, producing battery-grade lithium carbonate validated by OEM and third-party testing. To our knowledge, Aqua Metals remains the only company to demonstrate an economically viable path for producing battery-grade lithium carbonate by recycling from LFP at a commercially relevant scale. As the industry evolves with both NMC and LFP chemistries, our feedstock flexible refining technology positions us for the next phase of market demand. We also saw the strategic network effects of our platform really beginning to compound. Our MOU agreements with Moby Robotics and Impossible Metals extend the AquaRefining platform into deep-sea mineral feedstocks rich in nickel, cobalt, manganese, and rare earth elements. While our LOI agreement with Westwind Elements advances discussions for the potential supply of 500 to 1,000 metric tons, which is approximately $12 million of recycled nickel carbonate annually based on today's nickel prices. Together, these initiatives reinforce Aqua Metals' expanding role in sustainable domestic critical mineral supply. These aren't pivots. They're deliberate extensions of our core technology into adjacent markets, reinforcing our role in securing strategic metals for the energy transition. We also regained compliance with Nasdaq listing requirements, strengthening our market position as we advance toward commercial operations. And continued active industry engagement through events such as the battery show and the battery recycling workshop in Kuzu, China. Throughout, we remain disciplined. Aqua Metals has always taken a long-term view. Partnering with the right stakeholders, deploying capital efficiently, and building a platform designed to scale rationally and sustainably. I'm really proud of how consistently the team has delivered on that balanced approach. Executing near-term priorities while keeping a clear focus on long-term creation. Looking ahead, we see a consolidating industry centering around a smaller number of technically validated, financially strong recyclers with proven solutions. That environment plays to our strengths. While we don't front-run announcements, we continue to evaluate compelling opportunities. And we expect to remain selectively active as the market evolves. This is a dynamic period in energy and critical mineral supply chains. And we intend to help shape what comes next from a position of strength. And to our shareholders, partners, and employees, thank you all for your continued support. Our mission remains clear. Our strategy is intact, and our momentum is building at a pivotal moment for the clean energy supply chain. With that, I'll turn it over to Eric to review the financials. Eric West: Thanks, Stephen. I'll provide an overview of our financial results and current balance sheet position. We ended the quarter with $2.9 million in cash and cash equivalents, up from $1.9 million at the end of Q2. During the quarter, we raised approximately $4.1 million through our ATM and equity line program. Maintaining flexibility while supporting pilot operations and commercial planning activities. Subsequent to the quarter end, we closed a $13 million investment from a leading institutional investor, bringing total recent capital raised to over $17 million. With this funding, we now have multiple quarters of operating runway and the resources needed to complete engineering and permitting work as we finalize site selection for our first commercial-scale AquaRefining facility. Now I'm moving to highlight a few items on the income statement. Total operating costs were approximately $2.7 million for the quarter compared to $3 million in the prior year period. The decrease reflects continued cost discipline while maintaining key technical and commercial development programs. General and administrative expense was approximately $2.1 million, down from $2.5 million last year, and R&D expense totaled about $600,000, which is consistent with our continued process improvement and expanding our suite of off-take material options. We reported a net loss of $2.8 million for the quarter or negative $1.52 per share compared to a net loss of $4.7 million or negative $6.87 per share in 2024. Year-to-date net loss improved to $12.3 million or negative $7.41 per share from $19.2 million or negative $27.63 per share in the same period last year. A reduction of more than one-third reflecting lower operating expense and disciplined management of overhead. Operating cash used year-to-date was approximately $7.2 million compared to $10.4 million in the same period last year. Looking ahead, as Stephen outlined, we anticipate a modest increase in cash use as we ramp R&D process optimization and site readiness efforts in support of commercialization. We will continue to manage spending with discipline and ensure that every dollar invested advances our strategic and technical objectives. Our focus remains on maintaining liquidity, aligning investment with clear milestones, and advancing the commercialization plan efficiently. With the strengthened balance sheet, disciplined cost structure, and growing technical momentum, Aqua Metals enters 2026 from a position of stability and focus. That concludes my prepared remarks. I will now turn the call back to the moderator for Q&A. Rob Fink: Thank you. Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from the line of Mickey Legg with The Benchmark Company. Please proceed. Mickey Legg: Hey, guys. Thanks for taking my questions, and congrats on the quarter. I'd like to start with maybe what are a few of the biggest gaining factors to securing first build and if you were able to clear those, how long, you know, do you expect to get the commissioning from there? Thanks. Stephen Cotton: Hey, Mickey. Good to hear your voice as always, and thanks for the question. Really, I think what you're asking is with a stronger cash position, why not begin building the ARC commercial facility now? And, you know, ask me how I know that's a great question. The answer is really simple. Discipline. While it may be tempting to accelerate the construction immediately as we have seen several players attempt in the past, prior market conditions have informed our philosophy on a go forward, which is really build once and build right. And build when the demand is contracted and not when we would build on speculation, as the industry has done in the past. We're really sequencing the ARC launch to align with market timing and feedstock certainty and off-take and really being fully ready from a capital perspective. So this approach will ensure that we avoid unnecessary dilution and maintain leverage and we can really execute that build from a position of confidence. Hope that answers your question. Mickey Legg: Yeah. Yeah. It does. I was more talking about, you know, securing that partnership so that you feel comfortable with the timing of the build? What's keeping the partnership discussions, how are those going? What, you know, any color on those and how they're progressing? Maybe that would be helpful. Stephen Cotton: Yeah. So on the OEMs and commercial partnerships, I would say interest is really increasing meaningfully. And our pilot scale run that we just announced of the one metric ton of LFP or lithium iron phosphate cathode scrap producing that battery-grade lithium carbonate has even further resonated on the commercial side and the commercial developments with OEMs and other ecosystem potential partners. We've really seen growing inbound interest, I would say deeper engagement from existing and prospective partners. And continued validation of our results really all the while while we're utilizing the strength of our team and what I would characterize as our mature innovation center right here in Tahoe, Reno, with what we think is North America's most sophisticated and proven lab and bench and full-blown pilot operation. So we expect that interest to continue as we continue to move through commercialization milestones. And a lot of that is about product qualification and building those relationships. And we also think that our recently strengthened balance sheet certainly will enhance the additional credibility that we have in those expect to be able to report some things soon. But as I said earlier, it's kind of a condition precedent for us to feel very good about the commercial relationships to be one of the key ingredients to justify the capital spend on a commercial-sized build. Mickey Legg: Got it. Got it. Okay. I'll keep an eye out for more info on that front as it's released. Maybe shifting gears a little bit, to the feedstock front, you mentioned that before wanting to feel comfortable with having that secured before you do anything too committal. Maybe could you just talk about your comfortability there specifically on the black mass front and how secure you feel about locking that down in the near to near term, you know, given a pretty volatile macro. Stephen Cotton: So, yeah, the feedstock, a, there's plenty of it. But, b, what's really happening to that feedstock today with the preprocessors, they collect the batteries, and pre you know, de-energize and crush them and produce the black mass, which is the input to our process. Those materials are being sent to commercial scale refiners that already exist in the Asia Pac region. And so, the metals, the payables on those black mass, are high because those entities out there have large facilities that they need to feed in order to keep them moving economically. Whereas here in the US, and frankly, all of the Americas, let alone North America, there is currently zero commercial scale refining capacity. And so what that means is that feedstock needs to get diverted to the commercial facilities that have the refining capacity here. And that's the classic chicken and the egg. Do you build the facility on speculation? And then go for the feedstock, or do you secure the feedstock and then build the facility suit? We've chosen the latter path. And so we're not concerned about being able to get the feedstock. And we also because of the economics of our process, are very confident in our ability to process that black mass at the same payables that are being sold to the folks in Asia. But we need to get those contracts in a place where we feel they're truly bankable and another key ingredient of that build process. But we're making great progress on that, and we feel like we're getting closer and closer while in the meantime we strengthen the balance sheet. Mickey Legg: Okay. Very helpful. Last one here. Can you give us maybe just a little more color on the pathway for the nickel product and maybe, you know, just a runway there, saw the LOI with Westwind, but that's not the delivery until 2027. So maybe just more near term, what sort of demand you're seeing on that front? Any particular direction that demand is trending? Just curious. Stephen Cotton: Yes, sure. So, you mentioned specifically nickel and the agreement we have with Westwind. And that is exciting because we believe that our partnership that we're developing with Westwind will produce the first U.S. nickel production and refinery in the US, in a long time. And so that really creates a great opportunity not an overnight sensation. This is a longer-term view on the nickel for that. That's also an example of nickel supply not necessarily going directly to the battery supply chain. One of the things that we think is special and unique about Aqua Metals is that we can produce nickel as an example, and cobalt in metal form, to go into the metals markets in general because currently in the US, there are no significant PCAM and CAM refineries. So those metals need to be able to come out of a process like ours and get into the hands of players like a Westwind, that can produce those materials. Additionally, I would say another longer-term thing that we are working on is the deep-sea mining where we can go after some other critical minerals, including more manganese and additional elements including rare earths. So we really see those relationships as an expansion of our opportunity and not a deviation from the core mission that we have. So the still nearer-term play is to take the black mass produce the lithium carbonate and the nickel and the cobalt in forms that can get into the supply chain here in the US, be it a battery supply chain and or otherwise. Mickey Legg: Okay. Great. That's all for me. Thanks, and congrats again. Rob Fink: Thanks. Great questions. Mickey Legg: Thank you. Operator: I would like to turn the call back to Rob to facilitate questions that were submitted online. Rob Fink: Thank you. And Stephen, Eric, we've received a number of questions from investors ahead of today's call. I'll be reading those on behalf of those who submitted them. To keep the call flowing smoothly, we've consolidated some similar topics and combined related questions where it was appropriate. So our first question is, can you expand on your financial position and the runway that you see? Eric West: Absolutely. The most important point for investors to understand is that Aqua Metals is now operating from a position of strength and not necessity. With the $17 million of capital infusion that we received, in our continued disciplined operating model, we secured multiple quarters of meaningful financial runway. The funding also supports our ongoing engineering permitting and ultimately, the site selection for our first commercial-scale facility. This gives us the ability to make measured choices, continued execution upon our commercialization plan, and pursuing additional strategic initiatives with confidence and credibility. The capital infusion also sends a strong signal of external confidence in the company and our vision. We raise proactively and not reactively, which gives us the flexibility to sequence our steps responsibly. So the main highlight here is really from a position of stability, momentum, and control. Rob Fink: Awesome. Thank you. How do you guys view the current consolidation that's happening in the battery recycling industry today? Stephen Cotton: Yeah, Rob. This is Stephen. I'll take that one. So what we are seeing now is what I would characterize as a natural phase in the evolution of the new industrial category. The early entrants proved the need and now the market is really selecting for technologies, business models, and just as importantly, capital structures capable of scaling profitability with commercial size facilities. Some really good assets are becoming available, and we do expect that trend to continue. So Aqua Metals, we feel, is very well positioned with our proven technology, the discipline that we've been talking about throughout this call, the continued Nasdaq listing, and the strength of the balance sheet. We're not gonna chase scale for scale's sake. And we really expect the market to center on a few technically validated financially prudent operators and we intend to be one of them. And as the industry consolidation enters its later stages, we see it a bit like the finals at the Olympics, let's say. We've earned our lane, and we really believe that we're positioned to medal. Rob Fink: Thank you. That is helpful. You guys didn't mention the specific site for your first commercial facility. Can you provide an update on where you are the timeline, and some more information there? Stephen Cotton: Yeah. Lots of activity on that front. We continue to make strong progress, I would say, on our site evaluation process. And we've advanced diligence on specific key locations, and that includes things like engineering and permitting reviews, and utility access studies, so we can get the power and all the other utility aspects that we need for our facility. This includes alignment with the related developing strategic partners which is key to that whole process, that we don't just plop a facility down the middle of nowhere, that we find the right partner where we have synergies. So we're solving for that as well. And we aim to bring forward the most capital efficient and strategically advantageous path. And we do expect that we'll be able to provide more updates as early as this quarter. Our priority is to launch the commercial facility at that right location or even locations, sequenced appropriately with the right partner or partners under the right market conditions. And it's aligning those things that make the most sense. And I believe that our continued disciplined approach does put us in the best position for long-term success and really execution certainty. Rob Fink: Right. And thank you for that. And to round out here with our final question, should investors expect more business development updates in the near term? Stephen Cotton: Yeah. Our philosophy remains consistent. We'll only announce when we can provide clear visibility and confidence. We'll report the news more than we'll forecast the weather. But that said, we are actively advancing the multiple initiatives that we've been talking about both in that commercial and strategic partnership side. And we do expect to share those additional developments as they mature, as I said earlier, potentially as early as this quarter. This is definitely an exciting period for us, and we are executing across multiple fronts. And our mandate is that we keep moving forward steadily and ensuring that each step that we take builds towards our mission of long-term value creation and for platform scale. Rob Fink: Thank you. Operator: There are no further questions at this time. I'd like to pass the call back over to Stephen for any closing remarks. Stephen Cotton: Well, thank you, everybody, for listening in. On our report for what we think was a very productive and exciting quarter with great prospects for the future for Aqua Metals and our shareholders, and we look forward to keeping everybody updated as we continue to make progress as we always promise to do. And we'll look forward to chatting with everybody soon. Thanks for your attendance and support of the company. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon. Welcome to the Q3 2025 Financial Results Conference call for Intelligent Protection Management Corporation, better known as IPM, for the quarter ended on 09/30/2025. At this time, all participants have been placed on a listen-only mode. Let me turn the floor over to Joe Diaz of Lithium Partners. Joe, please proceed. Joe Diaz: Good afternoon, and welcome to all participating on today's call to review the financial and operating results of IPM for the third quarter ended 09/30/2025. As the operator indicated, my name is Joe Diaz. I'm with Lithium Partners. We are the investor relations representative for IPM. By now, everyone should have access to the earnings results press release which was issued after the close of market today. This call is being webcast and will be available for replay. During the course of this call, management will include statements that are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements about future results of operations, business strategies and plans, IPM's relationship with its customers, as well as market and potential growth opportunities. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations as of today and are subject to certain risks, uncertainties, and assumptions related to factors that may cause actual results to differ materially from those anticipated in the forward-looking statements. These expectations and beliefs may not ultimately prove to be correct. A detailed discussion of such risks and uncertainties are contained in IPM's filings with the SEC, including its annual report on Form 10-Ks for the year ended 12/31/2024. You should refer to and consider these factors when relying on such forward-looking information. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise, except as required by applicable law. On this call, management will refer to adjusted EBITDA, a non-GAAP measure, which when used in combination with GAAP results provides investors with additional analytical tools to understand the company's operations. For adjusted EBITDA, management has provided a reconciliation to the most directly comparable GAAP financial measure in the earnings press release that has been posted on the Investor Relations section of the company's website at www.ipm.com. As previously disclosed on 01/02/2025, IPM completed its acquisition of Newtek Technology Solutions from NewtekOne Incorporated. The company also divested its Paletalk, Camfrog, and Vumber applications and certain assets and liabilities related to such applications to Meteor Mobile Holdings Incorporated, which are referred to as the transferred assets. At this time, I'd like to turn the call over to IPM's Chief Executive Officer, Jason Katz. After Jason's remarks, we will hear from IPM's CFO, Kara Jenny, and we will conclude with investor questions that were sent via email. Jason, take it away. Jason Katz: Thanks, Joe, and good afternoon, everyone. We greatly appreciate you taking the time to join us on today's call. We are pleased with the sequential progress made during our first three operational quarters after the acquisition of Newtek Technology Solutions and our successful rebranding to Intelligent Management Solutions or IPM. We continue to advance all components of the company: sales, marketing, accounting, and human capital. We have clearly stated that our focus is to position IPM to be a consistently performing company for the benefit of our customers, employees, and shareholders. Since the January 2 transactions, we have successfully integrated our operations and serviced our existing customers without interruption or downtime. Looking ahead, we are well-positioned to grow the company through the expansion of our service to existing legacy MTS customers while cross-selling our ManyCam software and varying new services to our historical web hosting customer base. Operational efficiencies continue to be advanced with the goal of driving value for all our stakeholders. Cybersecurity and cloud infrastructure are even more critical to protecting sensitive data, ensuring business continuity, and securing a digital economy in an era of growing cyber threats. We are dedicated to becoming one of the leading managed technology solutions providers with a focus on cybersecurity and cloud infrastructure. As we see it, our job is to protect the heart and soul, as it were, of all businesses today: their data, client information, intellectual property, and financial data, among other things. There are a load of bad players out there: individual organizations, and even governments looking to attack corporations as well as American citizens. I've spent the better part of my career in the technology services business, and so have the rest of the IPM senior management team. That deep industry experience has led us to provide a white-glove, high-touch service to our clients. Every one of our clients has a dedicated technology manager as a single point of contact. We do not use voice response, telephonic menus, or handoff service calls to agents in call centers in foreign countries. Our clients speak directly to their IPM account team in the United States, people that are familiar with their needs, their business, and the history of their account. This is an important IPM advantage. We have significant technological expertise, and we operate in large and growing markets where IPM is industry certified and critically important markets, including legal, healthcare, and finance, giving us another significant competitive advantage versus our peers. Those advantages will become more apparent in the quarters and years to come. For the nine months, IPM entered into a reseller agreement with MindsDB, a leading open-source AI platform, to provide its current and future customers sophisticated AI capabilities. We initiated a collaboration with IT Ally, a trusted business and technology services provider focused on lower middle market private equity firms and their portfolio companies. In May 2025, our board of directors approved a stock repurchase plan for up to 400,000 of our existing common stock, which plan expires on the one-year anniversary of such date. Pursuant to the repurchase plan, we purchased 46,658 shares of common stock during 2025 for an aggregate amount of $88,250. From inception, we have purchased 151,258 shares at an average price of $1.99. We also commenced offering Aura, a leading AI-powered online safety tool for individuals and families designed to help minimize the impact of data breaches, scams, and other online threats to consumers. Subsequent to the end of the quarter, we initiated our Heroes program to provide a 10% discount on all IPM products and services to all existing and future military, first responder, healthcare, teachers, and veterinary business owners. Regarding our patent litigation, on 08/29/2024, a jury awarded the company $65.7 million in a jury verdict in connection with the lawsuit against Webex Communications, Cisco Webex, and Cisco Systems in the US District Court for the Western District of Texas. On 10/08/2024, an order granting a motion for final judgment was entered into by the court in connection with the lawsuit. The final judgment was entered in our favor in the amount of the award and started the time for filing any post-trial motions or appeals. The exact amount of the award proceeds to be received by us will be determined based on a number of factors and will reflect the deduction of significant litigation-related expenses, including legal fees. As we've previously indicated, we estimate that we would net no more than one-third of the gross proceeds in connection with the awards, subject to post-trial proceedings, including any potential appellate proceedings by Cisco. We have not recorded any gain contingency in connection with the award. Having our NTS assets transition from being a division of a larger bank company to an independent publicly traded managed services technology company over the course of the first nine months of 2025 has been gratifying. We look forward to many opportunities to expand our business in the coming years. With that, let me turn the call over to Kara Jenny, our CFO, for a summary of our financial results for the third quarter and the nine months. Following Kara's remarks, we'll move into the Q&A portion and answer questions that were submitted by email prior to this call. Kara? Kara Jenny: Thank you, Jason. As Jason indicated, we acquired the operations of NTS on 01/02/2025 and rebranded the operation to Intelligent Protection Management Corp or IPM. The quarterly financial comparisons of IPM and the former NTS as a division of Newtek One are not comparable from a GAAP perspective. IPM Financials will become comparable on a GAAP basis as of 2026. For the three months ended 09/30/2025, revenue totaled $6.2 million compared to $300,000 for the prior year period. On a sequential basis, revenue increased 9% from 2025. Revenue for the nine months totaled $17.5 million compared to $800,000 in the prior year period. Revenue by product for the three and nine months period ended 09/30/2025 was as follows: Managed information technology revenue was $3.8 million and $10.9 million respectively. Procurement revenue was $1.7 million and $3.9 million respectively. Professional services revenue was $500,000 and $1.9 million respectively. Subscription revenue was $300,000 and $800,000 respectively. Operating loss from continuing operations for the three months ended 09/30/2025 totaled $1.4 million compared to an operating loss from continuing operations of $1.5 million for the three months ended 09/30/2024. Operating loss from continuing operations for the nine months ended 09/30/2025 totaled $3.9 million compared to an operating loss from continuing operations of $3.5 million for the prior nine months ended 09/30/2024. Net loss for the three months ended 09/30/2025 totaled $1.1 million compared to a net loss of $1.5 million for the three months ended 09/30/2024. Net loss for the nine months ended September 30 totaled $1.3 million compared to a net loss of $2.9 million for the nine months ended 09/30/2024. The reduction in net loss was attributed to IPM recording an income tax benefit during the first quarter of approximately $2.1 million in connection with the transaction. Adjusted EBITDA for the three months ended 09/30/2025 was negative $300,000 compared to negative $1.5 million for the three months ended 09/30/2024. Adjusted EBITDA for the nine months ended 09/30/2025 was negative $1.1 million compared to negative $2.9 million for the nine months ended 09/30/2024. As of 09/30/2025, we had no long-term debt and cash and cash equivalents totaled $8.3 million, which included $1 million of restricted cash. Cash provided by continuing operations for the nine months ended 09/30/2025 was $1 million compared to cash used in continuing operations for the nine months ended 09/30/2024 of $900,000. IPM reported deferred revenue of $3.5 million for Q3 2025, which will be recognized as revenue in future quarters as products and/or services are installed. The company had over 9,000 devices under management at 09/30/2025, representing the number of endpoints, servers, and network devices that are outsourced to the company under managed service agreements. That completes my comments, and we'll now move on to addressing online submitted questions. Joe Diaz: Okay. Thank you, Kara. We will now move into the question and answer section. One question submitted by investors was, are there any bolt-on acquisitions that would make sense to expand the business or new service offerings that you would like to see added to IPM in the coming years? Jason Katz: Sure. Acquiring sole proprietor lifestyle-type managed service provider businesses with attractive EBITDA multiples would be strategic in that we would be acquiring customer contracts with term agreements. This has the potential of immediately adding devices under management and monthly recurring revenue and would offer upside potential in other service lines. So in the short term, our focus would be to grow our existing customer base with more of the same types of services so that we leverage our existing infrastructure. Joe Diaz: Another question is, can you comment briefly on the recent AWS outages? What does IPM bring to the table that others can't? Jason Katz: That's a great question. We offer potential solutions that mitigate the recent public cloud outages. IPM's use of private data centers and private cloud means that our customers were generally not affected by the recent AWS outages, which impacted many public cloud users. We like to say that at IPM, we don't just try harder. We protect smarter. Joe Diaz: Can you please comment on the capital structure of the company right now? Will there be a need to raise additional capital in the next couple of years, 2026 or 2027 going forward? Jason Katz: We have a very clean capital structure and sufficient cash to run our business for at least the next twelve months. If we found an acquisition that was accretive and required financing, we would definitely consider doing that. Joe Diaz: Alright. Thank you, Jason. And that concludes the Q&A section. Let me turn the call back over to Jason for closing remarks. Jason? Jason Katz: Thanks, everyone, for your support and for joining us today. We are very grateful for your interest in our business. We look forward to updating the market on our progress as we continue to execute on our business plan. We will talk with you again to review our fourth quarter and full-year financial results in 2026. Joe Diaz: Have a great day. Operator: Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time, and thank you for your participation.
Sami Badri: Welcome to Cisco's First Quarter and Fiscal Year 2026 Financial Results Conference Call. At the request of Cisco, today's conference is being recorded. If you have any objections, you may disconnect. Now I would like to introduce Sami Badri, Head of Investor Relations. Sir, you may begin. Good afternoon, everyone. This is Sami Badri, Cisco's Head of Investor Relations, and I'm joined by Chuck Robbins, our Chair and CEO, and Mark Patterson, our CFO. Cisco's earnings press release and supplemental information, including GAAP to non-GAAP reconciliations, are available on our Investor Relations website. Following this call, we will also make the recorded webcast and slides available on the website. Throughout today's call, we'll be referencing both GAAP and non-GAAP financial results. We will discuss product results in terms of revenue and geographic and customer results in terms of product orders. Unless stated otherwise, all comparisons will be made on a year-over-year basis. Please note that our discussions today will include forward-looking statements, including our guidance for the second quarter and fiscal year 2026. Statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K report, which identifies important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements. With respect to guidance, please also see the slides and press release that accompany this call for further details. Cisco will not comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. Now, I'll turn it over to Chuck. Thanks, Sami, and thank you all for joining us today. Chuck Robbins: We had a strong start to fiscal 2026 with Q1 revenue and earnings per share both coming in above the high end of our guidance ranges. Delivered record Q1 revenue putting Cisco on track to deliver our strongest year yet as indicated in our guidance for the full year. In Q1, total revenue increased 8% year over year with product revenue up 10% driven by robust demand for our AI infrastructure and campus networking solutions. Our strong top-line performance combined with operating efficiencies and solid execution by our teams contributed to non-GAAP EPS growth of 10% as we continue to grow earnings faster than revenue. We delivered solid margins and cash flows allowing us to return $3 billion in capital to our shareholders through dividends and share repurchases representing 125% of free cash flow in Q1. Additionally, we generated solid growth in annualized recurring revenue and remaining performance obligations, both of which continue to provide a strong foundation for our future performance in FY 2026 and beyond. Cisco's strong start to fiscal 2026 is a testament to the critical role of secure networking and the strength of our portfolio as organizations look to deploy AI across their businesses. That said, we know many customers still have a lot of work to do to ensure they have the modern, scalable, secure networking infrastructure to support their AI goals. According to our 2025 Global AI Readiness Index, only one-third of organizations feel their IT infrastructure can accommodate the needs of their planned AI projects, which creates a massive opportunity for Cisco. With our industry-leading networking portfolio, powered by Silicon One, AI-native security solutions, and operating systems, we are well-positioned today to provide the critical infrastructure for the AI era. Now let me comment on the strong demand we saw in Q1. Overall, total product orders grew 13% year over year with growth across all geographies and customer markets. Enterprise product orders were up 4% year over year in Q1 on top of mid-teens growth excluding Splunk a year ago with strength in our campus switching and wireless solutions. Public sector orders were up 12% year over year with growth across all geographies and cohorts, including U.S. Federal. Product orders from service provider and cloud customers continue to be very strong, up 45% year over year driven by high double-digit order growth in hyperscalers even on a tough triple-digit growth comparison from 2025. Demand from telco customers was also strong in Q1 with orders growing more than 25% year over year. Now some color on demand from a product perspective. Networking product orders accelerated to high teens growth in Q1 marking the fifth consecutive quarter of double-digit growth driven by hyperscale infrastructure, enterprise routing, campus switching, wireless, industrial IoT, servers. Within our campus networking portfolio, we are seeing very strong demand for switch routing and wireless products, indicating that enterprise customers are investing in the connectivity needed for AI deployments. As early catalyst switching generations like the 4Ks and 6Ks near end of support, we see growing demand for our Cat 9Ks series. Additionally, all of our next-generation solutions, including smart switches, secure routers, and Wi-Fi 7 wireless products, are ramping faster than in prior product launches. This marks the beginning of a multi-year multibillion-dollar refresh opportunity. We are also seeing consistent progress across our industrial IoT portfolio, including new ruggedized equipment with orders growing more than 25% year over year in Q1. We expect this demand to increase. Driven by onshoring of manufacturing to The United States, the increase of AI workloads at the network edge, and the emergence of physical AI. AI infrastructure orders taken from in Q1 totaled $1.3 billion, balanced between Silicon One systems and optics. Marking a significant acceleration in growth demonstrating our strength for advanced AI use cases. Expect to recognize roughly $3 billion in AI infrastructure revenue from hyperscalers in fiscal year 2026. As these hyperscale customers look to extend AI clusters across their infrastructure, we see robust demand for Acacia's market-leading coherent pluggable optics offering significant cost and power savings. All hyperscalers are now customers of these products. In Q1, we also announced our latest 80 Cisco 8,223 router powered by our Silicon One P200 chip. This first-to-market 51.2 terabits per second fixed Ethernet routing system is designed for the intense AI workload traffic between data centers. With Silicon One's unmatched scalability, power efficiency, and programmability, we can provide the performance and speed across data centers would have previously only been possible within a data center with a switching infrastructure. Demand for Silicon One continues to grow and we expect to ship our one millionth chip in 2026. Product orders for AI use cases beyond hyperscaler training are also gaining traction. With orders for data center systems, including switching and compute growing double digits in Q1 as customers prepare their networks for inferencing and agentic workflows. We see a growing pipeline in excess of $2 billion for our high-performance networking products across sovereign neo cloud and enterprise customers. To capture this opportunity, continue to make progress both within our own portfolio across our strategic partnerships. We recently announced an expansion of our partnership with G42 in The UAE to power, connect and secure G42's large-scale AI clusters. Featuring AMD GPUs. Other strategic partnerships in the region, including Humane and Stargate UAE, are progressing as planned. We also launched our sovereign critical infrastructure portfolio for European customers to operate in their own air-gapped on-prem physical environments. This includes our networking and collaboration products enhanced by security and observability. In addition, Cisco announced an expansion of our NVIDIA partnership and our new N9100 switch based on Spectrum X silicon. We are now the first NVIDIA partner to offer networking with their cloud reference architecture. The N9100 available in 2026 will provide the operational consistency and flexibility needed for sovereign and neo cloud providers to build and manage AI at scale. We are also delivering new capabilities and features for Cisco Secure AI Factory with NVIDIA announced in 2025. These advancements strengthen our commitment to high-performance secure and trusted AI infrastructure globally. Expect Cisco's AI opportunity across sovereign neo and enterprise customers to ramp in 2026. Now shifting to security. We continue to see order growth for our new and refreshed products, which comprise around one-third of our security portfolio and include secure access, XDR, HyperShield, AI Defense, and our refreshed firewalls. Nearly 3,000 customers have purchased a new product since launch. And we saw mid-teens growth in demand for our next-generation firewalls in Q1. This growth was partially offset by a decline in our prior generation platforms. We continue to see strong performance from Splunk, closing one of our largest Splunk deals to date in Q1 enabled by joint Cisco and Splunk sales engagement. Splunk's ARR and product RPO grew double digits as we saw a notable change in how customers consume Splunk offerings in Q1. With a shift to more cloud subscriptions and fewer on-premise deals. Revenue for cloud subscriptions is recognized ratably whereas product revenue for on-prem deals is recognized on delivery. This shift negatively impacted security revenue growth in Q1, it is purely a timing issue. We are actually pleased to see more cloud subscriptions for Splunk as they enable greater expansion. And allow us to deliver innovation faster to enable customers to unlock value from AI. Now let me comment on some of our recent innovations. As we look at the AI opportunity, we see customer use cases growing across training, inferencing, and connectivity. With secure networking increasingly critical as workloads move from the data center to end users, devices, and agents at the edge. As mentioned last quarter, agents are transforming network traffic from predictable bursts to persistent high-intensity loads with AgenTeq AI queries generating up to 25 times more network traffic than chatbots. Instead of pulling data to and from the data center, AI workloads require models and infrastructure to be closer to where data is created and decisions are made. Particularly in industries such as retail, healthcare, and manufacturing. This is why we introduced Cisco Unified Edge last week. An industry-first converged platform for the network edge integrating compute, networking, and storage into a single system. Unified Edge enables real-time inferencing for agentic and physical AI workloads so enterprises can confidently deploy and manage AI at scale. We also announced Cisco Data Fabric in September. A Splunk-powered architecture to unify and manage machine data across various sources allowing enterprises to build AI models with their previously unused proprietary data. As always, these innovations are designed to further Cisco's platform advantage where every new technology investment compounds the value of a customer's existing investment. To summarize, we are seeing strong demand across all customer markets and geographies for their AI use cases from the data center to the edge. As well as expanded opportunities as our customers power. We continue to innovate at unprecedented scale to build AI-ready data centers, power future-proof workplaces, and create a foundation of digital resilience. And our strong performance is fueling our capital allocation model returning significant value to our shareholders while positioning our business for Cisco's strongest year yet in fiscal 2026 as indicated in our guidance. Now I'll turn it over to Mark for more detail on the quarter and our outlook. Mark Patterson: Thanks, Chuck. Delivered a strong quarter to launch our new fiscal year. With revenue, operating margin, and earnings per share all above the high end of our guidance. Coupled with solid gross margin and operating cash flow. For the quarter, total revenue was $14.9 billion, up 8% year over year. Non-GAAP net income was $4 billion, up 9%. And non-GAAP earnings per share was $1, up 10%. Demonstrating continuing operating leverage with non-GAAP earnings growing faster than revenue. Looking at our Q1 revenue in more detail, total product revenue was $11.1 billion, up 10%, and service revenue was $3.8 billion, up 2% year over year. Networking was a standout with growth of 15% with strength across the portfolio led by high double-digit growth in service provider routing largely driven by revenue from AI infrastructure. Data center switching and enterprise routing also contributed double-digit growth and campus switching had growth in the high single digits. Security was down 2%, reflecting declines in prior generation products, and a shift to cloud subscriptions in our Splunk business that Chuck referenced. Partially offset by growth in secure firewall, Duo, and SASE. Collaboration was down 3% reflecting declines in devices and WebEx. Observability was up 6%. 13%. Primarily driven by growth in ThousandEyes. Looking at our recurring metrics, total RPO was $42.9 billion, up 7%. Product RPO grew 10% of which the long-term portion was $11.8 billion, up total ARR ended the quarter at $31.4 billion, an increase of 5% with product ARR growth of 7%. Total subscription revenue was $8 billion and represented 54% of Cisco's total revenue. Total software revenue was up 3% to $5.7 billion. Q1 product orders were up 13% year over year. Product orders were up across all geographic segments, with The Americas up 16%, EMEA up 8%, and APJC up 13%. Product orders were also up across all customer markets. With service provider and cloud up 45%. Public sector up 12% and enterprise up 4%. Total non-GAAP gross margin came in at 68.1%, one hundred and twenty basis points year over year coming in slightly above the midpoint of our guidance range. Non-GAAP product gross margin was 67.2%, down 170 basis points. Driven by negative impacts from mix and pricing. Partially offset by productivity improvements. Non-GAAP services gross margin was 70.7%, up 40 basis points. Continue our focus on enhancing profitability and driving financial discipline. With non-GAAP operating margin at 34.4%. Above the high end of our guidance range. Our non-GAAP tax rate was 19% for the quarter. Shifting to the balance sheet. We ended Q1 with total cash, cash equivalents, and investments of $15.7 billion. Operating cash flow was $3.2 billion, down 12% due to investments to meet growing customer demand for AI infrastructure. From a capital allocation perspective, we returned $3.6 billion to our shareholders during the quarter. Comprised of $1.6 billion for a quarterly cash dividend and $2 billion of share repurchases. With $12.2 billion remaining under our share repurchase program. To summarize, we had a solid start to fiscal 2026. With top and bottom line performance exceeding our expectations. Driven by strong order growth and margins all demonstrating the power of our innovation engine to drive strong top-line growth as well as operating leverage to fuel profitability. We remain focused on making strategic investments and innovation to capitalize on the significant growth opportunities we see ahead. This will continue to be underpinned by disciplined spend management and it's this powerful combination that continues to fuel strong cash flow and our ability to return significant value to our shareholders. Turning to guidance. Please note our Q2 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through 2026. These assumptions remain unchanged from our prior guidance with the exception of the China fentanyl tariff being reduced from 20% to 10%. Looking ahead, you can expect us to continue our focus on durable growth with financial discipline, driving operating leverage and continued capital returns. For fiscal Q2, our guidance is as follows. We expect revenue to be in the range of $15 billion to $15.2 billion. Anticipate non-GAAP gross margin to be in the range of 67.5% to 68.5%. Non-GAAP operating margin is expected to be in the range of 33.5% to 34.5%. Non-GAAP earnings per share is expected to range from $1.10 to $1.13. We are assuming a non-GAAP effective tax rate of approximately 19%. For fiscal year 2026, our guidance is as follows. We expect revenue to be in the range of $60.2 billion to $61 billion. Non-GAAP earnings per share is expected to range from $4.08 to $4.14. Sammy? Let's now move into the Q&A. Sami Badri: Thank you, Mark. Before we start the Q&A portion of the call, I'd like to remind analysts to ask one question and a single follow-up question at the same time. Operator? We move to the first analyst in the queue? Operator: Thank you. Erin Rakers with Wells Fargo. Your line is open. Aaron Rakers: Yes. Thanks for taking the question and congrats on the quarter. I guess I want to dive a little bit deeper into the AI orders. Obviously, I think that was a $3 billion number in fiscal 2026 from the web scale vertical. So maybe start there. As we think about the diversity that Cisco is seeing in the web scale opportunity, how has that evolved? And have you guys been engaged in deepening kind of super spine or even scale across opportunities? In the web scale vertical. And then as a follow-up on the enterprise side, I think the number was a $2 billion pipeline. I think the slide deck says $200 million on orders this last quarter. How do we expect that to progress through this fiscal year? Thank you. Chuck Robbins: Thanks, Aaron. So let me want to just clarify the $3 billion number that we gave out was a revenue number from the hyperscale AI infrastructure in the fiscal year. I would say that the $1.3 billion were new orders that we took during the quarter from the same customers that we measured last year and it's the same products that we measured last year. So it's clear it is definitely apples to apples first and foremost. What we expect from an orders perspective this year is that we will we're expecting at least two times the orders that we received in fiscal year 2025 from that same set of customers. So we see a lot of solid pipeline throughout the rest of the year. And the use cases we see we see it expanding. Obviously, we've been selling networking infrastructure under the training models. We've been selling scale out. We launched the P200 base router that will begin to address some of the scale across opportunities. We clearly have seen great success with our pluggable optics. All of the hyperscalers now are officially customers of our pluggable optics. So, we feel like that's a great opportunity. Not only plug into our products, but they can be used with other companies' products with our competitors or white boxes. So that's been good. We've also begun to see inferencing use cases where we are, we're also winning there. I'd say that the other thing that we saw in Q1 is that we had four of the major hyperscalers who grew triple digits during the quarter and we had four meaningful use case wins during the quarter. One from each of those four, so across four different hyperscalers. So the momentum continues with the silicon. Your second question relative to the enterprise what we said was that the Neo Cloud Sovereign Cloud enterprise pipeline basically for the rest of our fiscal year for so for the next three quarters. Exceeds $2 billion. We booked $200 million in Q1 and so that provides incremental opportunity for us as we look to the future and that's through the end of our fiscal year. Thank you. Sami Badri: Thank you, Aaron. Michel, can we move to the next analyst please? Operator: Thank you. Meta Marshall with Morgan Stanley. Your line is open. Meta Marshall: Great, thanks. Maybe just following up on Erin's question. Just in terms of kind of some of that strength that you're seeing, is the kind of upside that you're seeing to some of these AI orders coming from kind of scale across strength or is it just coming from deepening engagement? Because I guess our view is that scale across has strengthened throughout the quarter. So kind of want to get a sense of if that is something you've picked up on as well. And then just as a follow-up question, just any commentary around DRAM pricing has certainly become more elevated, just how you guys are thinking about that in terms of the gross margin? Thanks. Chuck Robbins: Thanks, Meta. I would say that the scale across opportunity is emerging. And we obviously announced the 51.2 terabit router that will help us go after that opportunity. I'd say in general, most of what we saw in Q1 was just a deepening of existing use cases. We won the four new ones, but candidly, there wasn't a ton of new orders from them during the quarter. So those are all yet to be recognized. But we think the scale across opportunity will continue to grow and evolve. And again, we saw pretty meaningful acceleration in pluggable optics which is a really solid business for us and gives us yet another opportunity to pursue with these customers. On the DRAM question, Mark, I'll pass that one to you. Mark Patterson: Yes. So I would just say across memory as well as PCB and optics, we've noticed a bit of tightening of supply. On the memory side, we've seen what you all have all seen as well and that's pretty significant price increases as well. Both of those in terms of the supply as well as the pricing though are both included and considered in our updated guide for the Q2 as well as the year. Sami Badri: Thank you, Meta. Michel, can we move to the next analyst? Operator: Thank you. Tal Liani with Bank of America. Your line is open. Tal Liani: Hello. Great quarter. It's hard for me to ask a tough question in a great quarter, but I'm going to do it anyway with your permission. If I remove $1 billion from last year's revenues, which were the AI backend, and I removed $3 billion from the guidance for next year. The rest of the business, which is the majority, $55 billion base for last year, is only growing 3.6%. Why don't we see greater growth with what we have Wi-Fi and campus and security, why don't we see more than 3.5% growth for the rest of the business? Chuck Robbins: Tal, it's a good question and you're always allowed to ask tough ones. So I'm just going to point out on the orders front for Q1 and then I'm going to let Mark talk a little bit about the P&L. Just to be clear on the if you normalize out the hyper growth in Q1, the rest of the business grew nine from an orders perspective. So, I just that's not a data point we've given you. I want you to have it. And then Mark, you want to touch on? Yes, Tal. Thanks for the question, Tal. Mark Patterson: I would say, we're ninety days into the year. We've got a very good start as you've seen in the order growth rates and the momentum that we're building. But as we get into the second half of the year, we're seeing much much more difficult comps. I mean, the comps in Q1, Q2 a year ago were minus 6% and plus nine. The comps as you get into Q3 and Q4 are plus 11 and plus eight on the top line. So, much tougher comps there, but I do follow your math and that sounds about right. Sami Badri: Thank you, Tal. Michelle, can we move to the next analyst please? Operator: Thank you. Ben Reitzes with Melius Research. Your line is open. Ben Reitzes: Hey, how are you guys doing? Hey, Chuck, I wanted to talk about one of your comments around the multiyear nature of the cycle. I know you guided for the year. So I mean, we're good with that. But can you just elaborate a little bit more on that? What are you seeing that gives you the confidence to talk about multiyear cycles, maybe highlight the key ones you're thinking about a little more? And what made you say that comment which was particularly interesting? Thanks so much. Chuck Robbins: Yes. Thank you, Ben. I think when we look at the refresh opportunity, if you recall, we announced a new suite of products in our enterprise routing space. We announced a new WiFi seven portfolio and we announced a new suite of campus switches. And what we saw is we I think if you think about the Cat 4Ks and the Cat 6Ks installed base that's coming to end of support, that's one factor that's driving it. We saw in as we ramp this launch of these new products, all three of those product families are ramping faster than they have in historical launches. So that leads us to believe that customers are actually aggressively moving on this. And I think the other is that it indicates that customers are still very focused on modernizing their network infrastructure in the enterprise in preparation for inferencing and AI workloads. And so but these things are always multi-year, Ben. When we launched the Catalyst 9Ks in 2017 and I mean, it that transition just kept going for five, six, seven years. And so that's just typically what we see when these things move and the fact that they're growing they're ramping faster than what we've seen in the past would indicate there's a lot of interest in these portfolios. The last thing I would say is that these new switching platforms which truly enable security to be fused deeply into the network is a message that's resonating with our customers, particularly as they look to agentic workflows in the future realize they can't port this traffic off to a firewall. They're going to have to be applying security policies in the network as the traffic moves. I think that's another consideration that they're preparing for. Sami Badri: Thank you, Ben. I also want to remind analysts to ask a question and a follow-up question at the same time. Michelle, we can move to the next analyst. Operator: Thank you, sir. James Fish with Piper Sandler. Your line is open. James Fish: Hey, good stuff on the networking side. I guess, how far along or what's the penetration of Silicon One into the product portfolio now? And as a standalone product, what are you guys seeing as why Silicon One is starting to gain some of that traction with the hyperscalers and what it can do the custom solutions that are being talked about as well as Broadcom's latest chips and just as a follow-up, why is it now that Splunk is starting to see some of those greater shifts to cloud at this point? And any sense of the impact it had on the security number this quarter? Thanks, guys. Chuck Robbins: Yes, Jim. So on the silicon, we are we think by the 2019, so we think in another two point five years, we'll have that fully rolled we'll have Silicon One fully rolled across the entire portfolio. So that's the intent. It's in some of our data center switching products going to enterprise. It's obviously in the hyperscaler products. And I think it's a combination of performance, programmability, and low power consumption. And they really enjoy and I think the other thing is that they just they enjoy having multiple sources and custom engagements that we have with them to really look at their unique requirements for each. I mean, that's really what's changed the trajectory for us with these customers. And I mean, for those of you who are on these calls, five, six, seven years ago, you remember I kept telling you, that we hadn't done well here. We hadn't done well here. And then our intent was to do so. And I'm really proud of what the teams have accomplished. On the security stuff, Jim, I'm glad you picked up the revenue issue. As I said in my prepared comments on Splunk and then Mark, I'll let you talk a little bit about the implications. But we just saw a pretty meaningful mix shift during the quarter to cloud. I think the prior quarter it was somewhere roughly fifty-fifty and I think it was down to the on-prem was only about a third of the revenue. So we expected more of a fifty-fifty kind of mix because that's what we had seen. And at the end of the day, it's actually quite positive, as I said, because it allows us to it allows us to drive adoption with our customers expansion as well as deliver innovation real time because it's cloud tethered. So from a long-term perspective, it's good. In the quarter, was obviously a one-time timing issue on the revenue front. If you look at all the dynamics on the order side, things are generally the way they were the prior quarter. We saw positive order growth in our new and refreshed products. We saw the same drag from our prior generation products although that number is getting smaller. And then we saw double-digit ARR, digit RPO on the product side as it relates Splunk. So on the demand side, there's not a lot to worry about. We just had the one-time revenue issue this recognition with the six zero six accounting. So Mark, anything to add? Yes. So if you look at this transition that we're seeing on the Splunk side, as you mentioned, Chuck, it's a good thing, despite the timing difference that we're you will see, based on ASC six zero six and the revenue recognition, based on on-prem versus cloud, we expect to actually recognize more revenue over time. So when we look at the cloud offers, they're stickier than the on-prem offers. Customers are actually able to adopt the technology faster, adopt features, etcetera. And so it's a good thing. What you are seeing in, I think, a better measure of the health of the business of Splunk is really to look at ARR and RPO. Both of those grew in the double digits for the quarter. So again, while we're disappointed with the timing a little bit in the quarter overall, it's actually a really good thing for us. Sami Badri: Thank you, Jim. Operator, we can move to the next analyst. Operator: David Vogt with UBS. Your line is open. David Vogt: Great. Thanks, guys, for taking my questions. One, maybe Chuck to start, just to pivot to campus, I think in the deck in your prepared remarks, talked about the next-gen solutions ramping faster than prior product launches. You kind of give us a sense for like what's driving that? Is it a competitive is it just better for competitive products? Are you seeing disruption from some of the smaller players like number two and number three in the marketplace given sort of the dynamics in that sort of integration there? Just more color there would be helpful. And then along those lines, maybe when you think about sort of the campus market, I do know you mentioned in the prepared remarks, there's a lot of end-of-life product out there. How do you think about that as it relates to sort of some of those customers, I think, government customers, if not public sector customers, put in the context of what's going on actually in D.C. right now. So is that part of the strategy going forward is to upgrade those as soon as the money starts to free up and get dispersed? Just kind of trying to marry the two sort of markets here, both campus and government, kind of what's going on there? Chuck Robbins: Yes. Thank you, David. I'd say on the campus, it's a lot of what I said before. I think it's the end of in the sales stuff, the Cat 4K, Cat 6K, older Wi-Fi. And so we see, you know, we see in this early days of it, we see slightly faster adoption than we've seen historically with these launches. As it relates to number two and number three, there's clearly been some confusion in the marketplace, particularly around Wi-Fi. We've been talking about that for several quarters. And so I think that's, I think that's been positive for us. I can't give you any specifics relative to whether that's a big part of it now. And the other two things I think they're driving at our AI preparation and this belief that security does ultimately have to be in the network. And we're the only ones who have both security and networking. You've seen some of our competitors announce partnerships with security vendors. Those are hard to pull off. I mean, it's hard to get the level of integration gonna need to have when you don't own each of the technologies. So we feel like we're well-positioned there. So we think all of those things are having an impact on various customers. As it relates to the government, we were pleased last quarter that our U.S. Federal business despite the shutdown grew high single digits. From an orders perspective, we thought that was quite positive. Optimistic that the vote happens today and that the government reopens and we don't have to talk about this much more. But as it relates to the end of support stuff that happens to be in the particularly in the federal government, there is a lot of discussion and a lot of pressure beginning to build on ensuring that that equipment gets updated just from a cyber risk perspective and a hygiene perspective. So we would expect that there'll be some upside from that as they get back and begin working again and reopen the government. Sami Badri: Thank you, David. Michelle, we can move to the next analyst. Operator: Thank you. Samik Chatterjee with JPMorgan. Your line is open. Samik Chatterjee: Hi. Thanks for taking my questions. Chuck, maybe both questions on the AI front itself. Firstly, Optical, you talked about the strong growth you're seeing in Acacia. Could you just talk about Optical more broadly in terms of the demand you're seeing inside the data center versus outside the data center in terms of, like, pull through from scale across, etcetera? And how is Cisco participating in both of those aspects? And then for the follow-up for the I heard you say twice the number of orders in terms of AI orders from the same customer group. In fiscal 2026. And the sovereign customers, it looks like you are progressing on the engagement, but haven't seen orders as much yet. So that would be sort of upside to that number. I just want to clarify that the sovereigns aren't included as those orders come through in that sort of $4 billion number that you're highlighting for orders? Thank you. Chuck Robbins: Yes, Samik, thank you. On the optics side of AI, we're participating in both. We're blessed to have great solutions in both inside the data center and then outside the data center DCI scale across. I think we'll and we'll continue to innovate there. As I said, we now are selling our pluggable optics to all of the hyperscalers, all the major hyperscalers. And I think that we'll continue to have we'll continue to see great opportunities across both of those. And again, it's a really large market that is meaningful even on par with sort of the switching side of it. So we're pleased to be in both sides of it. On the order front, yes, what my comment was is that we expect this year that we would be at least 2x the orders that we saw from the hyperscale customers last year and that's the same products that we measured last year and the same customers that we measured last year. So no change. On the Neo Cloud, Sovereign Cloud enterprise, there's those that upside where I said we had $2 billion plus of pipeline for the balance of the year, none of that is included in that 2x number that I quoted. So you had that exactly right. Mark Patterson: And maybe just to add, Chuck, on the sovereign side, the early phases of the sovereign build-out are really not material to this year's guide as well. Chuck Robbins: Yes. And I would say that, as you all know, Samik, you know there's export licenses that have to be attained in many of these cases. And so we're still working through that and so we expect most some of that stuff will really start flowing in probably the second half of our fiscal year. But to Mark's point, it's not a material part of the guide this year. Sami Badri: Thank you, Samik. Michelle, we can move to the next analyst. Operator: Michael Ng with Goldman Sachs. Your line is open. Michael Ng: Hey, good afternoon. Thanks for the question. I just have two. First, the G42 partnership, looked like it was a full rack solution using AMD chips. I was just wondering if you have some sort of kind of preferred partnership with AMD. Should we see more of that as we head out through the year? And how important is that combination of compute and networking as RAC solutions potentially get more important? And then second, I wanted to ask about some of the channel partner program changes that are supposed to kick off next year. Any feedback or comments just on the drivers of that change? And what you expect to be the result on the business going forward? Thank you. Chuck Robbins: Yes. Thanks, Michael. On the yes, we're really pleased with the G42 partnership. I was over there again a couple of weeks ago. And you're right, the first announcement is with AMD. And I would say what we believe is that there are going to be multiple GPU providers particularly in the world of inferencing. You're going to continue to see an expansive portfolio of GPUs and XPUs. And what we want to do is participate as a connectivity layer across as many of those as we possibly can. And so that would we work very closely with AMD. We've been very close with them on the G42 opportunity and we continue to talk to them about other opportunities that are occurring around the world. So my anticipation is we'll have as many ecosystem partnerships as we possibly can. On the partner program, I'll make some comments and then Mark if you want to because I actually most of you know that twenty-five years ago, I helped build the program, in our partner and build our partner strategy. And I think that, what this really is, is it's a recognition of growth opportunities ahead of us and how do we align our programs so that our teams are incented and our partner teams are incented in the same way to go after these growth opportunities that we see in the future. And I'd say, we had our partner summit last week our annual partner summit, and the partners were generally positive. We have we've launched tools to help them assess the monetary impact of the new program versus their old program? Does it get better? Does it hurt you? And if it's hurting you, how can you adjust your sales strategy or your go-to-market strategy to actually increase your performance in the program. And I think we have a new worldwide partner leader, Tim Coogan, who is very well trusted by the partners. They know him really well. And, you know, every time we do one of these major changes, we know there's a reasonable chance that we miss something along the way. And commitment to them is that if we miss something, we'll fix it. And we've got a long history of doing that. And so I think in general, the partners feel pretty good about and they feel good about the fact that we're going to continue to adapt the program. To make sure it drives our growth priorities and helps them have a profitable journey alongside us. Mark Patterson: Chuck, maybe just to add three things. I think one, the new partner program is really about simplification. We've had a number of different rewards incentive programs. This really tries to streamline that and bring that together. Secondly, the new program rewards partners for not only portfolio breadth, but the depth of expertise. And I think that's a really important thing. And then lastly, it gets some laser focused on what really matters, what truly matters. And that's campus refresh, AI, security, and then premium services. So all in all, I'd say, you know, while there's always some concerns as you mentioned, whenever you do something new, I think, it's being accepted quite well. Sami Badri: Thank you, Michael. Michel, can we move to the next analyst? Operator: Thank you. Amit Daryanani with Evercore ISI. Your line is open. Amit Daryanani: Thanks a lot for taking my question. I have two as well. I guess, first, on the $3 billion of AI sales in fiscal 2026 that you folks talked about, there way to think about how much of that do you think is optics versus systems? And do you see the overall margin of AI really being comparable to the corporate averages? That's the first one. The second one, Chuck, security revenue was down 2%. I thought I'd hold you on the legacy pressure and the mix shift that you've also had on the cloud side. You just talk about what do you think normalized security growth could look like once this mix stabilizes? I'm sort of square that against the prior guide of mid-teens you've had on the security side, that would be helpful. Thanks a lot. Chuck Robbins: Yes. I'm going let Mark take the revenue and the margin one then I'll come back to security one, Mark. Yes, happy to. So when you look at it, certainly, we've got a broad portfolio and a range of margin if you will across and we've always had that, whether it's across geographies, it's across technologies that we sell, it's across customer markets, etcetera. I think what you're seeing right now is strong margin, 68.1% for Q1. We're pleased with that. In the guide that we gave you as well, you can see that both Q2 as well as the full year 2026 that we're expecting to grow the top line faster than the sorry, the bottom line faster than the top line. So a real focus on leverage and profitable growth if you will. And I would just tell you that optics web scale service provider are true enterprise core portfolio, etcetera, that's all part of the mix and all part of the guide that we gave. And then Amit on the security front at negative 2%. Yes, we first and foremost, I just want to reiterate, we still are committed to the mid-teens long-term guide on revenue for security. I've talked a lot about fact and by the way, none of us are happy about where we are right now. Let me be clear about that. But I think we think that it will continue to accelerate through the year. And it will come out of the year at a much higher rate. And then I think the normalization of this sort of mix shift is probably going take us four quarters to get to where the year over year comparisons are sort of apples to apples on the mix side. So that's how I think about it. We're going to just give you as much transparency as we possibly can. The other thing I would tell you is that we don't need security to materially improve from here. To hit the guide for Q2 or the year that we've given you. We sort of baked that in. Sami Badri: Thank you, Amit. Michelle, can we move to the next analyst? Operator: Thank you. Karl Ackerman with BNP Paribas. Your line is open. Karl Ackerman: Yes, thank you. I have two as well. For my first question, I guess, Chuck, how much of the incremental $1 billion in revenue in fiscal 2026 is coming from an earlier than expected enterprise campus refresh? Versus AI growth? And then separately for my follow-up, maybe for Mark, have you been able to secure enough capacity are you constrained in any way from fulfilling a doubling of AI orders among hyperscale customers this year? Thank you. Chuck Robbins: On the first one, I think you're referring to the incremental $1 billion being the increase in our guide from last time on the year. And I'd say it's a combination of those two things. I mean, you look at the hyperscale growth in of orders is certainly going to be meaningful. But when you look at the larger business that we're talking about that was orders were up 9% in Q1, I think it'd be a mix. I don't know that it would have an exact number, Mark. To go through. Then you want take a We're seeing strength clearly on both sides. Mark Patterson: Yes. As far as whether we've been able to secure sort of the capacity, if you will, and the supply, If you just look at, we always think the best measure is to look at sort of inventory plus advanced purchase commitments on a combined basis. If you look at that for the quarter, just in the last ninety days we're up almost $1 billion and year over year we're up 38% about $3 billion plus. So we are making those advanced purchase commitments and making sure that we can secure the supply and the inventory that we need meet the accelerating demand that we're seeing in hyperscale. Sami Badri: Thank you, Karl. Michel, can we take the next analyst? Operator: Thank you. Antoine Chkaiban, with New Street Research. Your line is open, sir. Antoine Chkaiban: Hi, thank you very much for taking my question. I'd love to follow-up about the Cisco Unified Edge. How large do you think that opportunity can be relative to the large scale multi-gigawatt cloud data centers. And you mentioned use cases in retail, healthcare, manufacturing, if you can double click on each of them. And what's the preferred deployment strategy for Edge AI compute? Do you think that's more an opportunity for players with edge assets like CDNs or operators? Or do you think that's something enterprises will deploy on-prem? And maybe as follow-up, is Cisco planning to participate to the scale-up opportunity? And will that be material? And what partnerships would you be forming to do that? Thank you. Chuck Robbins: Antoine. So yes, the Unified Edge product is something we're really excited about. As we all know, when you're really trying to do real-time inferencing in a retail environment when a customer is there and you're trying to learn something or gain very critical information at that moment in time, you're gonna have to push that inferencing to the edge and you can't send the data back and forth to a data center. So we think this unified edge over time is going to have huge applicability retail, restaurant chains, healthcare, and it's a unique thing that we can put together because we own all of those technologies. And so I'm proud again of the team for coming across coming together across all of our business units and actually seeing the need to deliver that product and delivering it. We'll see how it scales and ramps but I think it's something that's going to be very interesting to our customers. Years and years ago, we had branch solutions that had the integrated compute, etcetera, and integrated security. And I think this is sort of it's the revitalization of that kind of technology at the edge. From a deployment strategy perspective, I'd say it's all of the above. I think you could see CDN players I think it is something that hopefully the carriers and the telcos who have these distributed POPs that are very close to these customers can offer this as a consumption service. I think customers will also choose to put it on-prem. In certain cases, every customer has a different perspective. I go to your second question on the scale-up opportunity, if you look at the slide that we had in our prepared notes on our Silicon One roadmaps, we did have a scale-up silicon offering on the right side of that slide. So we have talked a bit about our future ability to participate in a scale-up. We do believe that that's going to a version of Ethernet. And, and it's our intent to play in that market. So you should expect to see something from us over time. For sure. Sami Badri: Thank you, Antoine. Michel, we can move to the next analyst. Operator: Thank you. Simon Leopold with Raymond James. Your line is open. Simon Leopold: Thanks for taking the question. I've got the two as well. One is I want to understand what's sort of motivating the customers in campus refresh and where I'm coming from is we had the sort of backlog flush after the pandemic, so 2023 was a phenomenal year for your campus business. And so I assume the embedded base is relatively young. So help me understand sort of the motivation or why you're succeeding here. And the second question is, we've heard that other governments, international governments, state and local governments have picked up more of the slack with the federal challenges you saw earlier this year. Could you unpack what you're seeing particularly on the international governments? Thank you. Chuck Robbins: Yes, Simon. So on the campus side, I think the reality is that I think the size of that installed base and how much of it was actually flushed in 2023 is probably over I mean, was a big move granted. But if you look at the amount of end-of-support equipment that teams have identified, it's billions and billions and billions of dollars of installed base that is pre-Cat 9Ks. So, not only it didn't get upgraded to Cat 9Ks, didn't get upgraded into 2023 push. So all of that is still out there and I think that's part of what we're seeing. On the other government's front, we see dynamics in Europe where from a defense perspective and from a geopolitical perspective, we see lots of happening in public sector in Europe. We see it in The U.K., in Germany. We obviously saw U.S. Federal growing strongly even though it was closed. The government was closed, but public sector globally has been strong for several quarters in a row and we anticipate that given the push for general sovereignty around the world, not just data sovereignty and tech sovereignty, but overall sovereignty, we would expect that to continue. Mark Patterson: Yes, Simon, would just add to your point, I think you were alluding to this. All three of our geographies grew in public sector. But the bulk of the strength or the greatest strength that we saw was actually outside The U.S. And kind of in the mid to upper teens in EMEA and APJC. So good strength there. Sami Badri: Thank you, Simon. Michel, can we move to the last and final analyst in the queue? Operator: Thank you, sir. Ben Bohlen with Cleveland Research. Your line is open. Ben Bohlen: Afternoon, everyone. Thanks for getting me in. Bigger picture question for you. Chuck. When you look at the current AI build-out, how do you think about this relative to the late 90s with respect to the Internet build-out? And interested in your thoughts and durability, sustainability, integrity, just how you're contemplating and thinking about all these orders and the optionality going forward? Chuck Robbins: Yes. Thanks, Ben. I think this is a common question that we get particularly since we lived through it. I think there's a few differences. I think that the speed at which this transition is moving is even faster than what it was I think, at the turn of the century. And in the .com days. I also think that the companies that are investing in this are massive strong balance sheet, strong cash flow profitable companies. And that's a lot of the spend is coming from companies that are incredibly strong. Who view this as existential right? And so this is not there aren't as many companies that are making bets that don't have business models mean, there's clearly gonna be winners and losers, but I think there's such a concentration of spend from highly profitable strong balance sheet, strong cash flow companies. I think that's a big difference. And I think the pace at which this is moving is meaningfully different. I think just to be determined, sort of the impact on society and the impact on business relative to what we saw in the at the turn of the century around 2000. But, it is the pace is the pace is what's hugely different for me. So it's an area we're really excited about. So, for the question, Ben. Sami Badri: Thank you, Ben. I'm going to hand it over to Chuck for some closing remarks on our conference call. Chuck Robbins: Yeah. Let me just start by saying how proud I am of our team. How hard they've worked to get to these results. I think the innovation that our teams are delivering is at an all-time high. The commitment and the focus on listening to our customers and delivering the technology that they need right now is fantastic. I think the last twelve to eighteen months, the real emergence of the importance of the network in this AI wave is very clear. And that's what we do best. And so driving a lot of innovation in the network, I think, at a time where the network is becoming more important is huge. It's just the beginning. We have momentum with a high. We see the growing opportunity across enterprise, sovereign and neo cloud. Got this multi-year multibillion-dollar network refresh opportunity. And again, with what I think is an unmatched innovation pipeline, as well as an acceleration of our global partnerships and it really does position us for the strongest fiscal year we've ever had. So, have a lot of confidence. We have a lot of excitement. And I want to just once more thank the teams for everything that they do and then Sammy, I'll turn it back over to. Sami Badri: Thank you, Chuck. Cisco's next quarterly calls, which will outline second quarter fiscal year 2026 results will be on Wednesday, 02/11/2020 at 01:30 PM Pacific Time, 04:30 PM Eastern Time. This concludes today's call. If you have any further questions, please feel free to contact Cisco Investor Relations department. We thank you very much for joining the call today. Operator: Thank you for participating on today's conference call. If you would like to listen to the call in its entirety, you may call 808-392-232. For participants dialing from outside The U.S., please dial (203) 369-3662. This concludes today's call. You may disconnect at this time.
Operator: Welcome to the Talphera, Inc. Third Quarter 2025 Financial Results Conference Call. This call is being webcast live via the Events page of the section of Talphera, Inc.'s website at www.talphera.com. You may listen to a replay of this webcast by going to the Investors section of Talphera, Inc.'s website. I would now like to turn the call over to Raffi Asadorian, Talphera, Inc.'s Chief Financial Officer. Please go ahead. Raffi Asadorian: Thank you for joining us. On the call today, we announced our third quarter 2025 financial results and associated business updates in a press release. With me today are Vincent J. Angotti, our Chief Executive Officer, and Doctor Shakil Aslam, Talphera, Inc.'s Chief Medical Officer. Before we begin, I want to remind listeners that during this call we will likely make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of Talphera, Inc. Please refer to our press release in addition to the company's periodic, current, and annual reports filed with the Securities and Exchange Commission for a discussion of the risks associated with such forward-looking statements. These documents can also be found on our website within the Investors section. I'll now hand the call over to Vincent J. Angotti. Vincent J. Angotti: Thanks, Raffi. Good afternoon, and thank you to everyone joining our call today. We are excited about the progress made this past quarter, specifically in the continued nephro study enrollment at our current clinical study sites and completing the financing that, with the additional tranches, provides us sufficient capital to a planned approval of the NIAID PMA later next year. In September, we completed the first closing of $17 million of a two-tranche financing, which included CorMedix with a $5 million strategic minority investment that provides them a 60-day exclusive negotiation period to enter into a definitive acquisition agreement following the release of our top-line data from the nephro study. CorMedix was also provided the right to a Talphera, Inc. board seat, to which Joe Todisco, CorMedix's CEO, was recently appointed. In addition to the CorMedix strategic investment in the first tranche, along with some new institutional investors, invested $12 million to complete the $17 million financing. Importantly, these institutional investors committed an additional $12 million in a second tranche upon announcement of achieving the nephro study primary endpoint and a stock price trading above $0.69 per share for five consecutive days post the announcement. This latest financing, combined with existing cash and the remaining conditional tranches, is expected to provide sufficient capital through at least an anticipated PMA approval in late 2026. These investments further validate the NIAID opportunity in the market and put us in a solid financial position to execute on the study and prepare for the launch. Beyond the NIAID opportunity, the recent investments were catalyzed by our efforts at the end of last year to restructure the nephro clinical study, which included changing the target profile for clinical sites and investigators and approaching the FDA with various study protocol changes, including the reduction of the study size from 166 to 70 patients with a goal of accelerating the completion of the study. The results of this restructuring were evident last quarter with the acceleration in the enrollment rate from our existing sites, which continued into the third quarter. The three new profile institutions that were brought on board earlier this year have demonstrated the speed of enrollment that is possible in focusing on medical ICUs and having nephrologists as the principal investigators. We expect continued positive enrollment rates from these institutions and will provide an update once we achieve 35 patients or 50% study enrollment. While the enrollment rate from our three existing target profile sites has remained robust, the initiation of the six additional target profile sites expected by the end of the third quarter has been slower than anticipated. As of today, we have successfully activated two of the six new target sites, each of which is expected to be high enrolling. The remaining four target sites, including one of the highest volume CRRT institutions in the country, are under contract but, for a variety of unique reasons to their respective institutions, have not yet started their enrollment. Because of the delays on the new site's activation, we have pushed the estimated timing of study enrollment completion to the first half of next year. Doctor Aslam will provide some details on the specific reasons for the delayed activation as well as his thoughts and assumptions on the timing of study completion. In addition, Doctor Aslam and I have continued to visit with many of the new study teams at their respective sites. While observing their study engagement, I am also highly encouraged by the eagerness of these institutions to have Nefamistat available. In their words, Nefamostat, based on its profile and use in other countries, would be a preferred anticoagulant for CRRT. And while we need to complete the study, this feedback from these investigators continues to strengthen my belief that Nefamostat, if approved, will become a primary product in the market for CRRT anticoagulation. Before I turn the call over to Doctor Aslam to provide some additional details, let me remind you that if approved, NIAID would become the only FDA-approved regional anticoagulant for use during continuous renal replacement therapy. This is important in that there are many disadvantages to the currently used products, heparin, which is systemic in nature, and citrate, which is being used off-label. I'll now hand the call over to Doctor Aslam. Shakil Aslam: Thank you, Vince. Similar to what we discussed last quarter, the enrollment rate at our existing target profile sites continues to impress and validate that the changes we made to the nephro study were the right moves to accelerate enrollment. We are confident these sites will achieve enrollment to complete the study in a timely manner once the remaining four sites with our target profile begin enrolling. Because of the short duration of the study, we have been successful in real-time data cleaning to minimize any delays in locking the database once the enrollment is completed. The guidance previously provided for study completion by the end of 2025 was contingent upon adding six new target profile sites by September 30. The existing three target profile sites that were already exceeding the historical enrollment rate. Importantly, these six new sites are all large academic institutions and most have higher volumes than the legacy sites. As of today, we have activated two of these six sites, with the remaining four sites to be activated during this quarter. We knew two of these four sites were going to be slow to activate. However, due to their large CRRT volumes and their status as prominent institutions, we welcomed their participation. These two sites have already completed contracting. One is waiting for the final internal approval expected any day now. The other is in the process of scheduling its site initiation visit with activation expected next month. The remaining two sites changed their approval processes after contracting was completed, resulting in delays past their original timelines for activation. One had an institution-wide restructuring resulting in unexpected delays in the final approval. They have assured us of the final approval next month. The final institution is having their site initiation visit next week, followed by activation as no additional approvals are required. Due to the delays in the activation of the new sites, we now anticipate study completion in 2026. While we are disappointed by the delays in the activation of these sites, we remain confident that these high-quality sites will significantly contribute to the study as well as the potential future utilization of NIAID. All of these institutions are anticipated to have similar or even higher enrollment rates than our initial three target profile sites. The PIs are excited to start enrolling and are expected to make a significant contribution to the study. In our continuous efforts to improve study enrollment, we reviewed the emerging screening data to optimize the study design. Based on this review, we have submitted further changes to the study eligibility criteria, which we expect will accelerate the enrollment rate and broaden the target patient population for NIAID. We expect to hear from the FDA in a couple of weeks. As we mentioned on our last call, we continue to advance our compassionate use IDE with a large institute in the Southeast for a subset of specific patients with contraindications to currently available anticoagulants. This is an opportunity to provide an alternative to these patients who cannot receive the currently available anticoagulants. As a result, they clot their CRRT circuits frequently. This is the first compassionate use submission by this institution, and we are helping them work through the process as quickly as possible. We will provide more information on the compassionate use IDE when submitted. And with that, I'll turn the call back over to Vince. Vincent J. Angotti: Thank you, Doctor Aslam. Before I hand the call over to Raffi, I want to reiterate our belief that the three critical risk elements—clinical, regulatory, and commercial—for the Nefamostat program are low for a number of reasons. First, with over thirty years of use as an anticoagulant during CRRT in Japan and South Korea, we know Nefamostat's track record of efficacy and safety, minimizing the clinical risk. The trial design has been agreed with the FDA, including broader inclusion criteria and a reduced number of patients, all of which have helped minimize study execution risk, improving to increase enrollment rates. Second, we have a clear regulatory path, including breakthrough designation from the FDA, which provided us with efficient access to the agency, leading to quick review and response times. And lastly, while we know there's always commercial risk, we believe this is mitigated given the disadvantages of the products currently being used for anticoagulation of the CRRT circuit, namely heparin and citrate. Based on all our discussions we're having with healthcare providers, there's a clear need for an FDA-approved regional anticoagulant. I'll now hand the call over to Raffi for a financial update. Raffi Asadorian: Thanks, Vince. Our cash balance at September 30, 2025, was $21.3 million. We believe this cash, combined with the future conditional financing tranches, will provide us sufficient capital to at least a NIAID PMA approval expected next year. Our cash operating expenses, or combined R&D and SG&A expenses for 2025, totaled $3.4 million compared to $3.7 million for 2024. Excluding non-cash stock-based compensation expense, these amounts were $3.3 million for 2025 compared to $3.5 million for 2024. The decrease in cash operating expenses in 2025 was primarily due to reductions in personnel expense and other SG&A expenses. As mentioned, due to delays on the activation of the new clinical sites, we've revised the estimated timing of nephro study completion to the first half of next year. Accordingly, we are reducing the previously communicated 2025 expected cash operating expense guidance to now be in the range of $14 million to $15 million. This is a reduction from the $16 million to $17 million range provided last quarter, with the difference expected to be realized in 2026. I'll now turn the call back to Vince. Vincent J. Angotti: Thank you, Raffi. Now I'd like to open the line for any questions you might have. Operator? Operator: Ladies and gentlemen, we will now begin the question and answer session. As a reminder, should you have a question, please press 451 on your telephone keypad. And should you wish to cancel your request, please press 452. One moment, please, for your first question. And your first question comes from the line of Nazibur Rahman from Maxim Group. Please go ahead. Nazibur Rahman: Hi, everyone. Thanks for taking my questions. I just have a couple. First, just want to start on the enrollment. The new target sites that have already been activated, are you finding that they're enrolling patients faster? Or I guess have the rates of patient enrollment increased? Because the last time when you last communicated the 17 patients, that was in August, and you still don't have the 35 patients. So it seems like mathematically, you're enrolling less than two patients a week. So I'm kind of left wondering why aren't the sites enrolling faster, the ones that have already been activated? Vincent J. Angotti: Yeah. No. The original sites that we communicated last time, there were three of them. Three of them only. And they hadn't enrolled the original five patients, right? Only when you put those three additional sites on did you see the movement from the five patients to the 17, and we're beyond the 17 now. So we're seeing a fairly similar rate of enrollment that we had seen before, similar rate of consents, enrollment, screening, etcetera. So we're well beyond that 17. But in order for us to achieve an accelerated enrollment, we need to layer on these additional sites. Nazibur Rahman: No, but what I'm asking is the new target sites, are you finding that they're enrolling patients faster now that they have some experience? Or are they still enrolling around the same rate? Vincent J. Angotti: Yeah. They're enrolling about the same rate. Nazibur Rahman: Got it. And, one more question, if I may. I know you're talking about these new target sites and these they're seeing delays. But I was also curious, obviously, there's been a lot of volatility in the federal government, and that affected funding for a bunch of medical and all academic institutions. Has that kind of played in or had any factor in any of these organizations? Their ability to conduct clinical study, whether staffing or other leadership or structural issues, has that affected anything? Vincent J. Angotti: Yeah. I'll I have not received that feedback from any of the sites, but I'll turn it to Doctor Aslam to see if he's gotten any additional insight as he speaks to these sites often weekly, if not daily. Shakil Aslam: Sure. Yes, so one of the sites which is Veterans Affairs Medical Center, they did have some issues earlier on of some cuts into their personnel. They are over that, but that did unfortunately add approximately, I would say, three to four months to their timeline. But the rest of the sites have not been affected by that. Vincent J. Angotti: And that VA site, Nazibur, is not one that is currently enrolling. Doctor Aslam, when he says, adds the four months to it, that's until enrollment occurs. So we expect them before the end of the year now. Nazibur Rahman: Got it. Thank you for taking my questions. Vincent J. Angotti: Sure. Thanks, Nazibur. Shakil Aslam: Thank you. Operator: Once again, should you have a question, please press 5, or the one on your telephone keypad. And there are no further questions at this time. I will now hand the back to Vincent J. Angotti for any closing remarks. Vincent J. Angotti: Thank you, operator. And again, thank you for joining our third quarter earnings call. We are excited about the progress we've made with the recent financing, increased enrollment, and continued quality of the additional new sites. To allow us to complete the Nephro study in 2026 and achieve a potential FDA approval of NIAID in late 2026. We hope you appreciate our transparency and site activation. Continuous efforts to improve the study execution. We look forward to providing additional updates on our progress and thank you for your interest in Talphera, Inc. That concludes our call. This concludes today's call. Thank you for participating. You may all disconnect.
Operator: Afternoon, and welcome to Lulu's Fashion Lounge Holdings, Inc. Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. And we have allocated one hour for the prepared remarks and Q&A. At this time, I'd like to turn the conference over to Lulu's Fashion Lounge Holdings, Inc. General Counsel and Corporate Secretary, Naomi Beckman-Straus. Thank you. You may begin. Naomi Beckman-Straus: Good afternoon, everyone, and thank you for joining us to discuss Lulu's Fashion Lounge Holdings, Inc. Fiscal Third Quarter 2025 Results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of fact should be considered forward-looking statements, including but not limited to statements regarding management's expectations, plans, strategies, goals, and objectives, their implementation, opportunities for growth in the coming quarter, the long-term growth trajectory of our business, our expectations around the continued impact of the macroeconomic environment including as a result of the imposition of tariffs, consumer demand and return rates on our business, our future expectations regarding financial results, our ability to realize the intended impact of cost reduction measures, reference to the fiscal year ending 12/28/2025, including our financial outlook for the fourth quarter and fiscal year 2025. Market opportunities, buying strategies, product launches, SKU management, our technology enablement initiative, and personalized shopping and other initiatives. These forward-looking statements are subject to various risks, uncertainties, assumptions, and other important factors, which could cause our actual results, performance, or achievements to differ materially from results, performance, or achievements, expressed or implied by these forward-looking statements. These risks, uncertainties, and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including our annual report on Form 10-Ks for the fiscal year ended 12/29/2024, and our quarterly reports on Form 10-Q for the fiscal quarters ended 03/30/2025, and 06/29/2025. All of which can be found on our website at investors.lulu.com. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt, and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. We also use certain key operating metrics, including gross average order value, and total orders placed. The description of these metrics can also be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our CEO, Crystal Landsem, our CFO, Heidi Crane, and our President and CIO, Mark Vos. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal. Crystal Landsem: Thank you, Naomi, and good afternoon, everyone. Appreciate you joining us today. Our third quarter results reflect the meaningful progress we are making in strengthening and optimizing key areas of the business through consistent execution of our strategic priorities and an eye towards a more occasion-wear-focused assortment. We believe we are on a solid path with another quarter of material sequential improvement in our quarterly year-over-year net revenue comparisons and another consecutive quarter of positive adjusted EBITDA in line with our expectations. Special occasion and bridesmaids categories continue to outperform, giving us confidence in our event attire strategy, reinforcing the strength of our attainable luxury value proposition. The outperformance in special occasion was offset by continued weaker performance in casual wear and footwear assortments, which we are actively realigning towards a more curated event-focused assortment. Importantly, we entered into a credit agreement with White Oak Commercial Finance in the third quarter, which strengthens our liquidity position and significantly improves our financial flexibility. Combined with another quarter of positive adjusted EBITDA performance, a more efficient cost structure, and a healthier balance sheet with the closing of our new ABL facility, we believe we are well-positioned to continue executing against our strategic priorities which are geared towards strengthening our foundation, driving customer engagement, and setting us up for sustainable long-term growth. I'd like to highlight a number of key positive developments from the quarter which showcase the continued momentum we're seeing across the business as a result of our strong execution against our strategic initiatives. Special occasion continues to lead outperformance, with formal and bridesmaids categories driving ongoing year-over-year net sales growth on top of a double-digit comparison in the prior year period. Our continued strong performance in event dressing gives us increased confidence in our assortment strategy and value proposition and further supports our belief that we are a leading destination for getting dressed up for under $200. Worth noting, these product classes year to date had a three-year CAGR of 6.7% in Q3 2025 had a three-year CAGR of 9.5% showing the growth acceleration throughout 2025. First-time reorders of new products once again saw sequential and year-over-year growth. Our refined reorder and merchandising strategies are working, and we are investing in areas of our new product assortment where there is demand to build upon our successes in these areas. Total reorder business and selected deposit in the back half of the quarter led by success across our reorder and debut reorder event dress businesses. This validates our strategy to lean into optimizing fewer SKUs with color additions and fabrication ads to build out our winning programs that customers tell us they love. Product margins improved for the fourth consecutive quarter. This is reflected in approximately a 500 basis point increase compared to the prior year period and 25 basis points higher than our pre-pandemic third-quarter merchandise margin high point illustrating the gap we've closed from a margin recovery perspective. The improvement highlights the continued consumer demand for our higher margin product categories, further supported by our pricing and margin enhancement initiatives and fewer markdown sales, which we remain focused on to drive steady margin improvement going forward. Gross margins expanded 450 basis points to 42.6% over the prior year period with monthly sequential improvement through the quarter. Our focus on selling profitably and at higher margins is yielding results. And we remain focused on continuing to optimize gross margins through a mix of SKU optimization, sourcing, price, and cost efficiencies. Return rates improved 110 basis points from 2Q underscoring the ongoing impact of our improved fit and quality efforts and measured return policy adjustments. Brand momentum continues to build as we lean further into visibility initiatives to drive discovery and relevance. During the third quarter, we launched our first fall brand campaign and leveraged editorial and influencer engagement around cultural moments and through talent partnerships. Our brand equity score has remained strong throughout the year, reflecting growing brand recognition and connection despite a more competitive market. Our wholesale business is ramping up with an exciting pipeline of interest and several new major partners and boutiques added during the third quarter. Resulting in our in-store and online wholesale presence expanding to six major retailers in Q3. As a result, we have achieved triple-digit 7-figure year-over-year growth in wholesale revenue year to date. The strong engagement we're seeing in this channel reaffirms the meaningful opportunity we see in the near and long term as we expand our footprint with existing partners and add brand accretive majors and boutiques to drive profitable wholesale volume and put Lulu's Fashion Lounge Holdings, Inc. products in the hands of more consumers nationwide. And last, we sustained positive adjusted EBITDA in the third quarter, consistent with our expectations. Our leaner cost structure and improved product margin supported our performance, resulting from our team's discipline and focus around streamlining operations and strengthening our bottom line. I'm incredibly proud of our consistent improvements in business performance over the last several quarters as we optimize our core business while also navigating a dynamic macro environment. We are keenly focused on addressing areas of our business that remain under pressure namely our shoes and casual apparel businesses, which have continued to weigh on top-line performance. As we have discussed on prior calls, we are actively resetting our merchandising strategy in casual apparel and shoes to stabilize these categories and reposition them for growth. By reducing SKU count and pulling back on inventory near term to improve turns, while also leaning into more elevated dressier styles, we believe we are able to rebuild with a more focused and productive assortment that better aligns consumer demand and margin goals. As we work through inventory, we expect top-line pressure from these categories to moderate towards 2026 allowing us to see more meaningful improvements in our revenue performance. To further support our realignment efforts, we made the strategic decision to optimize our team structure including narrowing our team, eliminating the chief merchandising officer role, and streamlining our operations to leverage the success we have seen with our occasion wear buying. As we look ahead, we remain committed to evaluating all options to enhance performance and drive sustained profitable, long-term growth focusing on process optimization and operational efficiency and positioning the brand as a key destination for special occasions and dressing up. Shifting to our cost reduction initiatives, we continue to reap the benefits of our cost-saving actions initiated last year. In the third quarter, OpEx declined 11% year over year and within that, fixed costs were down 18%. Enabling another quarter of positive adjusted EBITDA performance. We expect to continue to benefit from our leaner cost structure and the additional actions we're taking to drive operational efficiency, optimize performance, and sustain profitability. More recently, in response to heightened macro uncertainty, related to trade policy actions in the first half of the year, we took action to further promote cash generation and fortify our balance sheet through SKU rationalization. Our SKU rationalization initiative is bearing fruit with improved efficiencies and margins, reduced excess inventory, and incremental cost savings through a more curated assortment. As it relates to direct sourcing, we are on track with our direct-from-factory approach for select, mostly entry price point product category segments. In parallel, we are optimizing and diversifying our supply chain through reducing supply chain costs in close collaboration with our long-standing vendor partnerships. Furthermore, we are leveraging price strategy and assortment optimizations as incremental mitigation. On the home office front, I'm very excited to formally welcome Heidi Crane to our team as our fractional CFO. Heidi brings a wealth of experience leading financial strategies, for high-growth consumer companies which will be tremendously valuable to our team as we position for sustainable, long-term profitable growth. With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer. Mark will provide updates around the progress we are seeing against our strategic priorities. Mark Vos: Thank you, Crystal. Our brand engagement initiatives continued to resonate. Strengthening visibility and deepening awareness across key markets. Despite a decline in our active customer counts year over year. Our Love Rewards loyalty program membership continues to grow steadily. Contributing to higher reactivation rates amongst lapsed customers. We also saw a meaningful uplift in average order value. During the third quarter, which supported our strong comp performance for the period. With continuous progress across key engagement metrics, we're optimistic about the impact of our strategic initiatives are having an accelerated brand momentum for Lulu's Fashion Lounge Holdings, Inc. To that end, let me share more specifics around the progress we're seeing against our three strategic initiatives. Starting with our product assortment optimization, and related margin expansion efforts. We delivered another quarter of sequential improvement in return rates, and damages related to customer returns. The shift to a flat fee return policy in Q1 introduced to better align with industry standards has proven effective in enhancing the customer experience and preserving margins. We continue to monitor customer behavior and will adapt our policy, to support the customer experience and the financial impact of returns. Across event categories, we observed several positive trends that reinforce our confidence in our refined merchandising and product assortment strategy. In first-time reorder, our positive performance led by event gowns our ongoing reorder strategy of investing more into recently tested new products and retiring older reorder products. In cocktail dresses, we saw progressive sales comp improvements throughout the quarter, supported by very strong top performers in both our new product and reorder product assortments. Demonstrating the impact of our new merchandising strategy and assortment optimization initiatives. While our best-selling new assortments saw early sell-through, we are taking advantage of opportunities to increase depth in styles that are working. Telling us that well for the year ahead. In our reorder programs, our disciplined and data-driven buying decisions allowed us to maintain stock levels throughout the homecoming season. Minimizing lost sales and allowing us to more effectively meet elevated demand. Turning to our investments in strengthening brand awareness and customer engagement. In Q3, we launched our first fall brand campaign. The Itlist, supported by out-of-home placements, influencer activations, and paid partnerships. Maintaining our cultural relevance and organic reach. We continued to show up in culture through high-impact moments such as our New York Fashion Week showroom, girls night out events, and ambassador-led initiatives. Including ladies of the table and dime. These activations expanded our audience and strengthened earned media value. On social media and content performance, TikTok views increased 46% quarter over quarter. With top-performing content, such as try-ons and wedding guest halls. Reaching millions YouTube Shorts also saw a significant spike driven by paid amplification and a refined content strategy. Our ambassador program scaled meaningfully with year-over-year growth in creator count, reach, and engagement. These programs continue to be a key driver of community expansion and brand resonance. Marketing and promotional efficiency also improved. Supported by a refined spend allocation and smarter execution across channels. Additionally, enhanced automation and more precise audience targeting contributed to positive engagement outcomes during the quarter. Looking ahead, we remain highly encouraged by the sustained strength of our brand and the effectiveness of our engagement strategies. The sequential gains in brand equity, coupled with strong performance across social and creative channels, reinforce our confidence in the scalability of our approach. Our third initiative on driving technology enablement to improve decisioning. Efficiencies, and create a seamless customer experience across channels. During the quarter, we revamped customer feedback collection via exit surveys, enabling us to capture more actionable quality signals and experience feedback from customers. Additionally, we made several user interface enhancements around returns and store credit options in the quarter. To reduce friction, and improve conversion rates. While also improving Lulu's Fashion Lounge Holdings, Inc. data insights for various purchase journey decisions. In summary, we remain very focused on progress against our key strategic priorities, which we believe positions the business for a return to profitable, sustainable, growth. And with that, I'll turn it over to Heidi Crane, our fractional CFO, to provide more color on our financial performance. Heidi Crane: Thank you, Mark. I'm excited to join during this transformational time in Lulu's Fashion Lounge Holdings, Inc. journey and contribute to its path to profitable growth. I've been incredibly impressed by the talent, engagement, and hands-on culture here. The team's deep passion for the Lulu's Fashion Lounge Holdings, Inc. brand was palpable from day one. Over the next few months, I'll be focused on getting up to speed, deepening my knowledge of our operations strategy, and culture. I'm looking forward to collaborating across the organization and engaging with the investment community as we continue driving Lulu's Fashion Lounge Holdings, Inc. growth and value over the long term. Now to our results. In the third quarter, net revenue was approximately $73.6 million, a decrease of 9% year over year, driven by a 14% decrease in total orders placed partially offset by an 8% increase in average order value. Gross margin for the quarter was 42.6%, up 450 basis points year over year due to notable improvement in product-related margins driven from a higher mix of full-price sales and higher margin product categories in addition to further progress on direct sourcing initiatives, driving improved margins, specifically in our entry price point product assortment. On the expense side, Q3 selling and marketing expenses totaled $16.9 million, down about $0.7 million year over year, primarily due to lower marketing and merchant processing fees and lower revenues. General and administrative expenses decreased $3.5 million to $16.4 million in Q3 an 18% decline year over year primarily due to a decrease in fixed labor costs driven by reduced headcount lower variable labor costs, and lower sales volume, as well as lower equity-based compensation expense reduced insurance costs, and lower travel, supplies, other discretionary expenses, all the result of our ongoing cost control initiatives. Our net loss for Q3 improved to $2.3 million from a $6.9 million loss in the same period last year driven primarily by a $0.7 million improvement in gross profit and a $4.2 million reduction in our operating expenses. Slightly offset by a $0.3 million increase in net interest expense. Q3's adjusted EBITDA was approximately $0.4 million positive compared to a $3.6 million loss in Q3 2024 a $3.9 million improvement year over year for the third quarter. Adjusted EBITDA margin was positive 0.5% versus negative 4.4% in the prior year period. Interest expense in Q3 totaled $0.544 million versus $0.305 million in Q3 2024. Diluted loss per share for the quarter was $0.84 compared to a diluted loss per share of $2.47 in Q3 2024. In the third quarter, net cash used in operating activities was $1.8 million a $3.7 million improvement from $5.5 million cash used in the same period last year primarily reflecting the improvement in our P&L. Turning to the balance sheet and liquidity. In August, we announced a new credit agreement with White Oak Commercial Finance comprised of an asset-based revolving credit facility with a $20 million commitment a $5 million uncommitted accordion, a $1 million sub-limit for letters of credit, the facility maturing on 08/14/2028. The proceeds from the initial funding of the agreement were used to repay approximately $6 million outstanding under a prior credit agreement with Bank of America. At the end of the quarter, we had $9.2 million in outstanding borrowings, under the new facility with the facility's higher credit limit providing us with enhanced financial flexibility a stronger liquidity position. Free cash flow during Q3 was negative $2.4 million reflecting a $3.9 million improvement year over year. Year to date, Q3 free cash flow was $3.5 million compared to prior year Q3 year to date free cash flow of $2.7 million. Net debt was $7.3 million at the end of Q3, a $1.4 million reduction from our net debt position of $8.6 million at the end of the fourth quarter 2024. Our inventory balance at the end of the quarter was $38.4 million or less than a 1% decrease year over year. Turning to our outlook, for the remainder of the year. Similar to the third quarter 2025, we expect significant year-over-year improvement in adjusted EBITDA in 2025. We also continue to expect full-year capital expenditures to be approximately $2.5 million. Additionally, we remain focused on driving strong operational execution, supporting our progress towards profitable growth. As it relates to tariffs and mitigation strategies, we are actively executing a multifaceted strategy that includes vendor collaboration, diversified sourcing, strategic pricing actions, and optimizing our product assortment. These initiatives are being carefully managed, and are already helping offset our tariff-related costs. And now I'll turn it back to Crystal for closing remarks. Crystal Landsem: All in all, I am proud of the clear progress we've made driving positive momentum across key areas of our business. We continue to demonstrate the impact of our strategic and cost-saving initiatives on optimizing our operations driving a return to profitability, and delivering a more aligned and curated occasion wear to our customers at an attractive price point. We remain firmly committed to maintaining positive year-to-date cash flow protecting brand integrity, and investing in our long-term objectives to support our return to growth. To our Lulu's Fashion Lounge Holdings, Inc. team and partners around the world, thank you for your tireless effort, trust, and passion for our brand. And thank you to our shareholders for your ongoing support. With that, I'll open it up for questions. Operator: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please key in star and then one. On your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may key in star and then two, to leave the question queue. Thank you. Ladies and gentlemen, with no questions in the question queue, it brings us to the end of this event. Thank you for attending. And you may now disconnect your lines.
Operator: Ladies and gentlemen, greetings, and welcome to the Snail, Inc. Class A Common Stock Third Quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steven Shinmachi, Investor Relations. Please go ahead. Thank you. Steven Shinmachi: Thank you, and good afternoon, everyone. Welcome to Snail, Inc. Class A Common Stock Third Quarter 2025 Earnings Conference Call and Webcast. Joining us for today's call are Snail, Inc. Class A Common Stock Chief Financial Officer, Heidy Kingwan Chow, and Senior Vice President, Director of Business Development and Operations, Peter Kang. The company's third quarter 2025 earnings press release was filed earlier today and is available on the Investor Relations section of Snail, Inc. Class A Common Stock's website at www.snail.com or the SEC website at www.sec.gov/ekker. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company. Actual events or results may differ materially from our expectations, and forward-looking statements are subject to certain risks and uncertainties. Please refer to the company's Form 10-Q that has been filed with the SEC, the most recent Form 10-Ks that was filed with the SEC on 03/26/2025, and other SEC filings. The company makes these forward-looking statements as of today and disclaims any duty or obligation to update them or to release publicly any updates or revisions to any forward-looking statements to reflect changes in its expectations or any change in events, conditions, or circumstances on which any such statement is based. Additionally, on today's call, we refer to bookings and EBITDA, which are non-GAAP financial measures, and provide useful information for the company's investors. You will find a historical reconciliation of bookings and EBITDA to the corresponding GAAP measures in the earnings press release and the company's SEC filings. And now I will turn the call over to Heidy Kingwan Chow, Chief Financial Officer of Snail, Inc. Class A Common Stock. Ma'am, please proceed. Heidy Kingwan Chow: Good afternoon, everyone. Thank you for joining us today to review our financial and operational results for the third quarter ended 09/30/2025. The third quarter was a combination of growth, development, engagement, and heightened awareness across our portfolio, highlighted by participation in industry events, the launch of a new indie title, awards won by our upcoming indie title, ongoing progress across key projects and initiatives, and sneak peeks into upcoming titles and content. Peter will dive into the detail around the gaming business later in the call, but I would first like to provide an update on our stablecoin project. We continue to make meaningful progress towards our goal of becoming one of the first gaming companies to issue its own proprietary stablecoin. Currently, we are developing the underlying infrastructure that will support the coin and advancing through the multistate regulatory application process. The team we have put together has been instrumental in making such progress since we publicly announced this new project a few months back. While much of the work is happening behind the scenes, we are in a strong position to share more tangible updates with stakeholders in the next couple of months. To reiterate our rationale for pursuing the coin project, by pursuing this initiative, we are positioning Snail, Inc. Class A Common Stock as one of the pioneers in a space with significant untapped potential. We believe that the investments we are making today in technology and infrastructure will yield long-term benefits and create a foundation for innovation across the industry. We view stablecoins as the future of payments, and as a gaming company, we see endless opportunities. While widespread adoption will require an industry shift, the passage of the Genius app a few months ago was a pivotal moment that created a framework to accelerate this transformation. For a sector that relies heavily on online transactions, a digital currency pegged to the US dollar offers immense utility, efficiency, and reliability. Of course, achieving this vision will require many other stakeholders within the industry to embrace such an initiative, which in reality will take time. That said, we believe that the investments we are making now position us ahead of the curve as a bellwether and unlock a wealth of potential opportunities in the future. The progress made so far has been truly exciting, and we look forward to sharing more substantive updates with our shareholders and stakeholders in the near future. Before I turn the call over to Peter to discuss our gaming business, I would like to address our third quarter performance and provide some context behind our reported decline in net revenue for the third quarter. While top-line results for the quarter decreased year-over-year, this was primarily driven by the timing of revenue recognition rather than fundamental changes in our business or a reduction in the sales and demand for our products. Under our revenue recognition model, certain sales are deferred and recognized over time as performance obligations are met. We record deferred revenue when payments are received in advance of the fulfillment of our associated performance obligation, such as when we presale certain games and content. During this quarter, FIFA revenues increased approximately $10.9 million compared to the same period last year, primarily driven by ARC Survival Ascended Lost Colony Expansion Path DLC bundle. As of the quarter ended, the deferred revenue balance was $36.4 million, of which $35.3 million is due to nonrefundable payments. More importantly, we do expect to recognize approximately $26.5 million in nonrefundable deferred revenue payments within the next twelve months. We also are targeting the launch of ARC Lost Colony in December 2025, which we expect $5.8 million of the deferred revenue balance to be recognized and positively impact our fourth quarter top-line results. Despite our deferred revenues affecting this quarter's result, our core gaming business is still generating cash, with our operating cash flow for the nine-month period remaining solid at approximately $4.2 million. Our bookings for the third quarter also grew 9.3% to $17.6 million compared to the year-ago period, further demonstrating the strong demand and engagement we experienced in the third quarter. Snail, Inc. Class A Common Stock also typically experiences sales spikes during quarters where we launch a new ARC DLC. In addition to the deferred revenues, we expect incremental sales driven by the launch of Lost Colony from players who did not participate in the presale event. With this new content on the horizon, we also anticipate a corresponding increase in engagement in the assay. Together, these catalysts position us for a significantly stronger fourth quarter compared to Q3 and set us up to finish the year on a high note. Demand and engagement across our gaming portfolio remain robust, and with Lost Colony slated for Q4, we are confident in finishing the year on solid footing. Before I dive deeper into our quarterly results, I will hand the call over to Peter to discuss some recent developments in our gaming business and operations. Peter? Peter Kang: Thanks, Heidy, and good afternoon, everyone. As Heidy mentioned, the fundamentals across our gaming business remain unchanged. Our units sold for the quarter increased by 7.8% year-over-year, primarily related to ARC Ascended and its related DLCs. For the nine-month period, total units sold increased 38.7% to 4.8 million. ARC engagement also continued to remain stable. Average DAU for ARC Survival and ARC Survival Ascended used approximately 122,658 and 92,876, respectively. As of quarter-end, ARC has been played for 4.2 billion cumulative hours, with the average screen time for users reaching 161 hours. Our ARC mobile title also surpassed 9 million downloads across iOS and Android, and average DAU was approximately 144,750 during the third quarter. Engagement across ARC continues to remain strong and stable and has no material impact on our results for the quarter. Over the last several months, many of our titles were featured at leading industry events, including Gamescom, BridgeCon, and several niche conferences, all focused on driving awareness of current releases, as well as new and upcoming indie titles. We recently launched Rebel Engine just last week and officially announced the December 4 release date for our highly anticipated title Echoes of Elysium. The most impactful event we participated in during the quarter was the 2025 Steam Autumn Sale, which featured our flagship titles, early access projects, and indie portfolio. Notably, ARC Survival Ascended was discounted 50% during the week-long event, where we saw encouraging upticks in sales. The event generated 8.5x ARC Survival Ascended units per day and 3.5x ARC Survival Ascended revenue per day compared to the preceding nonsale period. This was encouraging to see as the uptick in sales and engagement positions the game well with the upcoming launch of Lost Colony DLC on ARC Survival Ascended next month. These sale events are strategically designed not only to reinvigorate engagement across our titles but also present an opportunity to showcase the depths of our portfolio, elevate the visibility of our indie games, and broaden each game's player base. A quick review on interactive films: As of September 30, 2025, we released 67 short film dramas through our short-form mobile application, Salty TV. While we remain in the early stages, the growth across Salty TV's portfolio has been encouraging to see. We remain optimistic and look forward to continuing to scale the total number of films available within the app. We also expanded the scope of interactive films during the quarter as we developed and released a narrative-driven simulation title, The Fame Game: Welcome to Hollywood. Looking ahead, our primary growth drivers for the fourth quarter will be the upcoming ARC Survival Ascended DLC Lost Colony. As we previously mentioned, presales for Lost Colony began in June and have delivered strong results as evidenced by strong bookings in Q2 and Q3. As of September 30, we have sold approximately 306,000 units of Lost Colony Expansion Pass, exceeding our expectations. A material portion of our deferred revenue balance is comprised of revenue from the Lost Colony presales, and once the DLC is released next month, we expect to recognize this deferred revenue in our Q4 top-line results. To further stimulate demand, we recently enhanced the value of the Lost Colony DLC bundle by adding a completely new and exclusive Fantastic Tames Elder Claw to the bundle. As mentioned previously, we are targeting Echoes of Elysium to be released on December 4, which we anticipate will be more impactful than our typical smaller-scale indie titles. Peeking into 2026, we have a handful of new games and content being developed across both the established and indie titles. Across ARC, we have Genesis One and Two coming to ARC Survival Ascended, along with several new projects currently underway. We are also continuing to develop Nanyan Sutra Vuzhou, Nanyin Sutra Immortal, and For the Stars. These three titles are larger in scope compared to our typical indie releases, and we also expect them to have more material impact compared to our smaller-scale niche games. As mentioned, we have a healthy backlog of games and content coming in the fourth quarter and throughout 2026, with a handful of unannounced projects at this point also poised to make a strong impact next year. Our team continues to focus on delivering to our core ARC fan base through the launch of Lost Colony next month, and we look forward to delivering innovative content to drive sustainable long-term returns and engagement for our shareholders and player base. With that, I will now turn the call back over to Heidy to discuss our financial results for the third quarter ended September 30, 2025. Heidy? Heidy Kingwan Chow: Thank you, Peter. Net revenue for the third quarter was $13.8 million compared to $22.5 million in the same period last year. As mentioned earlier, the decrease was not due to fundamental changes in the business but rather due to an increase in deferred revenue of $10.9 million, primarily from ARC Survival Ascended. In addition to a decrease in revenues related to BellRite of $500,000, we continue to see strong demand and engagement across our gaming portfolio, with total ARC sales increasing by $2.2 million compared to the same period last year, in addition to an increase in Salty TV sales of $300,000. Net revenues for the nine months ended 09/30/2025 were $56.1 million compared to $58.3 million in the same period last year. During the nine-month period, total ARC sales increased $13.7 million, and Salty TV increased $600,000 compared to the same period last year. This increase was offset by the increase in deferred revenue of $11.9 million, primarily from ARC Ascended, decreased revenue related to BellRite of $2.6 million, a decrease in Angela Games revenue of $1.2 million, and a nonrecurring games settlement of $600,000 occurring in 2024. To reiterate, as of 09/30/2025, the balance of deferred revenue was $36.4 million, of which $35.3 million is due to nonrefundable payments. We are expecting $26.5 million of the balance to be recognized within the next twelve months. $5.8 million of this balance, which consists of the ARC Lost Colony presale revenue, will be recognized during the fourth quarter. Net loss for the three months ended 09/30/2025 was $7.9 million compared to net income of $233,000 in the same period last year, primarily due to the decrease in net revenue and the increase in general administrative, advertising and marketing, and impairment of film assets expenses. Net loss for the nine months ended September 30, 2025, was $26.4 million compared to a net income of $700,000 in the same period last year, primarily due to an increase in provision for income taxes of $10.5 million, general and administrative expenses of $4.4 million, research and development of $3.1 million, advertising and marketing of $2.4 million, impairment of film assets of $800,000, an increase in cost of revenue of $3.9 million, a decrease in revenue of $2.1 million, partially offset by an increase in total other income of $100,000. Bookings for the third quarter increased 9.3% to $17.6 million compared to $16.1 million from the same period last year. The increase was primarily driven by various sales promotions in 2025 that did not occur in 2024, specifically around ARC Survival Evolved and the release of ARC Lost Colony and ARC Aquatica in 2025. Bookings for the nine months ended 09/30/2025 increased 14.3% to $67 million compared to $58.6 million in the same period last year. The increase was primarily driven by the releases of ARC Survival Ascended DLC Exteros in 2025, sales promotions that were the first of their kind on ARC Survival Evolved in 2025, the release of ARC Lost Colony to presale in 2025, and the release of ARC Aquatica. EBITDA for the third quarter was a $9.7 million loss compared to $500,000 in the same period last year. The decrease was primarily due to an increase in net loss of $8.1 million and a decrease in the provision of income taxes of $1.8 million, partially offset by an increase in interest income and interest income related parties of $400,000. EBITDA for the nine months ended 09/30/2025 was a loss of $15.6 million compared to $1.6 million in the same period last year. The decrease was primarily due to an increase in net loss of $27.1 million, a decrease in interest expenses of $200,000, partially offset by an increase in provision for income taxes of $10.5 million and a decrease in interest income and interest income related party of $400,000. As of 09/30/2025, unrestricted cash and cash equivalents were $12.3 million. To review our detailed financial statements, please refer to the earnings press release and the Form 10-Q filed with the SEC. To conclude, we remain excited about the progress made on both our stablecoin project and gaming portfolio and pipeline. ARC Lost Colony continues to remain a growth driver for the fourth quarter, and we look forward to a stronger finish to the year. Thank you all for joining us today. We will now open the line for Q&A. Operator? Operator: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Michael Kupinski with NOBLE Capital Markets. Please go ahead. Michael Kupinski: Hi. It's Jacob Metzler on for Michael Kupinski. I was just curious, could you talk a little bit about the gross margins in the quarter? We noticed that a gross margin was around 30% for Q1 and Q2. So just curious if you could talk a little bit about what led to that contraction. Heidy Kingwan Chow: This is Heidy, CFO of the company. That was a good question. This was really a combination of multiple factors. On our cost of the revenue side, while we pay royalties as a percentage to our net revenue, we do have a fixed license fee to our related party of approximately $6 million per quarter. This license fee is actually fixed and is paid on a monthly basis, regardless of our recognized revenue, which is also the main reason why the gross profit margin actually decreased this quarter. On our revenue side, we had an increase in our booking, but we deferred $5.9 million. As mentioned earlier, we deferred $5.9 million in our sales of Lost Colony. Additionally, we held a significant sale in 2025 that we do believe pulled demand forward for the quarter for the base game of ASE. Michael Kupinski: Gotcha. And then if I could just turn to deferred revenue, you know, I know you mentioned the increase in deferred revenue. But could you just talk a little bit about the timing of when some of that revenue is going to be re-recognized over the next twelve months? Heidy Kingwan Chow: Sounds good. Thank you, Jacob. As mentioned earlier in our earnings call, we do believe that all our deferred revenue is recognized as of 09/30/2025. In fact, the majority of it will be recognized within the next twelve months or so, assuming there are no delays in the delivery of our obligation to our customers and our players. We do expect to recognize $5.9 million of our short-term deferred revenue in 2025 related to Lost Colony. Once the game is released, we will recognize that as a top-line revenue. And $10.3 million were related to Genesis One and Two. Once Genesis One and Two are released, we will be able to recognize those as revenue in the upcoming year. Michael Kupinski: Gotcha. And outside of the Lost Colony deferred revenue and then Genesis One and Two, what is the... Operator: I'll hop back in queue. Thank you. Ladies and gentlemen, at this time, there are no further questions. The conference of Snail, Inc. Class A Common Stock has now concluded. Thank you for your participation. You may now disconnect your lines. Thank you.
Operator: Good day, ladies and gentlemen. And welcome to the GRAIL Third Quarter 2025 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that this conference call is being recorded. GRAIL Investor Relations, please begin. Robert P. Ragusa: Thanks, operator, and thanks, everyone, for joining us today. On the call are Robert Ragusa, our Chief Executive Officer; Aaron Freidin, Chief Financial Officer; Joshua J. Ofman, President; Harpal S. Kumar, Chief Scientific Officer and President International; and Andrew John Partridge, Chief Commercial Officer. We will be making forward-looking statements on this call based on current expectations. It is our intent that all statements other than statements of historical fact, including statements regarding our anticipated financial results and commercial activity, will be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 as amended and Section 21 of the Securities Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon currently available information, and GRAIL assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that GRAIL files with the SEC, including the risk factor section of GRAIL's most recent quarterly report on Form 10-Q. This call will also include a discussion of GAAP results and certain non-GAAP financial measures, including adjusted gross profit or loss, which are adjusted to exclude certain specified items. Our non-GAAP financial measures are intended to supplement your understanding of GRAIL's financials. Reconciliations of the non-GAAP measures to the most directly comparable GAAP financial measures are available in the press release issued today, which is posted to our website. And with that, we can turn to Robert Ragusa. Good afternoon, everyone, and thank you for joining us. Robert P. Ragusa: On today's call, we will review third-quarter results and discuss recent updates. These include PATHFINDER II results shared at ESMO, updated SIMPLIFY data shared at EDCC, and recent strategic and financing activities. We remain very pleased with our commercial progress. Growth in Gallery volumes and revenue in 2025 were 39% and 29%, respectively, as uptake continues to grow. From the launch of Gallery through September 30, approximately 420,000 Gallery commercial tests have been sold by more than 16,000 healthcare providers. We are continuing to progress our activities beyond the United States as well, recently announcing a strategic collaboration with Samsung to bring the Gallery test to key Asian markets. Subject to execution of definitive agreements, we and Samsung will work as exclusive partners to commercialize Gallery in South Korea and potentially other Asian markets, including Japan and Singapore. In addition, we plan to explore other strategic and operational collaborations. Samsung has also agreed to make an equity investment of $110 million in GRAIL, subject to closing conditions. In October, we also introduced Gallery commercially in Canada, in partnership with MedCan, a global leader in proactive health and wellness services. Eligible adults in Canada may now access the Gallery test at MedCan. In addition to these operational updates, we recently completed a $325 million private placement. This transaction strengthens our balance sheet as we progress through additional milestones. Gallery is the only MSAT available which has demonstrated performance in people being screened in the intended use population. This includes data from our registrational PATHFINDER II study, where a pre-specified analysis was presented at ESMO last month. I will ask Joshua J. Ofman, then Harpal S. Kumar, to discuss recent results from Gallery's clinical program. Joshua J. Ofman: Thank you, Robert Ragusa, and hi, everybody. We were really pleased last month to share very positive performance and safety results from the pre-specified analysis of the first 25,000 participants in our registrational PATHFINDER II study. This study started in 2021, and PATHFINDER II is a large prospective trial in a very broad and diverse enrolled group representative of Gallery's screening-eligible intended use population. Releasing the first results of this study at ESMO was so exciting and a big milestone for our company, and all of our partners and investigators. It was a meaningful contribution to the evidence base for the effectiveness of multi-cancer early detection. As you will recall, we found that adding Gallery to recommended screening for breast, cervical, colorectal, and lung cancer yielded a more than sevenfold increase in the overall cancer detection rate. Approximately three-quarters of the cancers detected by Gallery have no recommended screening options. More than half of the new cancers detected by Gallery were in stage one or two, and more than two-thirds detected at stages one, two, or three. One of the most important clinical metrics, the positive predictive value or PPV, which is the likelihood of receiving a cancer diagnosis following a positive test result, Gallery's PPV was 61.6%. Specificity was 99.6%, translating to a false positive rate of 0.4%, a critical safety metric. Gallery's ability to accurately identify where in the body cancer is located also helped guide an efficient and effective diagnostic evaluation. Importantly, there were no serious study-related adverse events reported thus far. Diagnostic resolution, an important economic and patient-centered outcome measure, took a median of 46 days. Only 0.6% of all participants had an invasive procedure, and again, no serious study-related adverse events were reported. Invasive procedures were two times more common in participants ultimately diagnosed with cancer than in those who were ultimately not diagnosed with cancer. PATHFINDER II and NHS Gallery make up our registrational clinical program for Gallery. Our PMA submission will include these data from the first 25,000 enrolled in PATHFINDER II, to complete twelve months of follow-up, plus findings from the prevalent round of screening from the NHS Gallery randomized clinical trial, as well as the results of a bridging study between the version of Gallery used in the two registrational trials to the updated version that we plan to submit to the FDA for premarket approval. As a reminder, we announced positive top-line results from the prevalent round of screening in the NHS Gallery trial in May. Namely, the data from the prevalent screening round showed a substantially higher positive predictive value than that was observed in the first PATHFINDER study. Now to review important new findings from our SIMPLIFY study, I will hand it off to Harpal S. Kumar. Thanks, Joshua J. Ofman, and good afternoon, everyone. Harpal S. Kumar: Working with the University of Oxford, we recently shared positive long-term results from an extended follow-up of the SIMPLIFY study at the Early Detection of Cancer Conference or EDCC in October. As a reminder, we conducted the observational SIMPLIFY study in symptomatic participants in the UK to understand whether our technology could play a role in helping clinicians guide investigation and accelerate time to diagnosis when patients present with concerning but nonspecific symptoms. Examples of these symptoms could include unexplained weight loss, fatigue, persistent abdominal pain, and others. The previous primary analysis from SIMPLIFY published in The Lancet Oncology in 2023 followed participants until diagnostic resolution or up to nine months and demonstrated Gallery's PPV in this population was approximately 75%. Patients determined to have a false positive Gallery result were followed for an additional fifteen months in the National Cancer Registry England and Wales. The updated analysis presented at EDCC includes the subsequent registry follow-up period for all seventy-nine of the patients who were originally classified as false positives. The data contained a number of important learnings. First, approximately one-third of the participants initially believed to be false positives were diagnosed with cancer during the full follow-up period. Second, of that group, a cancer signal of origin or CSO prediction from the Gallery test was correct in all but one patient. Finally, with a reduction in false positives in SIMPLIFY from 79 to 51, the updated PPV for Gallery in this symptomatic population increased to 84.2%. These findings reinforce the importance of proactive follow-up after a positive MSAT test result and the value of the Gallery test's accurate CSO capability. Now to Aaron Freidin for a review of our financials. Aaron Freidin: Thanks, Harpal S. Kumar, and good afternoon, everyone. I am pleased to present our results for the third quarter. Revenue for the quarter was $36.2 million, up $7.5 million or 26% as compared to 2024. Total revenue for the quarter is composed of $32.8 million of screening revenue and $3.4 million of development service revenue. Development services revenue includes services we provide to biopharmaceutical and clinical customers, including support of our clinical studies, pilot testing, research, and therapy development. We continue to see demand for our Gallery test and sold more than 45,000 tests in the third quarter. We have historically observed seasonal fluctuations over the course of the year, in particular, relatively high volume in the second and fourth quarters and lower in the first and third. We would expect these seasonal trends to continue. Screening revenue of $32.8 million in the third quarter was up 29% as compared with 2024. U.S. Gallery revenue was $32.6 million, up 28% compared to the third quarter last year. At the beginning of the year, we guided full-year 2025 U.S. Gallery revenue growth between 20% to 30%. We are refining this growth guidance today to the middle of that range. Cost of screening revenue, exclusive of amortization of intangible assets, as a percent of screening revenue decreased mainly due to lower variable costs of Gallery testing performed on our automated platform, partially offset by a decrease in ASP and higher sample reprocessing costs. Net loss for the quarter was $89 million, an improvement of 29% as compared to 2024. Gross loss for the third quarter of 2025 and 2024 were $13.7 million and $22.2 million, respectively. Non-GAAP adjusted gross profit for 2025 was $20 million, an increase of $8.2 million or 60% as compared with 2024. In Q3, we achieved a non-GAAP adjusted gross margin of 55% compared to 41% in 2024. This change was largely driven by improvements in variable cost on our updated Gallery platform that launched last year and by an increase in sample volume for the quarter. As we ran a one-time batch of research and development samples for clinical validation, resulting in reduced fixed cost per sample related to higher lab efficiency at higher volumes. We do not expect similar clinical validation sample volume in future quarters, but the higher number of samples processed demonstrates the benefits we expect to see in lab efficiency as the sample volume grows. We ended the quarter with a cash and investment position of $547.1 million. Including net proceeds from the $325 million private placement in October, we have approximately $850 million of cash and investments. This does not include the recently agreed-upon investment in GRAIL by Samsung, which is subject to closing conditions. In August, we drew down our cash burn guidance for the full year 2025 to be no more than $310 million from no more than $320 million. Today, we are updating our cash burn guidance further to no more than $290 million for the full year of 2025, net of $13 million in placement fees from our recently completed financing. Expected full-year burn represents a significant decrease of approximately 50% compared to 2024 as we remain focused on cost management. We believe our cash runway extends into 2030, enabling us to achieve major planned clinical and regulatory milestones. I will hand it back to Robert Ragusa for concluding remarks. Robert P. Ragusa: Thanks, Aaron Freidin. Our strategic priorities are seeking FDA approval of Gallery and pursuing broad reimbursement. We are advancing Gallery in the near and midterm towards key clinical and regulatory catalysts to achieve broad access while maintaining our disciplined cost management. As we move into 2026, our key milestones are the completion of our modular PMA submission to the FDA and full clinical utility results from our 140,000 participant NHS Gallery study, which we expect to read out midyear. This longitudinal data set will be reviewed by the NHS to determine Gallery's potential deployment within the UK population. Lastly, we look forward to welcoming many of you on-site tomorrow at our centralized labs in Research Triangle Park, North Carolina. A live webcast of our analyst day will begin at 11 AM Eastern Time and will also be available at the Investor Relations section of our website. Let's now go to Q&A. Operator, please go ahead. Operator: Thank you. Operator: At this time, if you would like to ask a question, please click on the raise hand button, which can be found in the black bar at the bottom of your screen. You may remove yourself from the queue at any time by lowering your hand. When it is your turn, you will hear your name called and receive a prompt to unmute. As a reminder, we are allowing analysts one question and one related follow-up today. We will wait one moment to allow the queue to form. Our first question will come from Subhalaxmi T. Nambi with Guggenheim. Please go ahead. Hey, guys. Thank you for taking my question. Subhalaxmi T. Nambi: The FDA timeline is moved to Q1 instead of 2026. What changed? Robert P. Ragusa: Yes. Subhalaxmi T. Nambi, thanks for the question. I think, you know, the main thing is just as we move forward in time, you know, we have gotten more certainty in the range of when we would be able to deliver that. You know, so we have been saying first half for a fair amount of time, and it looks like, you know, things are on track well enough where we are more confident to be able to put out for the first quarter. So it is really just kind of tightening the confidence intervals around the time frame. Subhalaxmi T. Nambi: Perfect. And you are currently running a promotion on your website, offering $150 off of Gallery for getting tested from October to year-end. What incentivized you to offer this promotion? How has the demand elasticity in response to this promotion been? And are you piloting a reduction to $800 moving forward? Could this impact ASPs moving forward? Thank you for that. Robert P. Ragusa: Yeah. Maybe a couple of comments, and I will turn it over to Andrew John Partridge, our CCO. Yes. We have done, you know, a fair amount of work, you know, looking at the price elasticity on the test. And, you know, this is kind of a reflection of some of that work. We do know that there is, you know, significant price elasticity and going into the end of the year is a good time to exercise some of that. But maybe to answer some of the other pieces, Andrew John Partridge, do you want to take that? Andrew John Partridge: Yeah. Thanks, Robert Ragusa. As you saw, we have reduced the price on the website. The growth that we have seen in Q3 year over year has been predominantly driven by the provider channel. We have seen improvements in both breadth of prescribing, bringing new prescribers onto using Gallery, and also depth of prescribing. So, yeah, discounting has been a component of increasing that depth and breadth of prescribing. Also, the integrations we have done with companies like Quest and Athena have also driven a lot of that breadth and depth. And then finally, repeat testing, which price is also a component of that, has also driven that depth of prescribing as well. So we are very pleased with what we have seen in the market. Operator: Next question will come from Kyle Mikson with Canaccord. Kyle Mikson: Hey guys, thanks for the congrats on the progress. So you have obviously bolstered the balance sheet nicely. You should have over an additional $400 million by early 2026 with the Samsung investment. I was just curious how you plan to use the additional capital, and specifically, how does the commercial strategy change, especially in light of recent or upcoming competition? And I appreciate to hear Andrew John Partridge's thoughts on that as well. Thanks. Robert P. Ragusa: Yeah. So I think you hit some of it. You know, obviously, it gives us a lot more flexibility on the balance sheet. With competition emerging, it does give us more flexibility in how we think about flexing our commercial investments. So we are looking at those things as well as any of the other areas that we need to really fortify as we continue to scale and expand our test footprint on the marketplace. But, you know, I guess, Andrew John Partridge, do you want to also comment on that? Andrew John Partridge: Yeah. I think Robert Ragusa really covered it. Yeah. I think that I would emphasize is we feel like we have got a lot of momentum right now with customers for all of the reasons that I described. And definitely coming now off the back of the PATHFINDER II data that we presented at ESMO, there is a palpable momentum that we have in our business. Kyle Mikson: Got it. That is helpful, guys. Thanks. And also, Hims and Hers made an investment in the company recently. Consequently, there has been some speculation that means GRAIL is going to take a direct-to-consumer approach to Gallery at some point. So if you could just comment on those plans or the potential to take that route over time in light of the increasing focus on longevity among consumers. Robert P. Ragusa: Yeah. No. It is a good question. You know, we are, as we just reiterated our timeline for our PMA, we are very committed to the PMA pathway. And so there is no change in that. In fact, you saw a slight acceleration in the actual time frame. But beyond that, you know, we do also recognize that the digital health channel is an important channel out there, more broadly. In this sector as well as many others. And so we want to make sure that we are able to utilize all the channels that are available to bring, you know, we have talked from the very beginning about how do we get broad access for Gallery, and that would be one other element to enable broad access. But that also would not diminish our, again, our push towards a PMA and broad access through that. Operator: Your next question will come from Doug Schenkel with Wolfe Research. Doug Schenkel: Hi, good afternoon, and thank you for taking my questions. So I want to actually talk about NHS England a little bit more, and then I have a COGS-specific question. So starting on NHS England, you know, looking back to May 2024 when the statement was issued saying that early results were not compelling enough to justify a large-scale pilot. Were they referring to any clinical utility data from year one or to test level performance metrics such as PPV sensitivity and or specificity? Can you share a little bit more on what prompted that decision? And then on the same topic, has anyone besides GRAIL and the NHS evaluation team seen the year one NHS Gallery data? I am just curious if anyone else has seen it, and then if not, at what menu do you anticipate releasing that data more broadly? You know, keeping in mind that you have said the FDA module submission is expected to be, I think, completed in Q1. So it would seem like that data would need to be released soon. Robert P. Ragusa: Yeah. Harpal S. Kumar, do you want to take that one on? Harpal S. Kumar: Sure. Thank you, Doug Schenkel. So on NHS England's decision last year, it is important to reiterate that what they would have wanted to see in order to initiate a pilot at that stage was very exceptional data. They looked at a few specific metrics of which PPV was definitely one. To remind everyone, it is not possible to look at the sort of broad utility measure of stage three and four reduction with only one year of data. That has to come with three years of data. But PPV was certainly one, and you will have seen our announcement earlier this year that the PPV in that first round was substantially greater than we saw in our first PATHFINDER study. Which, to remind everyone, was 43%. So it gives you a sense of some of the information that was seen at the time. But, again, to reiterate, what the NHS would have wanted to see was truly exceptional data in order to accelerate. And the point is they were looking about an acceleration of an implementation rather than waiting until the final study results. What they said at the time was, it was not exceptional enough to accelerate that implementation and so that they wanted to wait for the final study results. In answer to your second question, no. Only the NHS evaluation team has seen that data so far. To the third question, yes, the data from the prevalent round only from the intervention arm will be part of our FDA PMA submission package in Q1 next year. But that does not mean it will be in the public domain at that point. There will not be any data in the public domain from NHS Gallery until we have the final study results. Robert P. Ragusa: Yeah. And we are expecting that full readout in 2026. Your next question is your final question and will come from Bradley Bowers with Mizuho. Bradley Bowers: Hey, thanks for getting me in here. One on volumes and then maybe one a little high level. But just on volumes, you know, pretty, you know, acceleration here outgrew some seasonality. Just wanted to hear, you know, kind of driving volumes here, what cohorts, and then, you know, how that how we should think about that into next year and, you know, if international will have a tangible contribution next year? Robert P. Ragusa: Yeah. Aaron Freidin, you maybe want to pick the volume question, and maybe dish off to Andrew John Partridge as well. Aaron Freidin: Yeah. I mean, again, I can tag team that. So, yeah, you are right. Like, volumes are up 39% for the quarter year over year. Andrew John Partridge has kind of touched on already we are seeing, you know, more provider pull through and so on for the reasons that he has stated. As far as international goes, there are very minimal international volumes today. You know, it is an area that we are focusing on. And as you see through the Samsung engagement and so on, that we are being opportunistic there, and we are excited about what could be. Today, it is probably a little too early right now to say what volumes will be next year. But, you know, we are getting, as Andrew John Partridge said earlier, momentum internationally and lost momentum domestically. So anything you want to add? Nothing else to add. I think we covered it. Bradley Bowers: Thanks. And then if I could just double click on the SIMPLIFY study, you know, I think that is an interesting data point, you know, that going back and following up patients who were previously identified as false positives. I mean, does this were these patients, I guess, that went under, you know, typical protocols? You know, why were these, you know, cancers, I guess, kind of missed in follow-up? And then also, you know, there are, I guess, some serious implications about, you know, the possibility to detect, you know, cancers even earlier than, you know, the current paradigm or, you know, what follow-up testing would be. So just wondering to hear your thoughts on that. Robert P. Ragusa: Yeah. Harpal S. Kumar, why do not you go through that? Harpal S. Kumar: Yeah. I mean, look. First of all, it is, as you say, a really interesting set of data, and it is relatively recent. So we are still examining some of the detailed information. I think one of the most significant points is that many of these patients are presenting with very nonspecific symptoms, and these are the types of symptoms that could be indicative of cancer, and often they are. But they could also be indicative of many other conditions. And so primary care physicians, when they see patients like this, and they suspect cancer, will typically refer them to where they think that cancer is likely to be in the body. But given these nonspecific symptoms, many of them could be several different sites. And so then what happens is a patient gets referred to a particular type of clinic, they get worked up in that clinic for that type of cancer. But if nothing is found at that point, they may not be worked up any further. And because this was an observational study, we did not provide the CSO prediction to the clinician at the time. But what we have subsequently determined from this further follow-up is had we done so, it would have provided a directional investigation in all but one of the patients, which we think is a really encouraging development in terms of that CSO prediction capability. Andrew John Partridge: Yeah. And I would just add to Harpal S. Kumar's point the value of the CSO. What we have also seen in centers that have adopted Gallery in the US is physician confidence growing in the value of that CSO. We have seen real-world publications from both Mayo and Dana Farber where their PPVs have been in excess of 70%. So that physician confidence in the value of the CSO really means they really work that diagnostic workup to a final resolution. And what we have seen there, therefore, there is more cancers being diagnosed due to that guided diagnostic follow-up from the CSO. Operator: We have time for one more question, so we will return to Doug Schenkel with Wolfe Research. You may unmute. Doug Schenkel: Okay. Thank you guys for taking me back in the queue. So I think it is an Aaron Freidin question. Cost of screening revenue, I think in dollar terms, it was down $3 million relative to Q2. That is kind of a mid-teens per decline. So sequentially on a per test basis. I think it was down 28% on a per test basis year over year. So just want to make sure at least I am in the right ballpark in doing the math. And, you know, if so, that is pretty impressive and remarkable. Can you just share how you are getting there and the durability and the trajectory from here? Thank you. Aaron Freidin: Good, Doug Schenkel, happy to hear. Oh, sorry. Jump up. Robert P. Ragusa: Yeah. And I was just saying, you know, Aaron Freidin talked a little bit about that in the prepared remarks. But, yeah, Aaron Freidin, why do not you go into a little more detail on that? Aaron Freidin: Yeah. I could really an example of what we have been saying for a year now about the platform that we have built for high throughput, the capacity that we have to run a million samples a year. And just what higher volumes will show from a fixed cost leverage perspective. Comparing year over year, you have also got the variable cost impact that we have been talking about. We have kind of talked about that as a four to five times more samples per flow cell compared to the older version. So it is really a demonstration of what more volume will do to our cost leverage and why we are really focused on driving more volume, getting more access out there because we have got the infrastructure to handle it, and the margins are there for the day. Operator: And there are no further questions at this time. I will now turn the call back to GRAIL for closing remarks. Robert P. Ragusa: Thank you, everyone, for joining today's call. Operator: Ladies and gentlemen, this concludes the call, and you may now disconnect.
Operator: Good evening. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Surf Air Mobility Third Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now pass the call over to Sam Levenson. Please go ahead. Sam Levenson: Thank you, operator, and good afternoon, everyone. Welcome to Surf Air Mobility's third quarter 2025 earnings call. I'm joined today by Deanna White, Chief Executive Officer, and Oliver W. Reeves, Chief Financial Officer. Our earnings release can be found on the SEC EDGAR website and on our Surf Air Mobility Investor Relations page at investors.surfair.com. During this call, we will discuss our outlook and expectations for future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate, or other similar statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of those risks have been set forth in our earnings release and in our periodic reports filed with the SEC. During today's call, we will present both GAAP and non-GAAP measures. Additional disclosures regarding non-GAAP measures, including a reconciliation of GAAP to non-GAAP measures, are included in the earnings release we issued today, posted on the Surf Air Mobility Investor Relations website and in our filings with the SEC. I'll now turn the call over to Surf Air Mobility's CEO, Deanna White. Deanna? Deanna White: Thank you, Sam, and thank you to everyone who has joined our call today. One year ago, we announced a four-phase transformation plan to reset the financial and operational trajectory of Surf Air Mobility. Each phase was designed as a building block to execute on our core mission, to build the air mobility platform that will transform flying. Our goal is to fly people using technology that generates long-term value for our shareholders. The plan was crafted to first strengthen the financial position of the company, then leverage our many strengths into catalysts for the adoption of software and electrification technology. Our transformation plan is proving to be reality, and not just theory. We are executing and demonstrating improvements in all areas of the business: financially, operationally, and strategically. Financially, over the past year, we have improved our capital structure and deleveraged our balance sheet through a series of debt and equity transactions. During the twelve months ended September 30, 2025, we secured a $50 million credit facility and raised $50 million of additional capital through equity issuances. Furthermore, we reduced our debt by $52 million through pay downs and conversions to equity. Subsequent to the end of the third quarter, we announced a pivotal $100 million strategic financing that will accelerate growth and further strengthen our balance sheet. This financing includes $26 million of new capital to drive development and commercialization of Surf OS. The remaining $74 million, structured as a zero-coupon convertible note, will be used to refinance debt, reducing cash interest expense and allowing for further deleveraging of the balance sheet. We will continue to look for opportunities to strengthen our balance sheet and unlock catalysts for our shareholders. Turning to our third quarter results, this quarter marks the seventh consecutive quarter that we have met or exceeded our revenue and adjusted EBITDA guidance. Third quarter revenue of $29.2 million exceeded the company's guidance of $27 million to $28.5 million and rose 6% sequentially versus the second quarter. Adjusted EBITDA loss of $9.9 million was within our guidance range, as the disciplined execution led by our experienced management team once again yielded expected results. With another quarter of improved financial results behind us, we have raised our 2025 revenue guidance to at least $105 million and remain on track for a full year of profitability in our airline operations. Operationally, we have transformed our commuter airline, consistently producing strong results which have translated into our second consecutive quarter of profitability in this business. I would like to recognize the achievements of the seasoned aviation team recruited at our systems operations center, which was relocated to Dallas, Texas, this past year. This team has created a high-functioning operation grounded in performance metrics that produces safe, reliable, and profitable results for the organization. Our operations position us to both become a preferred operator in new markets and to deploy new electrification technology coming to market in the near future. We produced exceptional sales results in our on-demand business for the third quarter, generating an approximate 40% increase in revenue compared to both the second quarter and the same quarter of the prior year. Our on-demand business is executing strongly against our key recalibration initiatives. Third quarter results benefited from a shift in the mix of flying from turboprop to jet aircraft and from domestic to international flights, which resulted in a 14% increase in revenue per flight. At the same time, we reduced expenses of the on-demand team by 36% since adopting Surf OS, generating higher revenues for less cost. Additionally, the team implemented profitability enhancements by securing inventory through volume purchase agreements with operators who are also users of Surf OS. Our on-demand business is well-positioned for profitable growth. Surf Air Mobility is at the epicenter of the air mobility market, not only as one of the largest commuter airlines in the country, having flown over 300,000 passengers in the past twelve months, but also as a result of our relationships with over 400 operators who serve our on-demand operations and who are ideal customers of the Surf OS platform in the future. The Part 135 industry is made up of small businesses with unsophisticated tech stacks and fragmented data. As an operator and broker, we have unique insight into the technology needs of this industry. Our exclusive partnership with Palantir allows us to leverage cutting-edge AI tools and best-in-class data management expertise to build an all-in-one AI-enabled software platform for this industry. During the third quarter, we entered a five-year agreement with Palantir that expanded our relationship to include exclusivity for products developed for charter brokers and operators. We obtained the ability to team with on solutions designed for enterprise customers, aircraft manufacturers, and the FAA. As part of the recent strategic transaction, we added resources from Palantir to further these efforts. In our Surf OS business, we continue to make substantial progress on driving efficiencies in our own operations by adding incremental functionality and expanding our applications. We have successfully implemented multiple applications within our operations and are already seeing significant improvements in efficiency and profitability. In our scheduled operations, we launched an aircraft and crew scheduling tool in our Northeast and Hawaii networks that required parallel testing and FAA approvals. We anticipate that the entire network will be live on this tool by the end of the year. Our Surf OS team also launched additional features within the mobile crew app that increased pre- and post-flight communications and reporting. Lastly, robust CRM functionality was built into Broker OS to streamline customer insights and promote sales efficiencies. During 2025, Surf OS has been in a beta test phase with eight users who have given us valuable insights. We have secured seven LOIs from brokers and operators extremely interested in purchasing Surf OS once we commercialize this product. In October, the company hosted a private event at NBAA, showcasing Surf OS and conducted 18 product demos for a select group of brokers, operators, aircraft manufacturers, and enterprise clients. We are extremely pleased with the progress made in the last year and expect to exit 2025 with strong momentum as we enter the strategic phases of our transformation plan next year. Strategically, Surf Air Mobility is well-positioned to continue optimizing its businesses and begin pursuit of the expansion and acceleration phases of our transformation plan. First, we will commercialize Surf OS and begin full deployment to third parties in 2026. With a recently announced financing, we have secured funding for the continued development and commercialization of Surf OS. Surf OS is AI-driven software powered by Palantir that organizes key stakeholder data into a single platform allowing actionable insights for a business. We intend to launch our three flagship Surf OS products in 2026: Broker OS, Operator OS, and Owner OS. Broker OS manages end-to-end sales and sourcing and will empower charter brokers to automate processes. Operator OS improves efficiencies and the utilization of planes, pilots, and airport staff. Owner OS delivers transparency and optimization to private aircraft owners to generate better returns on their aviation assets. These products can be integrated into customized solutions for enterprise clients. We intend to announce our commercialization plan with milestones in the coming months. Second, we are pursuing strategies to showcase new technology in our airline operations network and in new markets. We currently provide commuter service to approximately 200,000 interisland flyers annually within the state of Hawaii. The length of these flights, ranging from 25 to 75 miles, is the perfect testing ground for electrified aircraft coming online in the near future. We are working with aircraft manufacturers in the state of Hawaii to launch a pilot program within our existing network. Additionally, we intend to launch a Part 145 maintenance program to service existing and new technology aircraft and are scouting potential locations within our network to invest. The high-functioning system operation center we have built positions Surf Air Mobility to become a preferred operator for companies looking to adopt new aircraft technology in their business models. Billions of dollars are being invested across the aviation industry in the development of new technologies focused on smaller aircraft flying shorter distances. With over a decade of operating both scheduled and on-demand short-haul flights, we have flown millions of passengers millions of miles and work with hundreds of operators in this market. This uniquely positions us to deploy these new technologies across a variety of business models and partners. In the meantime, we will continue to add capacity to our network utilizing combustion engine caravans, of which we are taking four new deliveries in 2026. Our work on detailed launch plans continues for new routes we intend to unveil next year. Third, we intend to grow our on-demand business and expand the number of operators in our network through a series of strategic initiatives directed at profitable revenue growth. We will continue our efforts to secure a supply advantage through operator partnerships that provide volume pricing benefits. To achieve our revenue aspirations, we plan to grow our sales team by acquiring seasoned broker talent and book the business. Currently, our on-demand team is working towards the coveted Argus broker accreditation, which will equip our operations with a 100% operator vetting and strong compliance oversight. Lastly, let me update you on our electrification efforts. We have targeted securing a supplemental type certificate for the electrified powertrain in 2027. As such, we have been working with key organizations within the industry supply chain and are evaluating partnership opportunities where we no longer bear the full cost of development. In addition to being the largest passenger operator of such Grand Caravans, we have an exclusive agreement with Textron Aviation, the manufacturer of this aircraft, for us to be the exclusive supplier of electric and hybrid electric powertrains, and for Textron Aviation to provide global marketing, sales, and distribution for these electrified aircraft. As our progress toward this initiative continues, we look forward to updating you as things unfold. Surf Air Mobility has never been positioned as strongly as we are today, and we fully intend to leverage that strength to drive shareholder value over the coming years. With that, let me now turn the call over to Oliver W. Reeves to cover the recently announced strategic financing and our Q3 results and Q4 outlook in more detail. Oliver? Oliver W. Reeves: Thank you, Deanna. In my remarks today, I will address the company's third quarter results and outlook for the fourth quarter and full year. But first, let me share details on our continued efforts to strengthen our balance sheet and secure capital for our technology initiatives that we believe will create significant shareholder value. On November 10, 2025, Surf Air Mobility announced a $100 million strategic transaction that will continue to enable us to achieve our transformation plan. This transaction directs $26 million from new equity issuances specifically to the development and commercialization of Surf OS, shifting this initiative from its beta phase into its commercial phase. A new institutional investor and a Surf Air Mobility cofounder, together with a related party, each purchased $10 million of this offering, which includes common stock and two-year warrants exercisable at a purchase price of $3.32 per share. Finally, Palantir was issued $6 million of new common equity as prepayment for software and additional services. This capital will be used to fund the continued development of Surf OS' three flagship products, Broker OS, Operator OS, and Owner OS, and to enable the scaling of our engineering and sales capability. The proceeds will also be used to invest in the development of new modules and products to capture a larger share of the growing air mobility software market. In the coming months, we intend to publicly share more information about Surf OS products, the sizable and growing addressable market, our distribution and commercialization strategy, and the pricing and business models, which will set revenue expectations for 2026. Concurrently with the equity raise, Surf Air Mobility completed the sale of a $74 million convertible note, yielding net cash proceeds to the company of $65 million. The company will use a portion of these proceeds to pay $51 million due under the company's four-year credit agreement with affiliates of Convest Partners and $8 million outstanding under the company's secured convertible note with Partner for Growth SPY LP. In aggregate, repayment of these liabilities represents a reduction in cash interest expense of approximately $5.5 million on an annualized basis. Earlier in the quarter, a lender transferred $35 million of the outstanding principal under their convertible note to a third party under terms identical to the original note. The new holder of the note converted the entire balance, inclusive of accrued interest, into 7.2 million shares of the company's common stock. This resulted in the elimination of a $35 million liability and a reduction of $3.5 million in annualized cash interest expense. Finally, during the quarter, the company elected to pay down $8.2 million of the outstanding principal of the GEM mandatory convertible security. To summarize, we significantly reduced our liabilities in Q3 and have subsequently provided funding for the continued development and commercialization of Surf OS. As a result of the financing transaction, we now see a path for the company to be debt-free. Let me turn to the results of the third quarter and our outlook for the remainder of the year. As discussed in our earnings release, revenue from the quarter exceeded our guidance, and adjusted EBITDA met our guidance. Strong execution of our transformation plan has driven significant improvement in our key operating metrics in both our scheduled service and on-demand operations, yielding significant and sustainable improvements in financial results. Third quarter revenue of $29.2 million exceeded our guidance range of $27 million to $28.5 million and rose 6% sequentially over the second quarter, driven by a 42% increase in on-demand revenue partially offset by a 4% decrease in scheduled service revenue. On a year-over-year basis, revenue increased 3%, driven by a 40% increase in on-demand revenue partially offset by a 7% decrease in scheduled service revenue. The drivers of both sequential and year-over-year increases in revenue were primarily related to a shift in the mix to larger aircraft and international flights, which resulted in an increase in revenue per departure in our on-demand business, and the exiting of unprofitable routes offset by improved operational metrics in our scheduled service operation. Our adjusted EBITDA loss of $9.9 million for the third quarter was within our guidance range of a loss of $10 million to $8.5 million. Compared with the second quarter and the same quarter of the prior year, adjusted EBITDA loss was relatively flat. Adjusted EBITDA loss continues to benefit from improvements in key operating metrics, including on-time departure, on-time arrival, and controllable completion factor, demonstrating the permanency of our transformation strategies. Our airline operations achieved a second consecutive quarter of profitability, defined as positive adjusted EBITDA. Now let's discuss our outlook for the fourth quarter and full year. For the fourth quarter, we expect revenue to be within a range of $25.5 million to $27.5 million and adjusted EBITDA loss to be within a range of $6.5 million to $8 million. These ranges reflect the exit of unprofitable routes and continued efforts to improve profitability. For the full year, we are raising our revenue guidance to at least $105 million, and we are reaffirming our guidance for full-year airline operations profitability, defined as positive adjusted EBITDA. With that, let me turn the call back over to the operator for Q&A. Operator? Operator: At this time, I would like to remind everyone, in order to ask a question, press 1 on your telephone keypad. Your first question comes from the line of Amit Dayal with H.C. Wainwright. Your line is open. Amit Dayal: Thank you. Good afternoon, everyone. Congrats on all the progress. With this financing, what kind of cash runway do you have in terms of commercializing Surf OS? Deanna White: Hi, Amit, and thank you for your interest in being on the call. I'll turn that question over to Oliver, the CFO, to answer. Oliver W. Reeves: Hi, Amit. As you saw, there were really two uses for the financing. One is obviously the investment into Surf OS, and we believe that that will give us a runway of between eighteen and twenty-four months. Amit Dayal: Okay. That's good to hear. Thank you for that. You have some really interesting partnerships with Palantir and Beta Technologies. Can you talk a little bit about what is happening with those efforts, especially in the context of Beta Technologies, which just went public? How are you potentially working with that company to commercialize the Surf OS offering? Deanna White: We announced in the second quarter working with Elektra and that we had an Elektra aircraft order for their future CTOL. But obviously, there is a lot of really interesting electrification technology coming from folks like Beta, Archer, and Joby that are coming in the near future. As a company, we are well-positioned to be able to partner with all of these folks that are bringing on this new technology. Why is that? It's because we fly in the regional air mobility space, which these vehicles, because they're shorter haul distances, will be able to be perfect testing grounds for those. And we're also in our Surf OS product. We are developing the platform in which all of these types of products can play within our platform, whether they're in our network or if they're deployed in other operators' networks. They can be within our Surf OS commercial platform and be part of an ecosystem for all of these new products that are coming online in the very near future. Amit Dayal: Okay. Thank you for that. Apologies if I got the Beta Technologies thing wrong. From an operating perspective, as you are exiting some of these unprofitable routes, are there opportunities to lower operating costs over the next twelve to eighteen months? Deanna White: Absolutely, Amit. We are still optimizing our airline operations. We don't have all the capabilities of Surf OS fully capable in our operations. There are still more benefits to receive once we do have all of those tools in place. We have the ability to use the optimization, so we can still hit those really great operational metrics that we are today consistently. But in the future, using technology, we should be able to do it with more efficiency and more optimization, which would require, obviously, less resources and less cost in the system. So, we do plan and we do see the opportunity for increased levels of profitability and even operational performance in the future. Amit Dayal: Understood. I'll take my other questions offline. And again, congrats on all the execution. Deanna White: Thank you very much, Amit. Your next question comes from the line of Austin Moeller with Canaccord Genuity. Your line is open. Austin Moeller: Hi, good afternoon. Just my first question here. Are there any features of Surf OS that you plan to make exclusive for your on-demand or scheduled business, or will all of your beta testers have access to all of the features of the stack? Deanna White: Our intention is to have all the features available to third parties. We represent a great staging ground and testing ground because we have a unique ability to be both a broker and an operator. We bring insights into what is needed. So when you're working hand in hand with the tech team and Palantir, to bring insights into the product requirements, we're able to make an amazing state-of-the-art tool that we are using in our own space. And we want that product to be deployed to other folks in the space and bring those people into the commercial and the ecosystem that that software develops for the industry. Austin Moeller: And on the scheduled business, so revenue was a little lower year over year. How many more routes might you expect to remove from the business before adding some of the new tier-one routes? And where geographically are you looking to add the new routes? Deanna White: So we have a few more exits in the fourth quarter. That's why our outlook for the fourth quarter in revenue dropped a bit. But we will be at the end of it, and all of the exiting of the unprofitable routes will be complete by the end of this year. Unless, of course, one of those routes tries to hold us in longer before they can get the new carrier in. As far as the announcement of any specifics on the 2026 launch of a new route, we don't want to do that too soon to give away that competitive advantage or exactly where we're going. But the team is busy developing and has a full business plan on exactly how that will come to play. And, obviously, we've used a lot of really good data that we have on where the demand is. Where are people traveling? That we can take them out of their cars and put them into the air using our service, and we have used that to make our decisions and then down-select where we're gonna go. Austin Moeller: Great. Thanks for the insights there. Deanna White: Your next question comes from the line of David Joseph Storms with Stonegate. Your line is open. David Joseph Storms: Good evening, and thank you for taking my calls. I did want to start, Oliver. You had a comment in your prepared remarks that you see a path for the company to be debt-free. I was just hoping you could speak a little more to maybe some of the variables that you would see impacting that and a sense of a timeline there. Oliver W. Reeves: Well, as you see, the convertible was designed with features that would allow us to gradually delever our balance sheet. So we feel that over time, this is a much better path for us rather than facing high interest or high cash interest debt and then bullet payments. So we feel pretty good about that across the duration of the convert, which, as you see, has a maturity of October 31, 2028. So as that converts and as we succeed, hopefully, before then, we have a great path to becoming debt-free. David Joseph Storms: Understood. I appreciate that. And then I also did want to circle back to the comment around Surf OS, which commercialization, hopefully, within the next eighteen to twenty-four months. The logistics around that, would you expect some sort of soft launch in the twelve to eighteen-month range that would maybe start generating revenue? Or I guess maybe what are your thoughts around that as we get closer to getting Surf OS on its feet? Deanna White: Yeah. So thanks, David. We have a commercial plan. We'll unveil it in the coming months, but we do plan in 2026 to start generating revenue with that product, and we will have revenue guidance that we give out and further discussion of the business model and the commercialization plan for 2026 and beyond. But we are starting commercialization. We're out of the beta phase, and we're doing everything. And this recent financing that we got for the strategic transaction we just announced is the catalyst to be able to start a full commercialization. David Joseph Storms: Understood. That's great. And then one more for me, if I could. Just any commentary around the recent government shutdown. Has that impacted your business model in Q4 here? Deanna White: Yeah. So our company's business is impacted in two ways from the government shutdown. I'll speak to the first because it's most on top of people's minds. It's the traffic reductions that were recently announced by the FAA. None of those traffic reductions targeted us or any of our operations or any of the regional flying. They were more directed at larger hubs in the major airports. So we did not have any capacity reductions, and we continued on operating and carrying our customers without any disruptions. The second area that we can be impacted from is we do participate in the Essential Air Service Program. We do routes in the rural areas under that program. That program includes subsidies to the companies who operate those flights. The DOT did, during the shutdown period, notify those carriers and say that there would potentially be a suspension of those fundings. That has not happened, but even if it was, we would continue to operate until the government came back up. We want to support all the communities in our Essential Air Service program, and we are committed to doing that. Right now, the current letter from the DOT talks about a suspension starting November 18, but, hopefully, the government can get back in this week and not be affected by that at all. So those are the two areas that we would have been affected, and so far we haven't. We've gotten all our EIS subsidies that we have billed, and haven't had any flight cancellations. I will now hand the call back to Deanna White for further response. Deanna White: Hi, everyone. For the first time during this earnings release, we have launched a new retail investor Q&A forum called Say Media. So we had a number of investors who submitted, and I appreciate everyone who submitted questions to that. We selected a handful of the top ones that were voted on by the folks to address and answer. I'll start with the first one. Given the current market skepticism and volatility, what is your plan to gain investor confidence and prove Surf Air Mobility can execute its vision better than competitors? At Surf Air Mobility, we are hyper-focused on shareholder value. And we've come a very long way in the last year. Over a year ago, we launched the transformation plan. So that is the plan that we are executing on to make sure that we can gain investor confidence in our company. The plan over the last year, I have spoken of, has been very effective. We have hit all of our milestones. We have improved and stabilized our operations. We've done a lot of work to stabilize our balance sheet and address our capital structure. And with this recent announcement, we are allocating funds to the higher growth areas of Surf OS, and we have delivered on the development milestones within Surf OS for the last year. You see us proving and performing against that plan. As we've achieved our seventh consecutive quarter of meeting or exceeding our guidance, investors are noticing. In the last six months, we've seen ten times the amount of shareholders in stock, and it's been great to see that many people interested and investing in our company. The second question was, with all the volatility over valuations and pullback from investors in regards to AI, can we expect true and realistic numbers coming from your company? So I'll turn this question over to Sudhin Shahani, our cofounder, to address. Sudhin Shahani: Thank you, Deanna. As you commented on earlier, we're going to comment on the numbers for the software Surf OS business for 2026 later on. And our 2026 is our year to start commercializing. But I'm going to address a couple of key points around our approach and positioning in the AI space. What we're building is a vertical AI product. We're solving specific high-value problems for businesses, using domain-specific data in an industry we consider ourselves an expert. We're not investing in foundational models, and we have a capital-efficient approach here, building core applications and leveraging data infrastructure from Palantir. And I would make a point that there are clear examples of companies in the space providing business solutions and applying AI with high degrees of profitability in these situations. Our partner Palantir is actually a perfect example of that. Deanna White: Thank you, Sudhin. The next question is very pertinent because we are talking to you from the Hawthorne Airport, where we have our corporate headquarters for this call. There was a recent announcement last week that Archer Aviation announced their acquisition of the Hawthorne Airport. Considering the corporate headquarters is there, what changes do you expect to emerge from this? Are there plans to work with Archer considering they're also a Palantir partner? Interestingly enough, we have been talking and highlighting the underutilized and underinvested airports that exist throughout the country. There are 5,500 public-use airports just like Hawthorne that can be used for the future of aviation through advanced air mobility. So we've been ahead of the curve because we play in this space, and we've been talking about this for a while. Interestingly enough, the industry and the investment in the aviation industry are moving from investment in R&D with OEMs that are making these aircraft and starting to move into infrastructure investments. This is going to bring a massive investment cycle change because you've got to now go in and make all the investment to have all the infrastructure needed for all these vehicles that are coming in the near future. So it makes sense that a party and a player like Archer Aviation would purchase such a thing. As far as Hawthorne Airport, and as far as partnering with these types of players, we're someone who flies today in those spaces in the shorter haul miles. And we're developing a software platform for that industry. And so we'll likely work with many of these best-in-class next-generation manufacturers to help bring their vehicles into the ecosystem and to our customers. And our last question is, what would be the main goal of the company to achieve by 2026, so in the next year? We want to continue to deliver execution on our transformation plan. Our transformation plan has four phases. We're in the second phase, moving into the third phase. We will continue to demonstrate stable, permanent operational performance, improving and optimizing our business through the adoption of software and the technologies that we ourselves are developing. The big thing in the next year is going to be our commercial rollout of Surf OS that we have planned. And we have the funding for that with the recent strategic transaction that we announced earlier this week. So that concludes our Q&A. Thank you for tuning in, listening to us, and the continued support of our company. We look forward to talking to you in our next quarter or installation when we start talking more about 2026, and we're able to provide more insight into the commercial details and the plans we have for 2026. This concludes today's conference call. You may now disconnect.
Operator: Greetings, and welcome to the KORE Group Holdings, Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Vik Vijayvergiya, Vice President of Investor Relations and Corporate Development. Please go ahead. Vik Vijayvergiya: Thank you, operator. On today's call, we will refer to the third quarter 2025 earnings presentation which will be helpful to follow along with as well as the press release filed this afternoon that details the company's third quarter 2025 results. Both of these can be found on our Investor Relations page at ir.korewireless.com. Finally, a recording of the call will be available in the Investors section of the company's website later today. The company encourages you to review the safe harbor statements, risk factors and other disclaimers contained on this slide and today's press release as well as in the company's filings with the Securities and Exchange Commission, which identify specific risk factors that may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this webcast. The company also notes that it will be discussing non-GAAP financial information on this call. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results and the reconciliation tables provided in today's earnings release and presentation. I'll now turn the call over to Ron Totton, the company's President and Chief Executive Officer. Ronald Totton: Thank you, Vik, and good afternoon, everyone. For today's call, I'll provide an update on the company's business highlights for the third quarter and then turn the call over to Anthony Bellomo, the company's CFO, to go through the financial results. As we look at our results for the third quarter, we delivered steadily improving operating performance with solid growth and profitability, while revenue held steady. Our revenue for the quarter was $68.7 million. Notably, our connectivity revenue increased 1.7% over Q2 2025, our second consecutive quarter of strong connectivity sequential growth. Adjusted EBITDA rose by 12% or $1.5 million to $14.5 million from Q3 2024, as we stay focused on operational excellence and profitability. Net loss also improved by $6.7 million due to the improved adjusted EBITDA, along with the tax benefit from recently enacted U.S. legislation. Now let's turn to a critical measure of our financial health and operational discipline, our cash flow. In the third quarter, we generated $1.1 million in cash from operations while our free cash flow improved $1.1 million over the same period last year. The steady improvement in our free cash flow profile is a direct result of our disciplined execution and our commitment to building a resilient and profitable business. Our strategy is centered on our 5-pillar value creation plan, and this quarter's results demonstrate that plan in action. On Slide 7, you can see clear tangible proof points on how our focused execution is translating into progress across the entire business. At the heart of our strategy is profitable growth and this quarter, we delivered driving a 12% increase in adjusted EBITDA. This financial discipline is complemented by strong commercial momentum as we secured $11.3 million in new and expansion eARR and grew our total connections to over 20.5 million. This growth is fueled by our commitment to both product innovation and customer intimacy. This quarter, we launched KORE One, our unified customer platform and we completed a limited release of a new connectivity offering, providing proprietary automated switching and enhanced network resilience. With investments in our products, platform and infrastructure and with the launch of a new AI assistant KORE we've seen a greater than 50% reduction in support tickets while continuing to improve our customer E-score. It is this combination of superior products and deep partnership that differentiates us in the market and fuels our sales momentum. Underpinning all of this is our relentless drive for operational excellence powered by our winning team. We're becoming a leaner, more agile company by executing on our facility rationalization plan and aggressively deploying AI tools to boost productivity. Simultaneously, we are investing in our people, launching our internal AI evangelist program and new development tools to build a culture of accountability and continuous improvement. Now let's dive deeper into our KORE IoT Connectivity business on Slide 8. The foundational metric for our recurring revenue model is our connection base, which continued its strong, steady growth. This quarter, we grew our total connections by 9% year-over-year to surpass 20.5 million. This is a direct result of our ability to win new logos and expand our share of wallet with existing customers. Turning now to Slide 9, which illustrates our sales momentum in the forward-looking health of our business. We closed $11.3 million in new eARR this quarter. This is a direct result of our sales team's success in converting opportunities in the committed recurring revenue. This success is well balanced, coming from both winning new logos and expanding our relationship with existing customers and validates our land-and-expand strategy. And looking at our total pipeline, we closed at a healthy $80.3 million in eARR which, as a reminder, is purely connectivity-related opportunities. Our solid eARR closed one and healthy pipeline gives us strong visibility and a growing degree of confidence in our ability to deliver sustained, predictable revenue growth into the future. As we have done previously, here are just four examples from the quarter that showcase how we are winning in the marketplace, highlighting our unique value proposition. First, a major win in fleet management with a leading provider who needed true multi-carrier capabilities and superior economics with our Super SIM technology. But just as importantly, they chose us because we acted as a true strategic partner, building a strong, responsive relationship at both the executive and technical levels. Next, we secured an exciting innovator in the anti-theft space. For their solution to work, connectivity must be flawless. They chose our Super SIM for its resilience and reliability enabling them to remotely access devices for GPS tracking and video transmission across different networks. This is a mission-critical application where good enough connectivity simply isn't an option. Our third win highlights our leadership in the heavy regulated connected health space, a global health care leader selected KORE for their medical technologies initiative. They chose us for our deep expertise our proven compliance framework, including HIPAA and ISO certifications and our ability to provide a complete single vendor solution for hardware, logistics and global connectivity. Finally, I mentioned a win with a fast-growing AI-powered telematics company where they required high reliability for a video telematics and in-cabin sensing platform. While competitors offered lower cost, we demonstrated that the superior reliability, performance and long-term quality of our native SIM technology provided far greater value. They understood that for a mission-critical application, total cost of ownership and reliability are what truly matter. The common thread connecting these diverse wins is clear. These market leaders required more than just connectivity. They needed a global and strategic partner to solve complex IoT challenges at scale. Our ability to deliver resilient technology navigate highly regulated industries and provide a complete end-to-end service are our differentiators. This is why we continue to win marquee customers and it is the engine behind our sustained growth. And now I'll turn the call over to Anthony to cover the financials in more detail. Anthony Bellomo: Thanks, Ron, and thanks for those joining us this evening for our third quarter results. Total revenue for the third quarter was approximately flat year-over-year to $68.7 million. Breaking revenue down by business lines, IoT Connectivity revenue was flat at $56.7 million. Most notably, IoT Connectivity revenue showed sequential quarter-over-quarter growth of 1.7%, which followed the second quarter sequential growth of 3.2%. This sequential growth is a clear indication that our transformation is producing results. IoT Solutions revenue was down slightly to the prior year at $11.9 million, driven primarily by timing of orders from customers. Overall, non-GAAP gross margin in Q3 2025 was 55.2%, down 147 basis points from the same quarter of the prior year. By business line, IoT Connectivity non-GAAP gross margin was down to 59.6% from 60.9% and IoT Solutions non-GAAP gross margin was down to 34.3% from 37% due to revenue mix. Average revenue per user per month or ARPU for the current quarter was $0.94 compared to $1.01 in Q3 2024. The decrease in ARPU year-over-year was due to the recent additions to total connections coming from lower ARPU use cases. On a sequential basis, ARPU was unchanged from Q2 2025. Operating expenses in the third quarter were $42.2 million, a decrease of $1.7 million compared to Q3 2024 due to cost savings from restructuring actions taken over the last 12 months. Adjusted EBITDA in the third quarter was $14.5 million, an increase of $1.5 million or 12% compared to the prior year. The $1.5 million increase in adjusted EBITDA was primarily attributable to lower operating expenses as discussed. Net loss in the third quarter was $12.7 million compared to $19.4 million in the prior year. The decrease in our net loss was due to a tax recovery as the result of recent U.S. tax legislation as well as the same factors that drove the improvement in adjusted EBITDA as described above. Finally, moving to cash flows. Cash provided by operations in the third quarter was $1.1 million, approximately flat with the prior year period. Free cash flow, measured by cash provided by operations, less cash used in investing activities improved by $1.1 million to negative $1.1 million in Q3 2025 compared to the prior year quarter due to our lower level of capitalized expenditures. As of September 30, 2025, cash and restricted cash was $19.6 million. In closing, our solid third quarter performance is evidence that the company's transformation has begun to take hold. And with that, I'll pass it back to you, Ron. Ronald Totton: Thank you, Anthony. As you may know, we recently announced that KORE received a letter from two existing investors in the company, Searchlight Capital Partners and Abry Partners on behalf of each of their affiliated funds. The letter indicated an interest in entering discussions to acquire all of KORE's common stock, not already held by Searchlight and Abry. In addition, KORE's Board of Directors has formed a special committee to review, evaluate and negotiate a potential strategic transaction and any alternative. The potential range and timing of outcomes from the strategic review process, make it difficult to continue to provide an outlook that would meaningfully represent the range of expected outcomes. As a result, the company is suspending guidance for the remainder of fiscal year 2025. With that said, I want to emphasize we continue with business as usual with full attention on delivering innovation and service to our customers and working closely with our partners. I would like to express my deep appreciation and gratitude for our global KORE team. You've demonstrated an incredible focus on execution and innovation, not only by securing key wins but by doing so with a discipline that strengthens our entire business. I'm proud of the work you do every day to serve our customers and move our company forward. In closing, overall, we had a solid quarter. We improved our profitability, produced the second sequential quarter of strong connectivity revenue growth and continue to stay focused on managing operating expenses. Thank you, everyone, for joining today's earnings call. We look forward to updating you next quarter on our progress in the fourth quarter of 2025 and our full year results. Have a good evening. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time.
Operator: Welcome to the Firefly Aerospace Inc. third quarter 2025 Financial Results Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal remarks. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note this conference is being recorded. I will now turn the conference over to Michael Sheetz, Firefly Director of Investor Relations. Michael, you may begin. Michael Sheetz: Thank you, operator. Hello there. I'm Michael Sheetz, and welcome to Firefly Aerospace Inc.'s third quarter financial results call. I'm pleased to be joined on the call by CEO, Jason Kim, and CFO Darren Ma as we report for the period ending September 30, 2025. Today's call will include forward-looking statements including, but not limited to, statements the company will make about its future financial and operating performance, growth strategy, and market outlook. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause the actual results and trends to differ materially are set forth in the annual and quarterly reports filed with the SEC. Firefly Aerospace Inc. assumes no obligation to update any forward-looking statements which speak only as of their respective dates. Also, in this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the third quarter 2025 filing. Unless otherwise stated, financial information referred in this call will be non-GAAP. Our earnings press release, SEC filings, and a replay of today's call can be found on our Investor Relations website at investors.fireflyspace.com. Now I'll turn the call over to Jason. Jason Kim: Thank you, Michael, and welcome to our third quarter 2025 earnings call. As yesterday was Veterans Day, I want to kick off today's call by thanking our country's service members for their dedication, courage, and sacrifices in serving our nation. Ensuring we remain the home of the free in the land of the brave, Firefly Aerospace Inc. proudly employs many veterans like myself. And we are honored to continue to serve as we work critical national security missions supporting our warfighters. Firefly Aerospace Inc. is a space and defense company delivering innovative hardware and software to perform the hardest missions in space for national security, exploration, and commercial technology. Built to keep America as the leader in space while inspiring the world. Our hardware is represented by four revenue-generating products: our small lift Alpha rocket, medium lift Eclipse rocket, Blue Ghost lunar lander, and Electra satellite orbiter. These hardware products have a robust backlog of $1.3 billion at the end of quarter three. Our software offerings come through our recent strategic acquisition of SciTech. These capabilities include AI-enabled defense software proven in operations, including missile warning and defense, intelligence surveillance and reconnaissance, space domain awareness, remote sensing and analysis, and autonomous command and control to support diverse spacecraft missions. Firefly Aerospace Inc.'s product suite is strategically tailored to support the growing opportunities in space. Every day, there are new industry tailwinds for the space sector: artificial intelligence development, data center expansion, and an intensifying focus on the strategic and economic benefits of the moon. In addition, we have seen a major shift on defense funding and priorities supporting Golden Dome, with $175 billion planned for the program over three years. We are positioned to meet the call from the secretary of war in his arsenal of freedom address, where he demanded commercial speed and scale, similar to what we delivered on the US Space Force with the 24-hour turnaround Victus Knox launch, as well as our landing on the moon earlier this year at a fraction of the time and cost of previous missions. Before I get into our third quarter business updates, I will provide an update on the status of one of our multiple product lines, Alpha. A few weeks ago, an event during a ground test firing at our facility in Texas led to the loss of the Alpha first stage booster that we were preparing for flight seven. Following a thorough review, Firefly Aerospace Inc. identified a process error during stage one integration that resulted in a minute hydrocarbon contamination which then led to a combustion event in one of the engines during the ground tests. Proper safety protocols were followed, and all personnel were safe. The test stand structure remained fully intact, and no other facilities were impacted. We immediately took actions and implemented corrective measures, including a production stand down day. As this was not a design issue, those corrections included increasing inspection requirements for the fluid systems, optimizing the first stage sensors, and incorporating additional automated awards for testing. We also implemented key process improvements following the stand down day, where the production, integration, and test teams conducted exercises to review and optimize existing procedures. As part of Firefly Aerospace Inc.'s effort to improve reliability and quality, the team will continue to hold regular exercises for sustained process enhancements. Flight seven will now utilize the next Alpha first stage booster from our production line, which is currently undergoing final preparations for shipment to our launch site in Vandenberg. Prior to the event, we had already tested the second stage and fairing and delivered them to the launch site. As part of Firefly Aerospace Inc.'s test campaign ahead of each launch, the team will then conduct a static fire test at our launch pad prior to flight seven launch. Our flight seven launch is targeted between late fourth quarter to early first quarter, depending on range availability. Firefly Aerospace Inc. will have more details to share on the technology demo mission in the coming weeks, and I have full confidence in our vehicle's design, as well as our passionate and dedicated Alpha team to return to flight safely. Additionally, we're concurrently upgrading the Alpha stage test stand at our Briggs facility. These previously planned upgrades are expected to be complete in the next few months. Another key update since the end of the third quarter is that Firefly Aerospace Inc. closed the acquisition of SciTech, in line with our strategic growth plan. SciTech is an exceptional company with more than four decades of operational excellence, bringing game-changing proven software applications and big data processing elements that bolster Firefly Aerospace Inc.'s proven hardware elements. As an analogy, Firefly Aerospace Inc. builds the hardware smartphone such as our launch vehicles and spacecraft, SciTech develops the software apps such as mission autonomy, targeting, and sensor intelligence. Together, we expand from hardware-centric programs into long-term software-enabled revenue. SciTech has operational defense software and big data processing. Their infrastructure is state of the art with classified facilities and of the Department of War, Intelligence Community, and commercial customers. SciTech is differentiated from other defense software companies through its industry-leading multi-phenomenology expertise. Are closely linked with spacecraft and constellations. Together with SciTech, Firefly Aerospace Inc. will be able to provide the Golden Dome program with comprehensive end-to-end capabilities. There are three major elements of Golden Dome that we are pursuing. We can fly and deliver space-based interceptors utilizing our spacecraft, launch surrogate targets and hypersonic tests with our Alpha rocket, as well as integrate data processing from a network of sensors to perform fire control with SciTech ground processing. This closes the fire control loop with an integrated network of interceptors, essentially filling the missing link for the air and missile defense shield for the US homeland. Firefly Aerospace Inc.'s workforce following the SciTech acquisition stands at over 1,300 strong, SciTech's highly technical employees are made up largely of PhDs software developers, 90% of whom have security clearances. Now turning to our business updates. In the third quarter, we completed important program milestones across each of our revenue-generating product lines. Let's start with spacecraft. As the only company to have successfully landed and completed a NASA commercial lunar payload services mission, we were honored to have the agency award us with back-to-back contracts worth $177 million to fly Blue Ghost mission four. Targeting a 2029 launch, this mission will see Blue Ghost deliver five NASA payloads to the moon's South Pole supporting our annual lunar flight cadence. On this mission, Blue Ghost will enable NASA to evaluate the moon's south pole resources, such as hydrogen and water, as well as study the radiation and thermal environment. The moon's south pole is a strategic priority for our nation, as we anticipate a high density of resources that supports the growth of the lunar ecosystem. Another opportunity we are able to provide to our was collecting additional data above contractual requirements during our first mission. In September, NASA awarded us a $10 million contract addendum for Blue Ghost mission one for the acquisition of additional lunar data collected. This stands as a historic lunar economic milestone as it represents the start of monetizing valuable data of the moon to support more science and exploration the understanding of the geographic features of the moon's surface, and to support future human mobility, mining, and infrastructure initiatives. Of note, we continue to pursue additional sales opportunities beyond NASA for our Blue Ghost mission one lunar data. We're in discussions with multiple commercial and international organizations about how the information gathered by Blue Ghost Mission One can benefit future missions, such as how we successfully landed and maintain operations through extreme temperature ranges on the moon. The Blue Ghost data cell also serves as validation for our Ocula commercial imaging and mapping service model, we are debuting with our Blue Ghost mission two. Hosted by an Electra orbiter, Ocula will continue to provide even higher resolution imagery videos, and multispectral phenomenology data that can support NASA, the commercial lunar industry, international entities, and the US Space Force missions on and around the moon. Blue Ghost mission two, targeted to launch next year, is well underway. We built and fit checked the structural qualification models that will support our second mission, as well as performed initial systems level qualification testing on-site in Texas, before delivering to the Jet Propulsion Laboratory in Pasadena, California where further testing is underway. This pioneering multi-mission effort will land on the far side of the moon, which will be a first for a US lunar lander and then perform the NASA Lucy Knight Science Mission to sense radio frequency signals traveling over millions of years that could help unlock answers about our universe. In addition, our lander will deploy the Rashid rover two for The United Arab Emirates Mohammed bin Rashid Space Center. The full stack will also include an electric transfer vehicle, that will deploy the lander as well as a European Space Agency lunar pathfinder satellite. We are excited about the nation, congress, and world's growing focus on the moon. We anticipate the next NASA administrator to further reinforce this leveraging transformative commercial technologies and increasing both the magnitude and frequency of high return on investment programs like that of the commercial lunar payload services program. Moving to Electra, our Mission One team conducted simulation testing in preparation for the spacecraft to ship out for launch. This rigorous testing campaign saw our team perform more than two hundred hours of rehearsals simulating dozens of orbits around the Earth. Back in our hive spacecraft clean room, assembly is underway of our Electra Mission two spacecraft, which will support Blue Ghost Mission two as mentioned earlier. And Electra mission three completed its preliminary design review, maturing the vehicle's high maneuverability design as we prepare for the defense innovation units high priority national security space domain awareness demonstration mission in 2027. And reduce risk for future space domain awareness programs of record. In addition, our SciTech team can enhance the mission with its over four decades of classified data processing and mission operations experience. Additionally, Electra is increasingly supporting more NASA initiatives. We partnered with Advanced Space to support NASA's LunaNet communications relay service. We're developing a mission framework that utilizes our electric vehicle as transfer stage for the relay network. Similar to how we will use Electra on Blue Ghost missions. NASA also awarded an Electra study contract to demonstrate how to meet the need for multi spacecraft and multi orbit delivery to difficult to reach orbits beyond current launch service offerings, highlighting the multi-mission capability of Electra. Shifting to the launch side of our business, we signed an IDIQ and task order for a hyper test mission on Alpha with a confidential customer. We're proud to have Alpha support these critical national security missions which further diversifies Alpha customer base and we look forward to sharing more information when possible. We also signed an agreement with SpaceCatan to study launching Alpha from the Haikaido Spaceport in Japan. Addition to work underway at our coming launch sites in Virginia and Sweden. This potential launch site in Northern Japan offers strategic orbital access advantages provides resiliency in launch pads, and would allow us to tap into the large satellite industry in Asia. While also supporting US allies in the region. Development of Eclipse, our medium lift reusable rocket continued to progress in the third quarter. The build of all first flight Miranda engines is underway. The first Vera development engine, powers the upper stage of Eclipse, has completed the majority of design reviews, clearing the way for manufacturing to begin build. We're on track to begin VERA hot fire testing in the first half of next year. And we've begun final assembly of the launch site hold down release adapter ahead of a fit check with the first flight engine bay. I am so proud of our Fireflies and the Cytecors who are now part of our team. They achieved historical milestones, proven to deliver operational systems, and continue to do the boldest missions in space. And we are just getting started. We are focused on executing our strategic growth plan fostering a culture of safety, quality, reliability, and innovation. We are enhancing our products and with our dedicated and passionate Firefly Aerospace Inc. team, we collaborate with our partners in achieving new category defining missions in space. To help protect, connect, and explore. With that business summary, I'll turn it over to Darren for a review of the third quarter financials. Darren Ma: Thank you, Jason, and good afternoon, everyone. In today's call, I'm going to review the SciTech acquisition, which recently closed, discuss our third quarter financial results, and provide our revenue outlook for the remainder of 2025. I would like to thank the teams from both Firefly Aerospace Inc. and SciTech for the incredible dedication and laser focus on completing this transaction in just a month after announcing the proposed deal. As we noted at the time of the transaction announcement on October 5, the purchase price of approximately $855 million included a combination of $300 million in cash, 11.1 million shares of our common stock at $50 per share. Recently, we upsized our revolving credit facility to $260 million from $125 million. For the cash portion, we used $40 million from our cash balances with the remaining amount coming from our recently upsized revolving credit facility. After careful analysis, we concluded increasing our revolver and minimizing cash usage was the most prudent way to maintain our fortress-like balance sheet that we will leverage to drive our growth objectives. Before reviewing our third quarter performance, I want to reemphasize that operational metrics drive Firefly Aerospace Inc.'s financial performance. Key operational metrics include the number of launches and execution on program milestones across both our spacecraft solutions and launch businesses. Specifically, in our spacecraft solutions business, which will include SciTech going forward, we recognize revenue as a percentage of completion under each contract. For the launch business, we focus on the number of launches, Revenue for our operational Alpha vehicle is recognized at a point in time when the launch occurs. For Eclipse, while in development, we recognize revenue as a percentage of completion based on program milestones as part of the Northrop Grumman partnership. Once the Eclipse vehicle is operational, we will recognize revenue as launches occur. Now turning to our third quarter results. Revenue was $30.8 million. This compares with $15.5 million in the second quarter and $22.4 million in the same quarter a year ago. Within our total revenue, spacecraft solutions was $21.4 million, and launch was $9.4 million. The sequential increase was primarily driven by the Blue Ghost Mission one data sale to NASA. Progress on Blue Ghost mission two development and the ramp of Electra mission three for the defense innovation unit. We ended the third quarter with a total backlog of approximately $1.3 billion. This was up from $1.1 billion at the end of the second quarter. Driven by the NASA CLIPS contract award Jason referenced earlier. Backlog is one of the key metrics we monitor and is a leading indicator of our future revenue performance. Third quarter gross margin was 27.6%. This compares with 25.7% in the prior quarter and 34.7% in the same quarter a year ago. GAAP operating expenses for the third quarter were $70.7 million compared with $58.3 million in the second quarter and $42 million in the same quarter a year ago. The changes were primarily driven by an increase in launch material expenses costs associated with becoming a public company, and one-time expenses, including those related to the IPO, and acquisition-related transactions. For operating expenses, the primary differences between GAAP and non-GAAP are stock-based compensation expense, and one-time expenses. Non-GAAP operating expenses for the third quarter were $61.3 million compared with $55.8 million in the second quarter and $39.7 million in the same quarter a year ago. The changes were driven by the same factors as I noted in the GAAP operating expense comments. GAAP operating loss was $62.2 million compared with a loss of $54.4 million in the second quarter and a loss of $34.2 million in the third quarter a year ago. Non-GAAP operating loss was $52.8 million compared with a loss of $51.8 million in the second quarter and a loss of $31.9 million in the third quarter a year ago. Our GAAP net loss in Q3 was $133.4 million. This compares with a loss of $63.8 million in the prior quarter and $40.8 million in the same quarter a year ago. The sequential difference was due primarily to a change in warrant liability, and a payoff of an existing term loan following the IPO. Our non-GAAP net loss was $51.4 million. This compares with a loss of $57.1 million in the prior quarter and $38.2 million in the same quarter a year ago. GAAP basic and diluted net loss per share was a loss of $1.50. Based on a weighted average share count of 93.8 million. Non-GAAP basic and diluted net loss per share was a loss of $0.55 based on a weighted average share count of 93.8 million. For some additional granularity on EPS and share count, as a reminder, our IPO date was August 7. If you took into account a full normalized quarter as a public company, assuming that the IPO and its related transactions, including the repayment of our term loan facility, occurred prior to the beginning of the third quarter. The basic undiluted non-GAAP net loss per share would have been a loss of $0.33. Based on a weighted average share count of 147.7 million. Adjusted EBITDA in the third quarter was negative $46.3 million compared with negative $47.9 million in the second quarter and negative $28 million in the third quarter a year ago. Turning to our balance sheet. As of September 30, our cash and cash equivalents and restricted cash was approximately $996 million. Firefly Aerospace Inc.'s fortified balance sheet positions us to scale our market-leading products and fuel strategic growth in the years ahead. Capital expenditures in the third quarter were $8.9 million compared with $9.2 million in the second quarter and $8.2 million in 2024. Free cash flow was negative $62 million compared with negative $37.3 million in the second quarter and negative $44.8 million in 2024. The increase in negative free cash flow is primarily driven by Blue Ghost's mission launch prepayments and investments in Eclipse development. With the government shutdown, we are assessing what lingering impact that the closure will have on our financial results. During the closure, there was a pause of many government programs that resulted in delays with some contract receivable payment dates, and customer milestone reviews. As of now, we don't have clarity when the government's normal operations will ramp and payments that were on hold will be made. Now moving to our outlook. We currently expect full year 2025 revenue will be in the range of $150 million to $158 million, which is an increase from the $133 million to $145 million range we previously provided. And for clarification, with the SciTech close date of October 31 and shares associated with the transaction, we expect our basic and diluted weighted average shares outstanding for Q4 to be between 155 million and 157 million shares. I would like to thank everyone for their interest in Firefly Aerospace Inc. I'll now turn the call back to Jason for his closing remarks. Jason Kim: Thank you, Darren. Since the end of the third quarter, Firefly Aerospace Inc. has been pushing forward with additional progress on several items. Recently, we took delivery of Rashid Rover two, which as noted earlier, is a payload we're flying on Blue Ghost mission two. The UAE MBRSC team has been a pleasure to work with and payload delivery was very smooth as a testament to their team's impeccable knowledge and dedication to space and the moon. We are honored to be supporting MBRSC further strengthening US relations with The UAE. Our Blue Ghost Mission three team completed the preliminary design review. As the mission progresses towards its launch for NASA targeted for 2028. As a reminder, Blue Ghost mission three will utilize Firefly Aerospace Inc.'s Blue Ghost lander, an Electra orbiter and a rover from Blue Origin Honeybee to investigate the unique composition of the Grutheissen domes. A part of the moon that has never been explored before. Blue Ghost mission three will deploy the rover and operate six NASA sponsored payloads for more than fourteen days on the lunar surface. And I'd be remiss if I didn't mention that time named Blue Ghost Mission one to its list of the best inventions of 2025. With Firefly Aerospace Inc. spacecraft program director Ray Ellensworth, also named among the world's rising stars on the TIME 100 next list. The planets are aligned with the White House, Pentagon, and NASA demanding speed and scale through transformational change. Leveraging commercial innovation, and investments into technology and production systems. We're delivering on those demands. We've mapped our return to flight path for Alpha Flight seven added alpha contracts via the hypersonic task order, and are expanding our plans. For multiple resilient launch sites. We are pursuing the $175 billion Golden Dome program on multiple fronts. And are clearing operational milestones. Across our product lines. These are exciting times at Firefly Aerospace Inc., as we execute our strategic growth plans and create new categories in space that support our customers and inspires the world. That concludes our prepared remarks. I'll turn it back over to Michael. Michael Sheetz: Thank you, Jason. Operator, we're ready to take questions. Operator: Thank you so much. And as a reminder, to ask a question, press 11 and wait for your name to be announced. To remove yourself, press 11 again. Moment for our first question. And it's from Sheila Kahyaoglu with Jefferies. Please proceed. Sheila Kahyaoglu: Good afternoon, guys, and thank you. Maybe just on visibility into launch seven timing now. How do you think about how that impacts 2026 Alpha launches? Does that put pressure on the rest of the manifest? Or do we think about launch date still a good target timing? Jason Kim: Yeah. Sheila, thank you for that question. This is Jason. So we're targeting in between late fourth quarter and beginning of, early first quarter for our Flight seven launch. We'll get a lot of you know, post flight data from that. But you know, we are still assessing, 2026. And you know, our plans are we get a good flight up get the post data, and continue production. As you know, we have a production line going. So that's how we were able to take the next stage one booster and apply it to our flight seven. So we're just continuing to make progress on production. Sheila Kahyaoglu: Got it. And then maybe if I could ask on I know it's only been a few days since you closed SciTech. So how are you just thinking about gonna next quarter or going into year end moving forward on the integration and the road map there? And just potential revenue synergies. Jason Kim: Yes. Sheila. The integration with SciTech is going very smoothly. We've done a lot of work with our finance and accounting and our human resources and IT and the list goes on and on, especially in engineering. One of the strategic values of the SciTech acquisition was it bolsters our national security pursuits. $175 billion Golden Dome program. And in addition, when we look at M&A, we're looking at strategic fit. We're looking at culture fit. Financials as well, but also synergies. And in the engineering department, there are a lot of synergies with software. Our hardware is defined by the software that goes into it. And so SciTech best practices and software developers the classified software developers, will help bolster capabilities that we already build today. So there's a lot of synergies there. And in addition, SciTech has a lot of capabilities that they could leverage Firefly Aerospace Inc. as well for their programs in particular. There's a lot of you know, forge work that they're doing, a lot of command and control work that they're doing, a lot of autonomy that they're doing, and there's a lot of synergies with what we're doing with our Electra spacecraft in terms of space domain awareness, missile warning, missile tracking, and autonomy that we could synergize with SciTech. Sheila Kahyaoglu: Got it. Thank you. Operator: Thank you. One moment for our next question. That comes from Seth Seifman with JPMorgan. Please proceed. Seth Seifman: Thanks very much, and good afternoon. Wanted to follow-up on SciTech. Know, if how should we think about the growth rate in that business versus know, the the LTM revenue that that you've reported? And and then well, let's just start with that one and then I have a follow-up as well. Darren Ma: Yeah. Hey, Seth. This is Darren. We haven't broken outside tech separately. We've rolled it in and factor in. So our our 2025 number. So, I mean, when you look at 2026, you know, that's obviously dependent on a number of factors. Number of Alpha launches. Have an know, we're making great progress on the clip side. While generating revenue on the development. And on the spacecraft side, we've got know, Blue Ghost missions two, three, and four ramping and fall in parallel as well as Electra missions. Seth Seifman: Right. Okay. Okay. And and for okay. And and so SciTech not not really much color at this point about how that I I think it was one sixty something in the slides for the the LTM revenue. Darren Ma: Yeah. We we've included obviously, I mean, right now, there's some moving parts, but we've included in two months of that into our 2025 revenue guidance. Seth Seifman: Right. Okay. And I guess, when we think about just more conceptually about how this fits into the business, SciTech can provide, and you talked about the analogy with the iPhone and and the apps and having it go into your hardware. Is is the is the intention for this to be something that's exclusively or very much, having the resources dedicated to your hardware or, you know, to the extent there's other hardware involved in in Golden Dome. That you would be pursuing the ability to have SciTech, you know, apps or or you know, SciTech involved in supporting the hardware that's made by others. Jason Kim: Yes, Seth. This is Jason. Thank you for that question. SciTech will be operated as a Firefly Aerospace Inc. subsidiary. And they'll operate under its current business model. So Jim Luszowski is the CEO. So I think he'll report into me directly. We did that for deliberately so that SciTech could continue to provide their best in class capabilities for all their government customers, but also their commercial customers. There's a number of prime contractors that they support with both ground processing and software analytics but in addition, also onboard processing, edge processing as well with the algorithms. And so we want them to continue that growing business, but where there are synergies is, you know, we build our own spacecraft as well, our lunar landers and our Electra orbiters, and so we will be able to leverage their software developers and their best practices and their algorithms to put onboard our spacecraft as well in addition to who they already support. In addition, they also do a lot in ground command and control and ground processing. And that's something that today could help some of our programs that we have. For national security in that they can provide classified mission operation centers as well as classified processing. In terms of Golden Dome, what they add to our offering is know, as you know, Firefly Aerospace Inc. offers our Alpha responsive launch capability to launch targets as well as hypersonic test vehicles. We also have our Electra spacecraft that can serve and is well positioned for the maneuverability requirements for a space-based interceptor capability. But SciTech has the ground processing and fire control element. That is also required by the Golden Dome program. And that's something that gives us you know, multiple shots of the goal for Golden Dome. Seth Seifman: Excellent. Thanks. Thanks very much. Operator: Thank you. Our next question comes from Edison Yu with Deutsche Bank. Edison Yu: Hey, thank you for taking our questions. Wanted to ask about the international opportunity. You cited the Alpha Partnership, and in Japan. What kind of volume do you think of launches is maybe up or grab outside The US? Jason Kim: The short answer is we want to continue building on the relationship with Japan and others in that region. As we build up relationships you know, we'll give more firm numbers in terms of the total available market. But what I would say is in the past, I've heard that Japan has $6 billion for applying to space. So that's a very large market, and they are also looking at their own Space Force that they stood up in the past couple years. So we envision that they'll need the same things that The US and other allies will need. Things like responsive launch, things like know, SciTech ground processing and software. Also things like a constellation launch with Eclipse, and furthermore, orbiters, such as Electra. We're working with, not only Japan, but the European Space Agency. We've been in discussions with The UAE, as mentioned before, and the RSC. So it goes beyond just you know, Alpha launches. It includes all of our product lines. And you know, the success and progress we've had with expansion into other launch sites. That gives us more resiliency of launch and more opportunities to have launch cadence launching from more destinations. Such as Wallops and Sweden, gives us a lot of good experience to support this study with SpaceGatan. Edison Yu: Understood. And then separate topic. On on I wanna follow-up on the SciTech question earlier. Can you disclose any sort of maybe backlog numbers or pipeline numbers around that business? And and I don't know. Kind of not not trying to give out a growth rate, but you would expect this to to grow right. Jason Kim: Going forward in the next couple years. Yeah. Absolutely, Edison. So I give you a little bit more color there in terms of SciTech. SciTech backlog is roughly $170 million, so that'll be additive to the $1.3 billion that we exited Q3 with. Edison Yu: Great. Thank you. Operator: Thank you so much. And as a reminder, if you do have a question, simply press 11 to get in the queue. Our next question is from Kristine Liwag with Morgan Stanley. Please proceed. Kristine Liwag: Hey, good afternoon, everyone. I just wanted to follow-up regarding SciTech on the guidance. You guys highlighted last twelve months, revenue for SciTech is $164 million. You know, if we if we kinda look at that on a monthly basis, that implies $14 million of revenue per month, and it looks like you're gonna own this thing for about two months. So presumably, you know, that's $28 million of potential SciTech revenue in 2025, but you only raised the mid of your guidance by $15 million. Can you talk us through what the moving pieces here are of the changes? Darren Ma: Yeah. Hey, Kristine. So just give you a little bit more color there. Yeah, it includes the our guide includes the two months of SciTech. Not all the SciTech revenue is all linear. So that's one part of it. There's some obviously, some, obviously, some moving pieces there. We've also included in in our revenue guide, and it the updated Alpha schedule as well. So it includes, again, the two month of SciTech and our updated Alpha schedule. So that at at that point, you know, we've raised our we've raised our guide to where it is, the $150 to $158 million. Kristine Liwag: Great. Super helpful. And then, also, you know, just looking back regarding your your launch success, you know, the launch six, you know, was a failure, and then this most recent ground test testing, the anomalous event also was a failure. So when you look at the repeatability of your capability, you walk us through what you're changing in your operational structure to make sure that the subsequent launches here would be successful. Are there changes that you're implementing, and how should we think about your path towards a repeatable, successful launch? Jason Kim: Yeah. Thank you for that question. Yeah. Following the test event, you know, we immediately took action and put implemented corrective actions. Which I mentioned before is includes increasing the inspection requirements for the fluid systems. Optimizing some first stage sensors, and also incorporating additional automated reports. We also had a day-long quality stand down with production integration and test teams. We implemented key process improvements. We conducted a number of exercises to review and optimize our existing procedures. And we're gonna continue to enhance our reliability quality culture. The team's gonna continue to hold regular exercises. For these sustained process enhancements. I will say that safety and quality has been a major focus for me this past year at Firefly Aerospace Inc. After the test event, the team immediately started the root cause analysis. And when initial findings showed the process errors, that's when I immediately requested a full stand down. Of stand down production integration and quality test team, stand down day, required all of the executive leaders also to attend. And this was our moment to utilize industry best practices and reset, refocus, and return us to flight. Kristine Liwag: And do these events with Alpha change the timeline with Eclipse at all? Jason Kim: The short answer is no. We have different flows for Eclipse. In terms of the the test stands, both the structural testing and the engine testing. There are some subject matter experts we have at the company that are supporting Alpha but that's for a limited period of time. We are also staffing up on the Eclipse program per our program plan. And so you know, this should not Alpha should not affect our Eclipse production. I will also say that of the benefits of our common commonality in our product lines is that every time we reduce risk or learn best practices on any one of our product lines. It also benefits the other programs. In terms of carbon composites and tap off cycle engines and test procedures as well. Kristine Liwag: Thank you very much. Operator: Our next question is from Sujeeva De Silva with ROTH Capital. Please proceed. Sujeeva De Silva: Hi, Jason, Darren. My first question is on Golden Dome. Could Can you please go through some of the details of how Firefly Aerospace Inc. perhaps would SciTech would have opportunity here so we can kinda think about what may be coming, as that program starts up. Have, have have, offerings. Jason Kim: Yeah. Thanks, Sujeeva. This is Jason. I think the plan is aligned. As I mentioned, in the call, the White House, the Pentagon, they have strong initiatives for reform for speed and scale and affordability. You've heard that on the Golden Dome program under general Gute Line. You've also heard it from secretary of War Hegseth and others. You know, it's things like the first is only twenty four hour Space Force Victus Knox mission. That they want more of, and we have more of those kinda missions coming as well. Know, they want more OTAs more CSOs. They wanna look at commercial technology first as a default. And so they're very focused on interoperability, speed, scale, strengthening competition in the industrial base. With that, know, we've we've been in communications with the Goldman Dome customers, in terms of know, Alpha Rockets, like I mentioned before, to support test targets for the space-based interceptors. Also, hypersonic test as well because there's a rich backlog of hypersonic test technology that needs to get burned down. So Alpha provides a commercially available capability to launch up to one ton of into orbit and and two tons of suborbital regimes. It's also something that, if you look at Golden Dome, it's got multiple lines of effort, at least this first tranche of space-based interceptors, there's at least five lines of effort. Three are space-based, and two are ground-based. And with the acquisition of SciTech, we're able to go after not only the rocket part of Golden Dome, but also the space-based interceptor part of Golden Dome, with our Electra vehicle, partnered up with SciTech, for some of the discriminating algorithms. And then the ground piece which includes the fire control system and the ground control element, that's something that SciTech does for a living. As you know, they are the prime contractor and software developer for the apps and the the hardware portion of Forge. The Space Force. And if you remember what Forge does, it takes in all the sensor data with high volume at rate from low Earth orbit, medium Earth orbit, geosynchronous orbit, polar orbit, you know, zebras, and know, next generation OPIR systems takes all that data at rate, and then processes it into decision quality information that the warfighters can use to to go and, protect our nation. So it's that type of ground processing and software analytics that can be brought to bear to Golden Dome. Just like you know, other national security ground systems. That the space development agency has and the Space Force has. Sujeeva De Silva: Okay, Jason. Appreciate all that detail. And then thinking about, SciTech and the synergies, I know it sounds like it's a very, you know, feels like it's a very terrestrial sort of value proposition for SciTech, but could it possibly enhance what you may be planning with Ocula? And being able to extract analytics information from LUNAR observation, in the future as well? Jason Kim: You're spot on, Sujeeva. You know, anywhere that you could take sense you know, you know, optical information, infrared information, even radio frequency information, whether it's around the earth or interplanetary or even the moon. And Mars. SciTech has the capabilities with their forty years of algorithm development and continuous you know, tech refresh of those algorithms and apply it know, almost from a library like LEGO pieces mix and match it to apply to different missions such as Ocula. Ocula is gonna you know, debut next we're targeting, late next year, 2026 to launch our Blue Ghost two mission, and that Blue Ghost two mission, there will be an Electra transfer vehicle that will orbit the moon for five years, and it'll do the first commercial imaging and mapping of the lunar surface. It also be tasked to do space domain awareness in cislunar space. And so all those algorithms that SciTech provide today for missile warning, missile tracking, and ISR and space domain awareness around the Earth. Can also be applied to the moon as well. Sujeeva De Silva: Okay. Thanks, Jason. Operator: Thank you. And this concludes our Q and A session. I will turn it back to management for final comments. Michael Sheetz: This is Michael. Thank you so much for joining today's call. We look forward to talking to you next time in our fourth quarter financial results. Have a good day. Operator: Ladies and gentlemen, this concludes our Q and A session. Thank you all for participating. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the KinderCare Learning Companies, Inc. third quarter 2025 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Wednesday, November 12, 2025. I would now like to turn the call over to Miss Olivia Kirrer. Please go ahead. Olivia Kirrer: Thank you, and good evening, everyone. Welcome to KinderCare Learning Companies, Inc.'s third quarter earnings call. Joining me from the company are Chief Executive Officer, Paul Thompson, and Chief Financial Officer, Tony Amandi. Following Paul and Tony's comments today, we will have a question and answer session. During this call, we will be discussing non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release, which is posted on our Investor Relations website at investors.kindercare.com under the Financials tab. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company and involve a number of uncertainties and risks, which are explained in detail in the Risk Factors section of our most recent annual report on Form 10-Ks and other filings with the SEC. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. The actual results of operations and financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. All forward-looking statements are made as of today, except as required by law, KinderCare Learning Companies, Inc. undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future developments, or otherwise. I would also like to mention for interested parties, our executive team will be participating in an upcoming fireside chat over the next few weeks, which will be publicly accessible on our Investor Relations website under the News and Events tab. And with that, I'd like to turn the call over to Chief Executive Officer, Paul Thompson. Paul Thompson: Thank you, Olivia, and welcome to everyone on the call with us today. In the third quarter, we saw success across our B2B and portfolio growth levers. Revenue was $677 million, up nearly 1% from last year, with same center revenue of $617 million. The softness we anticipated in organic growth continued, resulting in same center occupancy of 67%, at the lower end of our expected range. Remember, Q3 is typically our lowest quarter due to summer seasonality. When thinking about our current occupancy, it is important to note that our top three quintiles, which are roughly 960 early childhood education centers, continue to operate around 80% occupancy on average, and our employer on-site centers average over 70% occupancy. While the balance of our network provides clear growth opportunities, I'll share in a moment some of the operational initiatives we focused on during the third quarter, which we believe over time will help ease the recent moderation in occupancy and position us to drive future growth. The back-to-school season unfolded amidst a more cautious consumer backdrop, which we believe influenced family decision-making. While demand at the center level was adequate to support our enrollment objectives, our average weekly enrollments fell short of last year's mark. Additionally, we saw headwinds in our subsidy business in a handful of states, with near-term softening of tuition reimbursement rates and fewer new student authorizations. We believe the enrollment challenges reflect the current economic environment and are not permanent, and we expect to see a return to the historical performance we have experienced in subsidy enrollments in the future. It's worth noting here that our belief is rooted in the historical bipartisan support for child care funding we have seen both at the federal and state level, and we remain confident in the long-term outlook for child care subsidy funding. Turning to our other growth levers, we continue to make great progress in the quarter. Specifically, we signed a number of new clients at our Champion School Age program and expanded our employer relationships, as employers look to offer dedicated on-site or access to our network of community centers for their employees. We also grew our center count through new center openings and tuck-in acquisitions, with the latter continuing to outperform on the year. Stepping back from the quarter's results, I'll spend a moment on what we're seeing in the broader economic landscape. Inflation remains elevated, and families are showing more caution in their decision-making, as reflected in recent economic data showing an overall decline in consumer confidence. We recognize how these influences are causing hesitation for some as they make their child care decisions. We believe these dynamics are likely to persist into 2026. In this environment, we're managing with a focus on disciplined execution, operational efficiency, effective cash management, and a continued commitment to meet families in their local market where they need us the most. We believe KinderCare Learning Companies, Inc.'s national scale, strong subsidy partnerships, and ability to serve families across diverse circumstances position us to navigate these conditions with resilience. Our commitment to high-quality early education and the distinctive experiences offered through our centers strengthen our brand and reinforce the trust families place in us. These advantages give us confidence in KinderCare Learning Companies, Inc.'s ability to perform through varying and uncertain economic conditions. The number of families seeking subsidy assistance remains elevated across the country, and our government funding team continually seeks to engage state and local agencies in productive ways to expand care to as many of those families as possible. However, to maintain balanced budgets, some states have implemented measures such as waitlists and reducing reimbursement rates. In certain cases, these actions have had a significant impact. For example, in Indiana, roughly 13,000 fewer children are receiving subsidy assistance since the start of the year, and our full-time subsidy enrollments have declined proportionately in the state by nearly 1,000 children over that same period. At the same time, many providers in this state have been further pressured from reduced reimbursement rates. Other states are taking steps in the opposite direction, by expanding support for child care with measures like reducing costs for families by lowering co-pays, increasing reimbursement rates, or in the case of New Mexico, pursuing a public-private solution to make child care universally accessible. Regardless of each state's approach to appropriating their budget, we remain committed to partnering with state and federal leaders to expand access to affordable, high-quality childcare for families across the country. As these efforts unfold across the broader child care landscape, we remain focused on strengthening our own operational foundation. As I mentioned, occupancy was at the lower end of our expected range due to a complex of near-term dynamics. Over time, we are confident that our ability to convert demand we see in our centers together with ongoing positive and constructive engagement with state and federal leaders on child care funding will be important drivers toward achieving our occupancy goals. Progress here may take some time, however, we believe we are taking the right strategic steps to build sustained improvement upon solid fundamentals. In order to accelerate our pace of results, we intensified our focus on the operational levers within our control, evolving our leadership talent, applying lessons learned from our opportunity region more broadly, and expanding the use of our digital and diagnostic tools. We concentrated on center-level improvements, particularly enhancing both the speed and personalization of family interactions. Our digital tools continue to make it easier for families to move through the enrollment process and for center directors to more effectively match available spots with family needs. The digital tools are also helping to drive overall improvement within our opportunity region, and in some cases, creating significant impact at the center level. As a reminder, our opportunity region is a collection of around 150 centers that we've determined to have high performance potential which can be unlocked with focused attention and resources. One of our opportunity region centers located in Michigan and led by a veteran center director used our center diagnostic tool to pinpoint opportunities for improving enrollment and work with our district leader to develop a remediation plan. Within eight months, she lifted occupancy from 48% to 95%. That kind of turnaround shows what's possible when we pair well-trained leaders with our tools to execute. I share this example to illustrate that despite the challenging environment, we are finding ways to make progress. Overall, we continue to see encouraging progress within the opportunity region, and we're applying the lessons learned from our successes there more broadly across our network. To be clear, we don't expect to achieve results of the same magnitude in all of our almost 1,600 ECE centers. We believe, however, that the easiest path for broad-based improvement and overall enrollment is generally going to be among centers that currently have lower occupancy, most of which are grouped in quintiles four or five. Beyond attracting new families, we're equally focused on the engagement of our current families. In fact, we recently completed our annual engagement survey with over 130,000 responses from our families, which is near last year's record response total. This represents our thirteenth year of partnering with Gallup, and as a reminder, we measure both employee and family engagement. Consistently, we hear from families that they celebrate the positive impact that safe, high-quality childcare can have on their child's development and that the families are deeply connected to our center staff. In addition to receiving feedback, high levels of engagement help us maintain strong family retention. Our ability to create consistent, nurturing environments is a hallmark of the KinderCare Learning Companies, Inc. experience and another reason so many families stay with us year after year. Our focus on operational excellence extends into the management ranks as well. In order to better align our strategic operational goals with our growth initiatives, we recently announced the promotion of Lindsay Sarhondo to Chief Operating Officer. Lindsay has been an incredible executive leader for us during her twelve years with the company, most recently as our Chief Innovation Officer. She has been a decisive business partner with a strong track record of execution and driving results. We're excited for Lindsay to apply her tremendous skill set to accelerating operational excellence throughout the organization. This structural alignment represents an important step forward in our broader strategy to sharpen brand-level focus and connect our strongest operators directly to driving same center occupancy growth across our centers. Closer to the center level, we also took purposeful actions within our field leadership to strengthen performance. During the quarter, we refined our district leader structure to sharpen operational focus, increase accountability, and improve agility while ensuring we have retained our most effective leaders. These critical members of our organization are responsible for oversight and development of our center directors and are expected to step in and personally support them where help is needed. Turning to tuition, growth came in at 2% for the third quarter, which Tony will discuss in more detail shortly. With back-to-school finished, we are now finalizing our plans for 2026 tuition rates. As a reminder, we maintained a 50 to 100 basis point spread overall between wages and tuition, and we will continue with that strategy while setting tuition to reflect local market dynamics and needs. This financial discipline gives us flexibility to continue investing in our other growth levers. B2B, NCOs, and tuck-in acquisitions all of which performed to expectations this quarter. Our Champions before and after school business continued to perform well, with double-digit revenue growth year over year, including meaningful growth in average enrollments in established sites. Year to date, we expanded the program with over 200 new site wins. The solid performance from the Champions team this past quarter and, frankly, all year provides momentum for Q4 and the rest of the school year. KinderCare Learning Companies, Inc. for Employers, which consists of our on-site employer-focused centers, also continued to perform well for us. During the quarter, we opened three new centers and employer locations and continued to develop our pipeline of opportunity. It's also important to note that occupancy at our on-site averages over 70%, which speaks to the great partnerships we have fostered with employers to let their employees know about this benefit available for their children. Employers are also expanding child care for their employees through our tuition benefit offerings. During Q3, we signed 20 contracts with employers, including Parkview Health System, Discovery Life Sciences, The Aspen Group, and MassMutual Life Insurance. Our new contracts were spread across 17 states covering 317,000 employees who will now have access to KinderCare Learning Companies, Inc.'s nationwide network of centers at a discounted tuition rate. We continued executing on our other growth levers during the quarter, by welcoming families to two new early childhood education centers in Illinois and Colorado. This brings our year-to-date total to eight new center openings within communities. We're also very active with tuck-in acquisitions the past quarter, by acquiring six centers across six different states. Taken together, we have clear visibility into these two levers and expect 2026 to be another active year. Looking at the remainder of this year, we'll continue to focus on improving same center occupancy and tuition, by driving engagement and consistency through our leaders and center-level teams. We expect our other levers will perform to our 2025 expectations, reinforcing the diversification of our model. With that, I'll hand it over to Tony to walk through the financial results and outlook. Tony Amandi: Thanks, Paul. Our third quarter results were mixed as revenue came in slightly below our expectations, largely reflecting a slower pace of enrollments through the back-to-school season. While this pressured margins for the quarter, cost discipline and positive cash generation remained consistent as Champions and KinderCare Learning Companies, Inc. for Employers, NCOs, and tuck-in acquisitions all continue to perform well. Let me walk through the quarter in more detail. Total revenue was $677 million, up 80 basis points from last year, with growth driven by Champions. Despite positive effects from tuition increases, early childhood education revenue softened due to slower enrollment activity during the quarter, which also resulted in lower occupancy for the quarter. Same center revenue was flat to last year, at $617 million, supported by generally robust retention levels during the third quarter, and continued contribution of prior new center openings and acquisitions being included in the same center pool. Total average weekly full-time enrollments decreased by 190 basis points to just over 140,000 students in the quarter, reflecting lower overall enrollment compared to last year and a softer starting point at the beginning of Q3. The new student enrollment dynamics during back-to-school compressed our same center occupancy to the low end of the range we expected for the quarter, finishing at an average of 67%, down 160 basis points from a year ago. As we look forward, remember that back-to-school is our highest new student enrollment period, and sets the start of the climb for the next seven to eight months, during which we historically have sequential growth each week until summer. Tuition was a 2% contributor to revenue growth versus last year, which was lower than we anticipated entering Q3, reflecting a higher subsidy mix, smaller subsidy rate increases than expected for 2025, further affected by subsidy rate reductions in a few states. Most importantly, we continue to maintain a healthy spread between tuition and wages, which ensures our ability to consistently drive margin within our centers as we deliver the high-quality care KinderCare Learning Companies, Inc. is known for, and ensure our teachers can receive a competitive pay and benefits package. Champions and KinderCare Learning Companies, Inc. for Employers continue to demonstrate solid growth. Champions revenue grew 11% in the third quarter versus last year, to $50 million, with 120 net new sites added to the portfolio over the past twelve months. Employer on-site centers continue to perform well during the quarter with average occupancy over 70% and consistent revenue growth. As employees continue to navigate flexible work arrangements, our team is deepening partnerships with employers to expand on-site child care options, including the opening of three new centers this quarter, while also growing participation in our tuition benefit programs that support families using our community-based care. As Paul mentioned, we opened two NCOs during the third quarter and acquired six tuck-ins, bringing us to 20 tuck-ins so far this year. On a year-to-date basis, cash consideration for the tuck-ins is just under $18 million and was funded completely out of the $138 million in free cash flow generated this year. Our ability to fund new centers and tuck-ins while maintaining our leverage is a testament to the strength of our operating and growth models. The revenue contribution from new and acquired centers year-to-date was $21 million as of the third quarter, relatively consistent with the first three quarters of last year. Our development timeline for new centers provides excellent visibility into the timing of future openings, and we are firmly on track to accelerate our pace of NCOs into the mid-twenties per year in 2026 and beyond, consistent with our long-term growth objectives. While we aren't seeing a flood of independently owned center closures this year, after the expiration of COVID funding, we are certainly seeing many more opportunities for tuck-ins. We expect to sustain this momentum beyond the current year as part of our broader long-term growth strategy. Net income for the quarter was $4.6 million, bringing the year-to-date total to $64 million, a 58% increase over the same year-to-date time period last year, benefiting from operational improvements and lower interest expense, following our deleveraging actions. Adjusted EBITDA for Q3 came in at $66 million, down 7% from last year as lower occupancy led to leverage pressure in the quarter. Our adjusted EBITDA margin for the quarter came in just under 10%, reflecting fewer enrollments in Q3 seasonality. Quarterly SG&A expense to revenue was up 109 basis points year over year. Embedded in there are one-time fees incurred from favorable credit facility repricing we completed in July and increased public company costs versus Q3 last year. We'll begin to lap the incremental public company costs incurred since the IPO in Q4 this year, and as we move forward, we will remain focused on disciplined cost management and operational efficiency. Income from operations was $26 million for the third quarter, compared to $54 million from the prior year. Interest expense was $24 million, sharply down from the $39 million last year, reflecting the positive impact of our post-IPO debt repayment and repricing actions since, including the repricing we completed on July 1. Adjusted net income for Q3 was $15 million, up from $4 million last year, and adjusted EPS was $0.13, increasing from $0.05 a year ago. Our ratio of net debt to adjusted EBITDA at the end of Q3 was 2.5 times, which remains comfortably at the bottom of our targeted range. Moving on to our outlook for the rest of the year. As we analyze trends coming out of back-to-school, it's clear the recovery in enrollment and occupancy is going to take longer than we expected. In addition, while we haven't experienced a direct material impact from the government shutdown, the tangential and downstream unknowns due to its severity added another layer of complexity into our expectations for the year. As a result of these factors, we are updating our forecast for 2025. For the full year 2025, we're expecting revenue to finish the year between $2.72 billion and $2.74 billion. Adjusted EBITDA is expected to land between $290 million to $295 million, and adjusted EPS to be between $0.64 and $0.67. Looking at our growth lever assumptions for the year, we expect revenue growth from tuition to increase by approximately 2% from 2024, a reduction from our prior guide, due to the combination of higher subsidy revenue proportion and a small amount of states reducing their reimbursement rate. We are currently finalizing our 2026 tuition planning, and as always, we align our pricing approach with community-level dynamics, ensuring we balance profitability with the different pressures families are managing for access to care. Turning to same center occupancy, we expect to continue seeing week-to-week growth in full-time enrollments for the remainder of this year. Given where we ended Q3 and the subsequent data so far in Q4, we now see full-year occupancy coming in about 200 basis points lower than 2024. We expect Champions to continue performing well in Q4, and carry that momentum into 2026. At the same time, we continue to see solid progress in KinderCare Learning Companies, Inc. for Employers as contractual recurring revenue streams. Putting these two together, our B2B business is expected to contribute about 1% to growth this year. New center openings are expected to be shy of 1% growth contribution this year, as previously expected. We will continue our thoughtful and measured strategy with opening new centers, given our clear visibility into new centers coming online, which should improve this contribution percentage in 2026 and beyond. Tuck-in acquisitions have been robust all year and continue to be favorable for us. We have been able to advance our growth priorities in this space, with a discerning eye on quality and capital efficiency. We believe the number of opportunities we evaluate will continue at a high level for the foreseeable future. This key lever for portfolio expansion and diversification is expected to contribute about 1% to growth this year and at least the same in 2026. The pipeline visibility for acquisitions remains strong. We expect free cash flow to be between $88 million to $94 million for the year, and CapEx will likely land in the range of $131 million to $133 million for the year, with most of that aimed towards growth initiatives. For modeling purposes, our effective tax rate should be around 27% for 2025. While we are not providing official guidance for 2026, we're giving some directional insights into growth levers as we see them today. We expect tuition increases will be a larger contributor to growth than in 2025. We also believe the momentum we have in B2B, our pipeline visibility for NCOs, and tuck-in acquisitions should keep each of these three levers on a solid trajectory with each around 1% for 2026. With that, operator, let's open up the line for some questions. Operator: Thank you. Ladies and gentlemen, we'll now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift a handset before pressing any key. One moment, please, for your first question. And your first question comes from Toni Michele Kaplan from Morgan Stanley. Please go ahead. Yehuda Solderman: Hi. This is Yehuda Solderman on for Toni Michele Kaplan. Just had a quick question about enrollment. So we know it's been a bit weaker all year, weaker in this quarter. Just wondering heading into 2026, what your expectations were surrounding it, at least directionally? I know you mentioned that there's been some hesitation. Do you expect it to be in 2026 at current levels, worse, or better? Just want some color on that. Thanks. Paul Thompson: I appreciate the question. And as Tony said in his comments, that's what we're watching for in the remainder of 2025. So that we can clearly see any continuation of impact from the government shutdown. What I would tell you is we still feel very good about the level of inquiries we're seeing at the local level of each one of our centers. We continue to see improved performance from our center directors and district leaders on how they work those inquiries into enrollment. And then as we continue to see confidence return for our consumer who are in that space, we believe over the long term, we will return to the growth algorithm we've talked about historically for growth for KinderCare Learning Companies, Inc. And our scale and diversification allow us to do that. Yehuda Solderman: Great. And just a quick follow-up. So you mentioned in the guide that there was no direct impact from the government shutdown. But the uncertainty added more issues heading into the end of the year. Is there anything factored into the guide itself? And if so, to which growth algorithm assumptions is this tied to? Tony Amandi: Yeah. So what we did not see, right, very, very, very few families that were impacted by it. We extended a couple of courtesies to a few families here and there that were impacted to help them make it through. And that would be great for them and for us in the end. Just some of the uncertainty continues to come from some of the things we talked about. That we think it's putting pressure on the states as they think about what they're doing in the future as far as their spend. We are in constant talks with all those states. Know that there's a lot of thought process going on and what the impacts to their budgets might be by something like this in the future too. And so that's just kinda where some of the uncertainty currently sits. Yehuda Solderman: Got it. Thanks. Operator: Thank you. And your next question comes from Andrew Steinerman from JPMorgan. Please go ahead. Andrew Steinerman: Hi. I was wondering what timing you think you could get back to the long-term algo. And I think you said for 2026, expect pricing increases to be higher than 25%. Could you just comment on that? Tony Amandi: Yes. No, that's right, Andrew. We believe they'll be higher, right, as we're ending this year on 2%. So we're still finalizing what our private pay rates will be for next year that'll go in place January 1. We're not quite there on the private pay side. And then a little bit, like I just mentioned, still some of that uncertainty we wanna see what happens here with the states as we conclude our fiscal year and head into next year and have some better expectations for what's gonna happen on the subsidy side. We still have direct confirmation with some states what they're doing. There's a number. There's still we're not sure yet. So that's why we're not going out with a guide, but at this point, feel good that it'll be above next year. I mean, this year. Sorry. Next year will be above this year. Andrew Steinerman: Right. And my first question was when do you think you'll get back to Algo? Tony Amandi: As far as pricing, Andrew? Andrew Steinerman: No. No. Overall, your medium-term algorithm when do you think what do you think you'll get back to? What type of timing do you think you'll get back to the medium-term algorithm overall? Paul Thompson: Overall, we will get back to the algorithm in 2027. And then what we're watching for is clearly on B2B and NCOs and acquisitions, we continue to be in 2026, as Tony articulated, on track for that. Feel good about tuition. And then for us to continue to make progress on occupancy specifically. Andrew Steinerman: Understood. Thank you very much. Operator: Thank you. And your next question comes from Ronan Kennedy from Barclays. Please go ahead. Ronan Kennedy: Hi. This is Ronan Kennedy on for Manav. Thank you for taking my questions. Tony, may I ask if you could please expand or just remind us on the softer starting point you referenced for the back-to-school enrollment period. And then could you confirm the extent to which the lower enrollment was driven by macro factors, the softening of reimbursement rates, fewer student authorizations, or internal opportunities for improvement, of conversion? Tony Amandi: Yeah. So look, the reference to the softer start was already that we were bringing in a lower number coming into back-to-school, right, than we would have liked to really start the year. So it's part of my talking points there was that, you know, Q2, as we headed out of the summer, was at a lower point than we would have liked to be heading in. So that kinda gives us a softer starting point for back-to-school in general. To do it. As far as kinda I don't think we I we don't have a quantitative number for you in each one of those, Ronan. They're obviously all impacting it. And we're well aware that the consumer confidence environment and people thinking about their next dollar spent is clearly impacting our whole economy. Once you get down to a local level though, then that's on us to show the value you get out of spending those dollars to come to KinderCare Learning Companies, Inc. and having your child ready to be ready for kindergarten as they get through with us. And so that gets down to the local level. Where it's on us to utilize those tools and tell those stories and show that value. And so that those those kinda Gantt charts start to overlap quite quickly. And then the subsidy one, Paul alluded to Indiana. Indiana's the biggest state for us. It's definitely impacting us. With being down a thousand students from the start of the year. Based on some of the decisions they've made to balance their budget what they've done to waitlist and some freezes. We have a couple other states that aren't up to that level but have also been a really drag to us here at back-to-school as well. So hopefully that helps. Ronan Kennedy: Thank you for that. And then you provide any insights on your occupancy trends by quintile through the quarter and exiting into 4Q? Paul Thompson: It's consistent with what we talked last time about that slight decline in the top three quintiles and then an improvement in that fifth quintile. That continues to give us the confidence what we're talking about returning to our long-term growth algorithm is the improvement we're seeing in our opportunity region. We've talked about the larger opportunity that exists in our lower occupied centers. So the diagnostic tools and the digital tools are working well to enable that growth, and we believe that will continue. Ronan Kennedy: Thank you. Appreciate it. Operator: And your next question comes from Jeff Meuler from Baird. Please go ahead. Jeff Meuler: Yes. Thank you. Just on your optimism for getting back to Elgo in 2027 and characterizing this as short-term factors, can you just address I guess, the structural concern that industry supply has been built over time and you're now combining that with a lower birth rate and the industry had taken a lot of above CPI pricing that's compounded over time that's pricing families out of the market. Just what gives you confidence that it is just short-term factors and not a greater, supply-demand imbalance that's built in the industry over time. Paul Thompson: Yeah. You know, great question. And there are many factors that we're watching. Beyond birth rates, you're also looking at women in the workforce. You're looking at children ages zero to five. And all those things accumulate to what we track as inquiries per center. So that we know that we're getting the sufficient flow of inquiries at the top of the pipeline to fill our centers. And that is the most important thing to us, which continues to be very, very good for us. In addition to that, the bipartisan support for child care so that we can have a thriving economy across the US so working parents can go back to work and know that their children are in a safe environment where they're being ready for a successful kindergarten transition as they go into that. So those things about seeing bipartisan support for our lower-income families, the continuation of good inquiries, even through the last number of months as we came into this back-to-school, and then knowing there's a lot of controllable factors for us, one of which we just mentioned is our center directors slowing down with those parents who are looking at making an investment in their child for early childhood education. Is us helping them recognize their child, the longer they are in our care, the more successful they're going to be in kindergarten and beyond. And that's a really compelling argument as we talk to or justification is probably a better word as we talk to parents. So all those things as we continue to improve the talent across our organization at that district leader as I talked is what gives us confidence as we move into 2026. Jeff Meuler: And then beyond, I guess, disciplined cost management and operational efficiency initiatives, at what point do you more proactively take cost out of the business? I ask because we're now in a position of revenue declines on a per-week basis. And it looks like the EBITDA deleveraging on the revenue adjustment and guidance is pretty significant. So at what point would you be more proactive about taking expense out of the business? Paul Thompson: It's something we're looking at all the time on evaluating the efficiencies of different investments we're making to become stronger on the digital side or other investments across our teams. And so there's things that we're already doing to ensure we're delivering the best flow through of profit from the revenue that we do have. Labor continues to be a big part of our P&L, as you well know. So continuing to think about how we up-level our sophistication around labor is another piece that we'll continue to lean into. So there's a number of ways that we can ensure that whether it's G&A or labor or other things that we have from a cost control, we are watching that all the time and talking about any more aggressive measures that we should be doing all at the same time that we're delivering long-term revenue growth is very important. Jeff Meuler: Thank you. Operator: Thank you. And your next question comes from Jeffrey Marc Silber from BMO Capital Markets. Jeffrey Marc Silber: Thanks so much. I just wanted to continue on Jeff's question. Are you thinking at all about more aggressively closing some centers? You didn't really mention that when you talked about some of your cost control. Tony Amandi: Yeah. I wouldn't necessarily say more aggressively, Jeff. We are constantly looking at the right centers for us to maintain and go forward with them. Right? So that starts with the demographic look and a little bit, that's what Paul was talking to. Like, where are our current inquiry levels? Where are competition levels? On an outside of our walls one. And then basing that then against inside our walls. Where are engagement levels? Are we performing to those right levels? And then where is our profitability based on rent and labor and things like that. So we're constantly looking at those. We are up for closing centers, and I think that's been clear in the past. We don't have a cap for how many centers we need to do. If it's the right time to close centers, we'll do that. Obviously, you're looking at lease timing on those. And making sure that the ROI on a closure does make sense. But you won't see us hesitate to close centers that should be closed. But we'll continue to keep the ones open that we think can and should be profitable, not only in the long term, but in the short or medium term too that we believe we can get there. The right methods. Jeffrey Marc Silber: Alright. Fair enough. And let me just continue this questioning. You continue to make acquisitions I know it's a small piece of the capital allocation, but would that be something that you might consider putting on hold and maybe shifting more towards a little bit more aggressive deleveraging? Thanks. Tony Amandi: Yeah. So as we sit today, our board is pushing us to continue to make sure we do have that medium to longer-term look on the use of our capital. And so as we sit today, we are going to continue to fund that NCO engine which, you know, is a couple of years out from when we say yes on the center. And also continue on the tuck-in ones. We're still getting nice value on those. In the very low single-digit EBITDA multiples. And think that that's both helpful for short-term and long-term. Jeffrey Marc Silber: Alright. Thank you. Operator: Thank you. And your next question comes from George Tong from Goldman Sachs. Please go ahead. George Tong: Hi. Thanks. Good afternoon. I wanted to go back to enrollment trends. Can you estimate how much of the enrollment headwinds you're seeing are due purely to economic factors like confidence versus more idiosyncratic factors at the local level? Paul Thompson: You know, it's difficult, George, to draw a line of direct correlation to those factors. To the enrollment. What we would tell you is but for those handful of centers or, excuse me, states, where we saw a slowdown of subsidy we would be in a much stronger position closer to flattish enrollment. And so that in of itself is something that we know is more short-term in nature. Then there are other things where we see as we've talked to you before, the decisions from parents and the longer cycle around that that they are considering consumer and thinking about the overall macro conditions, but nothing that we can provide to you on a direct correlation, just recognizing that it does these factors have an impact. George Tong: Got it. That's helpful. And along the same lines as you look at the center diagnostic tools and the various findings at the various centers, especially in the opportunity regions, what have been the latest, local factors that have come up most frequently as preventing enrollment growth? And have those factors changed from the prior quarter? Paul Thompson: So from you know, the way I would answer it with what we're seeing with our opportunity reach, and them using and the change management and adoption that goes with those diagnostic tools and digital tools, we actually are seeing stronger enrollment in those centers. So it is working, and again, they are at lower occupancy. So the range of age groups and parents that you can activate across that pipeline, are more significant. And so what I would answer to your question is continuing to take those learnings from opportunity to region, continuing to be more proactive with our parents in our higher occupied centers. Those things will continue to minimize the reasons why a parent isn't enrolling as quickly as they might have been over the last few months in our higher quintile centers. George Tong: Got it. Thank you very much. Operator: And your next question comes from Joshua Chan from UBS. Please go ahead. Joshua Chan: Hi. Good afternoon. Thanks for taking my questions. I guess a question on the Q4 enrollment that is baked into the guidance. Like, how low does guidance? Is it around the four percent decline mark? I guess that's important because it sort of sets the stage, like you said, for the remainder of the school year, I guess. Tony Amandi: Josh, will you ask it one more time? So I heard you reference a 2%, and then we lost you for about six or seven seconds, and you said four. Can you restate it one more time for me? Joshua Chan: Yeah. Yeah. I apologize. I'm wondering what type of enrollment decline is baked into the Q4 because that forms the run rate into next year. Tony Amandi: Yep. So we obviously gave you kind of a guide for the full year. Right? We're seeing Q4 so far be slightly slightly below, where we were at Q3. So it's not nearly as dramatic as you know, your numbers are suggesting. But, we are seeing a slight flip that, like you said, take us into the holidays, holidays being an important inflection point. It's kind of a number three behind summer and back-to-school. And how we come out of that. And then that really sets range outcomes, through May. Joshua Chan: Okay. That's helpful. And then on the margins that's embedded into the Q4 guide, could you just talk through what is happening to cause the relatively steep change in terms of the EBITDA expectations relative to the revenue expectation change? Tony Amandi: Yeah. Of course. Yeah. So, look, the revenue is being caused by two different things, right, that we talked about. And so I'll take those two and talk about the impact. Occupancy dropping a little bit more than we thought is having some impact. Occupancy declines obviously don't have as big of an impact on EBITDA. As do pricing, but it does. Less students, obviously, is bringing in less revenue, which brings in less EBITDA. Then obviously an occupancy decline impacts our ability to leverage, especially our gross margin and even our G&A a little bit. So we're seeing definitely some impacts from that. And then the other one is the pricing. Alright? So as we're seeing a few of these states, Indiana, again, being one of the big ones, drop some of their reimbursement rates, those dollars flow pretty much straight through to the bottom line. And so that dropping to 2% is really the probably more powerful thing here in the fourth quarter that dropped our EBITDA guide. Joshua Chan: That makes a lot of sense. Yeah. Thanks for the color there. Tony Amandi: Thanks, Josh. Operator: Thank you. And your last question comes from Faiza Alwy from Deutsche Bank. Please go ahead. Faiza Alwy: Yes. Hi. Thank you. I want to just make sure that I'm understanding the mechanics around the subsidies, especially after listening to the last answer from you, Tony. So just maybe could you take a step back and just explain to us, you know, maybe how much of an impact that had on the quarter or you're expecting to have, you know, on the year? And kind of what the when do you expect resolution and, like, what should we be following to get a better sense of you know, where we land here, whether things are getting you know, better or worse in the specific states. And know, any sort of timeline or decision when other states might make certain decisions around you know, these reimbursement. Paul Thompson: Yes. Most of the states have already worked through that. And what is the origination from it is everything not related to child care specifically. So all of that was fully funded but these are the discretionary dollars this year as other impacts flowed into states. They needed to think about how they budgeted for the new fiscal year. And so it is the expectation that every state has already gone through the awareness for what their funds need to be or what their balanced budget needs to be going into 2026. Where we saw the most significant change, as I mentioned, was in a handful of states. Even in two of those states, Texas and Arizona, they after that time, have come out that they're adding both of them are in the $50 million to $100 million over the next two years. Some of that will come in a rate improvement. Some of that will come in additional chairs for children. So I believe that we're through it with most states. We've already seen those two states take a different weighing back in. And then for the remaining states, there's a continuation of that going into 2026. Faiza Alwy: Okay. Understood. And then just on the pricing comment, that pricing is gonna be higher in 2026. Like, I'm curious what you're seeing from a wage inflation perspective and I know the question has been asked before around you know, whether or not the end consumer is sort of ready for that pricing given the level of inflation that we have seen generally. So just give us a bit more color around why you think pricing will be higher and what's driving the decision behind higher pricing in '26? Tony Amandi: Yeah. So I'll take your wage one first, which I think you were leading me to the second one, Faiza, because you remember how we really do that as kind of a starting point. So we're working on wage right now and where we believe that will end. And are pretty much there on that one. We utilize that one to test ourselves, but we're always trying to make sure we can get 50 to 100 basis points differential, and at this point, believe we can again next year. From there, kind of in parallel, we're working at a center level to look at a number of factors. The ones internal to us are engagement levels and our occupancy are the two biggest ones. How those families feel with us and how many we have, obviously, are two big factors there. And then externally, we're looking at number of competitors. We're looking at competitor pricing. We're looking at general other demographic factors for that local center. So as we're seeing the early roll-ups of where we think we're going to land, and believe what we can do at that center by center level are the things that give me the confidence to make that statement. Faiza Alwy: Sorry. If I can just clarify. So do you think that 50 to 100 basis points differential can actually be higher in '26, or is it really the higher wage growth that's leading to higher pricing? Tony Amandi: Yeah. So I wouldn't say they tie directly, but we will still be at 50 to 100 basis points next year as well. So I don't want you to walk away thinking wage growth leading to higher pricing. We believe we know where we'll land wage. And with the tools we have, we can be pretty precise for that. For the year. And we are also confident we can create 50 to 100 basis points of price based on our individual center dynamic. Faiza Alwy: Got it. Thank you. Operator: Thank you. And there are no further questions at this time. I will now turn the call over to Mr. Paul Thompson. Please continue. Paul Thompson: Thank you, Kelsey. Just last month, we passed the one-year anniversary of becoming a publicly traded company. As we move forward from this milestone, we are focused on the SEC discipline in driving continuous improvement in all facets of our organization. Our long-term strategy remains sound, and we are confident in our ability to deliver against it as broader economic conditions improve. Thank you all for joining us today, and we look forward to speaking with you again soon. Operator: Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.
Operator: Greetings, and welcome to the CuriosityStream Third Quarter 2025 Financial Results Conference Call [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Tia Cudahy, CuriosityStream's Chief Operating Officer. Please go ahead. Tia Cudahy: Thank you, and welcome to CuriosityStream's discussion of its third quarter 2025 financial results. Leading the discussion today are Clint Stinchcomb, CuriosityStream's Chief Executive Officer; and Brady Hayden, CuriosityStream's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions. But first, I'll review the safe harbor statement. During this call, we may make statements related to our business that are forward-looking statements under the federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks, uncertainties and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements. Please be aware that any forward-looking statements reflect management's current views only, and the company undertakes no obligation to revise or update these statements nor to make additional forward-looking statements in the future. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and on our Investor Relations website as well as the risks and other important factors discussed in today's press release. Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended September 30, 2025, when filed. In addition, reference will be made to non-GAAP financial measures. A reconciliation of these non-GAAP measures to comparable GAAP measures can be found on our website at investors.curiositystream.com. Unless otherwise stated, all comparisons will be against our results for the comparable 2024 period. Now I'll turn the call over to Clint. Clint Stinchcomb: Thank you, Tia. We delivered strong Q3 results. Revenue grew 46% year-over-year to $18.4 million, exceeding guidance. Adjusted free cash flow rose 88% to $4.8 million, and adjusted EBITDA improved by $3.4 million year-over-year. Our 3 complementary growth pillars, subscriptions, licensing and advertising are driving momentum and strengthening CuriosityStream's position at the intersection of knowledge, media and AI. I'll briefly recap the underpinnings of Q3 and then look ahead to 2026 and beyond. Licensing revenue increased over 40% year-over-year, reflecting the strength of our team, demand for our corpus and the trusted relationships we built with traditional media partners and hyperscalers. We engaged with 9 key partners across video, audio, script and code and delivered over 1.5 million distinct assets. To achieve dominance as a provider of AI training data, we've assembled nearly 2-million hour library of video and audio across multiple genres, content largely cannot be scraped from the open web. We've also expanded our large-scale data structuring and metadata capabilities so we can meet partners' volume requirements and bespoke specifications for high integrity and rich data sets. In parallel, we broadened traditional content partnerships with leading global broadcasters, streamers and pay TV networks, including AMC, Netflix, Foxtel and a range of licensees across Asia. Overall subscription revenue, retail and wholesale combined was down year-over-year but increased sequentially every quarter in 2025. Importantly, our sequential growth in subscription revenue has been driven by daily operating focus, not simply by implementing price increases like many subscription services. In Q3, all 3 of our subscription services launched with partners in key English-speaking markets, the U.S., Australia and New Zealand as well as in our non-English market, Germany. Extensions with partners like Amazon and new multifaceted agreements with partners like TMTG further support this growth trajectory. While not yet a separate revenue pillar at scale, we continue to build on the solid foundation of our advertising business. Our U.S. Hispanic and flagship FAST channels recently launched on Amazon, Roku, LG and Truth+. We also launched a 2-hour branded block on Australia TV's free-to-air broadcast channel, an initiative we plan to replicate with additional partners. Given the quality and volume of content we control, we see meaningful advertising and sponsorship opportunities across FAST, AVOD, social, pay-TV and free-to-air. To thoughtfully capture this opportunity, we plan to install a proven leader to run the business in early 2026. We are particularly proud that adjusted free cash flow increased 88% to $4.8 million this quarter. This reflects a focus growth strategy and a sustained commitment to rationalizing our cost base, especially hard, largely nondiscretionary costs. Cost discipline is a strategic advantage, one that supports pricing power, resilience and durable growth. Despite higher storage and delivery expenses from managing a large content library, we more than offset those increases through disciplined expense management. Looking ahead, while we are not yet providing guidance for 2026, we expect overall subscription revenue, retail and wholesale to grow faster in 2026 than in 2025, supported by a strong launch pipeline and new pricing and packaging across our own services, including our premium tier. We anticipate high-growth licensing to continue and believe licensing will exceed subscription revenue in 2027, possibly earlier. We expect significant year-over-year growth with existing partners and believe our roster of AI licensing partners could double or even triple in 2026. Beyond training, we see additional monetizable grants of rights becoming part of our agreements. Given the quality and scale of our corpus, which we expect to more than double in 2026, and our ability to structure and deliver data at scale, we believe we will solidify our position as the leader or among the top 2 or 3 video licensers for AI development. In summary, we believe that we will continue double-digit growth in both revenue and cash flow, driven by our 3 complementary pillars: subscriptions, licensing and advertising, while continuing to improve efficiency. We intend to pay 2026 dividends from cash generated by operations as we did in 2024. Our balance sheet remains strong with over $29 million in liquidity and no debt, giving us substantial flexibility. At today's share price, we're a growth company that also offers a dividend yield of well over 8%. It's an exciting time to be in the media business. Opportunities abound, and we intend to swarm them with discipline. Over to you, Brady. Phillip Hayden: Thanks, Clint, and good afternoon, everyone. Our full financial results will be in the 10-Q that we'll file in the next day or 2, but let me hit some of our third quarter highlights. As Clint said, in the third quarter, we reported revenue of $18.4 million, exceeding our guidance and a 46% increase compared to $12.6 million a year ago. Likewise, we reported another quarter of positive adjusted EBITDA, which came in at $3 million. This was an improvement of $3.4 million from a year ago and essentially flat from last quarter, which was a record quarter for us. This was also our third sequential quarter of positive adjusted EBITDA. Adjusted free cash flow came in at $4.8 million, an increase of $2.3 million compared to last year. This also represented our seventh quarter in a row of positive adjusted free cash flow. Third quarter revenue was led by our subscription business, which came in at $9.3 million, a sequential increase. Content licensing came in at $8.7 million in the quarter, an increase of over $7 million or 425% from last year, driven by continued growth in AI training fulfillments. Looking at our year-to-date numbers, licensing generated $23.4 million through September, which in perspective is already over half of what our subscription business generated for all of 2024. Third quarter gross margin was 59%, improving from 54% last year. We continue to see reductions in noncash content amortization, although our distribution and storage costs have increased slightly due to licensing and acquisition of content through revenue share arrangements. Combined costs for advertising and marketing plus G&A were higher by 52% compared to last year. This increase was the result of a noncash charge for stock-based compensation of $7 million or about $0.12 on a per share basis. G&A also included a number of onetime expenses associated with our August secondary stock offering. Were it not for the noncash SBC and the common stock sale, G&A would have declined in the quarter. We reported a third quarter net loss of $3.7 million or $0.06 a share. This compares to a $3.1 million net loss in the third quarter of 2024. While our revenue was up materially from last year, the net loss was driven by the onetime charges and noncash SBC. Were it not for these specific nonrecurring or noncash charges, we would have posted our third quarterly net income this year. And as we said earlier, adjusted EBITDA was $3 million in the third quarter compared to a loss of $0.4 million a year ago. Adjusted free cash flow was $4.8 million in the quarter compared with $2.6 million a year ago. And through the first 9 months of 2025, adjusted free cash flow was $9.6 million, which is more than the company generated for all of last year. In September, we paid our regular $4.6 million dividend, and we ended the quarter with total cash and securities of $29.3 million and no outstanding debt. We believe our balance sheet remains in great shape. Based on yesterday's share price, CuriosityStream is generating an adjusted free cash flow yield of over 7% and a current dividend yield of over 8%. Also just after quarter end, on October 14, 6.7 million of our warrants expired unexercised. While these warrants have been trading well out of the money for some time, this expiration of all of the company's outstanding warrants reduces potential dilution and should eliminate any lingering share overhang associated with these instruments. Looking ahead, for the fourth quarter, we expect revenue in the range of $18 million to $20 million, which would imply full year 2025 revenue in the range of $70 million to $72 million or a 38% to 42% revenue increase from 2024. We expect fourth quarter adjusted free cash flow of $2.5 million to $3.5 million, which would imply full year 2025 adjusted free cash flow of $12 million to $13 million or a 27% to 37% free cash flow increase from 2024. We're not yet providing guidance for 2026, but we believe that our top line and bottom line growth will continue into next year. And although we're obviously using some of our cash and investment reserves to pay our dividends in 2025, we intend to fully cover our 2026 dividends from operating cash as we did in 2024. With that, we can hand it back to the operator and open the call to questions. Operator: [Operator Instructions] And our first question will come from Laura Martin with Needham & Company. Laura Martin: So Clint, a strategy one for you first, and that is -- so I know you've been a media CEO for a long time, but the returns on capital in this new revenue stream of licensees are like 10x higher. So what I don't understand is why are we taking these fabulous revenue and investing and hiring a guy to do media in Australia, which is offshore, lower margin, lower returns on capital. Why don't we just stick with -- stick with focusing on becoming sort of the go-to de facto AI guys that are independent and put all -- say no to media stuff, which is our path. Why are we adding stuff that's lower return on capital just because that's where we came from. Let's start with that one. Clint Stinchcomb: I appreciate the question, Laura. You cut out a little bit. The Australia reference was -- I just -- I didn't hear what you're referring to in Australia. I think I got the base... Laura Martin: You're hiring, right? What's the new guy going to do when you hire in? Clint Stinchcomb: We haven't hired anybody new. We just -- we announced a promotion of one of our guys who has been focused on helping to craft our AI relationships. We announced that last week, if that's what you're referring to. Laura Martin: No, I thought you said on the call that you were going to... Clint Stinchcomb: Okay. Yes, I did say on the call that we're going to hire a sales leader, yes. And let me take the -- and I think your question is a good one as it -- and so I think we've done a great job certainly on the cost side here, and we've done a really good job across the company, getting this business rolling. But we do need some additional sales leaders, even some who are really seasoned. And so there's an opportunity for us to do that. And sometimes, if you get a chance to bring somebody into the mix, it's a little bit like the NFL draft. We're not necessarily drafting for pure position, but if you can bring on an A+ player with real talent, you take the opportunity to do that. And so I didn't mean to imply that he would be -- or she would be working in only one area, but really helping on the revenue generation side. That is a -- key for us is we do need some help there. And we've done, as I said, I feel like we've done a nice job on the cost side, and we've laid some good groundwork so that if we bring in a couple of really strong players, it can have an accelerating impact on what we're doing. Let me do dodge, hopefully, I addressed that. If I didn't, Laura, ask me to clarify. Laura Martin: Well, I just want to be sure we're staying in the AI business is not... Clint Stinchcomb: Yes. 100% Yes, yes. Absolutely, Laura. Absolutely. And yes, and I know that you've expressed some concern in the past about smoothing out the revenue. And I'd love to address that if that's still a question on... Laura Martin: That was my second question, which is... Clint Stinchcomb: Okay. You're not the only one asking. So look, there will always be some lumpiness in licensing, but we're going to smooth it out over time. And we're going to accomplish this, and we are accomplishing this by both operational and contractual means. So operationally, as we increase our roster of partners, we reduce lumpiness. We believe that we'll double or triple our number of partners in the AI licensing area by the end of 2026. And in 2027, possibly earlier, as more open source models become accessible, there will potentially be hundreds and even thousands of companies who will need video to fine-tune specific models for consumer and enterprise purposes. Some refer to this as the open source and tune evolution. Contractually, structurally, SaaS, something you're familiar with, of course, Software as a Service. We know that's beloved by the software industry. We know that is beloved by investors. So with the type of volume we control, we've had discussions around structuring certain agreements as CaaS or C-a-a-S or Content as a Service, where we grant access over a term, so as a subscription with access to clouds of content with lots and lots of hours. Now in these deals, we need to make sure we have proper minimums in place and a few other safeguards, but this is a proven model that I think a lot of people love and that will enable smoother quarters and tighter predictability over time. Operator: And our next question comes from Jason Kreyer with Craig-Hallum. Jason Kreyer: Great job, guys. So maybe kind of building on just the library and the AI opportunity. Clint, just curious if you could talk about how AI licensing has evolved over the last year. You had mentioned 9 partners this quarter. Just maybe talk about how broad is the demand for your corpus and how frequently are those platforms coming back to get more and more of your content? Clint Stinchcomb: Yes. So we've done about 18 fulfillments to date, and we've done that across 9 partners. And so without naming names, based on the math, I think we can represent that we've done 2 or 3 more renewals with some key existing partners. And as we look out into 2026, we see -- we suspect really the revenue from our existing partners, they'll probably comprise 60% to 80% of the AI licensing revenue and 20% to 40% will come from new partners. So we do see the roster increasing significantly. And we also see real opportunity for licensing beyond simply a training right, additional grants of rights like display rights or transformative rights or adaptation rights or even certain derivative rights or possibly even some that are as of yet unnamed. I mean we're building long-term relationships, and we're committed to making sure that as we enter into all of these agreements, it's not one and done. And so I think from an -- and then to answer your question about the evolution and the changes, I think if you look at the first deals that we did, it was just get people finish content, let them use that for training the models. Today, obviously, people are still looking for finished content, looking for raw video. But there's a real advantage to being able to structure the data in a way that many of your competitors can't. And what I mean by that is just the ability to clip content to index content to annotate and to then deliver it in 7- to 20-second clips with really detailed enriched metadata. So one thing I didn't mention on the call is in Q3, we entered into some of the highest cost per hour or cost per minute agreements by far that we had heretofore not entered into. So that's a function of being able to create things that are a little bit more bespoke and a much enhanced ability on our end to structure a data. Jason Kreyer: And Clint, when you talk about having nearly 2 million hours in the library, how does that split between what's available for AI licensing, what's available for streaming by consumers? Or is that the same number for both? Clint Stinchcomb: Yes. No, it's not the same number. It's a good question. The overwhelming majority of that is for AI licensing. So we have a lot of content partners, probably over 150 different content partners for our subscription services and for our ad-supported services. And obviously, as we're building our AI library, so those are some of the first people that we went to. But the overwhelming majority of that is for AI licensing. We are increasing our volume of rights in our traditional platforms, but the overwhelming majority is for AI licensing. Jason Kreyer: You've nearly doubled that in like the last quarter or 2 or doubled the library. I'm going to assume that's a proxy for effectively doubling the AI library over the last quarter or 2. Curious, is that an indication of, hey, you guys are getting better at figuring out what these AI platforms need and you're going out and sourcing a lot more of that? Or is there a different reason that we're not thinking about it and why you're adding so much more content to the library? Clint Stinchcomb: Well, you're 100% right on the first part. We are sourcing specific content. So that's part of it. At the same time, we feel like one of our advantages is the fact that we have existing relationships with so many production companies, so many distribution companies, so many creators, so many people who own and control large libraries of content that wherever it makes sense, we want to put our foot on the gas. And we're not going to be the #1 subscription service in the world. I mean Netflix and Amazon, they've got escape velocity. They have that covered. However, we believe that we can be, if not #1, one of the top 2 or 3 licensors of video for AI training and other purposes. And part of the way that you do that is you try to generate some escape velocity on your own. So as we build out the volume of our library, it makes us more appealing even more so as a one-stop shop for any of our partners. Operator: And moving on to David Marsh with Singular Research. David Marsh: Congrats on the quarter. I wanted to start, Brady, if I could. Could you give us a little bit more explanation of the stock-based comp here in the quarter? It's -- I know you had some comments about it in your prepared remarks, but I'm still a little bit confused by it. So I was just hoping you could maybe just give us a little bit more color. Phillip Hayden: Yes, sure. So -- and the 10-Q will be out either tomorrow or the next day, possibly Friday, but a lot of the details from that will be -- for the stock-based comp will be in that document. But a number of employees received a market-based SBC warrants and awards during the quarter, during -- actually in July. You'll see some of those in the Form 4s that the executives filed and a number of other employees received those as well. The market-based components of those were something new this quarter. And because of that, we had to take a much higher grant date fair value than we would have if the awards had just been purely time-based or purely internal performance-based. Because the stock -- because of the stock market component of those awards, the market-based component, we have to value those differently. So I think the total value -- and this will be in the Q, but it's well -- it's into the 8 figures, the total value of all of those awards, and that has to be expensed over an aggressive period of time, more aggressive than if they were purely time-based over 4 years. So that's why we are -- that's why we had the unusually high SBC in this quarter. And you'll see we have another -- we disclosed an amount that will need to be expensed over the next several quarters. So hopefully, that will be easier for you guys to factor into your models. Is that helpful, Dave? David Marsh: Yes. That's really helpful. I appreciate it. Yes, it looks like almost $7 million a quarter. A couple of follow-up questions on that. How is that reflected in the current diluted share count, if it is at all? And how will it impact the share count going forward? And then just again, around SG&A, I mean, would you expect it to retreat pretty substantially in Q4? Is this an annual like accrual type thing? Or is this recurring quarterly? Phillip Hayden: Yes. So if you do the math and you look at all of our public filings, we -- I'd say it was a majority of what we will do in a year were granted in the quarter. I wouldn't expect there to be anything to that level in the next several quarters. I don't know exactly what our SBC will be for Q4, but I think the majority of what we will do for this year's grants we had to expense in Q3. David Marsh: Okay. That's really helpful. Turning kind of more strategically, Clint, thanks for the color around the licenses. It's helpful. Could you talk about content or subscriptions a bit though? You guys have launched a number of new -- kind of new markets over the last several quarters. And can you just give us an update on reception and what kind of momentum you're seeing in some of those new markets and new platforms, please? Clint Stinchcomb: I appreciate that question. And if I may, if I could just add a little color to what Brady shared. I want everybody to know that all of our employee equity grants at this point, including or especially mine, are linked to financial performance of the company, all quantitative goals. So as a company, we're very tightly aligned around business and performance compensation. It's a key pillar of culture, and it's a key pillar of our compensation structure. We are not a bloated media company where people claim to fat-based salaries and guaranteed bonuses really strive to be the farthest thing from that as a performance-based company. So equity is a critical component of this pursuit, and it's also a way to help maintain a competitively advantageous operating budget. But getting back to your question around subscriptions. We have had a number of new launches with partners like Amazon in Australia, in New Zealand. And as they roll out subscription-based services around the world, we want to roll out with them. It's a -- building a subscription business is something where there are huge barriers to entry. And so for us, like beyond just the reliable recurring revenue of our subscription services, it's a moat and it's a competitive advantage in our licensing acquisition efforts. And as a result of these deals, David, and as a result of our sort of pipeline visibility, we're supremely confident that our overall subscription revenue, retail and wholesale will grow at a higher rate in '26 than in '25. And again, we're confident because we have visibility in the third-party pipeline, meaning new and meaningful wholesale distribution agreements, which will kick in as well as channel store launches inside and outside the U.S. for our SVOD services and also because we're diligently planning and taking the requisite steps to execute new pricing and packaging in 2026. I mean if you look at a lot of public and private companies in the subscription space, the way that they've grown is through simply or I might add often just lazily raising price. That's something we have the capacity to do, but we're trying to get to the core of what we really need to do based on our marketing spend to grow subscribers. Phillip Hayden: And -- let me jump back in. I think I forgot to answer your question on dilution. A portion of the RSUs for Q3 already vested in those were those did factor into our share count for dilution purposes. Obviously, we reported a net loss for the quarter. So it was overall anti-dilutive. But going forward, assuming we're -- for net positive quarters, we'll certainly have to include those -- all of those are fully diluted. Operator: And Patrick Sholl with Barrington Research has our next question. Patrick Sholl: Just first one on the guidance in the quarter. Could you maybe just talk about the free cash flow guidance? It seems like relative to the increase in revenue, there's kind of limited free cash flow growth in the quarter. Is that mostly just a timing issue? Or is there anything to keep in mind there? Clint Stinchcomb: Timing issue. Patrick Sholl: Okay. And then on the content library for AI licensing. Can you just maybe talk about like the different markets between the content that you have that is from maybe your partners that also work with you on the streaming side versus other partners? And just maybe the different dynamics on margins and use cases and partners for licensing there. Clint Stinchcomb: Yes. It's a good question, Pat, and thank you. So when we were first building our library for AI licensing, we went to people with whom we had great existing relationships. And most of those companies are in the factual space, nonfiction entertainment, science, technology, history, travel, lifestyle, et cetera. In an effort to try to generate, again, escape velocity or dominate in the space, we then, at the same time, or shortly thereafter, start reaching out to people that we knew distributors who controlled content in other genres, general entertainment, sports as an example. And so with that type of corpus and with the way that we're able to structure some of that data, that's made a real difference as it relates to our overall proposition. I mean people love our content and love working with us because we have diversity of content, we have high quality, and we're able to just enrich the data in a way that's unique. But we do have some content whereas a lot of the content that we have in our AI corpus, we could put on our services, there is some content that goes well beyond the factual content that you would see on any of our subscription services or our ad-supported services. Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Greetings. Welcome to Playboy, Inc.'s Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Matt Chesler, Investor Relations. Thank you. You may begin. Matt Chesler: Thank you, Operator, and good afternoon, everyone. I'd like to remind you that the information discussed today is qualified in its entirety by the Form 8-K and Form 10-K filed today by Playboy, Inc., which may be accessed on the SEC's website and on Playboy's website. Today's call is also being webcast, and a replay will also be posted to the company Investor Relations website. Please note that statements made during this call, including financial projections and other statements that are not historical in nature, may constitute forward-looking statements. Such statements are made on the basis of Playboy's views and assumptions regarding future events and business performance at the time they are made. We do not undertake any obligation to update them. Forward-looking statements are subject to risks, which could cause the company's actual results to differ from its historical results and forecasts, including those risks set forth in the SEC filings, and you should refer to and carefully consider those for more information. This cautionary statement applies to all forward-looking statements made during this call. Do not place undue reliance on any forward-looking statements. During this call, management may refer to non-GAAP financial measures. Such non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation to the most directly comparable GAAP measure is available in the earnings release filed with our Form 10-Ks today, and in our Form 10-Q filed today as well. I'd now like to turn the call over to Ben Kohn. Ben Kohn: Thanks, Matt. Good afternoon, everyone, and thank you for joining us today for our Q3 earnings call. This past year or so has been all about transforming Playboy into a high-margin, asset-light business. And I'm pleased to say that the results of that hard work are now becoming clear. This quarter marks our third consecutive quarter of positive adjusted EBITDA and, importantly, our first quarter of positive net income since going public. These results validate the strategy we've been executing to stabilize the business around our licensing foundation and now position us to focus on growth moving forward. Let me start with a quick review of the quarter. Revenue for the third quarter was $29 million. Net income came in at $500,000, and adjusted EBITDA was $4.1 million. It's important to note that adjusted EBITDA was inclusive of $2.5 million of litigation expenses. Excluding those expenses, adjusted EBITDA would have been $6.6 million. Our revenue trend is particularly encouraging when you normalize for one-time items in last year's quarter, so Q3 2024. Adjusting for the 2024 revenue related to the e-commerce outsourcing and Honey Birdette store closures, revenue would have been up just over 4% year over year with basically no investment. So the underlying numbers are even better than what we reported. Licensing continues to be a bright spot for us, with revenue up 61% year over year. We signed six new licensing deals during the quarter, bringing our total for the year so far to 14. We also restructured our China partnership with a subsidiary of Li & Fung, moving them to a revenue-based structure that better aligns our interests moving forward. As previously disclosed, we were awarded $81 million in damages through a Hong Kong arbitration against a former Chinese licensee. We are taking all appropriate steps to enforce that award in China, and while it may take time to work through that process, we remain committed to pursuing recovery in full. We are just as confident about prevailing in our other litigation with a former licensee domestically. Although legal expenses have been high, we feel very good about our case and will pursue this to completion. Honey Birdette continues to perform well, reflecting the hard work we have done to improve the brand and the performance of the business. Comparable store sales grew 22% year over year, and gross margins expanded by 700 basis points from 54% to 61%. We've intentionally reduced the number and depth of promotional events, and that strengthened the brand while also seeing full-price items increase by 15%. Now I'd like to turn to our go-forward strategy, which is all about growth. As we detailed in the stockholder letter, which you can find on our investor website, we believe the next phase of Playboy's growth will be substantial, and importantly, it will be achieved in a measured way without requiring significant investment. The first step in this is clearly defining how we want to leverage the Playboy brand. Over the past four months, we've been working with a third-party agency on comprehensive brand positioning work, and it fully supports our strategy centered around content. Playboy is returning to its roots as an aspirational men's lifestyle brand with beautiful women and compelling storytelling at its core. For more than seventy years, content has been the heartbeat of Playboy. It's what fuels our cultural relevance and drives every aspect of our business. Looking ahead, our model will be focused around three verticals: licensing, media and experiences, and hospitality. First, our recurring high-margin licensing business remains the cornerstone of our profitability and visibility. The new content we're creating will open new doors for licensing opportunities and strengthen our brand across categories and geographies. The last time we invested meaningfully in content, we saw major collaborations and revenue emerge, from PacSun to Saint Laurent to Amiri. And we expect to replicate that success moving forward. Second, our media and experiential business will be driven by new content and monetized through subscriptions, paid voting, community engagement, and brand sponsorships. We've already begun testing new offerings with encouraging results. The relaunch of the Playboy magazine has generated meaningful demand, and our trial of the Great Playmate Search exceeded expectations, with around 16,000 contestants entering, representing a combined social media following of more than 200 million. We've had over a million votes cast to date by over 100,000 users. It's important to note that we have spent almost no money on this contest. The Playmate competition remains ongoing, and we plan to launch the next one in early 2026. Based on what we've learned, we expect paid voting to become a multimillion-dollar annual business moving forward. Yesterday, our winter 2025-2026 issue of the Playboy magazine hit newsstands across the US and Europe. It's a beautiful 240-page issue featuring 12 Playmates of the month and archival images of Jane Birkin on the cover. I would encourage you to go to playboy.com and buy your copy. We've also been developing a bundled subscription offering that combines access to the quarterly magazine, exclusive new content, seven decades of archives, and unique interactive experiences like subscriber-only interviews and voting for the Playmate of the Year. This strategy is designed to deepen engagement and build loyalty within our community. Second, beyond subscriptions, we're expanding into a moderate entertainment and media strategy. We signed two new deals, one with Cooper Hefner for a feature film titled "Dead After Dark," and another with Ben Silverman's Propagate Content to develop the Great Playmate Search into a reality television show. Both of these are structured as licensing-style deals. They provide for a licensing fee plus upside participation in related profits. Over time, we also plan to reintroduce experiential elements as part of our subscription or membership offering that capture the spirit of Playboy, like exclusive golf outings and poker tournaments hosted by our Playmates. Our third vertical, hospitality, will center around membership experiences. We are making great progress towards launching a Playboy Club in Miami Beach as part of our relocation to that city. We signed a nonbinding term sheet with a group of Miami investors for a $25 million investment into Playboy Hospitality, and we're finalizing the selection of our operating partner. Similar to licensing, Playboy will contribute the brand IP while partners contribute the capital. We see hospitality as a natural and powerful extension of the Playboy brand. At Honey Birdette, we're focused on maintaining its luxury positioning and expanding high-margin full-price sales through e-commerce in key flagship locations. We recently relaunched our website with enhancements aimed at increasing conversion, average order value, and engagement. Since we launched, AOV, or average order value, is up 9%, and we will be launching a loyalty program within the next two weeks. With e-commerce leading the way, we're preparing to expand into the Middle East and the Asia Pacific markets. From a retail perspective, we'll continue to invest in our flagship US stores, where sales growth is outpacing the rest of the portfolio with margins exceeding 30%, while evaluating underperforming locations. We are also thinking hard about raising capital at the Honey Birdette level to accelerate the growth there while not diverting capital away from the Playboy growth. As we move into 2026, we're excited to roll out our new brand positioning across every touchpoint of the Playboy ecosystem. This includes enhanced website functionality, subscription offerings, and premium content behind the paywall, all leading to the launch of a redesigned playboy.com. From a balance sheet perspective, we ended Q3 with over $32 million in cash, and we amended our debt facility, extending the maturity until May 2028 and reducing interest rates upon prepayments. With the progress we are making with our brand revitalization, a clear strategic vision, and a business model built to balance strong profitability with meaningful growth, we're entering the next phase of Playboy's journey from a position of real strength. Thank you all for your continued support and belief in what we're building. Operator, I'd now like to take questions. Operator: Thank you. Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Our first question is from George Kelly with ROTH Capital Partners. Please proceed. George Kelly: Hey, everybody. Thanks for taking my questions. Maybe if we could start with Honey Birdette, there was a lot you just went through, a lot of sort of initiatives and capital raising, etcetera, that you went through in the letter. I was curious just what is the goal there? And how should we think about that business growth margin, you know, the store base? Just any more context you can provide over sort of what you're shooting for over the next couple of years? Ben Kohn: Hey, George. It's Ben. Thanks for the question, and I'll let Marc Crossman pipe in as well. Look, I think as we've talked about for the past couple of years, we were all about fixing Honey Birdette and stabilizing the business, and I think we've done that. Right? We've reduced our inventory substantially. We're seeing same-store sales even though we're down seven stores year over year. Right? And we've talked about that as level setting the revenue. You know, the same-store sales are up 22%. We're seeing full-price items up 15%. We've seen 700 basis points of margin expansion. There is significant demand for the business. The issue we have moving forward is, you know, our goal is to continue to delever the company. We see a massive growth opportunity with Playboy. And so any free cash we have, we want to invest in that because we're seeing the data behind it. And so the question is, what do you do with Honey Birdette knowing that we fixed the business, it's on really stable footing, and we know there's growth there. And that leads to thinking about raising capital at the Honey Birdette level so that it doesn't divert resources away from Playboy and allows that business to continue to grow. I think, you know, long term, as we've talked about previously, you know, let's see where that process goes and whether or not Honey Birdette, you know, on the long term, should be part of Playboy as a 100% or something less than a 100% moving forward. George Kelly: And the reason you're considering capital, is it just opening more stores, or is there some other investment you're contemplating? Ben Kohn: I would say, again, you know, it would be some flagship stores that we're seeing 30% four-wall EBITDA margins on. And then, obviously, continuing to grow our e-commerce business. You know, if you look at what we've done since we've taken over the business, you know, e-commerce as a percentage of total revenue, you know, has basically flipped from when we took it on the brick and mortar. And I think we want to continue to expand into new territories. The demand and growth is there. We just need the capital to do it. And, you know, again, growth doesn't come for free. You have to make an investment. Again, we're not talking about big dollars. But right now, given that we still have a desire to continue to delever this business and invest in Playboy, I think based on where Honey Birdette is now, I think there's a good chance we could raise money from, you know, third parties to continue to grow that business. Marc, anything you want to add on that? Marc Crossman: No. I think you pretty much touched on every bit of it. George Kelly: Okay. Okay. That's helpful. Thank you. And then next question is on your licensed business outside of Viborg. It stepped up in Q3 sequentially. And I know you've signed all these new license deals. I think you said fourteen year to date. Are the deals you've signed contributing now? Is that cool? What explained the step up, and how significant are the fourteen? I'm just kind of thinking about, you know, what kind of growth those new deals should drive in the coming quarters? Ben Kohn: Yeah. So go ahead. Go ahead. No. No. Here you go. I would say, look. Again, remember, there's always a lag for when you sign a new deal because we as a business have to use 606 accounting. So you straight line it. So there's always a lag between signing deals and revenue recognition. You know, look. The pipeline is strong. I expect, you know, should the year finish strong, we should be able to sign more deals in the fourth quarter than we signed in the third quarter based on our pipeline today. And so I think we remain optimistic. You know, we put things out there in the past showing sort of the revenue by geography. And we've also put something out there in the past in our previous investor decks and hope to have a new one out shortly. But that shows by category. There's a lot of white space. The thing I would tell you, George, and we did this before. We did this back in 2018-2019 when we invested in content, and that led to, you know, the PacSun and the Amiris and these other deals. Investing in content actually really drives growth in licensing. It gives us new IP actually to somewhat to license, and it leads to brand relevancy. And so that's why content is the center of our strategy moving forward. We'll drive all three facets or all three verticals of our business moving forward. And so I would expect moving forward that will continue to accelerate as we move into 2026 and 2027. George Kelly: Okay. Okay. Helpful. And just one last question for me. Sort of a multipart one. There's a lot of different initiatives that you talked about in the letter and in your prepared remarks. Media and hospitality, all the different stuff. As we think about 2026, what opportunities do you think have the most potential to drive revenue growth? And will any of these initiatives require kind of front-loaded OpEx investments that could pressure EBITDA growth into next year? Ben Kohn: Yeah. So I know there's a lot in the letter, and it's a good question. I want to say that, you know, the biggest investment we're making, and we're doing this in a very measured way, okay? And we already started this this year with the magazine. That is our marketing for the brand. Right? We're not a brand of said this before, that spends millions of dollars, you know, taking out billboards and doing everything else. Right? Our brand relevancy and the marketing for the brand comes to the content. We're just going to monetize that content moving forward. And so it might sound like a lot, and I understand that. It's actually not a lot from an operational perspective because we've already started some of that this year. The tweaks that we're talking about, we're selling the magazine on an a la carte individual basis. We're selling the archives today on an individual basis. It's just not easy to find it. It's not done in a bundled offering. And so moving forward, you know, as we return Playboy to its roots as an aspirational men's lifestyle brand, you know, I think there's a massive opportunity when you look at the data, you know, really around relationships and sex and what's happening to men in society today. Where people are having less sex than ever before. You know, relationships are harder to come by. That's core to the Playboy brand in our brand work and what we got from consumer surveys. That is stuff that consumers will pay for, giving people relationship advice, giving people dating advice, giving people sex advice. That's the type of content that can sit behind the paywall, and then you surround that with four issues in the magazine, the Playmate calendar that is also for sale today on playboy.com, because we did 12 Playmates in this issue. You know, a great example of moving forward, and we are already doing this, is we have 12 Playmates. But instead of launching this January, February, March in the March issue, we can launch this January digitally on a safer work environment leveraging her social media as well as our social media. YouTube, get to know her, Instagram, you know, TikTok lives, all of that. But then to see her photo spreads early and behind-the-scenes content from that photo spread, you would need to be a subscriber on an annual basis to see that. And so those are the low list that we're talking about. And, again, as I said, we're going to be very disciplined in how much money we invest. We're going to do this in small increments. But, yeah, there could be substantial growth based on the data if it works, and we're seeing that with paid voting. Right? You know, paid voting on an annualized basis is already multiple millions of dollars. Right? Obviously, not this year because the contest has only been running for a short period of time. But as we move into next year, I see us not only having one contest, I see us having multiple contests during the course of the year. And what we've been able to do with paid voting when you look at the data, you know, we've acquired over 100,000 users. Okay? And we've had some real tech challenges on this first one that we have now fixed. Engaging those creators. So we got 16,000 creators sign up, but we acquired over 100,000 users with zero CAC. Right? And so last night, we actually started emailing a small group of those users to buy the magazine in the calendar, and that would then lead to emailing those users to actually become a Playboy subscriber or member, however you want to call it. And maybe as we move into next year, the voting packages that people are buying to are integrated into different levels of membership. The hospitality, let me be clear, you know, very excited by the response we've received. We signed a term sheet with a group of investors to fund Playboy Hospitality. Again, it's going to be a licensing deal. We'll take fees out for contributing the brand. We're not putting capital up. That is a longer lead time to get that Playboy Club in Miami open. When we start selling memberships, I don't want to comment on at this point, but it will be a membership club. But the first thing is getting the capital and getting the operating partner, and then you can start to begin to sell members. I don't think 2026, you'll see meaningful revenue from that. I think, you know, I think wise, I think the media and the subscription side of the business, you could start to see real revenue there next year. I think 2027 will be about getting that club going, and you'll start to see membership sales come in then. George Kelly: Okay. Okay. That's helpful. Thank you. Ben Kohn: Thanks, George. Operator: Our next question is from Alex Joseph Fuhrman with Lucid Capital Markets. Please proceed. Alex Joseph Fuhrman: Hey, guys. Thanks very much for taking my question. You know, nice to see really nice free cash flow here in the third quarter. It looks like you're getting a lot of traction with some of these high-margin initiatives. One in particular I wanted to ask you about, Ben, you mentioned paid voting. Sounds like you have a lot of confidence that that's going to be a multimillion-dollar business. Can you tell us a little bit about what you've seen so far that gives you that confidence in terms of, you know, numbers of users and spend and things like that? Ben Kohn: Sure. So, you know, let's just talk about the way we set this up, Alex, and go from there. So we set this up as a licensing deal. So there was really zero capital outlay on our part. There were some technical challenges we had when we first launched this that we have now fixed, and there's also, you know, the partner that we have on this is a good partner, and there are some flow issues that we had to fix in the beginning. The biggest issue we had was actually our SMS provider. We lost in the beginning. And so we had 16,000 people register. We unfortunately couldn't actually take advantage of our partnership with Viborg on this one, who has a large amount of international creators. We lost the ability to actually message the international creators right when this started. The second big thing was because this was our first one, instead of having, like, a rolling vote where someone signs and you're immediately in a bracket and they could share a link, we had a period of two months where we basically went dark with the creator where they would sign up, you know, call it August 1, but they didn't get their link to share in their bio on social until October 1. Okay? So there were some challenges, and then we reengaging them because you lose a lot of momentum. All of those will be fixed for the next one. But if you look at it, you know, we had 16,000 creators. The actual number of engaged creators was much smaller than that because we lost the international creators. And we spent no money on marketing on this. So we actually think it would warrant small investments moving forward to build the momentum here. But we've generated over a million votes. We've generated over 130,000 unique users signing up for this. Okay? On what was, you know, 16,000 creators, obviously, is smaller than that because some of them weren't able to participate in the contest because we couldn't engage with the international creators. So I think the momentum will build on that. On top of that, we've signed a deal with Ben Silverman's Propagate to take the Great Playmate Search and actually develop this into a reality television show. So the way we're thinking about this long term, and again, you know, we're working on that as a licensing deal too, but the awareness like a television show could bring to this overall, the way that you would do the casting is through the digital paid voting side, which then leads to basically the casting for who would be on the television show. And so this is all part of this, like, 360-degree media strategy. Again, we have to execute. It's going to take some time to do this, but I would tell you that, you know, the data alone on the revenue that we're generating, if you look at our days on an annualized basis, and we still have, what, almost a month to go in this contest. There is no revenue in the third quarter from it because voting didn't start till October 1. But when you look at this moving forward, yeah, this is already on track if you annualize sort of where we are through the first month of voting, you know, where it's already annualized out a multimillion-dollar business. And this is on one contest, and I would say next year, yeah, we're thinking about, you know, four to ten different contests that you run during the course of the year. Alex Joseph Fuhrman: I mean, I'll give you an example also. We're working on a where Honey Birdette can do a Playboy lingerie line. We're thinking about running a voting contest to find the next phase of the Playboy Honey Birdette collaboration line. Right? And so not just appear on the magazine, but how could you extend this to other parts of the business? Again, think about the top of the funnel. 130,000 people we have verified emails for zero CAC against that. Now the question is, can we start to market them other products and services as well? Alex Joseph Fuhrman: That's great. A lot of reasons to be excited there. If I could also ask some more questions on Honey Birdette following up on some of George's. You know, that's nice to see really big comp store sales growth and gross margin growth. Can you just remind us the seven stores that were closed since last year, how were those stores underperforming? Are there any other stores that need to be closed before you can really get this brand back to very significant growth? Marc Crossman: Yes. So, Alex, it's Marc. In terms of our store base, what we really look at when we talk about the flagships, it's about our top 20 stores, and we have 51 stores right now. So those stores are running close to 40% four-wall margin. And so we're really looking at, you know, the bottom 20. I'm not saying it's 20 stores that we would close, but we're really focusing on those stores as, alright. We're the ones that we think are underperforming. And don't see that path forward for those stores. But, again, that's a multiyear process, and it is definitely not 20 stores, but I do think the base needs to be rationalized a little bit. Alex Joseph Fuhrman: Right. And bigger flagships could there be? I imagine those are mostly in big markets. Marc Crossman: Yeah. But it may mainly be one in the US, and there are plenty of big cities that we have not hit. We basically hit the Southeast, you know, in the Southwest. And so there's we've got the entire US to tackle. We only have 10 stores in the US. And then there are a lot of other places around the world. You can see, you know, Dubai, Vietnam. There are a lot of different places where you would go in. Korea and have just one big flagship store in that country. And then, you know, one of the examples we can do is if we want to be in the Middle East, we want to be in APAC, because we have a distribution center in Australia, can ship out of Australia, and we don't have to deal with the duties that we're seeing coming into the US. So it's you have the entire world that you can now you can start opening these flagship stores in. Ben Kohn: Yeah. I mean, Alex, I'd also tell you that, like, you look at a market like Miami just because we've been spending a lot of time down there. You know, that's a great performing store for us. But the Miami market is huge and growing. Right? Especially after what happened in the elections this past week. So you look at South Florida in general, Miami could easily take, you know, two to four more stores down there. A question of having the right capital to invest in it, and it's why we're thinking about, you know, now that the business is on stable financial footing, there'll still be growth there. But how do we actually accelerate that growth moving forward? Alex Joseph Fuhrman: No. That's great. Really appreciate the answers. Thank you both. Matt Chesler: Thanks, Alex. Appreciate it. Ben, let's ask one more analyst question before we move on to the retail investor portion of the Q&A session. This one is from James Heeney and team from Jefferies. It's actually a two-parter, and the first one is licensing. With licensing revenue up 51% in the quarter and signing 14 deals year to date, what are the categories or geographies where you see as the next frontiers for growth? Ben Kohn: So, yeah, Matt, I would answer this very similar to, you know, comments I've already made on the call, which is when you look at the geographical dispersion of our licensing deals in the categories, there's a lot of room to grow. Now the question is making sure that we do the right deals. And so I think there's growth across geographies, and I think there's growth across categories as well. It's just a question of making sure that we continue to focus on bigger and fewer deals versus, you know, smaller deals that add more complication from an operations perspective to the business. And so the pipeline is strong. And I think our investment in content moving forward will continue to enhance that pipeline. What's the second portion of the question? Matt Chesler: The second portion of the question is can you give any more details or metrics on, you know, engagement or monetization from some of the efforts you highlighted, such as the magazine relaunch, although, I guess, this launched yesterday. The Great Playmate Search, and then the studio production deals that you talked about. Ben Kohn: Sure. So I think we've, you know, we've commented on the metrics around the Great Playmate Search. You know, the magazine just launched yesterday. Presales were strong. And Books A Million yesterday. You know, it went on sale at Barnes and Nobles. And A million. Then the studio deals are quasi-licensing deals. Right? They are they call for a licensing fee plus a percentage of the profits. Marc Crossman: Yeah. And I'd also want to add that the calendar had the same level of distribution that we had with the magazine itself, and All Doors Books A Million, All Doors Barnes and Noble. Matt Chesler: Okay. Thank you for those questions. Let's now move on to the retail questions. I'd like to say we really appreciate all the thoughtful questions submitted ahead of today's call. What we've done is taken the time to carefully review and group them. We've summarized them into some common themes so that we could address as many as possible during today's session. The first question is also a licensing question. Can you talk about any of the new deals, particularly the land-based entertainment deals? And whether the new China licensees are showing any signs of growth. Ben Kohn: Sure. So I think there's sort of two parts to this question. I think, you know, just to reiterate, we signed 14 new licensing deals, including six in the last quarter. We are targeting to sign more in the fourth quarter than we did in the third quarter. You know, as far as China, that's its own animal. You know, we obviously won the lawsuit there. That was a huge overhang on the business because of what our ex-licensing partner was sort of threatening new partners for us. That they were going to win. And therefore, if they signed with Playboy, you know, they would be throwing their money away. You know, now that that is behind us, and we'll do everything we possible to enforce that award. That, you know, we expect China to return to a more normal market still with issues in the market with high unemployment and, obviously, home values within China have, you know, been decimated. I think, again, you know, investment in content is really going to drive licensing growth moving forward and accelerate that growth. You know, as far as LBE, I think it really speaks to the partnership we're starting with in Miami. You know, we're setting it up as a licensing deal, but we put together, you know, a term sheet with a group of investors that have come to us that want to invest in it, that see the opportunity. Let's get Miami off the ground. And then we'll look at how to expand that to other cities around the world. Matt Chesler: Ben, I'm going to move to a question on digital. If that's okay. Right. So let me summarize this one. It's related to Viborg. A lot of interest in getting an update on how that partnership is evolving, including potential opportunities to collaborate with some of their platforms such as, you know, Vibe Jasmine or new digital initiatives such as Centerfold and Playboy TV. Ben Kohn: Yeah. And if you while you're answering that, if you could also address the questions around whether, you know, when do we expect that the revenue to exceed the $20 million base? Ben Kohn: Sure. So I think let's just level set that this partnership is even though we signed the deal actually a year ago next month, you know, the transition of the sites and the channels to Viborg wasn't really completed until the summer. Right? So it went in different phases. So we're very, very new in that partnership. I think we've also previously commented that, you know, we are not counting on overages in the first couple of years of that business. We're not counting on overages the way we built our organization in the restructuring of Playboy at all. That's all gravy to our earnings moving forward. But they're investing in those businesses, and we invest in the business, you're doing it because there will be future growth. That just takes time, and I think we have to be patient. As far as collaboration, we've already started it. So as I mentioned a few minutes ago, we had some issues in the beginning on the international creators. We lost the ability to message them. But regardless of that, we did some various tests with Viborg, all with good results. So we had Viborg sign up creators send out an email to their universe. We got creators to sign up. Unfortunately, in this contest, we couldn't monetize them. We had Viborg send out an email to their users to vote for the next Playmate. Again, you know, these were good results. And then lastly, we had Viborg send out an email to a select group of their users to buy the Playboy magazine. All again, we're testing everything right now. And, again, you know, we're pleased with the results. So we're beginning that testing on how to work together outside of just the licensing deal that we have in place. Matt Chesler: And now building on the Viborg topic, and where that could go over time, you know, given their significant financial commitment, and the shared synergies that exist between the two companies. Has Playboy considered a potential merger or some sort of deeper strategic integration to unlock additional scale and value? Ben Kohn: Sure. So we can't comment on any corporate transactions. You know, what I could say, and this is all publicly disclosed, is that we have a standstill with Viborg, including an ownership cap of 29.9%. And any other transaction would have to be done through, you know, the proper channels. Matt Chesler: Understood. So now let's talk about other avenues of growth. Beyond these current initiatives, are there other green shoots you see emerging that could drive momentum in Playboy's business? Such as fan voting and licensing. I think you've talked about both of those a bit. Or the revival of the Playboy Club concept perhaps. Ben Kohn: Sure. So, again, I think this is a question George had as well, but we're staying very, very focused. Right? We are making very small bets moving forward, making sure that before we commit real dollars to anything that we've tested it and we know the data supports a further investment. But, you know, to the extent we can set things up like a licensing deal, all the better. The place where really we'll be investing small amounts of money in content. We've already started that this year with the magazine. Now we're going to roll out the second phase of that, which is sort of the subscription side of it. You know, we think the media and experiential business, you know, could be larger than the licensing business over time if we execute it properly. I think on the Playboy Club, we're, you know, we're well on the way to getting that one off the ground in Miami. There's still a lot of work to be done. But we are working on that. And outside of that and growing, you know, investing in content to continue to grow licensing, we are not distracting ourselves with anything else. We have a small team. We have to stay super, super focused. And, you know, we're in the process of making sure that we can bring in the right people with the right skill sets to help us execute properly in these areas. Matt Chesler: Okay. There is an additional question about Honey Birdette. That I'll ask if there's anything incremental to offer here. How is Honey Birdette positioned competitively as the premium lingerie market strengthens, and what are the brand's priorities to sustain growth in '26? Ben Kohn: So, look, the brand's positioned really well. You know, that's what we did, Marc, two years ago, I guess. We started really cutting down the number of days on sale, focusing on brand health. You know, we've seen the results. So, again, we could drive a lot more revenue if we wanted to. Okay? There's the growth is there. But that means I got to take more inventory. Right? We've reduced our inventory to approximately nine and change. Down from, like, 13. Right. So we've substantially reduced inventory because that's cash tied up in the balance sheet. Right? That limits what you can do from a business perspective with the business. The growth is there, but you have to then say, I want to invest the capital to do it. So we focus on brand health because coming out of COVID, you remember, we bought the business in '21. August '21, if I remember properly. It's been a long time. And the week after we bought the business, I think Australia went on, like, a three-month lockdown. Okay? And on top of that, we had a lot of inventory that the previous owner had bought, and so we ended up having to sell that at discounts coming out of COVID lockdowns because on top of that, you already had your inventory plan for, you know, October, November, December in addition to all the stuff you got stuck with. So we revitalized the brand. I think the brand is doing really well. We've improved the margins. There's still growth to be had even with our inventory levels. But to really accelerate that growth, I think we need to raise some third-party capital. Or if we had extra capital, we could do it, but we don't because we want to invest in the content, and we still need to continue to delever the business. I don't mind selling a piece of that business today if I know that my remaining stake is going to be worth a lot more because the growth is there. And so that's how we're thinking about it. Matt Chesler: A different topic here. What steps is the board taking to ensure strong accountability and alignment between management and shareholder interests? Given the stock's performance and investor concerns. Ben Kohn: Yeah. So, look, let me comment first and foremost that I think the management is fully aligned with the board, and we're fully aligned with investors. And I think, you know, the turnaround in the company, we're showing that. I understand the frustration more than anyone. I know people might not think I do. I hate losing money. It drives me absolutely crazy. And I understand how frustrating this journey has been. But we have done the right things and taken the necessary steps. I want to also comment that no one on the senior team has sold any shares for personal gain. I'm actually one of the largest individual shareholders in the company. And I also want to clear up that I've actually invested my own money in this business. On three different occasions. I put almost $3 million of my own capital buying shares. One at the IPO, I bought shares at $10 a share. Second, when the stock was in the teens, I bought stock then. And then I participated in the rights offering as well. So I've invested approximately $3 million in my own capital into the business. Most of our compensation as management comes in the form of stock grants. Right? So in addition to the stock grants, I've actually put real money out of my savings into the business, which is the right thing to do as the CEO of the company. So we are fully aligned. I also think it's important to level set what's happened to us and why we got to this point. Right? So when we went public, in '21, we had a business in China that was doing about $42 million of revenue, call it $32 million and change of net profits to us. After agency fees and withholding taxes. Okay? We definitely have screwed up things. I take full responsibility for the mistakes we've made as a business. There are also things like China that went against us that you just couldn't forecast. We had $32 million of cash flow that basically evaporated overnight. Forget about the accounting treatment of it. I'm talking about cash coming into the business. At the same time, we had just bought companies and taken on a mass amount of fixed liabilities to actually integrate those businesses. And at the same time, our cost of debt because we were levered, being a levered retail play at the time wasn't the greatest thing. Our cost of debt more than doubled. So you should think about, like, the cash flow swing in the business of, like, $45 million between the loss of China and the extra interest cost that we started to absorb. Because of the debt. Right? And no question about it. We made mistakes, but those are things that we just couldn't forecast at the time. You wouldn't have thought that based on the stability of the business beforehand. You know? So we had two options. Right? You either grind it out or you could give the company to the lenders with the debt. And, you know, I'm a fighter. I think everyone on this team is a fighter. There's not a person that has sold shares here. And we did what we needed to do to survive, and it came at a huge personal cost. Right? Seeing the comments, I understand people's frustration with the business. But, you know, there's a human side of this too, which is we had to part with a lot of really good colleagues along the way. But we did what we had to do to survive. And I think now you're seeing the flip side of that. Right? I also had a really good personal relationship based on my private equity days with their lenders. I got them to amend the debt facilities six times with no amendment fees, right, including a $40 million extinguishment of debt. And then rolling another big chunk of debt into a convert. If you actually look at the convert, that we converted, plus the $40 million of debt forgiveness they gave us, it's actually, like, over, like, $4.50 a share if you combine the two of those for what the actual conversion price would be. That hard work that the team has put in, right, and has not been fun, but you're trying to get to the other side of it. Right? You first quarter since, I think, in the company's history that we now have net income at least since we went public. You're seeing sequential EBITDA growth every single quarter. The business is on a solid financial footing. We've reduced the cost infrastructure. But now what's actually becoming fun for the first time is we actually can focus on growth moving forward. So we've invested some money this year. On the brand. That was a first and foremost thing. Obviously, coming out of the mid-2020s, we went way too woke with the brand, etcetera. I've commented on that in the past. We have a really clean mission statement moving forward. We have a really clean vision. We're going to roll that out to investors in 2026. But then you'll start to see us align the rest of the company's properties around that. And I see there's a real opportunity. We know the data on because of when we had the Playboy Plus and Playboy TV websites, of what people will pay for. So we have a real path to actually monetize this moving forward and accelerate the growth with a really stable base of licensing revenue and a much lower cost infrastructure than we ever have before. So are we aligned? I think we're 100% aligned, you know, with investors both through our equity holdings, my personal investment in the company, and the path moving forward. Next question. Matt Chesler: Can you provide an update on the efforts to enforce and collect the $81 million arbitration award related to the former China licensee? And what impact could this have on cash flow on the balance sheet once received? Ben Kohn: Sure. I'm going to be slightly careful on how I answer this, but, you know, what I'd say is first and foremost, you know, we are very happy with the results of the arbitration, and we believe justice has been served. You can't get into all the particulars, but I can say that we and our counsel in China are working with the appropriate local court to formally recognize the award in Mainland China and seek enforcement. You know, we also have another litigation going on, and I understand it's more frustrating for us than anyone of what we're spending with litigation, but it's the right thing to do. We have a domestic case, you know, that we're in the process of. We feel strongly about our case in the other arbitration or the other litigation than we did in the China. And we are going to pursue that one to the end. And believe that we will be successful in that case as well. We are going to do everything in our power to collect as much of that $81 million as we possibly can. I want that money more than anyone. We deserve that money. And we're going to do everything we possibly can to collect that money. And if we collect it, it's going to be all gravy to the business. Because we're in a good place overall with the company now. Matt Chesler: We have two more questions. I promise we'll get through it. Stock buyback. Is the authorization still active? And, you know, under what conditions would management consider utilizing it given the share price levels? Ben Kohn: So let me just say the following. The authorization is not currently active. Our number one priority is to continue to I'll double check it if I'm wrong, but I believe it's not. It's not something that we're focused on right now. Our number one priority is to make sure that we continue to delever the company. You know, lenders were great again. We've extended our debt maturity into May 2028. So, you know, we don't have to worry about that right now. We also have the ability to actually reduce our interest costs by making certain prepayments to the lenders. So we're very focused on that. And then our focus is on making sure that we make smart small investments to fuel the growth of the company. So first and foremost, I want to delever this business because that takes away cash that we could otherwise invest in growth. And so we need to solve that. Once we solve that issue, we invest in growth, then you can decide what to do with, you know, the free cash flow afterwards. But right now, the priority is not to buy back shares. It's to continue to delever the company. What's left? Matt Chesler: Let's end on one final paid voting question, and then I'll turn it over to you for final remarks. Which is, you know, what kind of revenue contribution engagement are you seeing? Are you expecting? And I think most importantly, who's the winner? Ben Kohn: Well, here's what I'd encourage. Is one is all of our investors should go out and buy the magazine on our website. Please do that. Also, please go to the website and vote for who should become the winner. The competition is still going. It will end in the beginning of December, second week. Or give or take in December. So there's still live voting. We'd love for everyone to buy a package of votes. Help us on the revenue perspective. And then we can talk about that in March. I don't know who the winner is. I can tell you that, you know, we weren't sure about the quality of contestant that would enroll. And I would tell you that both us and our partner are very, very happy with the quality of contestant. You know, the contestants represented over 200 million social media followers. Now, obviously, we couldn't activate with all of those contestants because I described the technical issues. Those will be fixed for the next contest, and then we'll also take the contestants and make sure that we reach back out to them. You know, we've also done other things like we've emailed all the contestants the opportunity to buy Honey Birdette at a discount. So there's a lot of great stuff coming out of this. That we're testing, and we'll get smarter as we go. And, you know, to generate what we've generated, it will be definitely profitable for us. Because we haven't spent any money. And I think the real opportunity then is to understand how do we smartly start to spend a little bit of money to amplify this contest. If we do it the right way, this should be a multimillion-dollar business for us as we move into '20 and beyond. And more importantly, it's community engagement. Right? That to me is the most thing. The most important thing is, you know, the question is, how do I take those 130,000 fans that have, you know, actually registered and start to sell other things to them. Not going to answer the exact question outside of the numbers we've already given. Matt Chesler: Okay. Okay. Ben, thank you for taking the time to go through those retail questions. I want to thank our retail investors for submitting them. And so with that, I'd like to turn it back to you, Ben, for closing remarks. Ben Kohn: No. I really, Matt, I just want to sort of echo what you just said. I think we should make this part of our earnings call moving forward. I do this is a retail stock at the end of this day. You know, again, I want to fully acknowledge the mistakes that we've made as a team. You know, I always believe in making mistakes is okay. Just don't want to make the same mistake twice. I think we've learned from those. We're a better, more nimble, more organized management team coming out of this. I think we're starting to finally hit our stride and get some breathing room to focus on growth. I want to thank the investors for staying with us. I know it's not been easy. I will say personally, it's not easy looking at my brokerage account either, but I finally feel like we're in a place where we're taking two steps forward and one step back versus taking one step forward and two steps back. So I feel like we've turned that corner, and there's some good things happening here. And I just want to acknowledge, you know, the frustration because I see it. I do sometimes look at social media comments, and so I acknowledge it and just want to thank people, and hopefully, we can continue to deliver good results moving forward, and we look forward to talking to you guys in the March time frame when we announce annual year. We have a couple of investor conferences that we'll be announcing soon that we're participating in. And hopefully, in the short term, we'll get a new investor deck up on our website that really clearly outlines our strategy moving forward. And then as we get into 2026, we'll start to roll out, you know, this new brand positioning, which is really taking the company back to its roots, looking at that core DNA, knowing that, you know, our core audience is an 18 to 40-year-old male and making sure that we deliver the content experiences and products to satisfy that customer. So I appreciate everyone joining. I know it's been a much longer call, but I think it's important that we took the questions. And thank you all for listening. Operator: Thank you. This concludes today's sorry, ma'am. Good. Matt Chesler: I was going to say what you're this concludes the call. You may now disconnect your lines. Alex Joseph Fuhrman: Thank you.
Operator: Good day, and thank you for standing by. Welcome to the Fiscal Q4 2025 Digi International Inc. Earnings 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 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. I would now like to hand the conference over to your speaker today, Jamie Loch, CFO. Please go ahead. Jamie Loch: Thank you. Good day, everyone. It's great to talk to you again, and thanks for joining us today to discuss the earnings results of Digi International Inc. Joining me on today's call is Ronald E. Konezny, our President and CEO. We issued our earnings release after the market closed today. You may obtain a copy of the press release through the Financial Releases section of our Investor Relations at digi.com. This afternoon, Ron will provide a comment on our performance, and then we'll take your questions. Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements. We believe the expectations reflected in our forward-looking statements are reasonable, but we give no assurance such expectations will be met or that any of our forward-looking statements will prove to be correct. For additional information, please refer to the forward-looking statements section in our earnings release today and the Risk Factors section of our most recent Form 10-Ks and reports on file with the SEC. Finally, certain of the financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures, are included in the earnings release. The earnings release is also furnished as an exhibit to Form 8-Ks that can be accessed through the SEC filings sections of our Investor Relations website. Now I'll turn the call over to Ron. Ronald E. Konezny: Thank you, Jamie. Afternoon, everyone. Before we take questions, I'd like to reflect on our fiscal 2025 performance and share our outlook for fiscal 2026. Digi delivered a strong finish to the year with record quarterly revenue of $114 million, up 9% year over year, cementing our return to top-line growth. We reported a record $152 million ARR with the inclusion of Jolt software acquired in August, which represents a 31% year-over-year increase. This marks our fourth consecutive quarter of double-digit ARR growth. ARR now represents approximately 35% of total revenue, underscoring our continued transition from transactional sales to multiyear solution subscriptions. For the full fiscal year, we generated $430 million in revenue, up 1% year over year, and $108 million in adjusted EBITDA, an 11% increase year over year. Incredible collaboration between our product lines and supply chain teams drove inventory down, helping our cash conversion to deliver $105 million in free cash flow for a yield of 8%. We paid off all the debt from the Ventas acquisition as promised. Lastly, the integration of SmartSense and Jolt is being embraced by the marketplace with our first cross-selling opportunities unfolding. We have a clear vision of the combined platform, and we have integrated the teams. Digi's broad industrial Internet of Things offerings from embedded solutions to edge solutions to turnkey vertical offerings appeal to a wide variety of industries and applications. This diversity fuels our resilience, durability, and relevance. Digi's unique position in the market allows us to participate in emerging and evolving technology trends such as artificial intelligence, edge computing, and industrial automation. We see a broad-based opportunity in connecting hundreds of billions of devices to the Internet. Our AI journey began with an internal focus, and we have seen meaningful productivity gains across the company. We are now in the process of leveraging AI for our products and solutions. Integrating AI as a search tool within our web applications and exploring the use of tiny language models at the edge are potential examples we are beginning to explore. These types of advancements can enhance our customer experience and unlock additional ROI. Acquisitions remain our top capital deployment priority, and we are tracking a number of opportunities in the industrial IoT space. In fiscal 2026, we expect double-digit growth for all three of our key metrics: ARR, revenue, and adjusted EBITDA. We are confident in our long-term goal of reaching $200 million of ARR and $200 million adjusted EBITDA by the end of fiscal 2028. Additional strategic acquisitions aligned with these metrics may accelerate this timeline. As we celebrate Digi's fortieth anniversary, I want to recognize our team's incredible dedication and laser focus on our customers' success. I'm so incredibly proud to work with these outstanding teammates. Very few companies that went public in 1989 remain independent today. For perspective, the median lifespan for all US companies is seven to eight years; for the current day S&P 500, it's about eighteen years. Our team's ability to adapt and evolve is a testament to our enduring culture and commitment to continuous improvement. With that, I'll turn the call back to the operator. Thank you. Operator: Thank you. To withdraw your question, please press 11 again. And our first question comes from Thomas Allen Moll of Stephens. Your line is open. Thomas Allen Moll: Good afternoon and thanks for taking my questions. Thanks, Tommy. Ron, I wanted to start on the P&S recurring revenue trends, strong growth again this quarter, whether you're looking quarter over quarter, year over year. What can you share about the field-level execution here? Any tweaks you've made in the go-to-market strategy? What's driving some of the success? And if you keep this up, how much of that segment in particular is up for grabs to sell on a recurring basis? Ronald E. Konezny: Tom, a good question. As you know, we've talked about it for several periods here about wanting to sell solutions and having 100% attached. We really are getting closer to that goal. And so you're seeing that progress, and it's a testament to our teams and also our channel partners that have embraced this as well. And it's not all about just the upfront sale. It's delivering on that promise and, of course, contract extensions, renewals, and cotermination, those kinds of things. But it's been great to see the progress, and you're seeing that attach rate really increase. And we expect that to continue in FY '26. I'm gonna ask a multipart question here. On your revenue guidance, just to address some issues that I think will come up in the coming quarters. So to the extent you can answer these, please do. So a few things jump out on the trend for recurring revenue; it sits below what your reported revenue is expected to be. What's driving the spread there between those two? And then separately, how much are you assuming for Jolt? Just so we could have more of an organic view if we want to strip that out? And how much are you assuming for data centers? Is that a theme worth exploring here as a key growth driver? I'll let you answer whatever you can there. Thank you. Ronald E. Konezny: Yeah, yeah. So, I mean, we were very deliberate in the guidance. We're taking two successful teams, SmartSense and Jolt, and we've combined them. We've got some synergies we've captured. So I think we've been just deliberate in incorporating that into our guidance. There's incredible growth opportunities, but there's also obviously some integration we're working through with the teams, with the solutions, with the customer base as well. Jolt just tended, Tommy, to sell a little bottoms up to smaller customers. We're reaching into the enterprise. We've tended, with SmartSense, to be the opposite, selling enterprise. And so we're really moving towards enterprise sales and away from the very, very small customers. And so that's really incorporated in that ARR guidance that you see in fiscal 2026. Regarding revenue, you know, we're seeing really strong contributions from a wide variety of verticals. Data center is certainly one of those. And that's really lifting that one-time revenue, which helps that, incorporated with Jolt too. As you recall from our acquisition, we indicated Jolt contributed over $20 million annualized recurring revenue, so you can kind of add that into the organic growth rates or that's embedded in '26, which, of course, the ARR has incorporated the revenue. We had about a half a quarter that we were able to enjoy in fiscal 2025. Thank you for all that, Ron. I'll turn it back. Operator: Thank you. And our next question comes from Scott Wallace Searle of Roth Capital. Your line is open. Scott Wallace Searle: Hey, good afternoon. Thanks for taking the questions and a really nice job on the quarter, guys. Thanks, Scott. Scott. Scott. Jamie, maybe first, just to calibrate in the September quarter, I'm wondering if you could just break out Jolt so we have an idea of the organic uplift in the quarter. It seems like things accelerated towards the end of the quarter. And maybe bolting on to that, I think in some of our last conversations, over the past couple of quarters, sales cycles had been getting extended, and it seemed like that was kind of starting to go in the other direction. I'm wondering if you could comment in terms of the general pace of business right now and maybe by vertical how you're seeing that demand and those decisions getting made now? Is there an acceleration? And maybe as well, if you could address sort of government headwinds on that front as well. Jamie Loch: Yeah. Thanks, Scott. I think relative to the first question on the Jolt side, back to Ron's sort of comment on it. At the time of the acquisition, we had indicated Jolt had done over $20 million of ARR. The Jolt deal was closed midway through August, so you could sort of envision based on that ARR with a month and a half what the revenue contribution would have been like based on what we had disclosed at the time of acquisition. So that would kind of give you a guide there in terms of how that impacted both Q4 as well as what the impact would be on '26 going back to that press release. I would say in terms of more broader macro kind of conditions, I do think that we're seeing certain verticals are maybe accelerating some of their decision-making. I think others are still taking their time. I think the current shutdown of the government adds to just uncertainty. I would say we're less impacted by, say, pure government shutdown and more just by the continued uncertainty that it drives out the marketplace. And so I think, you know, again, you kind of we've seen over the last several years we're bouncing from issue to issue, whether that's from COVID into supply chain challenges into macro headwinds, into tariff questions, and now into the shutdown. And so that uncertainty, I think, causes delays. I don't think it's as much because of specific end users or, say, programs that we're working with with government entities as much as it just kind of drags it out. Undoubtedly, though, there are certain verticals where you can see a lot of movement and decision-making having to ramp up in order for those customers to be able to meet their critical objectives. So I would say on the whole, things are accelerating. But for sure, the current geopolitical conditions are creating some uncertainty that keeps things a little bit suppressed in terms of normalcy. Scott Wallace Searle: Gotcha. And, Ron, maybe if I could, comments in terms of processing at the edge, and I think tiny language models, I wonder if you could expand on that in terms of what you're seeing from a customer input, desire, I guess, and design activity. You know, where you guys are going on that front, what kind of opportunities that represents, and maybe kind of couple that with some thoughts on M&A. You folded in Jolt in the last quarter. But it sounds like you guys have got some more debt capacity now. In effect, to go out and start to be a little bit more aggressive. I wonder if you could give us your latest thoughts on that front. Ronald E. Konezny: Yeah. On the first one, and I'll provide some context to my comments that, you know, I think AI in the industrial IoT world will be a very long fuse. It will have different durations depending upon industries because the very first part of AI is you've got to get your data collected and normalized and ready to be used by AI. So whether you're a manufacturer of generators, elevators, solar farms, you know, all those different industries and all the different market participants have their own journeys they're going on to get their data ready to be leveraged by AI. But to give you a sort of a crude example, today, most IoT applications there's a device at the edge that's interfacing with some piece of equipment. It's typically talking to the computer board inside that device. It's gathering information. It's then transmitting that data to a customer or an application that then is using that data to make some kind of decision. Do I change configuration? Do I update software? Worst case, do I send a person out there to provide some kind of fix in the field, which is sort of the worst case. Right? If you think about fast forwarding to a day where these edge devices are AI-enabled, the tiny language model you're attached to an elevator, that's all you care about is elevators. Right? In fact, you only care about your provider's elevators. And that dataset is very small, a lot of that decision that is waiting to be transmitted to a centralized decision maker could be made at the edge. So those decisions could be made much more autonomously with changing configurations, potentially implementing or even requesting a software update to deal with an issue without any human interaction. That edge device could have someday, getting a little far out, even dispatch a humanoid robot to fix it. So I think that's the future we have unfolding. It will again, it will take many stages. There'll be some bumps along the roads, but that's the vision that I think a lot of our customers want to be able to realize. And it's an exciting one. Regarding the acquisition piece, the industrial IoT world is massive. And it's incredibly fragmented. It is the perfect environment for Digi and our acquisition strategy. So there are a number of opportunities out there. As you know, we have very specific criteria we're looking for. We're looking for a right to own them strategically. We're looking for ARR to be a big part of their genetic DNA as well as their business model. We're looking for them to have some degree of scale within our terms. So although there's a ton of opportunities, just like in their life out in the universe, you have to be very selective on what teams we want to partner with. So we do think that there's tons of opportunity. As you mentioned, we are generating cash. We're paying down our debt. We've got a bit of a flywheel model as we're getting bigger and generating more profitability and more cash. We're able to pursue larger opportunities or smaller ones, but in multiple frequencies. So we're excited about our playbook and our ability to execute. Scott Wallace Searle: Hey. One last one if I could. You know, in terms of the long-term guidance for ARR and adjusted EBITDA margins, you're well on the path from an ARR perspective, particularly with Jolt now folded in. But I think just from a numerical perspective, adjusted EBITDA was probably trailing that goal and a little more work to be done. But it sounds like you guys are still very comfortable with those fiscal 2028 timeline to double the adjusted EBITDA. I'm wondering if you could just provide some expanded thoughts on what gives you the comfort there, if you're seeing some other synergies, just a general operating leverage now you're expecting to get going forward. Thanks. Ronald E. Konezny: Yeah. Yeah. The ARR, you know, that's an easy one, I think, to envision. Starting fiscal 2026 with $152 million, literally, percent growth annually gets us to our goal by the '28. So that's not much of a stretch, I think, for Digi to accomplish. Adjusted EBITDA, clearly a bigger goal. We've guided 15 to 20. You know, we're gonna need 20% plus growth rates in 2027-2028 to hit that number. So there's more work to be done on there. But I will say as we start growing the top line in addition to ARR, and our margins, as you know, and you've seen our margins gradually improve, you can really start to visualize those productivity enhancements we talked about earlier really allow us to get more scale and more leverage out of that growth that we start to bring into the company. So we're still optimistic on our $200 million goals by the '28. Scott Wallace Searle: Great. Thanks so much. Great job on the quarter. Operator: Thank you. And our next question comes from James Fish of Piper Sandler. Your line is open. Caden Patrick Dahl: Hi. This is Caden on for Fish. Just wondering what kind of tailwinds are you guys seeing on the AI side with some of your larger customers? And then any way to parse out what's going into an AI data center or use case? Thank you. Ronald E. Konezny: Yeah. Good question. The data center has been the most applicable to our OpenGear console server business. We provide a pretty key piece of technology to allow an IT professional to access the equipment that is inside of that data center and to be able to use command line or other interfaces to change configurations, update software, to orchestrate that equipment without being there physically. And we do so with smart broadband connections so that you don't have to use the network to troubleshoot the network. That's really where we're seeing the most presence within our product line and data centers. And, you know, I think we're all talking about how big, how long will the AI investment last. And we're hopeful for longer and larger for OpenGear's sake. But it's unclear because there's a lot of work. You heard here at some of the major providers over the last week and a half talk about power being a critical issue or access to additional data center space. Not as much on access to NVIDIA technology. But there'll be some pacing to this. And then there's the broader question of are we over-investing in AI, and will there be a correction? Which I think none of us quite know. But in the meantime, OpenGear really is the primary beneficiary within our product lines of the data center expansion. I think to a lesser extent, we get beneficiary impacts in our cellular router and SmartSense solution businesses because utilities are spending a lot of money on their infrastructure, and that's a big vertical for our cellular router product line. Caden Patrick Dahl: Thanks. And then just my last one. Is Europe still a wildcard at this point? And if so, what do you need to work through there? Ronald E. Konezny: I'm sorry. Can you repeat that question, please? Caden Patrick Dahl: Yep. Is Europe still a wildcard at this point? And if so, what do you need to work through there? Ronald E. Konezny: Europe. Yeah. Europe, you know, both say most of our revenue is still North American centric. We're 70% plus North America. Let's say, you know, 15% to 20% Europe, and the rest is other geographies. You know, Europe is a country by country opportunity, and we have product lines that play better in certain countries than others. So we still think Europe will be a meaningful contributor. North America will probably grow faster. Caden Patrick Dahl: Thank you. Operator: And our next question comes from Josh Nichols of B. Riley. Your line is open. Josh Nichols: Yeah. Thanks. Great to see just another sequential quarter of pretty significant margin improvement. I know you have a half-quarter benefit from Jolt, but when looking at the revenue and then the sharper increase that you're expecting in EBITDA guidance in fiscal year 2026, is the expectation that you're going to continue to see some potential improvement on the gross margin line from the quarter you just did for a little bit of context? Jamie Loch: Yeah. Josh, it's Jamie. I think we moved our segment of reporting of profitability to op income coming out of the Jolt acquisition. So if we rewind the tapes, we said as ARR continues to expand, we've seen historically that there's that pretty consistent movement in gross margins in that 10 to 20 basis points sequentially. And I would say the story continues to hold the same. Right? ARR will continue to grow. As that continues to grow and adds into the mix, you'll continue to see similar type expansion. So I don't think there's anything really there. We don't guide to gross margins per se. So I really wouldn't be able to get more specific than that, but I would say history suggests based on the guidance that we've provided, we would see a similar pattern. Josh Nichols: Thanks. So then looking here, you've talked a lot about previously how these attach rates have kind of been trending up. That seems to be evident in the results. Any update on what you're seeing today in terms of attach rates or where you think that could be going over the next couple of years as you get to those, like, fiscal year 2028 targets for top line and EBITDA? Ronald E. Konezny: Yeah, Josh. It's a great question. In certain product lines, we're at 100%. In certain product lines, we're kind of in that 50% to 75% range, but we do expect it to go 100%. There are some products, especially in our embedded division, where we don't have those levels of attach rates. They're sold to engineers that are designing our products into a broader solution. But for most of our devices, we do expect to reach 100% by the end of our fiscal 2028 period. Josh Nichols: Great. And then last question for me, I think it was touched on earlier, but just to drill down a little bit further. Is there any context you can provide in terms of, like, you know, in terms of sales revenue? How much of that is actually going into data center if you try to break that out? I know OpenGear has been one of the beneficiaries, with all the increased spend in data centers. But I'm just kind of curious if you could give us a little bit more color on that. Ronald E. Konezny: Yeah. I mean, it's a positive, but we're incredibly diverse. While data center is a meaningful contributor, it's not like a dominant theme across the company's business. We do a lot of work in utilities, medical devices, SmartSense does work in health care and food. So it's an important vertical for us, but I wouldn't say any more important than those other verticals as well. But it is certainly one that OpenGear's business is about half data center, half edge. Josh Nichols: Got it. Thanks for the detail there. Appreciate it, and have a good one. Good catching up. Operator: Thank you. And our next question comes from Anthony Stoss of Craig Hallum. Your line is open. Anthony Stoss: Good afternoon, Ron and Jamie. I want to offer my congrats on the really strong quarter and really good guide for fiscal 2026. Ron, I'd love to hear your view, kind of rank order maybe some of your product segments, cellular routers, OpenGear, etcetera, IoT solutions. What you think might be kind of the fastest growing segment within each for 2026? Then I had a follow-up. Ronald E. Konezny: Yeah. The fastest growing doesn't always equal the biggest. So we expect growth across all of our product lines, which is really good. I think actually our cellular router division will probably grow the fastest of those on a percentage basis. And then our infrastructure management is our smallest product line. It's mainly legacy products with a couple of new ones. So that's typically the smallest of the four product groupings that we have inside of IoT product services. Anthony Stoss: Got it. And is it fair to say that your, in addition to the tariffs gonna be behind, that your customers are growing more confident even on the macro? Hence, that's why things are really starting to pick up for you guys. Ronald E. Konezny: I think so. I think there's a combination of a little bit more certainty. There still is, you know, less certainty than probably everybody would like, but you've got the Fed that's helping out on that side. You've got certain verticals that are really investing, utilities, data centers, medical devices. We still see a tremendous opportunity in point of sale, digital signage. There certainly are some verticals that have gotten softer. Residential solar is a really good example of that. So the beauty is the diversification of Digi. We can kind of pivot towards those areas where there's a little bit more strength in demand and deemphasize those where there's maybe some softness. Anthony Stoss: Got it. Great job, guys. Really appreciate it. Ronald E. Konezny: Thanks, Tony. Operator: Thank you. And as a reminder, if you have a question, please press 11. One moment. And our next question comes from Greg Messinas of Kingswood Capital Partners. Your line is open. Greg Messinas: Yes, thank you. Can you reiterate whatever guidance you gave on the accretion of the acquisition of Jolt back in August? And how have you progressed towards those goals? Have you run ahead of them? Or what? Thanks. Jamie Loch: Yeah. Thanks. It's a good question. At the time that we did the acquisition, we indicated really two things. We had said that Jolt was coming in with over $20 million of ARR, you can envision how the revenue was gonna fold in. We had a month and a half remaining in Q4, so we adjusted our revenue guidance to account for that incremental revenue coming from that ARR. We'd also indicated that by the end of calendar 2026, we would be at an $11 million run rate EBITDA through the acquisition. And that was gonna be through a combination of the profit that was coming in as well as synergies both top and bottom line. I would say to date, the teams have executed well, being into the acquisition now for a couple of months. We've got unified sales organizations. We've got, frankly, unified organizations across the board. As we've wrapped up our fiscal year-end, we've had an opportunity to integrate Jolt in with a year-end process that's a little bit different than theirs. So I would say thus far, we're tracking well. Both in terms of how we are focused on our integration with our people as well as being able to obtain both top and bottom line synergies that we have laid out that we would be achieving by the time we ended calendar '26. I would say to Ron's point, we're already seeing movement in our opportunity pipeline on cross-selling opportunities and where the combination is really making sense for our customers. So I think we've done a nice job. Our teams have done a nice job of coming together as one group. Jolt was a very successful company, and it's great having them be a part of Digi, and it's great seeing the enthusiasm and excitement throughout Digi on bringing these two companies together. I feel like we're executing well towards the objectives we laid out. Greg Messinas: Thank you for that. Operator: Thank you. I'm showing no further questions at this time. I'd like to turn it back to Ronald E. Konezny for closing remarks. Ronald E. Konezny: Thank you, everyone, for joining us this afternoon on the earnings call for Digi. As a reminder, we're going to be at the Stephens Investment Conference in Nashville next week. Thank you to the Digi team, and happy fortieth birthday, Digi International Inc. Operator: And this concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Hello and welcome to the Usio Third Quarter Fiscal 2025 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. Now I would like to turn the conference over to your host, Paul Manley. Please go ahead, sir. Paul Manley: Thank you, operator. Good afternoon, and thank you for joining Usio's third quarter fiscal 2025 conference call. The earnings release, which we issued today after the market closed, is available on our website at usio.com under the Investor Relations tab. On this call with me today are Louis Hoch, our Chairman and CEO, and Gregory Mark Carter, Executive Vice President Payment Acceptance and our Chief Revenue Officer. Michael White, our Chief Accounting Officer, Jerry Uffner, Head of Card Issuing, and Houston Frost, our Chief Product Officer, will be available during the question and answer session later. Please let me remind our listeners that certain statements made during the call today constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Act of 1995 as amended, as more fully discussed in our press release and in our filings with the SEC. I'd like to start off today's call with some highlights from this afternoon's release. Q3 was a solid quarter and in line with our commitment to deliver a stronger second half of the year. These results were achieved on the strength of strong across-the-board processing volumes with seven quarterly processing volume records set in the period, including a record quarterly overall transaction volume of 16,200,000, up 8% year over year. This resulted in a $1,200,000 sequential increase in revenues, impressively led by ACH, which was up strongly from the second quarter and for the third consecutive quarter up 30% from the year-ago quarter. While total revenues were relatively unchanged from the year-ago quarter, our strong sequential momentum positions Usio for a return to top-line growth in the fourth quarter and for the full year 2025. As discussed last quarter, our total revenues this period were again adversely impacted primarily by continued weakness in card issuing along with a decline in interest income. We expect this to mark the final quarter of difficult card issuing comparisons with performance improving going forward. One of the key themes this quarter is most of our new and total revenue are recurring in nature. This is an important milestone and one you'll hear reflected throughout our discussion today. Margins in the quarter improved year over year driven by strong growth of our high-margin ACH business as well as further efficiency and productivity enhancements. While salary adjustments and other costs led to an increase in SG&A, we do expect overhead to remain stable for the balance of the year. Our third quarter was another quarter of positive profits and cash flow. Adjusted EBITDA in the quarter was $368,000, down just incrementally on a sequential basis from $500,000 in the second quarter and also down from a year ago. Operating cash flow for the quarter was $1,400,000 reflecting the continued strength of our business. Our cash was up over $200,000 over the past three months to over $7,800,000 at quarter end. We anticipate continued cash growth through the remainder of fiscal 2025 positioning us to invest both in organic expansion and potentially into opportunistic strategic acquisitions. In the quarter, we used approximately $60,000 for share repurchases bringing our total year-to-date repurchases to $750,000 or just over 500,000 shares. The third quarter represented an important inflection point for Usio, with record processing and transaction volumes, solid sequential recurring revenue growth, and sustained profitability and cash flow. In addition, we completed or made significant progress on a number of our larger new implementations while continuing to build a growing pipeline of attractive opportunities. From an organizational standpoint, technology upgrades, new product launches, and ongoing productivity gains. At this time, I'd like to turn the call over to Gregory Mark Carter. Gregory Mark Carter: Thank you, Paul, and good afternoon, everyone. September was a record quarter for Card as we reported an all-time quarterly record of transactions processed and the second highest volume of card dollars processed in any quarter. Led by our continued focus on the PayFac business, our credit card segment continues to grow with dollars processed up 12% and transactions processed up 75% from a year ago. While card revenues were correspondingly up both sequentially and on a year-over-year basis, Key PayFac revenues were up 32%, continuing their double-digit year-over-year growth as a result of net new client implementations. There are currently 16 new ISVs in various stages of implementation. And from last quarter's implementations, I'm pleased to report that the largest of these new enterprise merchants has now been implemented and has been processing with us over the past few months. That's really the theme of the third quarter. This virtuous cycle of a strong pipeline leading to implementations that then lead to volume and ultimately recurring revenue. We are starting to see the fruits of that now and into the fourth quarter setting up for a really solid 2026. We've also been seeing existing customers adding new business. For example, have a long-time ISV that just added a new innovative prepaid program. The current customer base continues to evolve and grow through new programs and new merchant acquisitions. All along, referenceability has always been a key. Our capability and our unique products have attracted several referral entities that are sending larger opportunities our way as they've been impressed with our performance in the market. So in addition to our sales team, we are cultivating referral agents that can send us meaningful opportunities. This is paying dividends for us as, for instance, the large account recently implemented was from a referral entity. I should also mention that this account is not an ISV using our PayFac. So our traditional processing capabilities remain another growth channel. Another unique application where we've been able to win business is because of our willingness to provide customization that many of our competitors won't. One of these programs is our new filtered spend client. There are over 1,000 merchants that have already gone through underwriting and are on the program. So when it goes live, it could be meaningful. This is a new concept in the market we are helping to pioneer with the expectation that we could become a market leader. You may have seen Houston Frost on LinkedIn recently demonstrating one of our new wearables. This is just one of the many wearables we are exploring and developing whether that be wristbands, tap to pay, or similar products. It's another area on which to keep an eye. Finally, let me provide a quick update on our UCL1 initiative. Recall that UCL1 is being implemented as a main capture a greater share of our customers' electronic payment and printing volume. As of today, UCO is essentially integrated into one unified entity. We've rolled out a platform for boarding all of our customers on a centralized site. In addition, most of our sales team has been trained up and has a strong functional knowledge and understanding of all of our products. An example of how this is working is a salesperson that was originally selling legacy card processing recently sold a large print and mail program. I expect the productivity of UC01 to accelerate throughout 2026. Now I'd like to turn the call over to Louis Hoch. Louis Hoch: And welcome everyone. Let me begin by saying that I'm thrilled with the results of our operating metrics for the third quarter. We set seven quarterly processing records including most transactions processed through all of our payment channels, record electronic check transactions, check dollars, and return checks processed as well. Including penless debit transactions and dollars processed and credit card transactions. This momentum continued in the month of October. Where we set an all-time monthly processing record for ACH for both transactions processed and return checks processed. I'm very excited about what I'm seeing with our ACH business which also happens to be our highest margin business unit. What is different today is that the volume is primarily from recurring businesses. But when you look at our numbers, today's primarily recurring revenue is being compared to a year-ago quarter that included a number of one-time non-recurring items. UCO story. That's distorting our underlying progress and the real stripping away the influence of those one-time items provides a better picture of the fundamental growth and the strength of our core operations. And those seven processing records provide a great measure of our progress. I would also note that revenues were up on a sequential basis in all of our business lines. Putting us on pace to meet our commitment to shareholders to deliver a better second half compared to the first half of this year. This is a great start to the second half. Which we will expect to lead Usio to growing once again this year. The message is clear as a processor our job is to grow volumes to take advantage of the operating leverage that we have created. We want more transactions. And we want more volume. And we're doing it while maintaining our pricing discipline. And most importantly, as processing statistics illustrate, it is increasingly recurring in nature. Looking more closely at our businesses, ACH was a standout once again. Revenues were up 30% for the third quarter led by the previously mentioned record volume. In particular, this was the eighth consecutive quarter of year-over-year growth in electronic check transaction volume and dollars processed. ACH benefited from both new deals and the growth of our existing customers. At the same time, our penless debit offering also set all-time records for both transactions and dollars processed with growth over the same period in 2024 of 96% for transactions processed and 87% for dollars processed. Both metrics were primarily driven by the growth in the mortgage servicing industry and the FinTech industry. Penless Debit is a great solution for applications where credit card cannot be accepted. So mortgage servicers absolutely love it. And we are one of the few processors that offers this market of a pinless solution. Turning to card issuing, we generated sequential volume growth in the third quarter with total dollars loaded exceeding $75,000,000. Revenue was also up slightly on a sequential basis and card issuing profitability continues to improve. As we mentioned last quarter, this year, we are comping against a very strong year-ago quarter that had significant revenues from a very large account as some from residual New York City revenues. Going forward, the comps should begin to normalize as the large account revenues were concentrated primarily in 2024. So that once again, we will be able to clearly see the fundamental growth of its core business in the card issuing revenues. Because of card issuing's outstanding reputation, in its various governmental and charitable organizational markets, we're receiving calls from various card program opportunities for financial aid and assistance that is related to the government shutdown. We're hopeful that we will benefit from these financial assistance programs in the fourth quarter of this year. The card issuing continues to penetrate the healthcare market where early next year we expect one of our signature accounts to double their volume. And another new healthcare customer is also planning to launch their pilot with us this month. From a product standpoint, we are proving our consumer choice user interface and we've implemented and are in a beta rollout with our initial payroll card customers while our merchant-funded offers look like it will launch early next year. Card issuing also has an impressive price volume of numerous large and small new opportunities. While it'd be premature to forecast any of these opportunities into our future results, especially the larger opportunities. Based upon the ongoing dialogue and the activity levels which we are engaged, we are hopeful we should be able to land some of this business in 2026. Consequently, we believe that sequential growth generated into the third quarter is the beginning of a rebound that we expect to continue and to accelerate over the coming year. Output Solutions had a solid quarter looking beyond the year-ago one-time items. Output also generated sequential revenue growth. For instance, electronic-only documents delivered were up to 20,000,000 pieces in the quarter. Up about 500,000 from a year ago. Indicative of the fundamental core growth. In light card issuing, outputs profitability metrics continue to improve aided by the shift to more electronic document fulfillment. While on a per-unit basis, we charge less to process an electronic document than a paper document, processing electronic documents is more profitable. So the transition to electronic documents may reduce revenues while improving earnings. Output also had a solid quarter of closing new business. With 12 new agreements signed including municipalities, utilities, tax offices, and others. A majority of which are electronic document processing. That promising recurring revenue. They're also set to print and mail several million voter registration cards in the fourth quarter of this year. Output is also replacing some of their older equipment with some brand new state-of-the-art printing technology. Not only this will expand our capacity, but will enable a more competitive offering for large high-growth markets like healthcare and taxation. So we're building momentum across the organization focused on recurring revenue. In the near term, we will remain profitable with another quarter of both positive adjusted EBITDA and cash flow. The balance sheet is strong. And we continue to use this strength to build shareholder value. Having now used over $750,000 to repurchase shares so far this year. And with our positive cash flow, we can fund our growth and share repurchases while maintaining sufficient dry powder to capitalize on the favorable acquisition market should an appropriate opportunity arise. Behind the curtain, we continue to invest in the organization. Not only to strengthen our current infrastructure, but also to develop innovative new solutions that will leverage our technology in large and growing markets. I'm extremely encouraged by the conversations I'm having with all of our teams. Everyone is working hard. And we are seeing the results in growing volumes. This is very motivating. There is a great sense that we're on the verge of a potential inflection point that should follow the momentum that we've been building. We appreciate your support as we continue to build value for our shareholders. And with that, I'd like to turn the call back to the operator and conduct our question and answer session. Operator: Thank you. We will now begin the question and answer session. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Scott Buck of H. C. Wainwright. Please go ahead. Scott Buck: Hi, good afternoon guys. Thank you for taking my questions. Louis, I'm curious, you guys described a pretty sounds like a pretty strong pipeline of future opportunities. Are you seeing any change in sales cycles or anything along those lines that could potentially move some of those opportunities forward or maybe push them further out versus what you've seen historically? Well, pipeline strong. Greg wants to add anything to my comments, he's welcome to. But the sales process is very exciting for us. But we actually are focusing more on implementations. And trying to get these customers that we've already sold implemented. Which represent quite a bit of volume. So that's our focus is getting the merchants to implement faster. But sales pipeline for every division is rich. Craig, you want to add anything? Gregory Mark Carter: No. Just to echo that comment. Excuse me. Scott Buck: Okay. It's helpful. And it's a bit of a follow-up. Do you guys have levers in place where you can kind of push the pace of adoption? Or is that really outside of your control? Gregory Mark Carter: The implementations are out of our control. Yeah. If we could figure that out. That would be the secret sauce to accelerating us very fast. Okay. Each business is each business unit is nuanced and that the implementation of the adoption is slightly different. So there's really no one size fits all, but the UCL1 initiative is doing a lot better as far as standardizing kind of the input of information within UCO. But then it's all dependent on those customers to integrate at their will. Scott Buck: I see. Okay. That's helpful. And Louis, hopefully I didn't miss it I have a couple of calls going on at once here. But the federal government shutdown during the fourth quarter, has that the impact of that leak down into any of the state or local governments that you work with or would that potentially have any impact on the business during the fourth quarter? Louis Hoch: Well, when SNAP payments got suspended, we received numerous calls from cities and counties looking to bridge those payments on their own. And it was very heartening to hear that some of these new cities that we've never talked before and counties knew about us and reached out to us. Some of those programs they're going to go forward but they're not going to go forward on the basis that it could have been because it looks like we're going to be out of the government shutdown. So Yeah. Some were pushed out. We I think they're on hold pending the movement of the federal government and opening the government back up. Okay. But nice to know that you're the first call they make. Great. And then last thing, in terms of cash levels, you mentioned M&A. Could you just kind of run through what kind of criteria you would be looking for in a potential transaction? Louis Hoch: Yeah. I would go through this. I had this question quite a bit. You know, we're very strict. On what we acquire. And our criteria is threefold. One, it's got to provide some type of synergy. The synergy could come through people, industry, or technologies. We need to be able to buy it right. And the third thing is we need to whatever we're buying shouldn't have any issues you know, a problem that we think we can fix because we don't want to take our focus off of growing the company our organic growth that we have in sight. Scott Buck: Got it. Okay. And then I guess if I could squeeze just one last thing in. More of a housekeeping question. What's remaining on the current repurchase authorization? Michael White: Yes, sir. This is Michael. We renewed that at the beginning of the year. So there's still another, you know, just over $3,000,000 remaining on that current plan. Scott Buck: Okay. Perfect. Well, I appreciate the time, guys. Congrats on the progress and looking forward to seeing what you do the rest of the second half. Operator: Our next question comes from Jon Robert Hickman of Ladenburg. Please go ahead. Pardon me. Just one moment. Jon, your line is live. Jon Robert Hickman: Okay. Hey, Louis. Can you hear me? Yes. Hello? I can hear you. Okay. I'd like to circle back on your comments on the recurring revenue, particularly in the ACH business. What's changed that it's largely recurring now? Louis Hoch: All of our business has been marginally recurring. It's just when we compare to last year, had quite a few one-time events. Jon Robert Hickman: Could you That we earn revenue. Such as? Louis Hoch: Yeah. What was we've created a large bankruptcy distribution with a large card order. Plastic, which we usually don't mark up much at all. Jon Robert Hickman: Okay. Okay. So going forward, don't think gonna get like, I guess you can't ever count out the future but you if you don't get those one-time events, then rest of the revenues largely coming from the same customers and that should continue. Is that is that what I'm supposed to get out of that? Louis Hoch: No. You're what you're supposed to get out of it is our comp last year had one-time events. We may have one-time events in the future. In fact, we've already become public. You know, at the end of this year, we're gonna print the voter registration cards. You know, a large portion of them for Texas. While that's a recurring account, it only occurs every two years. So that will be another example that will occur in the fourth quarter of this year. We'll continue to get card orders but probably not at the scale that we got in Q3 of last year. So it's just a comp issue, but you can count on the revenue that we had this quarter was almost completely recurring. They're from existing customers that will continue to be customers. We'll continue to bring on new customers that have recurring business as well. To add to them. Jon Robert Hickman: Okay. And then I have a question for Houston. So I think you said credit card processing volumes were up 75% year over year? That accurate? Gregory Mark Carter: I think I think you will. It's for Greg. Yeah. I think it's Jon. Right? Jon Robert Hickman: Okay. Sorry. Yes. So The transactions process. Yes. Transactions process. So can you I guess for it's confusing that transaction volumes were up that much and revenues were up like 5%. Louis Hoch: Jon, we explained this to you when we met with you in California. The transactions for credit cards that when we report the operating metrics include penless debit. The revenue associated with penless debit goes into ACH and complementary services because Penless is an alternative to ACH. And at some point, we believe that it will diminish our ACH traffic just like that now in the clearinghouse when they get their act together and allow us to do debits. So the metrics operating metrics were up transaction-wise and also remember on credit cards, transactions don't really mean anything to us. It's the dollars process. That's how we earn revenue. Jon Robert Hickman: Okay. Thank you. Appreciate the reminder. Operator: This concludes our question and answer session as well as today's conference call. You may now disconnect your lines. Thank you for participating and have a great day.
Operator: Greetings, and welcome to the Alliance Entertainment First Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Kuntz. Thank you, sir. You may begin. Thank you. Paul Kuntz: Before we begin the formal presentation, I would like to remind everyone that statements made on the call will webcast may include predictions, estimates, or other information that might be considered forward-looking. While these forward-looking statements represent the company's current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect the company's opinions only as of the date of this presentation. Keep in mind that the company is not obligating itself to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion, management will attempt to present some important factors relating to the business that may affect predictions. You should also review the company's Form 10-K filed on 09/10/2025 for a more complete discussion of these factors and other risks, particularly under the heading "Risk Factors." During the conference call, management will discuss non-GAAP financial measures, including a discussion of adjusted EBITDA. Management believes non-GAAP disclosures enable investors to better understand Alliance Entertainment's core operating performance. Please refer to the investor presentation for reconciliation of each non-GAAP measure to the most directly comparable GAAP financial measure. A press release detailing these results crossed the wire this afternoon at 4:01 PM Eastern Time and is available in the Investor Relations section of Alliance Entertainment's website at aent.com. Your host today, Jeff Walker, Chief Executive Officer, and Amanda Gnecco, Chief Financial Officer, will present the results of operations for the 2026 ended September 30, 2025. Bruce Ogilvie, Executive Chairman, is also on the line and will be participating during the Q&A session. At this time, I will turn the call over to Alliance Entertainment's CEO, Jeff Walker. Thank you, Paul, and good afternoon, everyone. Jeff Walker: I'm pleased to welcome you to today's call. We opened fiscal 2026 with strong momentum, delivering both top-line expansion and improved profitability. Revenue grew 11% year over year to $254 million, reflecting solid demand across physical media, collectibles, and direct-to-consumer channels. Adjusted EBITDA increased to $12.2 million from $3.4 million a year ago, a 259% improvement, while gross margin expanded 340 basis points to 14.6%. These results highlight the strength of our content portfolio, disciplined expense management, and the efficiency gains we are achieving through automation and the early benefits of our AI initiatives. At the same time, our Handmade by Robots brand continues to scale rapidly. New collectible launches this quarter drove exceptional sell-through and expanded retail placement, and we are seeing growing fan engagement across both our own sites and partner channels. This business has quickly become a pillar of our collectible strategy, and we expect continued strength through the holiday season. We also strengthened our corporate governance, welcoming two new highly accomplished independent directors, Dimitri Cosco and Sheila Bangler. Each brings deep expertise in finance, AI technology, and governance. Their experience complements our leadership team and supports the company's next phase of growth and innovation. Operationally, we are advancing our AI-powered sales transformation. The rollout of HubSpot Sales Hub and Microsoft Copilot is already improving lead prioritization, automating content creation, and enabling our teams to work faster and smarter. These tools are helping us convert opportunities more efficiently as we capitalize on our busiest quarter of the year. Finally, our exclusive content portfolio continues to expand. Through AMPED, we signed a new distribution agreement with Virgin Music Group, which adds another premium catalog to our growing roster of label partners. Combined with our ongoing success in film, gaming, and collectibles, these partnerships reinforce Alliance's position at the center of the physical media and pop culture ecosystem. Taken together, fiscal 2026 is off to a strong start. We are executing on our strategy, driving profitable growth, advancing technology adoption, and deepening our relationship across entertainment categories. As we move through the balance of the year, our focus remains on delivering consistent results, expanding our exclusive content base, and creating long-term value for our shareholders. This slide offers a quick snapshot of our performance over the past several fiscal years and on a trailing twelve-month basis through 09/30/2025. Over the trailing twelve months, revenue totaled nearly $1.1 billion, reflecting stable demand across our core categories and the return to year-over-year top-line growth we saw this quarter. Adjusted EBITDA reached $45.3 million, up from $36.5 million in fiscal 2025 and $24.3 million in fiscal 2024. That continued expansion demonstrates the structural improvements we have made in product mix and cost efficiency. Our adjusted EBITDA margin on a trailing basis now stands at roughly 4.2%, and in the first quarter alone, we achieved 4.8%, a level we view as the new baseline for fiscal 2026 and beyond. That margin durability reflects higher value content, automation benefits, and early productivity gains from our AI initiatives. Earnings per share rose to $0.38 on a trailing twelve-month basis, building on $0.30 last year and $0.09 the year before. The steady earnings progression highlights the efficiency and strength of our model, even in a balanced revenue environment. On the balance sheet, we ended the quarter with $3.2 million in cash, inventory of $121.7 million, and debt of $66 million, essentially flat versus 06/30/2025, but well below our year-ago levels. Our equity position grew to $108 million, reflecting stronger retained earnings and disciplined working capital management. Subsequent to quarter-end, we further strengthened our financial flexibility by closing a new five-year $120 million senior secured revolving credit facility with Bank of America. This agreement replaces our prior asset-based facility and reduces borrowing costs by up to 250 basis points, with $61 million of undrawn availability at closing. The new structure provides lower interest expense, longer duration, and greater liquidity to support both seasonal inventory needs and future growth initiatives. Together, these metrics show a company that's expanding margins, generating consistent earnings, and operating from a stronger financial foundation. We are entering the remainder of fiscal 2026 with the balance sheet, liquidity, and operating discipline to sustain that momentum. Before I hand it over to Amanda, I want to take a moment to revisit what makes Alliance such a unique platform: the engine that powers the collectibles value chain. At its core, Alliance Entertainment connects fans to music, movies, games, and collectibles they love. We sit at the intersection of content and commerce, curating, sourcing, and delivering products that celebrate pop culture across every format. Our model is built on a fully integrated ecosystem, from exclusive product development to omnichannel fulfillment. On the front end, we partner with more than 150 studios, labels, and manufacturers to source and create the most sought-after titles and licensed collectibles. Additionally, through our own brands, like Handmade by Robots, we design and distribute exclusive products that collectors cannot find anywhere else. Those products move through a centralized distribution and logistics network that reaches 35,000 retail locations and 175 online platforms worldwide. Whether it's a major retailer, a specialty store, or a direct-to-consumer order, our automation and fulfillment system ensure accuracy, speed, and cost efficiency at scale. From there, our omnichannel delivery model brings those products to life, serving both B2B partners and consumers directly through our own retail group, which operates sites such as deepdiscount.com, importcds.com, and moviesunlimited.com. This structure gives us complete visibility across the supply chain and allows us to respond quickly to demand shifts. Each business unit—AMPED Entertainment and Music, Alliance Home Entertainment and Film and Television, and our growing collectible segment—plays a specific role in that ecosystem. Together, they create a diversified portfolio that blends recurring distribution revenue with higher-margin proprietary content and collectibles. It's this combination of deep relationships, efficient infrastructure, and a focus on fan-driven categories that gives Alliance its competitive edge and supports the margin profile we delivered in the first quarter. With that, I'll now turn it over to Amanda to walk through the financial results for 2026 in more detail. Amanda Gnecco: Thanks, Jeff. For the quarter ended 09/30/2025, we generated net revenue of $254 million, an increase of 11% from $229 million reported in 2025. Cost of revenue as a percentage of revenue improved from 88.6% to 85.4%, a 320 basis point improvement year over year. Gross profit increased 46% year over year to $37.2 million, with gross margin improving to 14.6%, up from 11.2% in the prior year period. Operating income increased nearly fivefold to $10.5 million, up from $2.1 million last year. Net income rose to $4.9 million, or $0.10 per diluted share, compared to $400,000, or $0.01 per share, in the prior year period. On an adjusted basis, EBITDA rose to $12.2 million, up 259% from $3.4 million a year ago, representing an EBITDA margin of 4.8%. That's nearly triple the prior year rate of 1.5% and aligned with the baseline we expect to maintain through fiscal 2026 and beyond. Overall, the first quarter delivered solid revenue growth, expanding margins, and continued financial discipline, a clear reflection of the progress we've made across both operations and product mix. Our financial improvement is grounded in a strong operational foundation. Alliance operates one of the most advanced entertainment distribution networks in North America, processing more than 15 million units each year and capable of scaling to over 260,000 daily units during peak demand. This scale allows us to manage both major new releases and seasonal surges efficiently, without compromising speed or accuracy. Our investment in state-of-the-art automation, including AutoStore and SureSort systems, has materially increased throughput and lowered per-unit handling costs. Those systems, combined with data-driven inventory management, enable us to move hundreds of thousands of SKUs across 76 countries while maintaining quality and consistency. We're also realizing significant cost efficiencies from these initiatives. Energy-efficient systems, reduced manual touches, and a flexible labor model are helping us control expenses even as volumes rise. That efficiency directly supports the 340 basis points improvement we've achieved this quarter. Just as important, these technologies protect product integrity and improve sustainability, minimizing waste and ensuring that every item reaches the customer in pristine condition. It's an advantage that builds trust with both retailers and consumers. While our operations are large, they're nimble and adaptable. Whether we're fulfilling a mass merchant order, shipping direct to consumer, or managing a limited collector release, the same infrastructure powers each channel. That versatility is what allows us to capture high-margin opportunities while maintaining discipline on cost. In short, the operational investments we've made over the past two years are delivering exactly what we intended: greater efficiency, better scalability, and sustainable margin performance. They give us the confidence that the profitability profile we achieved in the first quarter is not a peak but a new baseline we can build upon. One of the key strengths of our business model is our omnichannel distribution network that powers both B2B and direct-to-consumer growth. Alliance serves approximately 175 online retailers and more than 35,000 physical stores, giving us unmatched reach across entertainment and collectibles. Through this network, we connect fans and retailers with the products they love, whether it is vinyl, film, gaming, or licensed collectibles. Our direct-to-consumer has become a major revenue driver, now contributing 37% of total net revenue. We deliver this through both our own e-commerce platforms and drop-ship partnerships, which allow customers to access the industry's deepest catalog without retailers carrying physical inventory. This capital-light model expands our retail partners' online assortment while keeping working capital requirements low for everyone involved. On the B2B side, our relationships with leading national chains, independent stores, and specialty retailers remain a cornerstone of our business. We provide these partners with high-quality, in-demand products supported by robust fulfillment, automated replenishment, and seamless system integration. The result is stronger in-stock performance, faster delivery, and improved profitability for our retail customers. Our omnichannel platform is what makes Alliance so versatile. We can support a major studio release, fulfill thousands of individual collector orders, and manage retailer-specific campaigns all through the same infrastructure. This flexibility gives us a competitive advantage in a market where instant access, variety, and reliability are key. As retail continues to blend physical and digital experiences, our role as a trusted, technology-enabled fulfillment partner becomes even more essential. It's a model that scales efficiently, serves our partners well, and continues to drive meaningful margin contributions across the business. With that, I'll turn it back to Jeff for closing remarks. Jeff Walker: Thanks, Amanda. As we think about the strength of our retail partnerships, one of the best examples is our role as category adviser for Walmart's video category. This designation reflects the depth of our expertise in physical media and the trust we've built with the largest retailer in the world. In this capacity, Alliance provides Walmart with data-driven analysis, consumer insights, and operational support that inform how the video category is planned, merchandised, and executed across both in-store and online channels. Our team delivers strategic guidance on assortment, casings, and promotional planning, helping Walmart align inventory and shelf space with real-time shopper demand. We also provide forecasting and analytics that highlight emerging trends, guiding their buying decisions and release timing. For Alliance, this partnership is more than a recognition of capability; it's a validation of the strategic value we bring to our retail partners. It demonstrates how our scale, data, and category knowledge go beyond distribution to help drive category growth across the industry. By pairing our operational excellence with deep consumer insight, we're not only supporting Walmart's success, we're strengthening the overall ecosystem for physical media and collectibles. Our exclusive distribution and license agreements provide a strong competitive edge. These partnerships secure Alliance unmatched access to premium and exclusive content pipelines, reinforcing our leadership position and ensuring we remain indispensable to both studios and retailers. Today, our exclusive distribution and licensing agreements collectively drive more than $365 million in annual sales and continue to expand across music, film, and collectibles. Within Alliance Home Entertainment, our exclusive licensing agreement with Paramount Pictures has become a major revenue contributor. Under that agreement, we now handle the full life cycle: creation, manufacturing, marketing, and retail distribution for Paramount's Blu-ray, 4K, and DVD catalog. The relationship has been a key driver of the 59% year-over-year increase in physical movie sales in the first quarter and continues to strengthen our position as the leading distributor of premium film and TV content in North America. Across music, our AMPED Entertainment division represents more than 110 label partners, giving us the industry's most diverse catalog of independent and specialty music content. In collectibles, we're expanding our owned and licensed offerings. Handmade by Robots, which we acquired in December 2024, has quickly grown into a cornerstone of our collectible strategy. We've expanded its retail footprint and licensing pipeline with upcoming releases featuring characters from Sanrio, Jurassic World, Peanuts, Sonic the Hedgehog, SpongeBob SquarePants, Toho, and others. All of which will begin rolling out through fiscal 2026. Our long-standing collaboration with Weta Workshop also continues to deliver high-quality collectibles and prop replicas from iconic franchises, while our new Master Replicas partnership adds another layer of premium fan-focused products. Together, these exclusive and owned brands form a powerful portfolio that drives high-margin revenue, deepens our relationships with studios and licensors, and reinforces Alliance's position at the center of the entertainment and collectibles ecosystem. Before we move to Q&A, I want to touch on our ongoing strategic M&A priorities. M&A has always been a core part of how Alliance builds scale and capability. Over the years, we've completed 15 successful acquisitions, each expanding our reach across content, collectibles, and fulfillment. Every deal has been grounded in the same principles: strategic fit, operational synergy, and accretion. Today, our pipeline remains active, but our approach is as disciplined as ever. We're focused on opportunities that extend our licensing relationships, deepen our collectibles portfolio, and enhance our e-commerce and fulfillment capabilities. That includes specialty brands, niche distributors, and complementary entertainment businesses that align with our capital-light model. Our recent success with Handmade by Robots is a great example of that strategy in action—an acquisition that's delivering strong performance, expanding into new retail channels, and opening the door to high-value licensing opportunities. We're now applying that same playbook to evaluate the next set of opportunities that can strengthen our position in the collectibles and physical media ecosystem. With the new Bank of America credit facility in play, we have both the financial flexibility and operational infrastructure to pursue these opportunities thoughtfully. And as we do, our focus will remain squarely on driving sustainable, profitable growth and building long-term value for our shareholders. We're entering the rest of fiscal 2026 from a position of strength, supported by exclusive content, advanced operations, and a proven ability to execute. The progress we made this quarter reinforces our confidence in that strategy, and we're excited about what comes next. Before we turn to questions, I want to take a moment to thank our employees across every division. Their hard work, creativity, and execution are what drive our success. I'd also like to thank our customers, partners, and shareholders for their continued support and trust in Alliance Entertainment. We're proud of the momentum we've built and committed to delivering on the opportunities ahead. Operator, we're ready to open the line for questions. Operator: Thank you. At this time, we will conduct a question and answer session. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Once again, that's 1 to ask a question at this time. The first question comes from Thomas Forte with Maxim Group. Please proceed. Thomas Forte: Great. Bruce, Jeff, Amanda, congratulations on the quarter. I have three questions. I'll ask them one at a time. The first question is, could physical media outperform this holiday versus prior ones due to the relative favorability when it comes to tariff status versus other categories, including apparel and toys? Jeff Walker: Good afternoon. This is Jeff Walker, CEO. We are definitely seeing strong sales in all the entertainment categories right now. I think it's—I don't know if it's related to the tariffs in other categories and the minimal amount of tariffs in music and video, or actually no tariffs in music and video, but I think it's collectors who are excited about their collections. You know, movies, music, gaming, and collectibles are all huge gift items. And I think we're going to see a lot of people being gifted items, especially vinyl in particular this year. Thomas Forte: Thanks, Jeff. And if anyone's listening, I look forward to vinyl on my holiday list. So if someone wants to give me something, vinyl will be greatly appreciated. So sticking with vinyl then, can you talk about the performance of Taylor Swift's "Life of the Showgirl" versus her last album, "The Tortured Poets Department," as a proxy for the current state of consumer demand for vinyl? Jeff Walker: Well, I think a lot in the news there on Taylor. You saw some of the records that she broke with that. Interestingly enough for us, the Taylor Swift album—we did a lot of fulfillment for that album. None of it was booked into the quarter that we just reported. That street date was October 3, and we weren't allowed to ship anything out until October 1. So we didn't book anything in the previous quarter there or in the current quarter we just reported. I think one thing to keep in mind with all of the sales that she did on vinyl and CD, the CD sales for Taylor were extremely strong as well. And one of the things I've been saying about it is nobody had to buy a vinyl record or a CD of Taylor Swift. They can listen to her music on all the different digital and online platforms. So they're purely buying it because they want to collect something of their favorite artist, and they're huge fans of her. And that really goes to this—the conversation about all of our media products are for fans, and they're for collectors. And that's what we're feeding right into that. And I don't see that slowing down. People have collected music and video and gaming and other collectible items for centuries, in a sense. So that's right smack where we're at. The ability to listen to the music digitally doesn't derail people's desire to have something in their house that they can look at and that they can show off to their friends and so forth there. Thomas Forte: Great. Thanks a lot. People in check. Bruce Ogilvie: Tom, one thing I could just add to Jeff there. There is a—the consumer is wanting to own their content instead of renting it, and that also started to happen. There's a small little push in that area there, which is helping our business. Thomas Forte: Excellent. And then, alright. So last one, and thanks for taking all my questions. So it sounds like your exclusive physical media deal with Paramount is doing incredibly well. What are your thoughts on forging exclusive deals with other studios? Jeff Walker: Well, we're always working on new opportunities in the company. I do think that there's a good path there for studios to transition to Alliance to really run that aspect of the physical media for them. And we're in different levels of conversations with studios on that, big and small. There's a lot of studios out there that have fantastic content, and we're just continuing to show and prove that we're a great solution for those studios to maximize the sales of physical media for them. And the more that we continue to prove that, you know, quarter in and quarter out, the more that those opportunities will come our way. Bruce Ogilvie: Yeah. Tom, one thing to add to that. We do our own physical distribution; it's not outsourced to a third party. That creates a tremendous advantage we have over anybody even thinking about trying to do what we're doing. Thomas Forte: Wonderful. So thank you for taking all my questions, and congrats again on the quarter. Jeff Walker: Thank you. Operator: Thank you. The next question comes from Michael Kupinski with Noble Capital Partners. Please proceed. Michael Kupinski: Thank you. Thanks for taking my questions. And I want to offer my congratulations as well. It's a great quarter. A couple of questions. I understand that Handmade by Robots contributed in the quarter, and I was just wondering, you had very strong results in collectibles. Did Handmade by Robots have broad retail distribution in the quarter? I was just wondering if you can just give me a little color of what we could expect, especially as we kind of go into the second quarter. Should we start looking for more of a significant impact to that brand as we go into the second quarter, maybe the third quarter? I'm just kind of wanting to get your thoughts on the impact of that brand on that segment. Jeff Walker: Yeah. Hey, Michael. Good to hear from you. You know, Handmade by Robots, we acquired that almost a year ago. We've been really ramping up with licensing and new designs, new IP coming out. We have significant releases this month here in November. And we have some new licenses getting finalized with Disney and some of the other big licensors right now. I would say that for fiscal, we're doing well with the brand. For fiscal 2026 that we're in today, I don't think Handmade is going to make a huge impact on the overall financial aspect of Alliance. As everybody knows, Alliance is a big company, and we're really ramping that up. I think we're going to start to see a financial impact in fiscal 2027 and '28 with respect to Handmade as this continues to ramp up on the brand, and we continue to get more placement with retailers and so forth. We are continuing to add to the team, the Handmade team, to drive those sales and so forth going forward. So most of the growth in Alliance's revenue and profitability here in fiscal 2026 is not going to be attributed to Handmade. Even though it's on a significant growth pattern for that business, it just started small, and it's growing quickly. Michael Kupinski: Thanks for that color. And so I want to go back to the vinyl question. Vinyl sales seem to be a little stronger than what I was expecting. I was just wondering if you can maybe give us your thoughts on what was the factor there. Certainly, you just mentioned that Taylor Swift wasn't a big factor in the quarter. So can you kind of give us some thoughts on what were the driving factors in vinyl in the quarter? Jeff Walker: Well, we're seeing continuous consumer demand in vinyl across the board. I think also the artists in particular have really—there's been a lot of new releases, and I think top new releases are—top artists are having pretty strong following and success right now. And music overall is the category that consumers are gravitating to. And the vinyl continues to expand. And it's a pretty wide range, from all ages in the vinyl. And then there are some other additional components with vinyl, with reissues and some of the older catalog pieces of vinyl. They are reissuing those on a different color vinyl or some other aspect there, and that really helps build some more new demand to that particular vinyl piece. Michael Kupinski: Gotcha. I think one last thing on that, I think a couple of very big artists from the past are looking at bringing out some of their vinyl in the near future in colored vinyl that has only been available in black vinyl. And I think things like that can really help support the vinyl sales. Jeff Walker: Mhmm. Michael Kupinski: Gotcha. And then, the movie segment seemed to obviously have an exceptional quarter, certainly benefiting from Paramount. And I'm just wondering if I maybe underestimated the Paramount aspect of that or if there were other maybe other significant lifts that's outside of the Paramount deal. And I was just wondering if you can just kind of frame for us the significance of the Paramount licensing agreement to the movie segment or if there were maybe other contributing factors that might have accounted for such strong results in the movie segment. Jeff Walker: Yeah. I think overall, our movie division is doing pretty well. We are seeing some really crazy strong numbers with SteelBook, which is a collectible version of a steel package DVD. We're a big distributor on that for all the studios, and we're seeing really good sell-through there. In addition, it's a collectible SteelBook. It's a nice higher price point as well. And the numbers are pretty robust with SteelBook. With respect to Paramount, we've had solid releases, and we really spent a lot of time making sure that we've got all the catalog product out and we've got it all in stock. And our in-stock percentages are good. I think one thing to think about in Paramount—at the time that we picked up the Paramount business, the bulk of video DVD at this point is Walmart stores, Amazon, and Alliance. The three of us do the majority, almost 90%, of all the DVD sales. And Alliance supports a lot of other stores, including Barnes and Noble, a lot of e-commerce for Walmart and Target, and a lot of independent stores and so forth. That's our niche in it. So when we got the Paramount license business, we have our existing business that improved the margins from there. But we picked up the Paramount business to Walmart and Amazon. And that's what's driving some of our Paramount sales growth. Michael Kupinski: Well, congratulations, and good luck on the rest of the year. Jeff Walker: Thank you. We're looking for a great fourth quarter. Operator: Thank you. At this time, I would like to turn the call back to Paul Kuntz for web questions. Please proceed. Paul Kuntz: Thank you. Our first question we had is you mentioned serving as category advisor for Walmart's video business. Could you elaborate on how that role translates into incremental revenue or share gains for Alliance and whether that model could expand into other product categories? Jeff Walker: So the category adviser role with Walmart—I think everybody needs to understand that this is an independent group of people that are Alliance employees that are dedicated to be the category adviser team for Walmart on behalf of all the studios. And so this team assists Walmart in their video direction with store planning, promotional aspects, and future plans in the video category. And so that team is there to represent all the studios and work with Walmart on strategic initiatives going forward. And so with that, they're not connected to our Alliance sales team that is focused on selling not only Paramount product but all of our distributed video product to Walmart and the sales aspect there. So the advisory role doesn't necessarily translate into extra revenue for Alliance. What it does translate into is confidence in Alliance and the team from Walmart, which is a big aspect going forward in our long-term strategies with all the studios and so forth. As you gotta realize that we are at Alliance, we're also the third largest physical account behind Walmart and Amazon with all the studios' product on physical product there. And then whether it could expand into other product categories, we are the—we're not—they don't have a specific category adviser for music. But the Alliance team, sales team, we do manage and sell all the vinyl and CDs at Walmart currently in that as well. One thing I want to mention that just for recall is the adviser role also is focused on the combination of the store strategy and the e-commerce strategy. And that's something that we're right in the middle of as we do all the e-commerce fulfillment for Walmart on music and video. And so that strategy there helps to coordinate all of that together so that it's really an omnichannel strategy for Walmart with respect to video and also for music. Paul Kuntz: Thank you. And our next question, you talked about early benefits from implementing AI tools. From a simple standpoint, how are these tools helping your teams? Jeff Walker: Oh, AI is great. We're hot on AI here right now. A couple of things we're doing. We've definitely rolled out Copilot as we're a Microsoft-based company here with our software. And we've got 280 people on Copilot license, actively working with that on a daily basis, helping them be more efficient in aspects of doing their roles, and our team is very excited about that. We have internal training programs and so forth in place, and even best practices calls that we're doing. And we're really seeing a big impact on that. I think we rolled that out in July or August of this year. And really look at it and say, you know, we've continued this role with that over this year, this twelve months, how much better in advance we will be next July with respect to that on the AI side. And then the last part is we also are rolling into a HubSpot implementation on our sales management, which also involves our AR team and our marketing team. That's really going to streamline business there, and that platform has a lot of robust tools and things leaning on AI strategies and abilities there. Paul Kuntz: Great. Thank you. And our next question, you've talked about momentum heading into the holiday season. What are you most excited about from a product or partnership standpoint in Q2? And how is the holiday demand shaping up so far? Jeff Walker: Well, holiday is shaping up pretty well. We're pretty excited about this quarter that we're in. We're seeing consumer demand pretty strong across the board. And we're just seeing solid numbers right now. I know vinyl's continuing strong, and our Handmade is on a roll right now as that's building. And on the video side, we're doing a lot of new strong things too. So we should have a strong quarter here. Paul Kuntz: And our next question, you highlighted a significant 17% reduction in interest expense year over year. With the new Bank of America facility, what's the expected annualized savings? And how does that impact free cash flow trajectory in fiscal 2026? Jeff Walker: Yeah. That was a big improvement for us going to Bank of America. We reduced our interest from SOFR four to a SOFR one and five-eighths. And at that type of difference, if you run about a $60 million borrowing across twelve months, I believe that's about a million and a half interest savings per year. And so we're in pretty good shape with that. And then, you know, we also will get the benefit or have been getting the benefit of the Fed rate reductions as that has been bringing down the SOFR as well on top of that. So as we move into January and the beginning of 2026, we're going to be sitting with a pretty nice interest rate cost going forward for calendar '26, so we're pretty happy about that. Paul Kuntz: Thank you. And our next question, Handmade by Robots seems to have strong traction. Are owned IP products now meaningfully lifting blended gross margin? Jeff Walker: I think I got most of that answer there with Mike earlier. It's overall margin—we're seeing good margin in Handmade by Robots. The overall sales volume is, you know, compared to our $1.1 billion in revenue, is not at the level that it's going to make a significant impact yet this year in fiscal 2026. But I think you'll start to see impact in fiscal 2027 and '28 from an earnings standpoint there. Paul Kuntz: Thank you. And then we have another question. If Paramount doesn't win the bid to acquire Warner Brothers Discovery, does that influence Alliance's chance of getting a licensing deal with Warner Brothers? Jeff Walker: I think those are totally separate conversations there. All the studios at some point, we believe in the future, will move towards a licensing model on physical media. And we are positioning ourselves to be the front runner as to the place that studios would move to. They all have different time frames and initiatives within their organizations. And so, but with respect to the Paramount, whatever happens with Warner, I don't know that that means one way or the other for us there. I will say, you know, that we just saw some more news today about David Ellison wanting to feature some more focus more on theatrical releases for Paramount. That is smack dab a home run for Alliance that they release a few more, you know, top tentpole theatrical releases that those movies roll into our, you know, DVD release after that. So we are optimistic with Paramount itself, whether they acquire Warner or not, but they are investing in content, and that investment in content will be a positive thing for Alliance. Paul Kuntz: Thank you. And our next question, as you look ahead to the rest of fiscal 2026, what gives you the most confidence in Alliance's ability to sustain the strong margin performance that you've established over the past two quarters? Jeff Walker: Well, the results that we've been producing the last two quarters are not—they're not a fluke. They're where our business is currently. We see a lot of strength in there. We have a lot of initiatives that we're working on for 2026, internal initiatives for organic growth and other opportunities to grow the business. So we're pretty bullish as to what we've got. You have to realize that I have an all-star team of people here at Alliance. It's not just me, and it's not just me and Bruce. I mean, we have a significant team of all-stars in all these different areas. And each one of these areas that Alliance is participating in, those leaders are running fast in those areas. And that's why you're starting to see this performance and the growth that we're putting together is because we've got a big team of people that are all running fast in their areas and working to add new customers, new sales, new product lines to their areas. That's all that's driving us forward here. And part of that too is we gotta remember that my entire team here is over 700 people that also have shares in the company. As we went public two and a half years ago, everyone on the team was awarded shares. And newcomers onto the team are in a vesting program for their shares. And so we have the entire organization focused on driving this business forward and growing the business and doing great work. And so that's what you're seeing. And I have no reason to doubt that our team's gonna continue to do that all through 2026 and beyond. Paul Kuntz: Thank you. And we're coming up on an hour here. That was looks like the last question that came in. Any final comments that you would like to leave with the audience before we wrap up? Jeff Walker: I'm just excited about what we're doing. We're on a roll. As I just said, we've got a great team. It's fun working with our team. Everybody's working hard, and we got a lot of fun stuff coming up. So I think that's where we're at. We're super excited to be able to put together good numbers and continue doing that and driving that forward. That's what we're working on right now. We're working hard on it. And thank you, everybody, for joining our call today. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Greetings. Welcome to the CX AI Third Quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please click on the ask question box on the left side of your screen. Type in your question, and hit submit. As a reminder, this conference call is being recorded. Now I would like to turn the call over to your host, Khurram Sheikh, Chairman and CEO of CXAI. Please go ahead. Khurram Sheikh: Thank you, operator. Good afternoon, everyone, and thank you for joining us. I'm Khurram Sheikh, Chairman and CEO of CXApp Inc., trading on Nasdaq under the symbol CXAI, pronounced Sky. Also joining me on this call is our CFO, Joy Mbanugo. And before we begin, please note our forward-looking statements as outlined in our safe harbor statements as outlined in our disclosures. We're also submitting our 10-Q, which will be filed with the SEC, and you'll also see a press release that just got launched out there. So let me talk about Sky. You know, people ask me the question, what does Sky actually do? At Sky, we are defining the intelligent experience layer for the modern enterprise. Our platform blends AgenTeq AI autonomous context over agents, spatial intelligence that understands how people actually use the workplace. This combination turns data into decisioning, and routine actions into automation. We're not just another AI platform. We're the bridge between billions in corporate AI investment and the actual human experience at work. When people ask, what does Sky actually do? Here's my answer. We transform office buildings, campuses, and digital workspaces into living, learning, and adaptive environments. Environments that think and act with you. We now operate in 200 plus cities across 50 countries serving over a million users. And all of those users are using us in a very secure manner across all their campus environments, integrating all the enterprise functions into one application. I'm also proud of the great team we have. We have around 65 Willow Sky employees who are all based in multiple offices globally. In the Bay Area where our headquarters is, in Toronto, Canada, and in Manila. And more than 70% of them are in R&D. We're a technology-focused company. And this tells you that our DNA is an innovation company. So let's talk about, you know, technology-wise, what does this entail? And we've been the leader in the first mobile app for this application of workplace experience. Being cloud-first, and now we're AI native in terms of this deployment that we're embarking on with Sky 1.0 going to Sky 2.0. So, and I've shared these slides in the past, but I want to just reinforce the fact that we're building this as a platform. It's not a one-off application. The Sky apps go from all the way from your mobile device all the way to a kiosk or even larger. We'll talk about that today. Also be multi-OS and be able to be adaptive. Our BTS behind the scenes is our rule engine, our brains behind the Sky system that allows enterprise owners and users to control and manage the content as well as provide access control and create all the great things that will enable productivity at the workplace. I want to show you some great examples of that. And then finally, SkyView is our data analytics and ingestion engine that allows you to create your own dashboard, create your own analytics, and create insights and the outcomes that really matter at the end of the day. And all of this is hosted on the cloud. We're partnered with Google, as you know, but we also enable things on AWS and Azure. So we're multi-cloud. We're multi-application across the board, and we're building this as a platform for scale. So I want to talk about the market and what's happening within the market today and the market trends. Across this is a study done by McKinsey. And it's very enlightening to see that across the Fortune 500 where we participate, 88% of organizations say they can when they use AI, they only don't scale it to the enterprise level. So although AI is being used by more than a large percent of enterprises, they're not using a scale. They have the tools, but not the orchestration. That's where Sky comes in. Sky solves that execution gap. By unifying workflows, analytics, and human experience into a single agentic layer. It's what we call agentic orchestration, turning disconnected tools into intelligence systems that anticipate and act. Think of a global bank with 40 offices worldwide. You already have Teams, Zoom, ServiceNow, and multiple space management tools. But no unified experience. OriginChic engine stitches those environments together so that a team lead books a hybrid meeting in New York, the system automatically coordinates rooms, catering, visitor access, AV support across different time zones. It's invisible, autonomous, and measurable. Along with that, you've seen what's happening in the environment. You see a lot of CEOs are mandating return to office in AI tool adoption. Where employees are burned out and disengaged. That's the leadership expectation versus workflow reality divide. As executives, we are pushing return to office mandate employees create flexibility. The result is policy friction. Sky bridges that mandate to execution gap. For a major technology client in Silicon Valley, we used our platform to launch the new campus at headquarters. Right size their campus designs and footprint, allowing for colleague booking feature, to allow selecting where and who they want to spend their day providing an automated check-in process for their users via their internal badging system. This improved on-site attendance satisfaction scores as well as created higher employee engagement. That's productivity, collaboration, and sustainability altogether. That's the beauty of Sky. We enable all of these great capabilities, and the outcomes are coming very clear now with our clients. And, you know, this is not us just talking about it, and the world is taking notice. This quarter, Gartner named Sky as a representative vendor in the 2025 market guide for workplace experience applications. A category we helped define, by the way. We've been working with them for the last two years, you know, educating them on the benefits of AI and the benefits of our capability to enable this transformation. It's a validation that our combination of AgenTeq AI and spatial intelligence isn't just visionary. It's essential to the future of work. And, you know, we've been very happy to see this guide come out. There's also more work coming out from Gartner and their analyst. As we said in our first calls with you guys, there is going to be a new category called employee experiences. And I think the market is headed in that direction. This last quarter, we were super busy also with lots of events and lots of things happening in the market. Amplified our ecosystem presence at the San Francisco Tech Week. Talk about that in a bit here. We were at WORKTEC at the META headquarters in Menlo Park in Palo Alto area on October 9, and then we also attended the Connect Global Summit in Anaheim. Across these events, one theme was constant. AI in the workplace is no longer a pilot. It is a board-level imperative. So it's super important to recognize that as we talk to our ecosystem partners, our customers, our stakeholders, all of them are pretty clear that the AI bandwagon is everybody's gotta be on it, and it's gonna change the way we work. So we are super excited about, you know, the events we were a lot of great new clients that came to us. Our existing clients were there. We hosted a number of networking events. And we discussed and debated and the reality is everybody wants our agentic AI solution. They want it faster. Another strategic collaboration that we announced this week was, you know, our collaboration with a really cool company called Noro. We are thrilled about our collaboration with Noro. It's a pioneer in immersive telepresence. Together, we're merging Sky's autonomous AI engine with Noro's life-size presence portals. Imagine walking up to a wall in New York and speaking naturally face to face with a colleague in London. With Sky's agentic AI automatically handling context, environment, collaboration tools behind the scenes. That's how we're turning presence into intelligence. For most of our global customers, this partnership will allow hybrid project teams to occupy, I mean, occupy in commerce shared spaces in real time, seeing body language, maintaining eye contact, ensuring digital work streams, all orchestrated by AgenTeq AI. That's how Sky makes distance disappear in hybrid work. We're super excited about it. We're gonna have the first unit being installed in our offices. You know, Noro also has locations already deployed to London and New York and then Atlanta and Chicago. And we're gonna be taking to our client. We're putting the road map together in terms of the combined offering. It'll be available to clients beginning in Q1. But we're doing a lot of internal testing right now. So super excited by this opportunity and Tomaso is a great partner, and I've known him for a while. And super happy that we're working together now. So let me talk about other highlights on the product side. You know, innovation continues to define Sky's Edge. Or 1050%, enhancing colleague visibility through dynamic math, delivering a cleaner, faster UI. And this is really important because a lot of our clients this last quarter were starting their RTO plans again. Reengaging with their employees to they wanted something slicker, faster, and our team delivered. For example, one global client used the enhanced booking engine to manage more than ten thousand plus desks across five campuses. They reported a significant percent drop in scheduling conflicts in the order of forty percent or so. A double-digit increase in employee satisfaction with hybrid coordination. That's another example where as our solution, as you can see the, you know, colleague booking where you can see the screens and the people and their images and also look at, you know, the visual representation of all the things around them. It's super amazing and interesting, and it creates that engagement layer. Say, yeah. I really wanna get back to the office. I really wanna interact with these people, and I really want to get my work done faster. Now to enable that, we also have we talked about a VTS, which is our behind the scenes. Oh, by the way, before I go there, let me show you a video jumping ahead of when I talked about this at the conference at the SF Tech Week, where we had Google as our invited guests as partners, but let me share with you something that I've said there. Okay. I don't know if the video was accessible or not, but we're gonna have it available on the platform. Let me try to play it again actually with my volume one. Maybe that'll help. So that feature becomes so important. Our customer said, this is a must-have. You gotta have it. And by the v one pictures. It's like a scramble screen of all these images. Like, don't we wanna see them? Let's see who they are. Right? It's just human behavior. Dash booking is a self-created feature, meaning that there's no need for it if you have assigned desks, which we grew up with assigned desks. It was clear because of the pandemic. So you create a new problem that has now been difficult for an employee to get to the office and find a spot which creates this new set of opportunities which I think agenda AI makes it more easy and simple because you don't wanna go every morning. Where do I have to sit or what do I have to do? Whatever we make it for the recommendations for me so I can make it better. So what we do. Okay. So I think we had some technical glitch earlier, but, hopefully, the audience heard the audio that just tells you, you know, what we see as a really killer application, a killer use case wanting to have this colleague booking feature, knowing what was in the office, where they're sitting, being able to, you know, adjust your daily calendar as well as your weekly calendar based on where it is. You know? And I think it's pretty cool to see this live in motion now. A lot of our clients are using it. It's a great feature. It's a must-have for a lot of our clients. I'm super excited about that. And what enables all of this stuff is the behind the scenes, the brains behind it, and, you know, before we go there, let me talk to you a little bit about one of the big deployments that we did this quarter, which was we were live at 30 Rock. Which is a marquee place, and it's been pretty amazing to have that deployment be live now. And that took a lot of effort from our client as well as us. And as you know, it's a high-profile place, so making sure that everything is working well. Be around, you know, 6,000 users day one on that system. The system did not implode. It actually worked really well. People were super happy. Actually, the clients made some Instagram posts, as you can see there. And there were some really great activities happening. And, you know, as we look at the activity logs, we have our SkyView Analytics, we can show you the things people were doing, and it's interesting. That client actually does not do any space booking. But they were doing a lot of amenities, a lot of content, a lot of events. Most importantly, dining. Dining was the number one feature across the board. We launched not only that one site in New York, we also launched four sites across the country. One is on the West Coast. The other were on the East Coast. And it's interesting to see that, you know, there's a lot of great demand for their capability. A lot of users, we are using it every single day. And some of the sites that we thought were gonna be less using it, actually using it more. Primarily, as I said, the dining feature is a must-have. Everybody loves the dining feature. And then seeing all of the other, you know, capabilities in terms of access to all the different amenities at the offices, all the different events that you can go to, really create that engagement layer. So now all of the ideas we talked about are now in real motion, in real deployment with this client, and they're super happy with the performance. So let's talk a little bit about I mentioned the BTS, which is behind the scenes, and that is actually the key technology platform that is letting enterprise admins manage complex content faster. And now we actually are in beta trials with a full AI plug-in for natural language content creation. These migrations are beginning in Q4. And this will be fully compatible with our legacy apps offering faster administration and granular growth controls as well. And what that means is, you know, if you're the IT guy, you can get to all the information ready to IT. Or if you're an HR manager, you get all the people data. Or if you're an operation manager and you want your team data, you can have that access to that. You can, you know, provide content, notifications, all the things that are necessary for that. So it's super exciting, and this is an infrastructure player that we really believe will enable, you know, supercharge your legacy apps. So I wanna go to the future a little bit. So we've talked about our Sky digital assistant and how it works. I'm gonna play a little video of how our existing new and enhanced Sky Digital Assistant is working in our labs in San Ramon. You know, it's kinda like a Sky digital assistant. It's like an intelligent concierge. It's employees can now book, plan, and act in real time using natural language. With the system proactively suggesting actions based on calendar, location, behavior. It's a living example of AgenTeq AI. Workplace that works for you and not the other way around. I wanna play the video. Hopefully, you'll hear the audio on this. And you'll see our Sky assistant interacting with one of our engineers. Joy Mbanugo: Hi. I'm Sky at San Ramon HQ. Can book meetings, reserve desks, or order food. How can I help today? Khurram Sheikh: I'm on the clinic tomorrow at 2 PM for one hour. Joy Mbanugo: Thanks. How many people including you, will be attending, and will you need a screen? Khurram Sheikh: Oh, yeah. There will be screen people, and, yes, I need a Joy Mbanugo: Yablo Gen with capacity for five and a screen sounds ideal. Would you like me to check its availability for tomorrow, November 12, at 2 PM to one hour? Khurram Sheikh: Yes, please. Joy Mbanugo: Perfect. Let me check if Diablo Den is available for you. Good news. Diablo Den is available. Booking it now. All done. I've successfully booked Diablo Den for Wednesday, November 12. From 2 PM to 3 PM. Would you like to order food for your meeting? Khurram Sheikh: Yeah. That that that actually would be great. Joy Mbanugo: Great. Type of food would you prefer? Do you recommend bamboo sushi for sushi? Both from tallest for vegetarian, or mixed for healthy bowls. Khurram Sheikh: I'll go with mixed. Joy Mbanugo: Perfect choice. I know you love the Dave's Taco Bowl from mixed. Should I order that for all three people? Khurram Sheikh: Yes. Operator: Great. Joy Mbanugo: What time should it arrive? Your meeting starts at 2 PM. Khurram Sheikh: 02:30 PM. Operator: Perfect. Joy Mbanugo: I've ordered three days taco bowls from Next. Being delivered to Diablo Den by 02:30 PM. You're all set. Khurram Sheikh: So that's a gender guide work. Context-aware, proactive, and human-centered. Hopefully, you see how intuitive it was, how easy it was to use, and how context-aware it was to find the right thing for you and making it happen effectively. I know that, you know, if you turn if you put push the video on the screen, you could you could see it in real time. So we'll have that available for you after the call. And for the next video, I'll let you know how to depress it, but, hopefully, you heard the audio on this. And, you know, before I go forward, you know, Q3 was a really good quarter for us. We had a lot of these great customer highlights, deployments, as well as, you know, this new advancement with the Sky. Platform. So we're super excited about that. I'm now gonna continue to our my my partner, CFO, Joy, to give you the financial updates for Q3. Joy? Joy Mbanugo: Thank you, Khurram. It sounds like or not sounds like, but the digital assistant just reminds me of a theme for this quarter, something I've been thinking about in the theme or keyword is momentum. So we're seeing momentum in the AI ecosystem. We're seeing momentum in the speed at which, you know, companies are implementing return to office or the reboot of return to office. So return to office two point o. And then, more excitingly, momentum in our product and think the digital assistant is, super exciting for me. I don't know if I want the whatever bowl I was ordering, but that sounds a lot of great progress there. If we go to slide 18, we can look at our three financial highlights. This was a solid quarter of execution and operating discipline. We maintained strong margins controlled OpEx, and delivered measurable improvement in profitability. Starting with ARR expansion, we closed the quarter with two large logo renewals both in the enterprise segment. These renewals reflect customer confidence in our workplace platform and demonstrate the durability of our recurring revenue base. Our subscription revenue mix reached 99%, an increase from 88% in the same quarter last year. That transition toward pure staff continues to be one of our key strategic levers. Increases predictability, expands gross margins, and creates multiyear visibility into future cash flow. Next, on gross margin, we delivered an 89% increase compared to 88% in Q3 of last year. And 86% last quarter. The steady improvement reflects the benefits of disciplined cloud cost management and more efficient infrastructure scaling. We're continuing to see leverage in our cost delivery as we optimize across multitenant environments and automate provisioning. Turning to cash OpEx, we held steady at $3,200,000 flat compared to both last quarter and the prior period. That stability reflects our ongoing focus on operational efficiency, for maintaining a lean structure while still investing in innovation and go to market execution. Finally, on profitability and earnings per share, we improved earnings per share this quarter to negative $0.13 a substantial gain negative 34¢ the same quarter last year. That's a very clear signal that our cost controls and recurring model are working together to improve the bottom line. We can go to Slide 19, which is our quarter over quarter comparison. Khurram Sheikh: Revenue came in Joy Mbanugo: at $1,100,000 compared to $1,200,000 in Q2. The modest decline reflects the shift in revenue mix. We saw lower hardware-related sales this quarter consistent with our strategy to phase out noncore components and focus on software-led growth. Cost of revenue, decreased from a 171,000 to a 123,000, which drove an improvement in growth profit to 991,000 and lifted gross margin to 89%. That gain was driven primarily by tighter control over cloud utilization and vendor optimization. Looking at operating expenses, total OpEx declined to 4,800,000.0 from $5,200,000 in Q2 an 8% reduction quarter over quarter. Most of that was related to some of that was related to savings in other areas, and you will see an slight increase in g and a, but that is primarily due to stock-based comp. Just because we have a large amount of stock that vest for employees in Q3. So you always see that probably quarter over quarter. Overall, the shift demonstrates flexibility of our operating model. We're able to scale innovation while containing discretionary spend. As a result, law firm operations improved to three point negative three point eight million compared to negative 4,100,000.0 in Q2 twenty twenty five. That's continued progress quarter over quarter as we execute against our goal of reaching breakeven as we execute reaching breakeven eventually. I also like to talk about our cash position. We remain very healthy with our cash position. We ended the quarter or as of right now, today, actually, with $9,000,000 in the bank. And with our equity and debt of fundraising that we've done throughout the year, we have access to cash that should last at the least for the next two years. In summary, Q3 showcased steady discipline performance, improving gross margins, consistent OpEx, and expanding recurring revenue. For managing growth, and profitability in tandem, ensuring Sky's position positioned to scale efficiently while driving durable shareholder value. Back over to you, Khurram. Khurram Sheikh: Thank you, Joy. So I wanna talk a little bit about the future here. You know, at as of tech week, we hosted a panel moderated by Samra Khan, who heads up system integrator partnerships at Google Cloud. She talked about the inclusive and immersive workplaces of the future. It's a very interesting talk. So I'm gonna play a snippet of it. What I ask the audience is please press on the play button so you can watch the video, but you're gonna hear the audio through this as well. So I'm gonna start right now. Joy Mbanugo: Speak if I'm in Foster City, my hologram is going to be sitting here. Those of you who are big Star Trek fans, I drove growing up as a kid. Was like, into it. I always believed that one day that's going to become reality. And if any of you have visited on Executive Meeting Center, we already have a demo of it. I have gone through it. It's I must say it's amazing and scary. All at the same time that you know, the hologram was eating an apple, and I'm like, oh my god. This this kid So I believe, you know, we're going to an in workspace, we're going to enter the world of Panover. There is going to be virtual reality. That's how we're going to do meetings. And I'm not saying that we're going to replace human interaction. I absolutely not. I think there is a need for that. The need for it is always going to stay there. If COVID has proven one thing, it's proven that. That human connections are important. We're going to, you know, we're going to continue to be in the hybrid environment. But I think most importantly, we going to do what what is going to get even more better in 2030 and beyond is that no matter what part of the globe you are in, your employee experience is going to be inclusive, It's going to be culturally adaptable to for somebody who's working out of Alaska versus Silicon Valley. And it's going to be it's going to be inclusive, which I think is very, very important. That's why I think for children, reality is going to be a big part of it. I wouldn't be surprised if I'm talking to around five years from now. And he's like, hey. I've been testing this new app if I've met a person at and you know, I have all of this other stuff. And then he just said going to work for you. Khurram Sheikh: It's pretty exciting stuff. And, you know, these conversations and the other conversation we've had, with great partners at our events, reaffirm that Sky is the partner choice for the world's most advanced AI ecosystems. We were very proud of our partnership with Google. And it's super interesting how they are, you know, aligned with our vision, helping us on the infrastructure side, helping us on the go-to-market side as well. And then, you know, being thought leaders with us as we look at defining future work. So I wanna summarize, you know, what you saw today, what you heard from us today, but you know, as we exit Q3 and now in Q4 moving into 2026, our priorities are clear. Three priorities. Number one, expand within our current customer base. Meaning for Fortune 500 clients, it's only, you know, two or three or four modules today. Every expansion into either analytics or content management, digital assistant that you saw multiplies ARR potential. Number two, accelerate ecosystem integrations. Partnerships, like you heard about Noro and Google Cloud extend Sky's reach beyond traditional workplace apps into immersive and agentic experiences. And third, Joy Mbanugo: maintain Khurram Sheikh: cost discipline while investing in AI leadership. We're balancing growth with responsibility, proving that AI companies can scale intelligently. In short, Sky is the most advanced agentic AI solution for workplace and employee markets. We're not just riding the AI wave. We're architecting it. We're building not just another AI company. We're building a category-defining enterprise cloud platform. The most advanced agent AI solution for workplace experience and hybrid collaboration. I wanna thank our employees, and extraordinary creative mission-driven team and our customers and shareholders for believing in this journey. Sky is more than a ticker symbol. It's a movement to make AI human again. We're super excited about this opportunity. Thank you, everybody, for joining the call. Gonna take a couple questions that came online. And so, Joy, if you have a list of questions, please go ahead. Yep. Joy Mbanugo: There's one from Jackson Vanderbilt Art from Maxim. It's multiple questions, Khurram, so I'm gonna let you decide how you wanna answer all of this. But the question is give me one second. He wants the kiosk update customer feedback, and usage set, how many units deployed today versus pipeline growth, and expansion progress with largest existing customers status of testing before expanding deployments to all locations, It's a couple of our clients and just the status of testing before expanding to large deployments and maybe more information on the thirty rock deployment and how he did that. Khurram Sheikh: Okay. Great. Thank you, Joy. Yeah. That's a lot of great questions all rolled into one. So I'll try to dissect it. So the first one on kiosk, absolutely. That's been a great product launch. We launched it with one client in Silicon Valley. They've deployed it in their campus in San Jose. It's working really well. It's super exciting for them to start using it. For their employees as they implement RTO. And that deployment was our first deployment. That, you know, it gained the traction. They wanna first, you know, ensure San Jose works really well and then deploy it globally. Around all of their 14 plus campuses. So that's an interesting opportunity. And in parallel, we've got three more clients, the existing clients who are already in pilot. And starting to that pilot phase to deployment. And a lot of them really like the fact that it's engaging. It's real-time. It's just in time. Getting actions completing, either it's booking a desk or, you know, or booking a conference room or just navigating to the right person or universal search. All of those are implemented with that, and I think there's a lot of genuine interest. I can't give you exact numbers on units right now, but I can tell you that, you know, for all the deployments in all the campuses, that we have with our clients, when they deploy one, it's obviously gonna deploy in all the different campuses. So we're excited about it, and I think there's a great opportunity, you know, coming in Q1 where we are gonna launch these other three clients. And then from those three will be the next ten. So I think that's the kind of scaling you see. On that product. On the other question in terms of our I think, Joy, was it about the other expansion opportunities. Right? So thirty Rock is an example of a large multinational media company that deployed a marquee site in New York City. It was super, super critical for them to get it absolutely right. And so it was a lot of focus, a lot of hard work. I commend the team, both our team and the customer's team for making it happen. But they not only just launched New York, they actually launched LA, and they launched Miami, and they launched Connecticut. So super excited. Actually, even though they're early customers of the product, they want the kiosk. Right away. So they're actually in trials with the kiosk. So I think all in all, it just shows that it takes a little effort to get into, you know, these clients. But once you're in there, see the opportunity. They're super excited about the potential of it. Then the outcomes, you know, through SkyView will be the test of, say, it actually, you know, really doing a great job for the employees? And I've mentioned before, my success criteria is the adoption. And we've been talking about our adoption numbers in terms of number of users, think it's gonna be number of interactions. If you look at the Sky, you know, the cloud I showed you, you know, in those six thousand day one users, there were 30,000 plus interactions. Right? It's amazing. The fact that they come to the app one time, they actually come to the app five or six times. I think those are the must-have moments that we believe create that affinity for Sky, create their affinity for the value of Sky. Then with the agenda, as you can see, everything can be done within the New York minute. And that to us is game-changing. That's why these clients are staying with us because they see the potential of how Sky with two point zero and with the AgenTeq solution is really gonna be transformative to their business and to their clients. I would tell you one of the there's a new study that I just saw that said that people are spending at least twenty-five minutes or more a day in scheduling conflicts. You know? And with what we showed you, we can take that scheduling conflicts out of the way. So you get your twenty-five minutes back or more. Then you make your life more productive. So I think we're in the phase now of moving into predictable outcomes and showing them the real value of the application, not just the, you know, the fact that the application functions, the fact that it actually transforms the way they work and the way they are productive in their environment. So I think there's a lot more coming, I would say, Jack, to answer your question, and we believe that all of our clients are destined for scale. So alright. Any other questions, Joy, that came in? Or that the only question we have? Joy Mbanugo: That was the only one. Khurram Sheikh: Okay. Well, I wanna close by saying thank you everybody for joining the call, for supporting Sky. I think we have a great future ahead of us as you can hear from some of the partners we are working with. We're super excited for our success, we're looking forward to giving you better and more predictable results in the future here as we start scaling the business. I think the exciting part is now coming with AI now being fully adopted in the enterprise. CIOs are not saying this is a nice to have. This is a must-have. And we believe that we have an exciting opportunity to enable them the future. So we're gonna be making a lot more announcements in the coming weeks and months. In terms of these opportunities. So stay tuned, and we look forward to having our next earnings call or annual call hopefully early next year. But till then, thank you everybody, and have a good evening. Operator: Thank you. This does conclude today's conference call and webcast. You may disconnect at this time. Have a wonderful day. Thank you once again for your participation.
Operator: Good evening. And welcome to Dyadic International, Inc. Q3 2025 Conference Call. Currently, all participants are in a listen-only mode. Following management's prepared remarks, there will be a brief question and answer session. As a reminder, this conference call is being recorded today, November 12, 2025. I would now like to turn the call over to Ping Wang Rawson, Dyadic's Chief Financial Officer. Please go ahead. Ping Wang Rawson: Thank you. Good evening, and welcome everyone to Dyadic International, Inc.'s Q3 2025 conference call. I hope you have had the opportunity to review Dyadic's press releases announcing financial results for the quarter ended September 30, 2025. You may access our release and Form 10-Q under the investor section of the company's website at dyadic.com. On today's call, our President and Chief Operating Officer, Joseph P. Hazelton, will give a review of our Q3 2025 business and corporate highlights and provide a commentary on the strategic direction of the business. Our CEO, Mark A. Emalfarb, will provide an update on our biopharmaceutical programs. And I will follow with a review of our financial results in more detail, after which we'll hold a brief question and answer session. At this time, I would like to inform you that certain commentary made in this conference call may be considered forward-looking statements, which involve risks and uncertainties and other factors that could cause Dyadic International, Inc.'s actual results, performance, scientific, or otherwise, or achievements to be materially different from those expressed or implied by these forward-looking statements. Dyadic International, Inc. expressly disclaims any duty to provide updates to its forward-looking statements, whether because of new information, future events, or otherwise. Participants are directed to the risk factors set forth in Dyadic International, Inc.'s report filed with the SEC. It is now my pleasure to pass the call to our President and COO, Joseph P. Hazelton. Joe? Joseph P. Hazelton: Thanks, Ping, and thank you all for joining today. The third quarter was another pivotal quarter for Dyadic International, Inc., as we continued our transformation from a platform-centric R&D organization into a commercially focused biotechnology company with a growing portfolio of high-value products. At the start of the fourth quarter, we saw our first commercial bulk sale of a Dyadic protein, marking the beginning of a new chapter in our company's evolution. We expect momentum to build with additional product opportunities emerging in 2025 and accelerating in 2026 as we scale our portfolio and expand our global market reach. We've now rebranded as Dyadic Applied Biosolutions, launched a redesigned corporate website to enhance commercial engagement, and strengthened our technology foundation with the addition of CRISPR Cas9 gene editing capabilities through our license with ERS Genomics. This license allows us to accelerate strain optimization, improve productivity, and further increase yields of consistency across our proprietary C1 and DAPIVIS platforms, directly supporting commercialization and profitability. At this stage, Dyadic International, Inc. is no longer just a story about potential. It's a story about execution, commercial traction, and growing product revenue. As we move from transformation to execution, our progress in the life sciences segment highlights how Dyadic International, Inc. is now operating as a product company. We are manufacturing and supplying lab-grade material for multiple recombinant proteins, focusing our efforts on near-term product revenue from markets where the need for animal-free, high-performance materials is rapidly expanding. The cell culture media market represents one of the most dynamic growth areas in biotechnology, supporting biologic manufacturing, cell and gene therapy, and cultivated meat. These markets require consistent animal-free proteins that enable scalability and regulatory confidence while balancing costs. And our protein production platforms deliver on those needs. Our recombinant human albumin program in partnership with ProLiant Health and Biologics continues to advance to a commercial launch in early 2026. Albumin is a cornerstone protein used across diagnostics, research, and biomanufacturing for stabilizing and transporting biomolecules. Transitioning to recombinant production offers significant advantages in purity, safety, and supply chain reliability. We remain fully aligned with ProLiant as they prepare for market entry. To date, Dyadic International, Inc. has received a total of $1.5 million in milestone payments from ProLiant, including a third payment of $500,000 received in October. We expect to share in the profits as the albumin products enter the market. This collaboration exemplifies how our platforms enable partners to deliver high-value animal-free proteins at commercial scale. In October, we achieved an important milestone with the first bulk purchase order for a Dyadic-produced protein. Our recombinant fibroblast growth factor, or FGF, is now being sold into the cultured meat market, demonstrating our ability to deliver commercial-grade material at scale and validating the market readiness of our technology. Looking ahead, in addition to growth factors, our top product priorities are animal-free transferrin and DNase I, which are now in active manufacturing and sampling to prepare for commercial launch. Transferrin is a key functional protein in serum-free cell culture media responsible for delivering iron to support healthy cell growth and metabolism. Dyadic International, Inc. is producing both bovine and human recombinant transferrin to serve distinct market segments. Bovine transferrin is designed for cultivated meat and research markets where cost efficiency and scalability are key, while human transferrin is targeted for biopharmaceutical and cell and gene therapy applications, which demand higher specification and regulatory-grade consistency. Together, these two products position Dyadic International, Inc. to compete effectively across complementary ends of the market. Our FGF program continues to advance beyond the cultured meat segment as we target cell and gene therapy manufacturers and suppliers. FGFs are essential growth factors in cell culture formulations, driving cell proliferation and differentiation. We're now expanding sampling and validation activities with additional customers as interest continues to build as companies look for reliable animal-free sources. In molecular biology reagents, our RNase-free DNase I has completed production validation and entered sampling while we work to secure purchase orders. DNase I is a critical enzyme used in gene therapy, molecular diagnostics, and biopharmaceutical manufacturing to remove unwanted DNA without compromising RNA or protein integrity. Dyadic International, Inc.'s ability to supply DNase I in a high-purity, animal-free form directly supports the industry's move toward cleaner, more consistent inputs without increased costs. These products form a high-margin recurring revenue foundation serving critical and fast-growing life science applications. We're also advancing the development of T7 RNA polymerase and RNase inhibitor products to expand Dyadic International, Inc.'s position in the DNA and RNA enzyme market. To further expand our global commercial reach, we recently partnered with Intralink, a leading Asia-Pacific business development firm, to accelerate market penetration in Japan and South Korea, two of the world's fastest-growing and most advanced markets for cell culture media and molecular biology reagents. Being a lean US-based organization, we look to leverage local expertise and establish commercial networks to effectively reach these important markets without the need for significant internal infrastructure or capital investment. Intralink provides Dyadic International, Inc. with on-the-ground commercial resources and regional experience that allow us to engage manufacturers, distributors, and potential partners more directly and efficiently. Through this partnership, we are actively introducing our products such as transferrin, DNase I, and growth factors, as well as our platform technologies, to new customers in the Asian region, expanding Dyadic International, Inc.'s footprint across key global manufacturing hubs in a cost-effective manner. Building on our momentum in life sciences, Dyadic International, Inc. is also advancing its commercialization efforts in the food nutrition segment, another large fast-growing market where our technology is enabling the transition to animal-free sustainable protein production. The food nutrition market is undergoing a structural transformation as global food producers shift towards sustainable, functional, and animal-free proteins. This transition is driven by consumer preference, regulatory trends, and supply chain sustainability pressures, and it presents Dyadic International, Inc. with a major opportunity to apply its DAPIVIS platform to supply recombinant proteins and enzymes at scale. The animal-free dairy protein market alone is expected to exceed $20 billion by 2035, led by growing demand for precision-fermented proteins in infant formula, medical nutrition, and wellness applications. These markets require consistent, high-purity proteins that replicate the nutritional and functional properties of traditional dairy ingredients, areas where we believe that DAPIVIS may provide a competitive edge. Our recombinant alpha-lactalbumin program advanced meaningfully this quarter. We've entered a new term sheet with a non-animal dairy development partner focused on the infant nutrition market, and we anticipate additional agreements for our alpha-lactalbumin program in 2025. The protein has demonstrated strong performance in product testing and formulation trials, with sampling for research and nutritional applications expected by late 2025 or early 2026. Also in the third quarter, our human lactoferrin program continues to progress with production strain development and yield optimization underway. Lactoferrin is valued for its antimicrobial and immune-supporting properties and commands premium pricing in both nutritional and wellness markets. We expect sampling for research use in early 2026. In non-animal dairy enzymes, we received a $250,000 milestone payment from Enzymes in the third quarter, bringing total license and milestone revenue from this partnership to $1,275,000 to date. Scale-up for the first enzyme remains on track for commercial launch in late 2025 or early 2026, with a second enzyme candidate advancing towards commercialization under the existing license. Importantly, Dyadic International, Inc. is eligible to receive future royalty payments on commercialized products, creating a recurring revenue opportunity and further validating the commercial value of our technology and partnership model. As we expand our presence in food nutrition, we're also applying our technology to industrial biotechnology, where Dyadic International, Inc.'s enzyme expertise is addressing global demand for more sustainable, efficient, and bio-based manufacturing solutions. Dyadic International, Inc.'s bioindustrial segment continues to demonstrate the scalability, flexibility, and cross-sector relevance of our enzyme technology. Using our DAPIVIS platform, we're delivering enzyme solutions that replace petrochemical or animal-derived inputs and improve process efficiency across industrial and emerging bio-based markets. Our collaboration with Fermbox Bio on an enzyme cocktail that converts agricultural residues into fermentable sugars continues to advance and deliver results. Fermbox is a strategic partner for Dyadic International, Inc. with robust manufacturing capabilities across multiple quality grades, which allows us to serve a broader range of industrial and bio-based customers. Initial commercial deliveries have been completed, and sampling is expanding with additional customers in biomass processing, biofuels, and pulp and paper markets. Under this partnership, Dyadic International, Inc. participates in a 50/50 profit share on sales, creating a scalable and recurring revenue model as the adoption and portfolio grow, and we expect to begin seeing revenues in 2026. Our cellulosic enzyme technology is also being evaluated in regenerative medicine and tissue engineering through collaborations with pharmaceutical and device companies. These efforts demonstrate how Dyadic International, Inc.'s enzymes can contribute to the development of biomaterials for the rapidly growing market of tissue repair and regeneration, further underscoring the versatility and commercial reach of our technology beyond traditional industrial applications. In parallel with our commercial initiatives, we continue to advance a select group of partner-funded biopharmaceutical collaborations that extend the reach of our technology into vaccines and antibody production, providing valuable validation and non-dilutive funding while we stay focused on near-term product revenue. I'll now turn the call over to our CEO, Mark A. Emalfarb, to provide an update on our progress of these partner-funded collaborations. Mark? Mark A. Emalfarb: Thanks, Joe. Our biopharmaceutical programs are accelerating and delivering meaningful advancements in vaccine and therapeutic protein development for both animal and human health. Through collaborations supported by the Gates Foundation, the Coalition for Epidemic Preparedness Innovations (CEPI), and our strategic partnership with Dr. Rina Rappuoli at the Fondazione Biotecnologie Comparate di Siena (FBS), as part of the €170 million EU vaccine hub, we're continuing to validate the power of our C1 protein production platform through non-dilutive funding. These efforts are generating strong data that demonstrates C1's ability to rapidly, efficiently, and affordably manufacture high-quality biologics, including vaccines, monoclonal antibodies, and other complex proteins with exceptional productivity and scalability. Our Gates Foundation program focused on developing low-cost monoclonal antibodies for malaria and RSV has achieved key milestones in both productivity and initial biological characterization when compared with the same antibody produced using traditional mammalian CHO production methods. To date, we've received $2.4 million of a $3 million grant. Under our CEPI-Fondazione Biotecnologie Siena collaboration, Dyadic International, Inc. is eligible for up to an additional $2.4 million in funding to support antigen design, cell line development, and cGMP manufacturing scale-up. This project has already begun to generate encouraging data, including the successful development of another C1-produced H5 influenza antigen by FBS. Initial results show that Dyadic International, Inc.'s H5 antigen reacts as expected with human monoclonal antibodies. In collaboration with FBS, we're preparing to provide H5 antigen samples for preclinical evaluation with the potential to advance into a funded Phase I trial. Other CEPI-supported programs, including the UVAX BioMERS vaccine and the Adaptec Consortium for Broad Spectrum Filovirus Vaccines, are expected to further reinforce C1's ability to deliver rapid, scalable, and cost-effective production solutions. Our collaboration with the process development unit at the NIAID/NIH continues to generate encouraging data that not only supports vaccine development but also enhances the productivity and consistency of our C1 platform. The insights and process improvements gained from this and other funded programs strengthen C1's broader capabilities, and these can be applied across both our biopharmaceutical and DAPIVIS non-pharmaceutical platforms. This cross-platform innovation drives future value creation and supports the potential for additional licensing and monetization opportunities in animal and human health. While our internal resources remain focused on generating near-term revenues through high-value non-therapeutic proteins, these externally funded biopharmaceutical programs provide valuable non-dilutive funding and global validation of our technology. With that, I'll now turn the call over to our Chief Financial Officer, Ping Wang Rawson, who will walk you through our third quarter 2025 financial results. Ping Wang Rawson: Thank you, Mark. I will now go over our key financial results for the quarter ended September 30, 2025, in more detail. You can find additional information in our earnings press release and Form 10-Q, which we filed earlier today. Total revenue for the quarter ended September 30, 2025, decreased to $1,165,000 compared to $1,958,000 for the same period a year ago. The decrease was due to decreases in research and development revenue of $183,000 and license and milestone revenue of $1,425,000 from the ProLiant agreement and Enzyme agreement in 2024. The decrease is offset by an increase in grant revenue of $815,000 from the Gates Foundation and the CEPI grants in 2025. Cost of research and development revenue and cost of grant revenue for the quarter ended September 30, 2025, decreased to $2,255,000 compared to $396,000 for the same period a year ago. For the quarter ended September 30, 2025, cost of grant revenue from the Gates Foundation and the CEPI grants was $769,000 compared to zero for the same period a year ago. Research and development expenses for the quarter increased to $572,000 compared to $460,000 for the same period a year ago. The increase was driven by a rise in the number of active internal initiatives undertaken to expedite product development. G&A expenses for the quarter increased to $1,481,000 compared to $1,298,000 for the same period a year ago. The increase reflected increases in rebranding and business development expenses of $176,000, legal and accounting expenses of $83,000, partially offset by a decrease in share-based compensation expenses of $79,000. Loss from operations for the quarter increased to $1,925,000 compared to $203,000 for the same period a year ago. Net loss for 2025 increased to $1,976,000 or $0.06 per share, compared to $203,000 or $0.01 per share for the same period a year ago. As we reported earlier, on August 1, 2025, the company closed its public offering of 6,052,000 shares of its common stock at a public offering price of $0.95 per share. The net proceeds to the company from the offering were approximately $4.9 million after deducting legal expenses, underwriting discounts, and commissions and other offering expenses. As of September 30, 2025, cash, cash equivalents, restricted cash and cash equivalents, and the carrying value of investment risk securities, including accrued interest, were approximately $10.4 million compared to $9.3 million as of December 31, 2024. On October 14, 2025, we received a third and final milestone payment of $500,000 from ProLiant upon meeting a certain productivity threshold, which was not included in the cash balance as of September 30, 2025. For the rest of 2025, we expect to see growth in product revenue in our life sciences, and food and nutrition markets as we launch products in cell culture media and molecular biology while maintaining our operating expenses in line with last year. With that, I will now ask the operator to begin our Q&A session. Each caller will be allowed one question and one follow-up question to provide all callers with an opportunity to participate. If time permits, the operator will allow additional questions from those who have already spoken. I will now ask the operator to begin our Q&A session. After which Joseph P. Hazelton, our COO, will provide closing remarks. Operator? Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. The first question comes from Matt Hewitt with Craig Hallum Capital. Please go ahead. Matt Hewitt: Good afternoon, and thanks for taking the questions. Maybe first up, and I apologize if I missed this, but earlier this week you announced a new relationship that's gonna grant you access to CRISPR commercial licenses. I'm just curious. What does that bring to your portfolio? How is that going to help you drive incremental growth and sign some new contracts? Joseph P. Hazelton: Hey, Matt. It's Joe. It's a great question. And the license that we signed with ERS Genomics earlier this week actually gives us a more powerful genetic toolbox to accelerate product development, improve optimization yields, both with our internal pipeline but also with our customers. Having access to the CRISPR technology actually helps our partners, for some of them that are in like food and nutrition, you know, CRISPR licensing can be somewhat problematic. So us having access to the technology to use in these development programs gives us a competitive advantage in some of these markets as well as the ability to expand and accelerate our internal programs. So we see this as a great opportunity to enhance the already strong genetic toolbox that we have. Matt Hewitt: That's great. And then maybe a follow-up question. And picking one is tough, but let I'll just go with this one. The DNase I opportunity. It sounds like you're making progress there. How should we be thinking about that opportunity ramping in '26 and beyond, and how big could that ultimately become? Thank you. Joseph P. Hazelton: Again, a great question. So the market itself for DNase I is roughly a $250 million market for recombinant products today. Overall, closer to a $1.5 billion market for DNase I for all methods of production and platforms. So as we look at, you know, what we're looking to, we're targeting distributors, suppliers, and manufacturers for bulk sale opportunities. So we're not gonna be manufacturing or selling to, like, individual institutions in small orders. The goal is and our focus right now is on securing OEM agreements or broader bulk opportunities. So we expect to see it scale rather rapidly. Obviously, we're getting lab-grade material up first. And as we start to expand the quality of the material, so moving up to, like, ISO and even GMP grade, those are very expensive to manufacture. So as we get the initial revenues in, we'll be able to target higher margin segments. So it'll be a slow growth at first. We anticipate it to be steady given the expansion of DNA and RNA products in the market itself. I mean, there's a ton of not just in mRNA still, but a ton of opportunity in cell and gene therapy. As well as other markets where we think we have a great opportunity and advantage given our cost structure in that segment. Matt Hewitt: That's excellent. Thank you. Operator: Next question, John Vandermosten with Zacks. Please go ahead. John Vandermosten: Thank you. So I wanted to ask about the other relationship that you announced with Intralink in Asia. What characteristics of the customers do you think they will be for those products there? The DNase I and the transferrin. Will those be academic centers or labs? Or what do you think those customers will be? Joseph P. Hazelton: John, this is Joe. It's a great question. So the reason we're targeting those markets specifically is that they're experiencing a significant growth in the uptake of these products with cell and gene therapy manufacturers, suppliers, and distributors. There's several new companies and several existing companies that are very large. We're targeting those organizations for purchase orders and bulk purchase orders, and then they would, in turn, supply the end users. We're not looking obviously to become a wholesale distribution network to every supplier or every academic institution, but we want to hit where they're pulling their product from. Mark A. Emalfarb: And I think, John, one of the things you should keep in mind on all these programs is, you know, we're dealing with global markets. And as Joe points out, you know, Japan and Korea are expanding and they're not in turmoil like in the US. So our global presence is paying off. As you know, we are heavily involved in Europe. And now in Asia and Japan. Of course, in the United States. But India and other countries. So we're kind of like in a lot of ways, protected from what's been going on here in the United States to some degree. And because, you know, we really haven't had a global footprint. And we're expanding that global footprint. Joseph P. Hazelton: From Box as well. And that's a great point because in addition, a lot of the companies are worried with regard to the tariff situation. So in Japan and Korea, they are looking to improve their manufacturing capability, you know, in the homeland. So obviously, us having the ability to transfer our technology in the world gives us an advantage. So I think, Mark, you're absolutely right. Mark A. Emalfarb: Well, and they need a lower cost of goods to offset the tariffs to ship back in the US. So it's opening up doors that heretofore might have been closed. John Vandermosten: Would the tariffs apply to your product? I mean, since it's the technology rather than a product itself crossing the border, would that be something that you'd have to worry about? Or would the customer have to worry about in Japan and Asia and other places outside the US? Mark A. Emalfarb: Yeah. I think the tariffs would be on the products coming back in. Not in the technology going out. John Vandermosten: Right. Right. Okay. Thank you for taking my question. Operator: Next question, Robert Hoffman with Princeton Opportunity Management. Please proceed. Robert Hoffman: Yeah. Thanks. I just want to dig in a little deeper on the CRISPR ERS agreement. So is that something you had to pay anything upfront? And I'm assuming it might be modest. And then how does it work going forward if you discover a system within their genomics? Are they gonna get a royalty on sales of that? Can you just kind of, I know you can't do specific numbers, but if you can kind of walk us through how a license agreement like that is structured, I'd appreciate it. Mark A. Emalfarb: Well, first of all, to your point, I think Joe did a great job in negotiating the deal with ERS Genomics. Gotta remember, we're not cutting and clipping out things going into human bodies. We're improving fungal cell lines to make them more efficient, to make them cleaner, to knock out things that might be problematic, improve qualities. And so can't give them the finances to your point because it's confidential. But I can assure you it's nothing like you hear about the CRISPR being used in the pharmaceutical and medical industry. This is really more about engineering cells and making them home at a higher level faster, quicker, and cheaper than they already are. So and as somebody brought up, I think Matt brought the point up earlier, we're expanding the opportunity that our customers don't have to use CRISPR. Have different technologies. We have a site-specific integration, which can allow you to do things repeatedly from a genotype. From a regulatory perspective, in the life sciences and food nutrition, we can do random. In a lot of ways, it will give you the same result as CRISPR, but CRISPR is a little faster and a little more directed. But if you screen more mutants, you might get to the same point. So it gives us an advantage of time and specific ways to manipulate and modify these cells. So I think, you know, I wouldn't worry about the back end because the back end you more than make up for it. You get higher productivity, you can afford to pay a little bit of a payment to ERS Genomics. That's a great deal for them as well because it's opening the door to a whole new area that heretofore they couldn't get into. Robert Hoffman: Got it. Yep. Sounds great. Thank you. Operator: Next question, John Vandermosten with Zacks. Please go ahead. John Vandermosten: Great. Thank you. My follow-up question is on the infant nutrition product. Is that something new that's being launched? Is the customer trying to differentiate it from an animal-based product or something? I want to see if you can help me understand how that product will be marketed to the end customer. Joseph P. Hazelton: I think in infant nutrition and medical nutrition, what they're looking to do is basically mimic human breast milk. That's really one of the key focuses. The other is obviously they want to mimic bovine milk as well. I think you'll see the bovine products be accepted or recombinant non-animal bovine products would probably be accepted first because that's a shorter, I guess, a shorter leap for most consumers and most larger companies to take is, you know, they're currently using an infant formula today. They're using bovine source materials. So when it gets to things like infant nutrition, ultimately, you know, the goal would be to mimic human breast milk. That would be the ultimate goal. But I know having human alpha-lactalbumin, I think you'll see it in, like, medical nutrition sports nutrition products prior to, you know, seeing it in infant nutrition. But that is exactly what they're trying to do. There's only, you know, again, so much like, actually naturally dried human breast milk that can be produced in a given year. As well as, you know, bovine milk as well. Those are, you know, self-limiting or, I will say unsustainable, but they're very difficult to scale to significant levels in certain cases where you're talking about the purity and consistency you need for something like infant nutrition. So the recombinant proteins themselves give them greater assurance of the product quality and better control of the manufacturing process than you get with animal or even human-derived protein. So the goal is there. The roadmap is there. You know, getting past some of the regulatory hurdles and then consumer issues as well. That'll take some time, but we do see this as a great opportunity. Mark A. Emalfarb: And, you know, just to add a little color to that, you know, just like ProLiant, you know, we've got partners that we're talking to and working with and have decades of experience in this industry. So it's not like we're tackling this on our own. We're aligning our interest with people that actually have the knowledge and the expertise to drive this forward to commercialization. If you think about omega-3, which is a, you know, kind of a similar thing, it's used in infant formula, for example. These are multibillion-dollar product opportunities. And DSM paid Martek over a billion dollars several years back. And it wasn't too long ago that we had this infant formula shortage. So, you know, that was a big deal. So this is a huge opportunity and we're addressing it not on our own, but in partnership with what we think are some of the smartest people to have the industry experience for decades. John Vandermosten: Okay. Great. Thank you for the additional info. Operator: Once again, if you would like to ask a question, please press 1 on your telephone keypad. Next question comes from Tony Bowers with Interact. Please go ahead. Tony Bowers: Hi, Mark. Hi, Joe. I know the grant business is pretty much of a breakeven proposition initially. But it's great credibility, great visibility, and validation. What do you think the positive endgame could be from the Gates Foundation and CEPI? Mark A. Emalfarb: Well, the positive endgame could be saving hundreds of thousands, if not millions of lives and getting rewarded for it financially. So, I mean, these people have the wherewithal, the Gates Foundation, to move this to the clinic. And it isn't just about that. This opens up the door for monoclonal antibody production and development of a faster, quicker, more efficient way lowering the cost of goods. If this administration wants to do anything, they want efficient, low-cost biologics because you got Lilly, you got Pfizer, you got Novo. You know, Trump calling them to the office, they're all caving in. But guess what? It's a drop in the bucket compared to what we can do with this platform to drive the cost of biologics down. So there's a huge opportunity at the end. But it's also providing technology and advancements for DAPIVIS. Joseph P. Hazelton: Well, in addition, Tony, what it also gives us some potential avenues for cell culture media. So, you know, one side of the fence, while we have the capability to produce mAbs, producing things like transferrin and growth factors and when you look at, you know, those markets themselves, the growing interest in demand for therapeutic proteins means that there's gonna be growing demand for cell culture media of all types. So, you know, as we're looking to launch, you know, transferrin, you know, very quickly here into the culture media market, not just for cultured meat, obviously, but we're looking to launch into the CHO market, the HEK market, where you need these high-quality, high-purity proteins at a reasonable cost in order to be able to produce some of these more high-value targets like monoclonal antibodies. So it really, to me, it not only validates our platform for biopharmaceutical use, it's giving us potential opportunities for us to get our other products in there as well. Tony Bowers: All three of the products that you're planning to manufacture under your own name, DNase I, transferrin, and growth factor, they're all essentially, they have been derisked in terms of production validation. And the CDMO market, there's plenty of choices. That's not a bottleneck for you commercializing these? Joseph P. Hazelton: No. Not today, Tony. But it's a great question. Right now, there's plenty of capacity with CDMOs. Obviously, you know, from our standpoint, it's the cost of producing at some of these grades that we have to be considerate of. But, you know, today, we're finding, you know, that type of an issue. The other thing we're trying to do is identify opportunities in market, right? So whether it's Japan or Korea, whether it's in the EU or we're adopting or trying to bring CDMOs in all different parts of the world, obviously, to, you know, reduce our tariff implications. And to improve the economics of being able to distribute these products in bulk. So, you know, we haven't seen that to be an issue, you know, as of yet. Tony Bowers: Last question, if I may. Can you comment on the burn and, yeah, how much ability you have to do what you need to? Ping Wang Rawson: Yeah. So he just says Ping. We don't normally give the cash guidance as you know, but as we close out to the end of the year, as you can see, at the third quarter, I think we are still expecting the last quarter to have the recognize the half million cash, we received in October from ProLiant. So that will be reflected in the Q4 financials. And also from a business perspective, I think we are still expecting certain product revenue even though the amount may be not, you know, as disclosed at this point. So it's really hard to give you the cash burn at this point. But we do, like I said in the script, we do expect the operating expenses will be in line with last year. Hope that helps. Thank you. Tony Bowers: Thank you. Operator: Next question, Robert Hoffman with Princeton Opportunity Management. Please go ahead. Robert Hoffman: Yeah. Just to pick up on that question. Moving forward, in terms of like just headcount and expenses, obviously, outsourcing a lot of things, especially the marketing and development, although maybe not the development. But do you see what do you see out two or three years? Are you going to have to expand dramatically? Or is it something that operating leverage is such that you know, you have to, you know, increase your cost structure by 50% while revenue goes up, you know, multiples of that. Can you give us just some sense of how the business model scales? Joseph P. Hazelton: Yeah. Actually, it scales rather easily considering the model that we're focusing on is the distributors, wholesalers, and suppliers. So from an infrastructure standpoint, that's not gonna require significant amounts of build. So even as we scale, it's really about your manufacturing capacity and getting product to those customers. So that we can do obviously through our current outsourced model. So we don't anticipate, you know, significant infrastructure changes, you know, in the next two to three years. Now, obviously, you know, as we continue to move forward and if it makes sense to grow in certain areas, we want to take a look at that. But right now, the quickest path to acceleration is more product that we're able to actually, you know, produce and get onto the market. So that's really the main focus right now. Robert Hoffman: Great. So you don't see G&A expense blowing up as your revenue expands. Obviously, it's gonna grow, but it's not going to keep pace with your revenue. Joseph P. Hazelton: No. Agree. Robert Hoffman: Great. Thank you. Operator: There are no further questions. I will now turn the call over to Dyadic International, Inc.'s President and COO, Joseph P. Hazelton. Joseph P. Hazelton: Thank you, everyone. Putting today's call in perspective, we're very encouraged by the progress we're making. While, of course, we want to see larger gains come faster, the indicators for growth are clear. Our pipeline is advancing, customer engagement is increasing, and the foundation for sustained commercial expansion is firmly in place. Q3 2025 marked a defining step in Dyadic International, Inc.'s commercial evolution. With our first bulk order, additional purchase orders underway, and multiple product launches approaching, we're now executing as a product-driven biotechnology company. With the integration of the CRISPR technology, the commercial expansion through Intralink, and a strong balance sheet of $10.4 million in cash and investments, Dyadic Applied Biosolutions is well-positioned to deliver sustainable revenue growth and long-term value creation. In parallel, our legacy biopharmaceutical programs and collaborations continue to advance, providing validation for our technology and the potential for longer-term revenue streams as those programs mature. At the same time, our near-term focus remains on executing the commercial strategy already taking shape across our core markets. Our near-term priorities are clear. First, to accelerate product sales across our life sciences and molecular biology reagent portfolio, where early commercial traction is already underway. Second, to expand customer engagement in key global markets, including Asia, Europe, and North America, through targeted partnerships and business development initiatives. And third, to advance commercialization in our food nutrition and bioindustrial segments, where our technology is enabling new sustainable solutions and creating meaningful opportunities for recurring revenue growth. Dyadic International, Inc. is now executing as a commercial organization built on validated platforms, established partnerships, and a clear path toward recurring revenue and profitability. Thank you for your continued support, and we look forward to updating you on our progress. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Operator: Greetings, and welcome to the ICS Third Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference call, please signal the operator by pressing star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sandra Carbone, SVP General Counsel at IZEA Worldwide, Inc. Please go ahead. Sandra Carbone: Good afternoon, everyone, and welcome to IZEA Worldwide, Inc.'s earnings call covering the 2025. I'm Sandra Carbone, SVP, General Counsel at IZEA Worldwide, Inc., and joining me on the call are IZEA Worldwide, Inc.'s Chief Executive Officer, Patrick James Venetucci, and IZEA Worldwide, Inc.'s Chief Financial Officer, Peter J. Biere. Thank you for being with us today. Earlier this afternoon, the company issued a press release detailing IZEA Worldwide, Inc.'s performance during Q3 2025. If you would like to review those details, please visit our Investor Relations website at izea.com/investors. Before we begin, please take note of the Safe Harbor paragraph included in today's press release covering IZEA Worldwide, Inc.'s financial results. And be advised that some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. We encourage you to consider the disclosures contained in our SEC filings for a detailed discussion of these factors. Our commentary today will also include the non-GAAP financial measures of adjusted EBITDA and revenues excluding divested operations. Reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued earlier today and in our publicly available filings. And with that, I would now like to introduce and turn the call over to IZEA Worldwide, Inc.'s Chief Executive Officer, Patrick James Venetucci. Patrick James Venetucci: Thank you, Sandra, and good afternoon, everyone. In Q2, I proudly announced that for the first time in the history of this company, we were profitable. This quarter, I'm pleased to announce that Q3 marks our third consecutive quarter of financial improvement. While total revenue for the quarter decreased 8% to $8.1 million as a result of our choosing to shed unprofitable, nonrecurring project work and some softness in government and retail accounts, the underlying health of our business is strong. Managed service revenue, excluding Hozoo, increased 5%. Total operating expenses decreased by 67%. Net income totaled $100,000 compared to a net loss of $8.8 million during Q3 last year. And cash increased by $800,000 to $51.4 million. Year to date, our managed services revenue is up 14% and net income totaled $1.2 million. Three consecutive quarters of continuous improvement underscore that our strategic direction and transformation towards sustainable, profitable growth is firmly taking hold. Since I stepped in as CEO, our objective has been clear: fortify, simplify, and focus. During the first half of the year, we fortified our business in America, simplified many aspects of our go-to-market, and focused on our managed services. We segmented our managed service accounts focusing on enterprise customers with recurring revenue and high growth potential instead of the long tail of transactional customers with small projects and high churn rates. As we've strengthened and expanded our relationships with enterprise clients, we've been rewarded with more business. Our enterprise accounts are now growing at double-digit rates, that are well above the industry average and a few at triple-digit rates. Our sales and marketing efforts are attracting new clients such as Amazon, General Motors, and Owens Corning. Plus, our pipeline reached a new high for the year with invitations to larger pitches growing. Lastly, we produced new work for Kellogg's, Clorox, Nestle, Danone, and many more clients. To bolster our enterprise growth strategy and momentum, we hired Steve Bunnell, EVP Account Management, who joined us from Publicis Group where he has a track record of rapidly growing large enterprise accounts such as McDonald's and Samsung. We also hired John Francis, VP Marketing and Revenue Operations, who joined our team from private equity-backed marketing services firms where he'd built effective B2B growth programs. Although we have been highly focused on services this year, we continue to invest in our technology platform. Earlier this year, we began simplifying our tech product offerings by focusing on fewer products, consolidating features, and delivering a more intuitive customer experience. In Q3, we infused our technology platform with AI-powered features that provide clients with strategic insights and campaign performance. We will be announcing more about our technology development soon. With all of this momentum and opportunity ahead of us, I am optimistic about the future of this company and our ability to deliver additional value to all of our stakeholders—shareholders, clients, and employees alike. With that, I'll turn the call over to Peter J. Biere, our Chief Financial Officer, for a closer look at the financial results. Peter J. Biere: Thank you, Patrick, and good afternoon, everyone. This afternoon, we released our results for the third quarter and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. Today, I'll review our operating results for the quarter ended September 30, 2025, with year-over-year and year-to-date comparisons. Highlight key balance sheet items, and provide an update on our stock repurchase activity. Beginning in early 2025, we implemented a new account management model focusing our resources toward larger, more profitable recurring accounts while scaling back selling and delivery efforts previously devoted to lower-value project-based accounts with limited repeat business. Strategic realignment reduced current year contract bookings but has materially improved profitability and strengthened our foundation for sustainable growth. Managed services bookings represent a total of sales orders received during the period, net of cancellations and refunds. They are an indicator of overall demand but are not necessarily predictive of quarterly revenue as timing varies with contract size, complexity, and customer arrangements. As we continue to emphasize enterprise accounts, individual bookings are expected to become higher in value but less consistent in timing, which can impact comparability. For the nine months ended September 30, 2025, managed services bookings, excluding Hozoo, declined 26% to $18.2 million compared to the prior year period and contract backlog decreased from $15.5 million at the beginning of the year to $7.1 million at quarter end. The decline primarily reflects the company's strategic focus on higher quality recurring accounts, along with more cautious marketing spend among certain enterprise and agency clients amid broader economic uncertainty including tariff impacts. Revenue from managed services excluding Hozoo increased 14% for the nine months ended September 30, 2025, compared to the prior year period, while overall growth slowed 5% in the current quarter. Growth in both comparative periods was driven by expansion among enterprise customers, partly offset by a reduction in smaller nonstrategic accounts that we intentionally deemphasized. Our total cost of revenue, including both external creative and internal labor costs, totaled $4.2 million or 51% of revenue in 2025, compared to $5.2 million or 59% of revenue in the same quarter of the prior year. Excluding Hozoo, the cost of revenue declined approximately 5% year over year, reflecting improved margin mix in the current period. Operating expenses other than the cost of revenue totaled $4.3 million for the third quarter, down $8.7 million or 67% compared to $13 million in the prior year quarter. Sales and marketing expenses were $1.1 million, down 62% from the prior year period, reflecting workforce reductions and a temporary pause in certain marketing initiatives. General and administrative expenses declined 49% to $3 million, primarily due to lower employee-related costs, reduced use of external contractors, and decreased spending on professional services, software licenses, and data storage. The prior year period also included a $4 million noncash charge related to goodwill impairment from an acquisition we made in 2019. We achieved profitability for the third quarter, generating net income of $100,000 or $0.01 per share on 18.7 million shares, compared to a net loss of $8.8 million or negative $0.52 per share on 17 million shares in 2024. This marks only the second quarter in the company's history in which profitability was achieved through operating performance, and the third consecutive quarter of financial improvement, underscoring that our transformation continues to be underway. Adjusted EBITDA for the third quarter 2025 was $400,000 compared to negative $3.4 million in the prior year quarter. As a reminder, we revised our non-GAAP definition of adjusted EBITDA in late 2024, excluding non-operating items such as interest income from our investment portfolio and restated prior year's results for comparability. A reconciliation of adjusted EBITDA to net income is available at the bottom of our earnings release. As of September 30, 2025, we had $51.4 million in cash and investments, an increase of $300,000 from the beginning of the year. This modest increase contrasts with an $8.8 million reduction in cash in the prior year period and reflects the benefits of improved operating performance and disciplined cost management. Operating cash flow is positive for the year-to-date period, inclusive of normal working capital timing variances. In September 2024, we announced a commitment to repurchase up to $10 million of our common stock in the open market, subject to customary restrictions, including regulatory limits on daily trading volume and company-imposed share price thresholds. Through September 30, 2025, cumulative repurchases totaled 561,950 shares for an aggregate investment of $1.4 million under the program. No purchases were made during the third quarter. We also earned $500,000 of interest in our investments during the recent quarter, and finally, we continue to operate with no debt on our balance sheet. With cash on hand and liquidity, we remain well-positioned to support organic business growth initiatives and pursue strategic acquisition opportunities. Thank you for your time today. And at this time, we invite our investors and analysts to share their questions so that we can provide clarity and insight. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Ladies and gentlemen, if you wish to ask a question, please press star. Reminder, ladies and gentlemen, if you wish to ask a question, please press star. As there are no questions in the queue, I now hand the conference over to IZEA Worldwide, Inc.'s SVP and General Counsel, Sandra Carbone, for closing comments. Sandra Carbone: Thanks so much, Ryan. And thank you, everyone, for joining us this afternoon. As a reminder, a replay of today's call will be available shortly on our website izea.com/investors. We appreciate your continued interest and support and hope you'll join us for our next conference call to discuss our fourth quarter 2025 results. Operator: Thank you. Ladies and gentlemen, the conference of IZEA Worldwide, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.