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Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the KLX Energy Services Third Quarter Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ken Dennard. Thank you. You may begin. Ken Dennard: Good morning, everyone. We appreciate you joining us for the KLX Energy Services conference call and webcast to review third quarter 2025 results. With me today are Chris Baker, President and Chief Executive Officer; and Keefer Lehner, Executive Vice President and Chief Financial Officer. Following my remarks, management will provide commentary on its quarterly financial results and outlook before opening the call for your questions. There will be a replay of today's call and it will be available by webcast by going to the company's website at klx.com. There'll also be a telephonic recorded replay available until November 20, 2025. For more information on how to access these replay features go to yesterday's earnings release. Please note that information reported on this call speaks only as of today, November 6, 2025. And therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Also, comments on this call will contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of KLX's management. However, various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in the quarterly press release, which can be found on the KLX website. And now with that behind me, I'd like to turn the call over to Chris Baker. Chris? Christopher Baker: Thank you, Ken, and good morning, everyone. Thank you for joining us today. The third quarter represents the strongest quarter of the year, overcoming continued market headwinds, including commodity price volatility and a softer OFS activity environment. Tax generated revenue of $167 million, up 5% from Q2 and adjusted EBITDA of $21 million, up 14% from Q2, ahead of our prior guidance. Adjusted EBITDA margin improved materially by 100 basis points sequentially to 13% despite the average U.S. land rig count declining 6% average frac spread count being down 12% over the same time period. Our results were driven by a 29% revenue increase in our Northeast Mid-Con segment which more than offset softer activity in the Rockies and Southwest segment. KLX outperformed the industry trend once again by strategically allocating its assets across our broad footprint focusing on field execution and efficiencies and tight cost controls. Operationally, our completion-oriented product lines in the Mid-Con Northeast, along with a rebound in our accommodations and flowback businesses contributed meaningfully to this quarter's top line strength. KLX's third quarter results are a testament to our team's agility, dedication and collaboration effectively managing white space in a difficult market, all while controlling costs. The operating environment remains challenging, shaped by OPEC+ supply growth and depressed rig counts across all major basins. We believe that our diversified asset base premium customer alignment and diverse geographic footprint will continue to support consistent performance. Third quarter revenue and adjusted EBITDA per rig were $318,000 and $40,000, respectively, 20% and 227% above the levels from the fourth quarter of 2021, the last time industry activity was at similar levels. This underscores the progress we've made in strengthening our competitive standing and driving operational and organizational cost efficiencies over the past several years. Simply put, KLX is significantly more efficient today than we've been in prior cycles. Now let's look at our segment results. The Southwest represented 34% of Q3 revenue, down from 37% in Q2. Northeast Mid-Con was 36%, up from 29% in the prior quarter, and the Rockies was 30%, down from 34% in Q2. The Rockies experienced reduced completion activity in our tech services, frac rentals and coiled tubing product service lines. In the Southwest, weaker demand in directional drilling, flowback and rentals driven by the overall reduction in Permian activity and white space associated with customer M&A integration initiatives resulted in a softer top line with revenue declining 4%, albeit still outperforming the segment's average rig count decline of 9%. The Northeast Mid-Con segment was a standout in Q3 with our completions-oriented product lines delivering sequential growth for both revenues and margins, demonstrating our ability to capture incremental activity by basin, focusing on crew and equipment allocation throughout the KLX footprint and we expect continued momentum into Q4. By end market, drilling, completion and production intervention services contributed approximately 15%, 60% 25% of Q3 revenue, respectively. Based on current customer calendars, we expect a healthy Q4 despite typical seasonality and budget exhaustion. This reflects recent market share gains, the solid execution of our strategy and a steady focus on long-term value creation, all of which positions KLX for increased activity anticipated in 2026. I'll now turn the call over to Keefer to review our financial results in greater detail, and I will return later to discuss our outlook. Keefer? Keefer Lehner: Thanks, Chris. Good morning, everyone. As Chris mentioned, Q3 2025 revenue was $167 million, a 5% sequential increase but 12% lower than Q3 2024. Average rig count was down 6% over this period and frac spread count was down 12% over the same period. Our Q3 sequential results were driven largely by strong growth in the MidCon, Northeast segment, which saw a 20% -- 29% quarter-over-quarter top line increase. The outperformance was complemented by disciplined management of fixed costs, resulting in consolidated adjusted EBITDA margin expansion to 12.7% from 11.6% in Q2 and was in line with last quarter's guidance and approaching Q3 2024 margin levels of 15% despite a market environment measured by rig count that is down 7% over the same period. Total SG&A expense for the quarter was $15.6 million. Excluding nonrecurring items, adjusted SG&A expense came to $14.8 million representing a 30% reduction from the same period last year and an 18% improvement sequentially. These reductions reflect the full impact of the cost structure initiatives implemented in 2024 supported by incremental efficiency gains realized throughout 2025, reduced third-party spend and settlement of a legal claim. Looking ahead, adjusted SG&A is expected to remain in the 9% to 10% of revenue range for the year. Moving to our segment results. The Rockies segment had Q3 revenue of $50.8 million and adjusted EBITDA of $8.1 million. Sequential revenue and adjusted EBITDA decreased 6% and 22%, respectively, mainly due to a slowdown in completions activity due to discrete customer scheduling, particularly in tech services, frac rental and coiled tubing. As we move into Q4, we've seen some choppiness to customer schedules and expect typical holiday slowdowns. In the Southwest segment, revenue and adjusted EBITDA were $56.6 million and $5.1 million, respectively. On a quarterly basis, Q3 revenue decreased 4% sequentially, with EBITDA down 29%. As expected, given the 9% decline in Southwest rig count, an 18% decline in permanent frac spread count, the Southwest experienced lower activity across directional drilling, flowback and rentals which drove a corresponding downward pressure on margins during the period. For the Northeast Mid-Con segment, revenue was $59.3 million and adjusted EBITDA was $14.5 million. The sequential increases in revenue of 29% and adjusted EBITDA of 101% were largely driven by higher utilization across our completions portfolio, reduced white space in our calendar and targeted expense management across our various PSLs operating within this segment. At corporate, our operating loss and adjusted EBITDA loss for Q3 were $8 million and $6.6 million, respectively, with our operating loss improving 11% from last quarter, and our adjusted EBITDA loss was within $300,000 of Q2 2025. Turning to our balance sheet, cash flow and capitalization. We ended the third quarter with approximately $65 million in liquidity, in line with Q2, including $8.3 million of cash and cash equivalents, and $56.9 million of availability on our revolving credit facility which includes $5.3 million on an undrawn FILO facility. Total debt as of September 30 was $259.2 million, including $219.2 million in notes and $40 million in ABL borrowings and is also largely in line with Q2 levels. We remain in compliance with our debt covenants. Our bonds require a 2% annual mandatory redemption paid quarterly. We've continued to make these payments, but we did PIK $6 million of interest in Q3, and we will evaluate future PIK versus cash decisions based on market conditions and company leverage and liquidity. It's worth noting that our most recent PIK election was 100% cash paid interest. Moving to working capital. As of September 30, we had $50.1 million of net working capital and our DSO held steady at a normalized level of 61 days and our DPO increased slightly to approximately 50 days, both roughly in line with long-term historical averages. We remain focused on disciplined and proactive management of working capital to ensure flexibility and resilience in the current market environment. Our capital expenditures for the quarter were $12 million, and $7.8 million net of asset sales, down 6% from Q2, and we expect a further decline in Q4, in line with our focus on further capital efficiency. Year-to-date, capital spending trends suggest a full year gross CapEx of $43 million to $48 million with net CapEx of $30 million to $35 million when you include asset sales. As activity declined, head count was reduced approximately 2% sequentially, supporting overhead control and increased operating leverage. Also, we completed the sale of facility in Q3 expect additional asset sales to close in Q4. We continue to monitor and respond to asset performance, and our finance leases are beginning to transition as older vehicles roll off in Q4. We contributing to increased operational agility into 2026, and our portfolio of finance leased coiled tubing units will be owned outright in late 2026, which will drive a meaningful improvement and free cash flow profile going forward. I'll now hand the call back to Chris for his concluding remarks and more color on our outlook. Christopher Baker: Thanks, Keefer. While the broader market conditions remain mixed and near-term visibility is limited, we are encouraged by recent signs of stabilization and rig activity and the emergence of sustained and incremental activity in the natural gas basins. We continue to emphasize operational discipline, margin optimization and proactive capital stewardship sustained by close coordination across our operating regions to weather current market volatility. With improved overhead efficiency, a disciplined cost structure and a flexible balance sheet, we are confident in our ability to navigate the remainder of 2025 successfully and capture upside as the market strengthens. As we look ahead, we anticipate typical seasonality and budget exhaustion to moderate activity through the fourth quarter, yielding a mid-single-digit revenue decline from Q3 to Q4. This signals a less pronounced Q4 reduction than in years past. Importantly, we expect continued stable adjusted EBITDA margins, aided by ongoing cost discipline, year-end accrual dynamics vehicle turnover and regional activity mix. Our fourth quarter guidance reflects steady demand across our core product service lines, supported by new project awards from key accounts. Operationally, our diversified portfolio, prudent capital discipline and proven operating leverage continue to drive strong execution, helping to offset macro volatility in commodity noise. In addition, KLX stands to benefit as natural gas demand accelerates, underpinned by new LNG export capacity and increased data center activity. On a quarter-over-quarter basis, dry gas revenue rose 15%, building on the 25% increase we saw in Q2. Haynesville activity rebounded by 6 rigs in Q3, and we continue to monitor demand drivers on the board. with close to 11 Bcf per day of new LNG export projects scheduled to come online over the next 5 years, including key capacity additions along the Gulf Coast. The U.S. is well positioned to strengthen its role as a global energy supplier. Our internal planning highlights continued relative stability in completion-focused service lines along with a modest Q4 bounce back in drilling activity. Combined with incremental benefits from strategic cost controls already underway, these strengths reinforce our confidence in delivering profitable growth in 2026. Our strategic capital stewardship ensures we remain ready for both measured top line expansion and sustained margin strength. In summary, unused fleet capacity and minimal white space have allowed us to adapt operations efficiently and support margin expansion even in periods of softer activity. KLX is now better situated from an overhead efficiency standpoint than at any time in our post-COVID history, empowering us to strategically capitalize on future opportunities. KLX has significant operating leverage to a rebound in market activity. And similar to prior cycles, we will ensure we are best positioned from a personnel asset and technology standpoint to maximize our upside in future periods. We appreciate the ongoing dedication and commitment of our team members, the partnership of our customers and the support of our stakeholders, empowering us to deliver value and drive KLX forward. With that, we will now take your questions. Operator? Operator: [Operator Instructions] Our first question is from Steve Ferazani with Sidoti & Company. Steve Ferazani: I got to start with the Northeast MidCon, which we expected it to trend higher for you. But those numbers were way past our expectations. That your Northeast Mid-Con margin was the highest it's been in 3 years and 3 years ago, natural gas prices were over $8. Can you indicate the performance because it's impressive? Christopher Baker: No. Look, I appreciate that. Our Northeast -- if you really dig into it, our Northeast business within the Northeast Mid-Con remained relatively stable, predominantly driven by rentals and fishing. You dig into the Haynesville, we were able to capture revenue increases and accommodations and flowback specifically. And I think perhaps most importantly, we saw less white space overall in our Mid-Con PSL. And so when you think about the positive operating leverage and just being base loaded, you see a lot of margin expansion. And so I wish we were back in a market where we were at $8 gas price, we're not. I don't expect to go there anytime soon. I do think a macro theme though is KLX as a whole is just more efficient today than we were in the period you referenced. And I think that shined through in our Northeast Mid-Con performance. Steve Ferazani: Is it also fair to say you're gaining market share? Christopher Baker: Well, look, I think rig count was up, what, 6 rigs quarter-over-quarter on average in the Haynesville. So you can think about that on a percentage basis where once again, we drove quarter-over-quarter revenue just from a dry gas perspective of 15%, 25% in the prior quarter, if you recall, our Q2 discussion. And so I think within certain product lines, yes, we've gained market share. Steve Ferazani: And then flipping to the other side, which was the Rockies, we know that drilling and completions are trending down, but you did outperform our estimates. Was there anything specific going on in that market in 3Q beyond the general macro? Christopher Baker: I think specific in nature, look, rig count to your point, was really flat in the Rockies quarter-over-quarter. There were puts and takes in the various basins within the Rockies, but overall Rockies was generally flat. However, what we did see was some very episodic completion programs with an overall decline in kind of refrac activity. And we saw a lot of refrac activity in '23 and continuing into parts of '24. And so I think the episodic nature of those completion programs is back to the point with the Mid-Con, it really highlights the negative operating leverage when your cost structure is relatively fixed in the short term and at current market pricing levels. And so when you get a last-minute delay in a completion program that pushes revenue out of the schedule or maybe out for a month, it's really hard to adjust your cost structure in the short term. And so the negative operating leverage really impacts margin. Steve Ferazani: That's helpful. When you're indicating the slower year-end slowdown, you're certainly not the first company to say that during earnings season. What is it you're hearing from operators? And how does that make us think about next year when, obviously, a lot of folks are concerned about oil oversupply and pressure on WTI? Christopher Baker: Yes. I think there's really 2 questions there. First, Q4, we stated a mid-single-digit revenue decline on a percentage basis. That's materially below the 13% quarter-over-quarter decline we saw last year. The decline is largely going to be driven by holiday slowdowns. I think, less pronounced budget exhaustion versus prior periods. I would note that on a monthly basis, our October revenue was flat to September whereas if you look at 2024, we saw a 7% decline October versus September in the same period. And so we're already off to kind of, on a relative basis, a better start. On the margin side, we expect margins to hold up despite declining revenue really just due to cost controls. We've got our typical Q4 accrual unwinds relative to PTO and other accruals. And we also talked about the fleet turnover in our prepared remarks that typically occurs in Q4. And so that's how we're set up on Q4 as we sit here today. Steve Ferazani: And then...go ahead. Christopher Baker: Yes, I was going to say on next year, look, it's still too early to give firm guidance from a 2026 perspective. we've seen puts and takes with operators saying their CapEx budget for next year is going to be to slightly down. I think we're set up where the gas market is going to be very consistent, and everybody is projecting a full year-over-year increase in activity, and we would expect that to hold true for us. We continue to see consolidation. We saw a major consolidation transaction earlier this week. We know these transactions can lead to episodic white space and growing pains as they integrate their portfolios. Net-net, we are typically the beneficiaries as we talked about before of consolidation, but it still can create some puts and takes. I will say we've received some recent wins from an RFQ perspective on the award front, which we think are supportive of both Q1 and 2026 overall. And then lastly, I think the last part of your question, the EIA just posted a report earlier this week saying, and I think it was on Tuesday, saying we're going to have to ramp up U.S. activity to sustain U.S. crude production. And so it's very circular. I think it's if and when production declines take over, that is supportive of commodity prices and higher commodity prices is supportive of activity. And so it feels like it's a question of when, not if activity rebounds in the oil basins. I think there's some optimism building around the second half of '26 into '27. We'll just have to see how it plays out. Steve Ferazani: Fair enough. That's very helpful. I do want to touch on the balance sheet. $65 million in available liquidity. 4Q tends to be a strong cash flow quarter, but then Q1 is the working capital builds again more dramatically. I'm just trying to think about your flexibility. You haven't used the PIK option yet, you have that at your disposal, which can help depending on how the first part of next year plays out. Generally speaking, and you've been selling some equipment, I think you talked about some facility sales. Can you just give us a general overview about -- and you've done a great job trying to protect the balance sheet during this downturn. Just generally, how you're thinking about that without knowing exactly how activity plays out first part of next year? Keefer Lehner: Yes. Good question and lots of moving pieces, obviously, in there from a free cash flow perspective. First, on the PIK, so we did PIK a portion of our Q3 interest. We picked about $6 million of interest in the third quarter. But in the prepared remarks, we did say that our most recent cash PIK election that we submitted last week, we did do 100% cash pay there, but we will continue to evaluate PIK versus cash decisions through the wins of managing the balance sheet from a leverage and liquidity standpoint. So nothing is going to change there. As it relates to free cash flow, you're spot on that Q4 is typically a strong free cash flow quarter for us. We had $11 million or so of unlevered free cash flow in Q3. We did guide Q4 down on a mid-single-digit percentage basis. With that said, working capital should unwind. Given that decline, Q4 does not also have the extra payroll that we have in the third quarter. So those 2 things combined should lead to improved kind of free cash flow generation in the quarter largely due to working capital trends. DSO has been holding in pretty consistently around 60, 61 days. I would expect that to hold going forward. On the DPO side, we've been kind of trending in the low 50s. Again, I would expect that to hold going forward. As you think about CapEx and its impact on free cash flow, we're guiding to a much lower kind of minimal net CapEx spend in Q4. Obviously, kind of gross spending will be down, but that will be offset by some of the asset sales that we mentioned and you alluded to in your question. So I think all those things combined to Q4 being a strong quarter, and that's why we continue to reiterate that we expect liquidity to continue to improve as we navigate the remainder of this year. As you turn into 2026, I think the quarterly trends there, as you point out, will continue to play out to some extent. I will say that I expect Q1 2026 to be less burdensome from a working capital investment standpoint compared to the '24 to '25 transition just given what we know today. Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Chris Baker for closing remarks. Christopher Baker: Thank you, operator. Thank you once again for joining us on the call today and your continued interest in KLX. We look forward to speaking with you again next quarter. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time.
Operator: Good morning, ladies and gentlemen, and welcome to the International Airlines Group Third Quarter 2025 Results Call. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Luis Gallego, Chief Executive Officer, to open the presentation. Please go ahead. Luis Martín: Thank you very much. Good morning, everyone, and welcome to the IAG third quarter results. Today, I have with me Nicholas Cadbury, our CFO; as well as members of the IAG Management Committee. This has been another good quarter for IAG, and we are on track for another very good year. Our strong fundamentals underpin our best-in-class value creation over the long term. We are continuing to see robust demand for travel across the group. Our leading network and brands have helped to deliver a strong revenue performance in the quarter with PRASK broadly flat at constant currency against a record quarter last year. Our transformation initiatives are delivering effective cost control, supporting our competitive cost base on which we are delivering market-leading margins at 22% for the quarter and over 15% on a last 12 months basis. As Nicholas will show you, every single one of our airlines has reported a margin over 20% this quarter. This was also one of the best summers operationally that we have ever had, which is also supporting positive NPS performance. Our balance sheet continues to be strong, giving us optionality around our capital allocation, whether that is investing in the business at high rates of return or reducing our gross leverage as we take and encumber aircraft deliveries or as we increase our dividends, as we are doing with this set of results for our shareholders. And we intend to announce further returns of excess cash to shareholders at full year results in February. So for the short term, we are confirming that our outlook for this year is unchanged. And in the longer term, we are confident in our strategy to create value for our shareholders. And on that note, I will hand over to Nicholas to take you through the details for the quarter. Nicholas Cadbury: Thank you, Luis. Good morning, everyone. I'm pleased to announce another strong set of results. On the left, you can see the breakdown of the key drivers of the profit increase we've delivered in Q3. These are shown on a constant currency basis, with the impact of FX shown separately. We delivered a passenger revenue increase of EUR 177 million or 2% up. Cargo revenue decreased slightly as we cycled over the elevated yields in the Red Sea disruption in 2024, and other revenue continued to perform well, with the increase including higher IAG loyalty revenues, together with increased third-party revenues from Iberia's MRO business. As we guided, the performance of nonfuel costs continue to improve quarter-on-quarter, and the increase was partially offset by lower fuel prices. We split out the FX into a separate item, and you can see that we had an EUR 8 million overall headwind from FX and profit, with benefits from the weaker U.S. dollar more than offset by weaker sterling euro in the quarter. Overall, we increased profit by EUR 40 million on the record performance in Q3 last year. By OpCo, Iberia, Aer Lingus and Loyalty showed strong profit growth, whilst BA and Vueling profits were slightly down year-on-year. BA is shown in euros here, and so it was impacted by the depreciation of sterling against the euro, driving a larger reduction in euro terms than in sterling terms. Now let's look at the operating company's performance in more detail. Aer Lingus increased its operating profit by EUR 31 million to EUR 170 million, and its operating margins by 3 percentage points to 21.6% despite competitor capacity growth in Dublin. Q3's performance was driven by the expansion of its networks, particularly on the North Atlantic and the impact of the industrial action of approximately EUR 30 million in Q3 last year. British Airways saw its operating profits declined slightly by GBP 18 million, and its operating margins remain high at 20.2%. Unit revenues fell 1%, driven by the expected softer trading in U.S. sold North Atlantic economy leisure and by 7% capacity growth in European short haul. Nonfuel unit costs increased by 3%, driven by employee pay deals and resilient costs not being fully offset by the transformational benefits. Iberia continued to report strong results with operating profits increasing EUR 56 million to EUR 510 million, and its operating margin increasing 2.2% to 23.7%. Iberia also saw softness in the North Atlantic driven by competitive capacity into Madrid. However, it was fully more than offset by the continued strong demand in the South Atlantic routes. Nonfuel costs increased by 2.2% primarily due to resilience costs and higher ownership costs from the new aircraft. Vueling operating profit was EUR 20 million lower at EUR 272 million, but at a high operating margin of just over 25%. Good nonfuel unit cost performance was offset by a decline in unit revenue driven by slightly weaker demand, particularly in Benelux and Germany and the U.K. as well as the effect of investing and strengthening some of its core markets, which was not fully offset by the strong demand in other markets. IAG Loyalty reported GBP 141 million in operating profit, up GBP 16 million year-on-year at a margin of nearly 19%. Moving on to our revenue performance in more detail. Overall demand for travel continues to be strong, driven by demand for our network and our strong brands. The performance was in line with the guidance we gave in an outlook at the interims. We grew capacity by 2.4% with unit revenue declining by 2.4% and around 2 percentage points of which was due to currency movements, so only marginally down on underlying basis against a record quarter last year. If we look at the performance by region, North Atlantic capacity increased by 2.9% with unit revenue decreasing by 7.1%, it's really important to note that around half of this was due to currency headwinds from both weak U.S. dollar and sterling against the euro. The trends were similar to those we reported at the interim results. We continue to see some softness in U.S. point-of-sale economy leisure and an impact on our transfer flows of U.S. direct capacity growth into secondary markets in Europe. Premium demand held up well. South Atlantic continues to be the star performer in the network. Unit revenue increased 0.6% on a capacity increase of up 2.9%. Iberia's performance continues to be strong with the routes to Argentina continuing to perform well, along with routes to Venezuela, Ecuador and Colombia. Europe unit revenues decreased by 6% on a capacity increase of 2.4%. I've already mentioned weak demand for Vueling, weaker demand for Vueling and the additional capacity from British Airways. In addition, there are FX headwinds from the weak sterling euro, representing about 2 percentage points on unit revenue impact with Iberia and Aer Lingus performing better. To finish off, Asia Pacific performed well and Africa and the Middle East and South Africa, partly saw the impact of additional capacity to Saudi Arabia and South Africa. Just turning to Q4. So far, we are pleased with the revenue performance with passenger route revenue held positively year-on-year, including the North Atlantic. We did have a particularly good month -- good in-month booking in December last year following the elections, so we do have some tougher comparatives over the next few weeks. Despite this, we are confident about the long-haul market in particular. And while it's a bit further away, H1 is so far looking positively. Just to note, as you've seen the currency impact on PRASK in Q3 was minus 2%. In Q4, we currently see higher adverse FX on revenue of around 3.5 percentage points, most of which is usually the average sterling to euro rate, which was about EUR 1.2 last year. And this year, it looks like it will be around about EUR 1.15. Clearly, the majority of the translation FX impact on revenue is offset by a favorable impact on costs. I guided last quarter that the increase in our nonfuel unit costs this year will be weighted to the first half of the year, and I'm pleased that we're broadly flat in Q3 compared to plus 4.6 increase in Q2. This is a good performance overall and in line with our expectations. Currency benefited the unit costs by about 2%. Employee unit costs increased 2.9% due to agreed salary increases, which were only partially mitigated by productivity benefits for more punctual operations. Supply and cost inflation was more than offset by procurement-driven transformation initiatives, part of our wider transformation program. Ownership unit costs increased by 9% driven by investments in new aircraft products and IT. Fuel unit costs reduced by almost 11%, driven by lower commodity prices and the fuel consumption savings from the new generation aircraft we're investing in. We continue to expect nonfuel unit cost to increase around 3%, in line with the guidance I gave you at the last quarter. And likewise, on fuel, we continue to expect fuel costs to be around EUR 7.1 billion. This slide shows our financial results for the 9 months down to net profit. Operating profit increased by around 18%, and pre-exceptional profit after tax increased by approximately 20% to EUR 2.7 billion, which, in addition to a lower share count from our share buyback program drove a 27% increase in adjusted earnings per share. I'm pleased to report that our balance sheet continues to strengthen, gross leverage reduced to 1.9x, down from 2.6x at this time last year, driven by the regular maturity of our aircraft financing and paying down IAG bonds. Net debt was relatively flat year-on-year despite the shareholder returns and net leverage decreased to 0.8x due to the year-on-year profit improvement. We still plan to give approximately 2/3 of our expected 25 new aircraft deliveries unencumbered, and we still expect to spend approximately GBP 3.7 billion on CapEx this year. This is my final slide. I want to remind you about how we think about capital allocation, which is core to how we create long-term value for our shareholders. Our first priority is to make our balance sheet strength targeting net leverage below 1.8x through the cycle, which is a proxy for investment grade. Our second priority is to invest in the long-term strength of the business at high rates of return with a focus on rebuilding our fleet, improving our customer experience and enhancing our digital capabilities and advancing our sustainability agenda. We're, of course, committed to a sustainable dividend return, and I'm delighted to announce an interim dividend of EUR 220 million. This represents approximately 50% of the anticipated annual total dividend, and as with the earnings per share, the dividend per share will also benefit from the share count production. Furthermore, with the current GBP 1 billion share buyback program nearly completed, we intend to announce further returns of excess cash to shareholders at our full year 2025 results at the end of February. We are confident of the strong end to the year and feel that this is a more appropriate time for the Board to make the decision in line with pre-COVID practices. And on that positive note, I will now hand back to Luis. Luis Martín: Thank you very much, Nicholas. As usual, I would like to remind you of our strategy that focuses on 3 strategic imperatives. Firstly, our strong core. We are deploying our capacity in a disciplined focused way to leverage our market-leading positions. And we are building our brands by investing in new, more efficient aircraft and better cabins and services alongside more efficient operations. Secondly, we are building up our complementary capital-light businesses, in particular, IAG Loyalty. And thirdly, we have a robust financial and sustainability framework. We consistently executing these imperatives we can deliver and maintain targets that we think are both best-in-class and appropriate for our business through the cycle. As I mentioned earlier, we have now delivered a 15.2% margin over the last 12 months which is market-leading. Fundamentally, we believe that delivering earnings growth at these levels of margin and return on capital will create substantial value for our shareholders. As usual, there are a lot of things going on around the group, and we have highlighted a few initiatives on this slide. Our network strategy is to focus on our core markets with increasing scale in our tax, we offer our customers more choice of destinations and frequencies. We focus on delivering improvements to the customer journey in our aircraft and on the ground and through a combination of the human touch and digital innovation. A good example of this is our announcement yesterday that we are going to partner with the Starlink to provide high-speed connectivity in all of our airlines with the rollout likely starting early in 2026, and our punctuality, as a driver of both customer satisfaction and efficiency is amongst the best in the world, and in particular, has been excellent over the summer despite many external headwinds. On-time performance improved across all airlines with British Airways achieving the best OTP at Heathrow since 2012, up by 10 points year-on-year. And NPS also continues to improve around the group with Vueling NPS hitting a record high this summer. Finally, we are pleased to announce today that IAG Loyalty has signed a multiyear partnership extension with American Express. Moving on to our outlook, our expectations for the 2025 full year are unchanged. As Nicholas has explained, we are booked positively so far for Q4, including the North Atlantic, so we are on track to deliver another very good year of revenue and earnings growth, margin progression and strong shareholder returns. Demand for travel is strong and our fundamentals are proven. We have leading market positions, a great network, powerful brands and an attractive customer base. Through the transformation program, we are delivering the margins that we are reporting today. And we still have a significant number of initiatives to roll out gross revenue, costs and operations. So we believe that we can continue to deliver strong value creation for our shareholders through the cycle. So I will finish by summarizing those key elements of that business model and our long-term investment case, strong markets, strong execution and strong value creation. And on that note, we will turn the call over to Q&A. Operator: [Operator Instructions] Your first question comes from the line of Alex Irving of Bernstein. Alexander Irving: Two for me, please. We heard from -- first of all, we have some of your peers about a less peaky summer, but with the summer extending into Q4. Does that match your assessment? If so, is that a 2025 factor or a lasting change? And what does that mean for how you manage the business? Second, on the North Atlantic, we saw Alaska launch in Heathrow. Do they get that slot in your existing joint business? If so, why? And should we see that as a precursor potentially adding them into the business? Luis Martín: So for the Q4 and Q1, we currently have about 80% of the Q4 book. The overall revenue performance is good and the passenger revenue is held positively versus last year. And we need to take into consideration that last year was very strong with total PRASK up 3.1% in general and in North America was up 14%. So performance is different by region. We see improving trends in North Atlantic. And currently, revenue is quite positive. We see also a strong October and November in North Atlantic. South Atlantic, as we said in the presentation, continue to be strong. And in Europe, we continue seeing some softness in intra Europe. But with lately, we have seen improving. Rest of World is also positive. And what we can see for Q1 right now with revenues around 30% the levels of revenue that we have are also above last year. So in general, the trend that we see is positive. So Q3 was a little weaker. As we said North Atlantic point of sale, nonpremium and transfer traffic had an impact in that. But we see that the situation is improving since then. And about Alaska, maybe you want to comment, Sean. Sean Doyle: Yes. Look, I think Alaska a very important partner to American and BA and we have a very good connecting partnership over Seattle and to places in the West Coast where they've developed the network over recent years. It would be premature to talk about entry into any joint business, but we work with Alaska on a very constructive basis, and we would have helped them through the kind of slot process in advance next summer. Operator: Your next question comes from the line of James Hollins of BNP Paribas. James Hollins: One for Sean, please. Maybe if you could give us a quick update on the very sort of current news on the U.S. shutdown. And clearly, international flights are protected, but whether you might perceive there's a little bit of reticence on late bookings on your transatlantic network. And while you're on, maybe update on your BA digital transformation, I think we're getting into the upcoming? And then for Nicholas, full year cost, I -- let me put it this way, is there a good chance you beat the 3% guide, particularly with FX and obviously, the performance you've had so far? Or is there anything specific on costs in Q4 that would mean you don't beat 3%? Sean Doyle: Just on shutdown, I think it's early stages. But right now, we're not seeing any impact. And I think one thing I would say is, we have -- it's November. So there's lots of kind of ability to reaccommodate across networks if there is an impact. We flight to 27 points directly in the U.S., and we work with American closely and start selling over those networks. So I think right now, it's business as usual, and we're not seeing any effect. But I think our direct network out of London, if there is any marginal impact on connecting traffic, we'll have plenty of capacity to kind of reabsorb any rebooking that we need to do. In relation to digital transformation, yes, we are entering an exciting phase. About 50% of our bookings on dotcom now are going through what we call our new booking flow, and that's showing very encouraging results. We're happy with conversion. We're happy with the performance, and we're very happy with the CSAT. We'll begin to scale the number of bookings we put through that platform as we head in towards the December, January sale period. So the vast, vast majority of bookings heading into next summer will have come through that new booking flow. And we're in a position that we start rolling out the app phasing element of the digital transformation early in 2026. So yes, it's exciting, and we're very encouraged by what we're seeing. Nicholas Cadbury: Yes. Just on the cost side, James, we've got all the MC here. So thanks for putting them under a bit of pressure overall. We're sticking with our kind of 3% guidance at the moment. You can see FX is moving around quite a bit at the moment overall, but we think that's still -- we're holding on for that at the moment. But we're pleased with the progress we've made, particularly with supplier costs overall, particularly the kind of process improvements we're putting and the kind of procurement savings we're doing. So we're pleased with how that's going. Operator: Your next question comes from the line of Stephen Furlong of Davy. Stephen Furlong: Maybe for Luis, just talking about or thinking about into next year, even into next summer. I'm just thinking about the competitive environment, maybe you could talk -- maybe go through the regions again because I'm thinking about things like, let's say, in LatAm, is there any change? Obviously, you have Turkish investing in Air Europa. I don't know on the other side. In the U.S. or North Atlantic I'm thinking about like United or I think it's delta expanding a lot of capacity. And then for yourselves in terms of capacity, maybe you'd be able to grow a bit more at Heathrow, if there's a bit of an improvement with the trends, et cetera. So just talk about the competitive dynamics as you see over the next 12 months in general terms. Luis Martín: So I can't comment on the capacity that we see for the next quarters. We need to take into consideration that still the people they are working in the programs for summer next year. But what we see for example, for Q4 and first quarter of 2026, is that capacity from London Heathrow, North Atlantic, London Heathrow is going to decrease in comparison to previous year. So that's going to help. We see that the other hubs, the traffic with North Atlantic are going to be more difficult. So Dublin, for example, the people, they are adding a lot of capacity in winter that is not usual. So we see in the Q4, an increase of capacity of around 16% and in the first quarter, 15%. So we are going to have a very tough competitive environment there. Madrid North Atlantic, Q4, we are going to have an increase in capacity of around 5% and the first quarter, 10%. So it's true that Q3, the increase of capacity was higher and other people they are moving capacity from Madrid to other regions in Spain. If we look at Latin America, from London, we see a decrease in capacity in the last quarter and also in the first quarter. Madrid is going to have an increase of around 4% in the Q4 and around 7% in the Q1. So -- but even with this increasing capacity, we are seeing strong yields and strong load factors. And the intra Europe is different in the different subs that we have, Heathrow Europe is going to be almost flat. Madrid Europe is going to be around 7%, Barcelona Europe around 4%. And Dublin Europe, again, high increase of capacity of around 12% in the fourth quarter and 15% in the first quarter. So the competitive environment, North Atlantic, we see positive trend, it's true that others are adding capacity. But in the joint business, we keep our market share and also in number of premium seats we continue with a very good position. And the other topics that you said, for example, Turkey with Air Europa, I think is going to be an investment of 26% in the company. I suppose they will try to develop the business, but we don't see an impact of that in the short and medium term. I don't know if there was another question. Operator: Your next question comes from the line of Jaime Rowbotham of Deutsche Bank. Jaime Rowbotham: Two from me, please. First, almost certainly for Nicholas on buybacks. On Slide 11, you reiterate the plan to return cash to maintain leverage of 1.2x to 1.5x net debt to EBITDA. It's obvious question, but if we assume you're still at 0.8x by year-end, it would imply a quite staggering EUR 3 billion to EUR 5 billion of potential headroom. Is it as simple as that, Nicholas, and presumably, at the lower end of that range, you could leave some buffer for potential M&A opportunities like TAP? Second question is just really on short haul. Could you remind us what the plan is for Vueling next year? I think there were some clues there in what Luis said about capacity out of Barcelona. It seems like the short-haul environment is a little bit tougher for you. You talked about weaker demand, Benelux, Germany, U.K., not offsetting strength in other areas. So some comments, please, on short-haul outlook and the plan for Vueling. Nicholas Cadbury: Yes. So I'll just start with shareholder returns. So this year, we'll have returned by the time we get to the year-end, we returned GBP 1.2 billion of share buybacks and GBP 400 million of dividends over GBP 1.6 billion in total. We haven't quite finished the share buybacks, so we'll finish that over the next month or so overall. We've kind of held back kind of doing the next shareholder return to year-end. Just to get it back into a normal process. We did was an exceptional one that we did last year was because it was the beginning of the process, but we'll just get back into the normal swing of it. It's a normal year-end decision that we have overall. But hopefully, we've kind of said in our statement that we're confident in going to give you share -- further returns later on in the year overall. Just in terms of the kind of way we think about it, as you said, we've got that range of 1.2x to 1.5x net leverage below that overall. I think kind of right at the moment, we've got some increasing capital coming over the next few years. And as you say, the TAP, so we'll probably manage more towards the bottom end of that range rather than the top end of that range overall, but that still gives us kind of quite a lot of flexibility overall. We've had 1 or 2 analysts kind of saying that not giving shareholder buybacks for this quarter may show kind of lack of confidence in the kind of future trading, I think, kind of after the strong quarter we just had and the fact that we've just said that we're booked positively for the year-end as well and kind of confidence in our overall strategy, we kind of find that that's obviously a personal statement, but it's doesn't reflect the confidence we have in our own business. Luis Martín: About the short-haul and maybe Carolina can expand on the Vueling. But the Q3, the point-to-point traffic was okay. We suffered in the transfer traffic, as I said previously. In the Q4, what we see is that competition is high. In Q4, intra-Europe capacity is going to raise around close to 6%. But we have different performance in different countries. For example, there are markets that are working very well for us. We need also to take into consideration the impact of the FX in the Q4 that is going to be relevant. But maybe Carolina, if you can comment on Vueling. Carolina Martinoli: Sure. If we look at Q3, I think it's a mixed bag. There are different things. So some markets work very well, domestic worked very well for us. As Nicholas said before, we had some specific markets with a weak performance. Germany, U.K., Netherlands, Netherlands very linked to the tax situation there. But we have a very strong position in Barcelona, and we offer from there over 100 routes, it's a constrained airport, and we have 1/3 of domestic traffic. So we are very used to face strong competition, but we are positive about our ability to compete. If you look at our RASK, A good part of that is self dilution. So we have decided cautiously to invest in some markets, Canary is a good example. We have grown over 30% in Canary but we are already seeing the results of that investment. So although you are right, it's going to be very competitive, I think we have a good position to compete in our core markets. Operator: Your next question comes from the line of Savi Syth of Raymond James. Savanthi Syth: Maybe for Nicholas, I'm not looking for guidance or anything like that, but I was wondering if you could talk a little bit about as you look out to 2026 just across the kind of the main cost items. Just generally, what you are expecting in terms of inflation and anything, any kind of offsets or headwinds or tailwinds that we should think about? Nicholas Cadbury: Yes. We're not giving guidance for 2026 overall at the moment. I think all I'm going to say just on the cost base as well, we've given kind of clarity for the last kind of 2 quarters on this year, which we're confident delivering. We've just delivered a good quarter on the cost base overall. So that will be up about 3% year-on-year on nonfuel cost. I'm expecting kind of the transformation program and also with kind of some -- hopefully, some kind of easing inflation overall that, that kind of number should moderate into next year overall. Savanthi Syth: That's helpful. And if I may just also ask just on the demand side, if you could kind of give a little bit more color between just kind of corporate versus premium versus kind of maybe the economy leisure. Luis Martín: Yes. I think that if we look at the business traffic, year-to-date, we have volumes around in total at group level of around 70% of the volumes that we had in 2019 and revenues close to 87%, so situation is improving but slowly and with a very different performance in the different airlines. So for example, in British Airways 62%, 63%, 82% in revenue, in Iberia, close to 80% in volume and above 100% in revenue and in Aer Lingus close to 100% in volume and similar in revenue. So with this, we expect to finish 2025 with business revenue above what we had last year. If we look at the volumes in Q3, we saw a decline in comparison with last year. But what we see now in the Q4 is positive, for example, in British Airways, we are seeing now growth in North Atlantic, both U.K. and North Atlantic point of sale. So we think that this is going to help to that recovery. But in any case, as I said, in some way, we are in a stable situation and the improvements slowly. In any case, when the COVID started, we said that we were expecting to come back to levels of revenue of around 85% of the revenues we have in 2019, and we are above that. And the good news is that we are delivering these strong results with this percentage of business traffic. What it means that our model is very -- is working very well also with the premium leisure traffic. Operator: Your next question comes from the line of Harry Gowers of JPMorgan. Harry Gowers: Two questions, if I could. The first one, just if I could ask on your positively booked revenue comments for Q4, if you could maybe clarify how positively booked we're talking? And could we end up seeing RASK higher year-over-year for Q4 versus last year? And then the second question, I was just wondering if you could go into some color on the U.K. point of sale on transatlantic and also U.K. point of sale on short haul as well and if we're seeing any demand weakness or price sensitivity? Nicholas Cadbury: Yes. So just -- Harry, I'd love to give you more detail, but that's about as much as we can give you that it's booked positively overall. I mean, we're currently -- we've had a good October and November, particularly we've seen actually point of sale in North America being good on both sides, actually from U.K. and from the U.S. as well and actually the U.S. leisure point of sale in the last few weeks has been a bit better as well, which is good to see. The only thing we're just calling out is we had a particularly strong December last year across the Atlantic. After the Atlantic, it was a bit of kind of pent-up demand. And if we saw it very strong. So we're just about to enter those weeks, but we're feeling pretty positive about it overall. So I think that's all we can say overall. And ASK is going to be up about 2.3% in the quarter as well. Sean Doyle: Yes, just on the U.K. segments in terms of the booking profile, Q3, we were positive across both business and premium and non-premium leisure and Q4, it's a little bit more positive, but we don't commit to the specifics. So yes, we're seeing stable demand is the best way I would describe it, and that's relevant, I think it's prevalent in both Europe and/or our U.S. markets, as Nicholas said. Nicholas Cadbury: Does that answer your question, Harry? Harry Gowers: Yes. Operator: Next question comes from the line of Conor Dwyer of Citibank. Conor Dwyer: I'd like to come back a little bit to the buyback question. Nicholas, you obviously already talked a little bit about managing towards the lower end of that range of 1.2x to allow for some potential M&A, things like that. But obviously, that still implies basically you can pay out more than your free cash over the next few years. Is that really how we should be thinking about this? Or are there other things in there that might, let's say, move that leverage number away from that kind of level? And second question was actually on the Loyalty. So growing revenue by about 7%, obviously, that growth has been extremely high in recent years. I'm just kind of wondering, are you now kind of viewing that business as a bit more mature now? Should we be really kind of thinking that as a kind of mid-single-digit percentage growth business? Nicholas Cadbury: Just on the share buyback. I mean, we set out the guidelines on where we want to manage our balance sheet to overall. And I think when we did that, we kind of said the things that we'll be looking out for it's a forward-looking thing rather than a backwards necessarily. So we'll be looking forward to how does the outlook look. We're feeling pretty positive about that at the moment. We also looked at what M&As on the horizon, TAP maybe potentially overall. And there's also kind of CapEx, what's our CapEx commitments looking forward as well. Now CapEx, as we know, is about EUR 3.7 billion this year, next year, probably more about EUR 4 billion, but we know over the next few years after that, it starts to ramp up, and that's why we could be managing towards the bottom end of that and making sure we've got some good headroom and ready for that overall. Adam Daniels: On the loyalty side, just to come back on that specifically, yes, we are continuing to see -- if you look at the year-to-date performance because there are some specifics around promotions around particularly on issuance of the points. So if you look at it across the year, we're still seeing double-digit growth in terms of the currency that's being issued and there or thereabouts on usage of those points and how those points redeemed. So I think we're seeing a continued growth and the continued double-digit growth that we've seen over the previous years. Operator: Your next question comes from the line of Ruairi Cullinane of RBC Capital Markets. Ruairi Cullinane: First question on Cargo revenue decline. Should we expect similar dynamics in Q4, given another strong prior year comp? And then just sort of coming back to the unit revenues. Do you think North Atlantic trends you've seen is suggestive of the Liberation Day headwind, which may now be fading, given the improvement looking forward? Nicholas Cadbury: Yes. On Cargo, yes, you're right. I think we're seeing actually the supply, the demand for Cargo is still relatively good. And you can see that our weight we're carrying is still up overall. But we're just seeing some softness in yields. And as we said in the call, that's really based on the fact that we're anniversarying the high yields we had as there was a lot of disruption over the Red Sea last year overall. And that's just the supply chain around that is just kind of normalizing overall, and you'll see that probably into Q4 as well. North Atlantic, I'm not sure we can -- anything else we can really say about that overall. I mean, Liberation Day was in April, overall. Luis Martín: Yes, as we said in Q3, we were below what we expected. But since then, we see a recovery. And as Nicholas said before, we see an improving trend, which is strong October and November, and we are booked positively. So I think the effect of the Liberation Day is, by far away. Operator: Your next question comes from the line of Andrew Lobbenberg of Barclays. Andrew Lobbenberg: Can I ask 2 questions. One on what labor relations lie ahead? I think there are some at BA, but perhaps you can correct me on that and whether there are any elsewhere in the group? Second question, I'd quite like to hear your thoughts around the situation at Aena, where I mean, obviously, you want lower airport charge, I can imagine. But it appears that the airport companies becoming something of a political football in Spain, and its plans to develop the infrastructure are potentially being threatened. So where do you sit, obviously, you do want beautiful facilities for very low cost. But how do you think about your key partner providing infrastructure in Spain being such a political football? Luis Martín: So about the labor situation, I think we have closed the most important agreements at group level. We are still negotiating some places like Iberia, with the ground staff. Maybe, Marco, you can comment on that later. We have now a situation -- a difficult situation in Manchester, where, as you know, we have a strike and it's probable that we are going to continue with a strike. And in Aer Lingus, they need to negotiate agreements with different collectives and in Vueling also, some of the agreements they expire at the end of this year and they are negotiating. So maybe you can comment maybe, Lynne, the situation in Manchester. Lynne Embleton: Yes. The -- just about Manchester in context, first of all, it takes 2 aircraft in Manchester base applies transatlantic. We're mounting through the strike. We've been accommodating -- we are accommodating more than 90% of our customers in strike date so far. We reached agreement with United on 2 separate occasions, and they've got the recommended deal for their members, which the members rejected. So we've benchmarked there. We've been working through ACAS. I think the key thing here is we need to be cost competitive, Manchester needs to be able to perform financially, it needs to justify its asset allocation. We're part of a group where capital is constrained and distributed where returns can be made the most and I'm very conscious of that when we look into our industrial relation situations. Luis Martín: Okay. Maybe, Marco, you want to comment on the ground staff. Marco Sansavini: Yes. Indeed. In terms of the labor relations in Iberia last year, there was a major milestone that was achieved. It was to set the new collective agreement with our pilots that, as you know, is a system where we share the benefits of and the results of the company, not only linking the pay evolution and the one-off evolution and a payment to the EBIT results of the group, but also to the productivity of our staff to the NPS and the OTP, so the capability to deliver to our customers. And the same has been achieved this year with our cabin crews. And we're just starting now the process of opening the negotiation with our brand personnel, and we are confident that the same scheme and system, of course, with the nuances for the specific collectives can be applied also there. It's very beneficial also for the people. And one remark, as you know, we also introduced the possibility for people to buy shares and become shareholders. And more than 1,000 of our staff currently have subscribed to that. That is another element of sharing the benefits of the resource of the company. And maybe a comment in terms of the Aena situation. Of course, our strategic plans implied the necessity of an alignment with Aena, and we have a common view of bringing to the full potential of the Spanish both operating companies and infrastructure. Of course, that needs to be done at an affordable price, it's the same view that the group has with regard to the U.K. So and we are in close contact with Aena to ensure that, that will happen. Andrew Lobbenberg: Can I just check? Is everything done and dusted on CLAs at BA? Or are there any... Nicholas Cadbury: Yes. our collective agreements go to the end of '26 and mid- '27, so we concluded those over the last 18 months. Operator: Your next question comes from the line of Patrick Creuset of Goldman Sachs. Patrick Creuset: Just coming back to your comments on Q4 trading, please. When you say booked passenger revenue for Q4 is up year-on-year including on the Atlantic. Just double checking that, that is after the FX headwind that you flagged or is this constant currency? And then secondly, if we look at your ASK guide of 2.3% for the quarter, again, coming back to your comment on increasing passenger revenue overall, and that would imply RASK at least somewhere around flat year-on-year, consensus standing at minus 2% for the quarter. So is that a fair interpretation? And then on the basis of that, looking at consensus expectations of somewhere around EUR 5 billion -- just shy of EUR 5 billion of profit for the year. Do you sort of feel comfortable with that? Nicholas Cadbury: Just you're right. The guidance we've given on the positive booking includes the FX. So it's not in constant currency overall it takes account of the currency impact as well. I'm afraid I can't give you -- I'm not going to give you PRASK guidance for -- with North Atlantic for Q4 overall, exactly, I think we said we were positive overall. I mean that's taking account the ASK growth as well, but we've got positive momentum on that overall. And so the last question on consensus, yes, you're right, consensus is just under GBP 5 billion. And if we weren't happy with that, we would have to say something, and we're not saying anything. Operator: Your next question comes from the line of Muneeba Kayani of Bank of America. Muneeba Kayani: I just wanted to touch on this new Amex partnership extension. How should we be thinking about it in terms of impacting the loyalty, top line margins? And then just related to that, overall margins into next year, you're very much at the top end of your midterm guide. You talked about positively unit cost inflation being better next year, you're seeing good demand trends. Like how are you thinking about that margin into next year, please? Adam Daniels: Yes. Just starting on the Amex agreement. Yes, so we're very pleased that we've reached an agreement with a -- long-term agreement with American Express. That continues the good work that we've done previously in terms of that. That agreement includes the British Airways co-brand, the Membership Rewards business and the acceptance of Amex across the different airlines this time to include LEVEL as well. So we're delighted that we have this multi-year agreement, and that will help the loyalty business as we go through the next few years to have that agreement in place, and we look forward to working with Amex in the years to come. Nicholas Cadbury: Yes, just on guidance, we're not giving guidance next year, but I mean I think kind of with the dynamics that we're seeing, we still see strong demand for travel, we still see a constraint in supply of aircraft into the market next year. Overall, we've got our transformation program, which is both driving our own revenues and also the kind of costs under control, which I said should moderate overall. So if you put those dynamics together, there's no reason why we shouldn't be at the top end of our guidance and sustain there overall. Of course, it depends on where fuel is and inflation ends up overall. But I think we're feeling confident in that. Operator: Your next question comes from the line of Gerald Khoo of Panmure Liberum. Gerald Khoo: One, if I can. There's been a lot to talk about the sort of ongoing strength in premium leisure. I was just wondering whether you could give an indication as to the relative importance of premium leisure within the Premium cabin. I know you probably won't give an exact figure, but just something to give a rough indication of how important that is proportionately? And what -- in terms of that trend of growth, what could derail it? What could cause that premium leisure strength to reverse or soften? And certainly, I think there was some talk about strong short-haul capacity growth at British Airways. So I just wanted to kind of understand where that was and why that was done, please? Nicholas Cadbury: Yes. Just in kind of premium leisure, yes, we don't disclose the kind of precise mix we've got on premium leisure Premium seats. If you look at it, it's different by different airlines, of course, if you look at British Airways, we've got about 45% of our seats are Premium overall, but a significant part of that is leisure. We've got about 20% of our overall customers and corporate customers. And more of that when you look at SME businesses overall, but they're important part of our growth. And you can see that in terms of corporate customers overall, they're still down year-on-year, but actually that's been filled very successfully by the demand for leisure, particularly at the front end of the plane. So it still continues to be strong. In terms of derailing one of the concerns we had as you get up to the -- we're approaching the U.S. -- U.K. election, which feels like it could be targeted more at the -- our customers at the wealthier end of the line. So you would expect maybe some slowdown, but we're seeing the opposite of that at the moment as well. So the people have got money, they've got money at the moment. Sean Doyle: In terms of short-haul capacity, there's probably 2 dimensions driving it. One is we have been replacing A319s with A320s and 321s at Heathrow. So that's a chunk of gauge. We've also been reorienting the network to fly to probably more of the Southern European leisure markets, which gives us a stage of that effect, which increases ASKs. And we've been continuing to build back our Euroflyer businesses at Gatwick. So that's operating kind of 25, 26 aircraft, which is probably where it was back in 2017, '18. So there are kind of 3 drivers of that capacity increase. And we've had some gauge benefits as well at London City, where again, we're adding some ASKs, but again, primarily into longer sector leisure markets, which were robust over summer. Operator: Your next question comes from the line of James Goodall of Rothschild. James Goodall: So just firstly, following up on Muneeba's question on Amex. Has there been any changes in commercial terms with Amex as a result of the new agreement? And how should we think about the cash remuneration element going forward? And then secondly, just given the strong on-time performance in all entities in Q3. Can you quantify what the benefit was to both revenue and costs from lower disruption in the quarter, please? Nicholas Cadbury: Yes. I mean the Amex card, it's a commercial sensitive agreement, so we can't really give any details in terms of the specifics overall, both in terms of, kind of, be it margin and cash, I don't know if you want to add anything. Adam Daniels: No, I just have to say, I think that's right. But clearly, we're very happy with that agreement. It works for both our South American Express, and we're very pleased to have extended it for the long term. Luis Martín: And about disruption cost, in the case of BA this year, the costs were almost half, 45% less than the growth that we had last year. Operator: Your next question comes from the line of Jarrod Castle of UBS. Jarrod Castle: Two as well. It seems like the MRO business is doing pretty well. So if you could just give a little bit more color in terms of pipeline of work and what you're seeing there? And then just secondly, I mean, a lot of attention to Loyalty. And obviously, the changes happened, I think, it was April this year. Loyalty members, they're going to get their tier status. I would imagine sometime in March next year. Just interested, within the different tiers, gold, silver, bronze at BA, has the mix changed, i.e., or some of the gold members as a percent of total mix slipping down or some of the silver going up? And what are signings like into the loyalty program at the moment. So any color on how you see that evolving going into March? Luis Martín: Maybe, Marco, you want to comment on MRO, mainly the engine business. Marco Sansavini: Yes. The engine business is still cycling over the post-COVID phase. So indeed, as you say, is recuperating, you see that a lot of the non-airline revenue growth has been driven by the growth of maintenance. So it's coming back to pre-COVID levels of profitability, and we are currently in the phase of setting the stages of the next longer-term view of the strategic opportunities there. So I think we will come back in time on that. Sean Doyle: In relation to the club and the relaunch, I think it's performing as we would expect, I think the tier sizes are broadly tracking the way they were last year. But we are hearing anecdotes of people who are higher-value customers getting their tier quicker. So we don't expect to see so much movements in terms of tier sizes. But we do think that the club tiers will be rewarding our higher revenue customers more quickly and more fairly. Adam Daniels: Yes. And I think I'd add to that, just in terms of the club, you asked about where the numbers are, we are still seeing some good growth in terms of people joining the club, both in terms of BA Club and Iberian Club. Active members, so that's somebody who's done something in the last 12 months is up double digits. So we're seeing a lot of activity. And we're also starting to see, which we talked about last quarter, people increasingly using their holiday as a method of obtaining tier point. So that's another trend that we're seeing. Operator: Your next question comes from the line of Alex Paterson of Peel Hunt. Alexander Paterson: Yes. So just continuing that theme of holiday sales to BA club members. Has that really benefited the third quarter? And if I look ahead, your -- the number of ATOLS that you have paid for is flat year-on-year. So if I think about then where is the growth in IAG Loyalty going to come from? If it's not from the number of holidays? Is it -- are you going more upscale? Or is it the growth is going to come from more Avios issuance? Adam Daniels: Yes, thanks for that. Yes, in terms of club members, we are seeing more revenue coming from club members, that's up on where we were in terms of if you look at it year-to-date. And we are expecting that to continue. So -- and you're right in thinking that the quality of revenue that come from those members tends to be strong. And so that's definitely where we're seeing some of the growth. In terms of ATOLs, I've always said that ATOLs are bit of an art rather than a science. And so we certainly plan to grow the business into '26. And in Q3, we definitely saw that growth in a lot of areas, I would highlight Greece is probably the region that's had its strongest summer certainly for us. So yes, that growth continues. Operator: There are no further questions. I will now hand back to Luis Gallego for final remarks. Luis Martín: Okay. So thank you very much. Thank you very much, everybody, for being here today. As we said at the beginning, a strong set of results, positive trend in bookings for the third quarter and first quarter. So we continue -- we are going to continue executing our strategy that is delivering better results than average. Thank you very much.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the OneStream's Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Now I would like to introduce your host for today's program, Anne Leschin, Vice President of Investor Relations and Strategic Finance. You may begin. Anne Leschin: Thank you, operator. Good afternoon, everyone, and welcome to OneStream's third quarter 2025 earnings conference call. Joining me on the call today is our Co-Founder and CEO and President, Tom Shae; and our CFO, Bill Koefoed. The press release announcing our third quarter 2025 results issued earlier today is posted on our Investor Relations website at investor.onestream.com, along with an earnings highlights presentation. Now let me remind everyone that some of the statements on today's call are forward-looking, including statements related to guidance for the fourth quarter and year ending December 31, 2025. Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors. Some of these risks are described in greater detail in the documents we file with the SEC from time-to-time, including our quarterly report on Form 10-Q for the quarter ended September 30, 2025, that we filed today. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During our call today, we will also reference certain non-GAAP financial measures. There are limitations to our non-GAAP measures, and they may not be comparable to similarly titled measures of other companies. The non-GAAP measures referenced on today's call should not be considered in isolation from or as a substitute for their most directly comparable GAAP measures. Management believes that our non-GAAP measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses that may not be indicative of our ongoing core operating performance. Reconciliations of our historical non-GAAP measures to the most directly comparable GAAP measures can be found in this afternoon's press release and the earnings highlights presentation posted on our Investor Relations website. We are not able to provide reconciliations for forward-looking non-GAAP measures without unreasonable effort because certain adjustments cannot be predicted with reasonable certainty and could be significant, particularly related to equity-based compensation and employee stock transactions and the related tax effects. Now I'll turn the call over to Tom. Tom? Thomas Shea: Thank you for joining us this afternoon. Third quarter was a story of focused execution. Facing headwinds and contract rationalization in our U.S. Federal business, the team exceeded expectations with strong billings growth in the quarter. More recently, at our sold-out Splash EMEA user conference, I was incredibly energized by the enthusiasm we received for our purpose-built finance AI. As we usher in the finance AI era, we remain one of the most innovative vendors in the CPM space, and we're not stopping there. We are constantly pushing forward and anticipating the growing demands of the office of the CFO. Let me start with some highlights of our third quarter performance. Year-over-year subscription revenue grew 27% and billings grew 20%. International revenue grew 37% year-over-year, particularly due to strong legacy replacement momentum in Europe. In the federal business, we renewed all of our Q3 agency customers with only one exception at a discontinued agency. We added one new federal customer and began multiple SaaS conversions, including one at our largest agency customer. CPM Express and our SensibleAI portfolio continue to show early momentum with customers. We are attracting new and existing customers by leveraging the proven customer ROI from SensibleAI Forecast. Additionally, OneStream was recognized as the exemplary leader in the 2025 Record to Report Buyers Guide by ISG Research, covering financial close, consolidation and overall record to report, achieving the highest scores in both customer and product experience. With AI at the forefront across all facets of business today, the drivers of our industry have never been more important for the office of the CFO. Number one, finance is in the initial phase of its transformation. Legacy financial systems often more than 20 years old, simply do not have the agility required for today's CFOs to effectively steer their businesses, never mind to maximize the value of AI. Finance organizations continue to look to modernize by unifying corporate data and moving core financial operations to the cloud. Number two, the role of the CFO is evolving and expanding. CFOs are being asked to do more than ever by becoming a strategic partner for the business. An integral part of that is helping them proactively look around corners, to anticipate challenges and opportunities and produce more timely and accurate forecasts. Number three, the use of AI is enabling finance teams to drive more business performance, not only measure it. In many cases, CFOs are the executive leaders taking responsibility for the AI evolution at their companies. They are being tasked with identifying key functions that can leverage these AI tools for productivity improvements and cost efficiencies. We believe platforms that provide purpose-built applied AI solutions will win the AI battle given the need for a single consistent data model and security framework. At OneStream, we have always challenged ourselves to raise the bar. Our approach to AI has been both forward thinking and deliberate. Since we began this journey a decade ago, we have gained a foundational understanding of what AI can bring to the office of the CFO by combining powerful quantitative, generative and agentic capabilities throughout our SensibleAI portfolio. We understood early on that AI for finance must run on clean data, provide context and solve specific use cases because 80% accurate is 0% useful for finance. Ultimately, we believe OneStream provides the key that unlocks the value of AI for finance through unified, secure, transparent and most importantly, contextualized information. Through our many AI announcements this year, customers are beginning to realize the growing power of our platform to drive better and faster decision-making and enhance their productivity. By modernizing the financial close process, customers are now able to, number one, unify their data on a common platform. And number two, interrogate that data using financially intelligent embedded AI; and number three, enhance and optimize the close process, enabling finance teams to focus on strategic high-value priorities such as integrated planning and forecasting. Just a few weeks ago at Splash EMEA, we again pushed the boundaries of applied AI for finance. We showed real package solutions designed specifically for finance, which we expect to deliver significant value for our customers. Let me recap some of our exciting product announcements. Since we introduced SensibleAI Studio in May, we have roughly doubled the number of algorithms currently available to 60. As you recall, Studio enables customers to quickly access a library of algorithms and routines and apply them to their own workflows. We showcased an example of this power and flexibility at Splash EMEA. Just 1 month after Studio's launch, our forward deployed engineers rapidly built our AI-powered benchmarking and outlier detection routine based on real-time customer specifications. Studio allows us to meet customers where they are in their AI journey, and we believe we are just scratching the surface of Studio's potential. We also took a big step with our SensibleAI agents, moving them out of private preview and into limited availability. So now our customers can begin to take advantage of them. Our agents are unique because they do not act alone. What's important is that they have financial context. They are embedded into solutions within OneStream, giving them direct access to all the customers' secured data stored on the platform. This allows finance teams to do tasks like ask questions in natural language, generate dynamic visualizations, query financial models and analyze contract data. Agents provide the ability to help automate repetitive work, reveal insights and help every analyst operate more like a strategic partner. We also unveiled AI-powered ESG. This enhanced solution is the culmination of our 3 strategic pillars. Core finance, operational analytics and finance AI. With AI-powered ESG, finance teams are able to link ESG reporting back to the core platform using real-time operational drivers, while automating quantitative forecasting by using SensibleAI Forecast. Further, we plan to embed our SensibleAI agents throughout the workflow to assist with data interrogation and reporting. Lastly, we continue to advance our best-in-class core finance capabilities by expanding our rapid deployment CPM Express with IFRS compliance and management. This includes a number of confirmation and validation rules adhering to IFRS Accounting Standards for our international customers. This is but one example of how we plan to expand our Express offer. Leveraging our plug-and-play architecture to bring a variety of rapid deployment productized use cases to our customers. Both at Splash EMEA and during the quarter, we had several noteworthy examples of how customers are seeing increased value from our strong and growing product line. Continuing the trend in recent quarters, OneStream is quickly becoming the CPM vendor of choice for companies transitioning from legacy systems nearing their end of life. One of the largest deals this quarter came from a Swiss multinational healthcare leader and a global leader in cancer treatments. A long-time customer of a competitive legacy CPM solution, the organization moved to OneStream to better unify financial consolidation, reporting and tax processes. They chose OneStream for our extensibility and flexibility. This significant legacy replacement marks our first big pharma win, highlighting how leading enterprises are modernizing with our unified platform. Additionally, with CPM Express, commercial customers are gaining access to the full power of OneStream with rapid deployment and best practice templates, workflows and frameworks all built in. Today, companies that are earlier in their financial journeys are starting to recognize just how valuable it can be to access our single unified platform with a preconfigured offering that can be implemented in as little as 8 to 12 weeks. One significant CPM Express win this quarter was with a leading residential real estate services company. Having recently centralized its finance and other core functions under a shared services model, the company needed greater visibility, agility and standardization across the business. Facing a legacy system infrastructure across their environment, we leveraged CPM Express to give the customer confidence in a faster, best practice-driven implementation with rapid time to value. Ultimately, they chose OneStream for our superior data integration, flexibility and finance own architecture. This empowered the finance team to streamline and modernize account reconciliations and transaction matching, all while reducing their dependency on IT. Lastly, we wanted to provide an update on a few major multinational customers that have gone live with SensibleAI Forecast and the remarkable ROI that they are realizing with the product. One of the great stories comes from the domestic healthcare division of a leading global logistics provider. They implemented SensibleAI Forecast across their U.S. operations to enhance financial forecasting as the company is developing an AI-powered approach, they reported that OneStream's SensibleAI Forecast is delivering measurable results. Gross revenue forecast accuracy has improved by 5 percentage points. Payroll forecast accuracy has improved by 8 percentage points. Forecast generation time has been reduced by 94%, freeing up more than 13,000 labor hours annually and eliminating the need for third-party specialized tools and staff augmentation. With these strong results, the organization is now expanding its use of SensibleAI Forecast to the healthcare division's international operations. Another long-time U.S. customer that builds systems and technology solutions deployed SensibleAI Forecast earlier this year. The customer was looking to transform its forecasting process for key financial metrics, including revenue, margin and SG&A using OneStream's single unified data model. SensibleAI Forecast has taken their forecasting and planning cycles from 20 days to less than 2 days, a 90% plus reduction. Additionally, the customer saw a noticeable improvement in forecast accuracy. One of the key features that led to the selection of SensibleAI Forecast was its ability to provide clear insights into how internal and external factors drive forecast outcomes. It is this level of transparency that is strengthening their trust in OneStream across its finance organization. In summary, the overarching drivers of the office of the CFO remains front and center today. OneStream has always looked to the future to anticipate and invest in what our customers will need and want to run their businesses more effectively. We have consistently been ahead in recognizing industry trends and emerging technologies as we have demonstrated with AI. Today, our customers are realizing the value that a unified and infinitely extensible platform delivers. Our SensibleAI provides insights and actions that are quantifiable and supercharged because of the high-quality and contextualized data controlled in OneStream. Our comprehensive platform has positioned us to lead the finance AI era and become the operating system for modern finance. Together with our exceptional team, we believe we have built a solid foundation to grow and scale the business. This gives me confidence in our ability to deliver unparalleled value for our customers, partners and shareholders over the long-term. I will now turn the call over to Bill to provide details on Q3 financials and our financial guidance. William Koefoed: Thanks, Tom. Good afternoon, everyone, and thank you for joining today's call. We are pleased to discuss the results of our third quarter, which proved stronger than expected as the team executed well, particularly in EMEA, while managing through a tough federal government environment in the U.S. Subscription revenue increased 27% year-over-year to $141 million, while total revenue grew 19% year-over-year to $154 million. License revenue of $4 million declined 64% compared with last year due to contract rationalization and our success in driving SaaS conversions, including at our largest federal agency customer. Professional services and other revenue was $9 million, up 38% year-over-year due to demand for our consulting services. Our international business had another strong quarter with revenue growth of 37% year-over-year, representing 34% of total revenue. Billings increased 20% year-over-year to $178 million and 21% on a trailing 12-month basis, which we believe is the best indicator of our billings momentum. This included roughly $4 million of accelerated billings from Q4 due to early renewals and add-ons. Free cash flow for the third quarter was $5 million and exceeded our expectations. We ended the quarter with 1,739 customers, up 13% year-over-year. We saw exceptional new business growth in EMEA, while in the U.S., we had particularly strong add-on business, partially offsetting the federal new business weakness and illustrating the value of our multiproduct strategy. For the first 9 months of the year, subscription revenue has increased 29% year-over-year to $400 million. Total revenue grew 23% year-over-year to $438 million. AI bookings were up 60% year-over-year, and our free cash flow for the first 9 months of the year was $70 million, up 107% over last year. Our 12-month cRPO was up 29% year-over-year and total RPO was up 24% year-over-year to $1.2 billion. Non-GAAP gross margin for the third quarter was 69% compared to 71% last year, and our non-GAAP software gross margin for the third quarter was 75% compared with 78% last year, primarily due to lower license revenue in the third quarter. Non-GAAP operating income for the third quarter was $9.3 million or 6% of revenue and increased significantly by $3.8 million or 69% compared with the prior year. This increase was due to a combination of strong revenue growth and the scaling of our operating expenses. Non-GAAP net income of $15.2 million in the third quarter increased $3.9 million from the prior year and non-GAAP earnings per share was $0.08, flat with last year. Total equity-based compensation expense for the third quarter was $25 million. We ended the quarter with $654 million in cash and cash equivalents. Now let me turn to guidance. Given our Q3 outperformance, we are raising our 2025 growth and profitability outlook. Together with our strong pipeline, we entered Q4 with a growing and more differentiated product portfolio than ever. With that, we are offering the following outlook, including an update to a onetime measure that we gave last quarter. In Q4, we expect total revenue to be between $156 million to $158 million. We expect non-GAAP operating margin to be between 4% to 6%. We expect non-GAAP net income per share to be between $0.04 to $0.07. We expect stock-based compensation expense to be approximately $25 million. Taking into account the roughly $4 million of accelerated billings in Q3, we expect billings growth of roughly 20% for the fourth quarter. For full year 2025, we expect total revenue to be between $594 million to $596 million. We expect non-GAAP operating margin to be between 2% to 3%. We expect non-GAAP net income per share to be between $0.15 to $0.19. We expect stock-based compensation expense to be between $115 million to $120 million. While we plan to give formal 2026 guidance in February, the combination of our Q3 outperformance, strong pipeline and innovative product portfolio make us comfortable with current Wall Street consensus for full year 2026 revenue and non-GAAP operating income. In conclusion, Q3 was a strong quarter. Our results underscore the power of the OneStream platform to bring the office of finance into the AI era. Now let's turn it over to the operator for Q&A. Operator: [Operator Instructions] And our first question comes from the line of John DiFucci with Guggenheim Securities. John DiFucci: Listen, on the federal dynamics this quarter, first, I want to say we really appreciate your transparency here, both last quarter and this quarter. In fact, we factored it into guidance. But your overall results really didn't skip a beat, and it's great to see subscription still growing at a really healthy clip here. It sounds like you only lost one federal contract because that agency was discontinued, but you also added a new federal customer. But I'd really like to better understand the remaining account, the renewals. And Bill, you mentioned the license rationalization. Anything you can add to help us better understand renewals in the September quarter and what this means for the future? It would be great. We're just trying to better understand the federal opportunity going forward within the context of the overall beat and raise this quarter. William Koefoed: Yes. Thanks for that, John. I'll take that and appreciate the commentary on the transparency. That's certainly something that we aspire to do and appreciate the comments. Look, the federal government, obviously, there were a lot of moving pieces as we went into the third quarter. We had SaaS conversions at a couple of our biggest agencies, and that obviously impacted license revenue, but obviously will flow through our subscription revenue in future quarters. And as you noted, we only lost one federal agency that actually doesn't exist anymore. It actually got merged into another agency. And obviously, we added a new one, as you noted. So we're really optimistic about our federal government opportunity as we turn the corner into 2026 now that I think we've gotten through this quarter, and we'll hopefully execute on that as we enter the year. Operator: Our next question comes from the line of Chris Quintero with Morgan Stanley. Christopher Quintero: Tom and Bill, congrats on a solid quarter here. I want to ask about AI. We've seen some data points that suggest that finance and accounting is actually one of the top areas that organizations are looking to deploy their AI budget dollars over the next 12 months. So I'm curious, like is that aligning with kind of what you're hearing from your customer base? And what are some of those kind of initial most important use cases that you're seeing them deploy some of your technology into? Thomas Shea: Thanks, Chris. Yes, I'll take that. As I mentioned in the remarks, we really feel great about our position in AI. We feel we're primed to lead the finance AI era. And what I mean by that is there is a lot of opportunity in finance, especially when you have a platform like OneStream that has this highly contextualized high-value information. So the use cases that you can think of -- you've heard us talk about SensibleAI Forecast, that's clearly predicting the quantitative outcomes for a business in those key line items that you heard, whether that's demand, whether that's multiple cost line items, that has a profound and direct impact on how you can manage your business. But that's just the beginning. With the comprehensive AI platform that we have, and you heard me talk about Studio as well, that opens up all kinds of additional use cases, outlier and sort of benchmarking analysis, giving companies the ability to do and measure their business in ways that they haven't been able to in the past and take immediate action. And then ultimately, agents, right? The autonomous financially intelligent coworkers that were -- we've built into the platform, that is very, very high interest in our customers because of the potential to actually interpret all this information, help take action and do repetitive work. So we feel finance is definitely embracing this opportunity. And again, our understanding of the deterministic nature of AI required for finance puts us in a great position to answer that need and interest for the customer base. Operator: Next question comes from the line of Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: I think you made the comment, Bill, about being comfortable with Street estimates for '26. And I think what's notable about that is there's less of a deceleration baked into numbers for '26 relative to '25. And so you're exuding some confidence and some growth stabilization. So if you could just maybe rank order for us qualitatively what the big drivers are there that helpful. William Koefoed: Yes. Let me talk about just about the overall performance of our business, and I think that will answer your question. And we saw this this last quarter. EMEA really performed super well this quarter. As Tom mentioned, some pretty big lighthouse wins that we had there. Obviously, considerable strong growth, strong momentum, and we're really optimistic about the opportunity that we see in EMEA. Asia Pacific continues to be a small but growing area of our business, and we expect that momentum to continue. And in the U.S., certainly, Tom's talked about CPM Express and the opportunity that we see in the commercial business. That is just getting started, as Tom mentioned, and we see strong opportunity there, particularly as we get into more verticals. Actually, I didn't mention it in EMEA, but we just released IFRS Express, which is a really awesome opportunity for us there. And then on the enterprise side here in the U.S., obviously, Q4 is our biggest quarter. And we -- as I mentioned in my commentary, we feel great about the pipeline. The team is working to execute. We actually signed a really nice big deal today, which we're excited about against 2 very strong competitors, and that all gives us optimism about 2026. Operator: Next question comes from the line of Koji Ikeda with Bank of America. Koji Ikeda: I wanted to double-click on the 2026 guide and really about pipeline assumptions and conversion assumptions in the fourth quarter guide and heading into 2026. How are you thinking about those assumptions? I guess, more specifically around conversions? Is it more conservative heading into 2026? Is it the same? I mean I just wanted to understand what is giving you the confidence to level set 2026, but also kind of expressed a lot of confidence there at the same time. William Koefoed: Yes. No, I'll take that. I mean, look, every quarter, every year as we start our forecast for the quarter and as we start our budgeting process for the next year, we look at 2 things, right? We look at our pipeline, which is arguably kind of the biggest driver of growth. And the second characteristic of that is obviously our conversion rate. And it obviously varies a little bit by quarter, but we certainly look at that as we enter the quarter and as we enter the year. In addition to the fact that we have our core business, as Tom mentioned, we're really enthusiastic about our new products. Tom's talked about our Agile Financial Analytics, which we see customers really excited about. We have our SensibleAI Forecast, which is showing some very strong growth. As I mentioned in my remarks, it's up 60% year-over-year, and we continue to see very strong pipeline as customers are seeing the results like Tom talked about in the script of better forecast accuracy, improved speed to forecast and just the benefits that we see there. Obviously, AI Studio is something Tom has talked about. And again, candidly, that new customer that I mentioned earlier has -- that's part of the solution that they've acquired. And then obviously, agents, which are just being released, we just announced limited availability when we're in Splash a few weeks ago. So look, as I mentioned in my closing remarks, we have our best product portfolio we've ever had going into any year. We have a very strong pipeline, and that gives us the confidence to obviously give our outlook for 2026. And again, I would just say like we'll give you more formal numbers when we get into February, but we just kind of wanted to give you a little bit of an update like I did. Operator: Next question comes from the line of Alex Zukin with Wolfe Research. Aleksandr Zukin: I appreciate that incremental color about the pipeline. I guess to that point, it sounds like, Bill, billings growth is going to accelerate if you take the fact that you pulled in or you had some early in Q3 and yet you're still kind of calling for really strong billings numbers in Q4. So maybe just comment on the demand environment as you kind of sit here in October? And also a metric that we haven't talked about at length previously, but like as you continue to see a lot of expansion opportunities from Sensible as well as moving into other parts of the finance workflow or outside of the core finance workflow, how should we think about NRR trends from here kind of moving forward as well? William Koefoed: So Alex, let me start with the last part of your question. I know you and I spent a lot of time talking about NRR. But we had this last quarter, as I mentioned, I think in my remarks was a really great add-on quarter. And it ended up being part of the upside that we saw in our numbers was -- were the add-ons. And candidly, it's just an illustration that our multiproduct strategy is working. A couple of years ago, we didn't have all these kind of new products that we've been introducing. And as Tom mentioned in his remarks, I think we're just getting started in our innovation around our products. Look, on the billing side, I would just tell you, again, we outperformed this quarter. We did have a bit, as I mentioned in my commentary, we saw some early renewals because -- back to your NRR point because our customers wanted to add on new products. And so we saw a bit of that in the third quarter. But obviously, in the guidance that I gave you for Q4 and as I think I mentioned that I don't expect to guide billings every quarter, but I thought it was important as we kind of went through Q3 to Q4 that we gave you that color. And obviously, we're enthusiastic about the quarter ahead. Operator: Next question comes from the line of Terry Tillman with Truist Securities. Terrell Tillman: Bill, it's always nice to hear about a deal closing, an important deal closing like in real time. William Koefoed: Terry, it's pretty exciting when we have a deal close on the day of earnings. I have to tell you, Tom and I were high-fiving at each other. Terrell Tillman: Well, if one closes before the end of the call, we'd appreciate another update. William Koefoed: We'll keep our eyes out. Terrell Tillman: My one question relates to EMEA. It does sound like you're firing on all cylinders there, and there's a lot more where it came from. What I'm curious about is there something going on with this replacement cycle. We know there's a lot of technical debt in these 20-year-old systems. Is there something that seems like it's accelerating in that cycle of replacement? And part of this is also -- but your field sales coverage is probably expanding, so maybe it's becoming more productive or maybe it's partners. But just maybe you could kind of stack rank some of the drivers that's driving that momentum. Thomas Shea: Thanks, Terry. I'll take that. And you pretty much hit on it. It's the fact that we're getting more scale in the region. So we are seeing that ability to have more coverage across the different countries. Secondarily, there is the opportunity of legacy applications that are coming up. And just to remind everybody, as I've mentioned in other calls, the foundation of getting access or being trusted to take those legacy replacements is that we've had prior success. And so when we think about that and we think about that opportunity, we're building on those foundational wins in that segment and some of those transformations that are happening. And then ultimately, when we look at the product portfolio and we look at the enthusiasm for our product, that is sort of the third component that I see driving it. But I definitely want to call out the execution of the team over there and the growth that we're seeing, and there's a lot of excitement. Operator: Next question comes from the line of Steve Enders with Citi. Steven Enders: I guess I want to follow-up on the AI side of it. I think the bookings growth you called out there, I would say it was 60%. But I guess what are you seeing maybe in the pipeline? Like are you starting to see incremental builds there from the sales build-out that you've been talking about for the past year or so? And then just how do you kind of view the future pipeline opportunity as we kind of go into '26? Thomas Shea: So we look at the current pipeline as a great validation of the momentum that we're building, first and foremost, is the way that I would talk about. So as we think about the product strategy that we have in AI, our AI portfolio consists of the first product SensibleAI Forecast, which is driving that adoption through the validation that I shared in my remarks. And so as we look going forward, what we're seeing is, again, early days, but excitement around AI Studio. It just opens up so many additional use cases. And the way that you want to think about AI Studio is AI everywhere in our platform. That's why we invented that product so that we can drive AI into meaningful workflows across our customers' set of use cases that they're enjoying on the platform. And then ultimately, we are very, very excited about what we're -- the feedback that we've been getting and the partnering, frankly, that we've had with our customers in the agentic space because, again, this is all -- this is a building process for us. It was quantitative, generative and agentic working together on a contextualized platform. And so as we look to 2026 and continuing the rollout of our limited availability of the agents, we're very excited about that opportunity and bringing that to our customers and again, building on that same momentum that we're seeing from SensibleAI Forecast. Operator: Next question comes from the line of Scott Berg with Needham. Scott Berg: Really nice quarter here. Tom or Bill, I just wanted to see if you could maybe comment on what you're seeing early with the revenue opportunity for the agents. I know they're not fully released in general availability yet. But I think a key question we've all kind of had is, as you release those, I guess, what's the uplift there? And does it impact any of your seat-based model at all? Thomas Shea: Sure. I'll take that. And as we look at agents, we're still in the early days in terms of the -- going from private preview to limited availability. So pricing, you can expect to be more of a usage-based pricing the way we price the other AI services products. And we think we have a strong applied approach, which is key here, and that is demonstrated value of our finance analyst agent. What we see this is a -- as I mentioned in one of my remarks, it's an autonomous coworker. It's the ability to help the customer get more value, do work efficiently and then let their team members do more high-value work is quite frankly, what we see. So, we see this as incremental revenue rather than sort of a replacement or displacement of seats. And I think that's largely what you're going to see in the financial space. There's certainly optimizations. But as we've highlighted in some of the studies that we've done, the 2035 finance, like you have -- finance teams are generally overworked, overstressed. It's not that there are always way too many people, right? They want to have those people working on the most important areas of the business, to be a true partner of the business. And we think that we're an unlock for that, giving them efficiency to do the things they have to do and help them be more of a business partner. Operator: Next question comes from the line of Mark Murphy with JPMorgan. Mark Murphy: Can you comment on traction in some of the emerging applications that sit outside of the core, maybe shed some light on where you see the strongest growth vectors? For instance, noticing you have account reconciliations now that are driven by SensibleAI. And then the supplier analysis, I'm wondering if there's any more interest there in the wake of the tariffs? And any brief mention on the big pharma win? Congrats on that. Just wondering if you see that as a linchpin to going a little deeper in a new vertical? Thomas Shea: Thanks, Mark. Yes, there's always -- if I can just orient everybody on our platform and our platform message. And I think this is critical to helping you -- to help everybody kind of baseline this. We think of the platform as having 3 key components: core; operational; and AI, kind of think of it as a triangle. Core is the stuff everybody has to do. Every big business has to do this, the things you have to get right. We need to help our customers become as efficient as possible. And to your point, Mark, the thing they want to do, though, is they want to help -- they want to start turning that fast-changing operational data, those operational use cases into a signal that they can take action on. So we have always seen a lot of interest in that particular space. And the fact that with our AFA or what we call Agile Financial Analytics, our ability to do more real-time analytics, no ETL, directly on top of operational sources and have our agents be able to interact with that data as well is an area that we're continuing to push into. And those are, again, some of the key innovative areas that are underpinning our excitement in the business and the opportunity that we see ahead. And so -- and when you think about these operational use cases, whether that's -- you mentioned AI-powered account reconciliations. We have that under an umbrella that we call the modern financial close. That's an opportunity for us to, again, to double down and address certain personas and make sure that they understand that we're delivering the key capabilities and technologies if you're a controller, to help you not only do your financial planning, your financial reporting, but also deliver on those and become more efficient at your closing. So any and all of those opportunities are what lie in front of us. And you'll see us continue to develop more and more productized use cases in those areas, as you mentioned, supplier analytics, and these are all areas that are part of our ongoing verticalization strategy and intention to focus in these areas. Operator: Next question comes from the line of Jake Roberge with William Blair. Jacob Roberge: I just wanted to follow-up on the new agentic offerings entering limited availability. Could you talk a little bit more about the feedback you've gotten from customers and if there are any specific agents that you're seeing drive outsized interest for the platform right now? Thomas Shea: Sure. So let me first just talk about the agent set that we have in play, just to level set for everyone. So we have our finance analyst agent. You can think of that as a structured kind of data analyst that understands the OneStream data architecture, data repository, highly contextualized data and can help with analytics, can help with reporting, answer questions that can help with education because individuals that don't understand some of the data models that customers have built now have access to that information. So it's broadly applicable. And that's a very high interest agent within our customer base. The other couple of agents that are also getting a lot of interest are our search agent and our deep analysis agent. These complement and contextualize and synthesize with our finance analyst agent. So meaning if you have an interesting set of analytics that are coming out from finance analysts, but you require additional information to provide context such as contract-based analysis, our agents, we've developed an agentic workflow. So the thing that has come out of the interaction with customers is more than -- these aren't just chat-oriented interactions. We've built an entire workflow-based interaction which will allow us to truly assign tasks that can be done on a repetitive basis. And this is some of the feedback loop and the processing that our AI engineering team has been working with to rapidly innovate that and make sure that we're iterating and delivering in real-time what the customer is looking for out of these agents. Operator: Next question comes from the line of Siti Panigrahi with Mizuho. Unknown Analyst: This is Phil on for Siti. Can you talk about what you're seeing in terms of competitive displacements like Hyperion and SAP? And how important are these legacy displacements in achieving the preliminary FY '26 growth targets? Thomas Shea: So when we look at the historical legacy replacement, it's a consistent and a large opportunity that we're continuing to focus on. And so it's obviously an important part of our numbers. It's an important part of our selling [ motion ]. But the thing I do want to make sure that we all focus on is any business -- as I mentioned, the core pillars of our platform. Any business that develops any degree of complexity in their own financial operations has a very high need for OneStream's platform. And that's, again, why we tend to focus on CPM Express and the productized approach because we view all companies that have those needs as our customers. So we want to continue to focus heavily on the replacement of legacy systems and help those customers that have been in the CPM world for a number of years, but also make sure that we're extending and onboarding any company that has that growing need for a full CPM solution. So I just want to make sure that I share the way that I see this expansive opportunity consisting of both legacy and evolving companies. Operator: Next question comes from the line of Brian Peterson with Raymond James. Unknown Analyst: This is John on for Brian. Maybe following up a bit on that earlier question on sales pipeline and as we think about customer sizes. You mentioned an acceleration in legacy CPM replacement, but then CPM Express also accelerating adoption in the commercial side of the equation there. So how have those been tracking in 2025? And as we look towards 2026, realizing that both might be the answer here, what are you most excited about? And what opportunity do you see creating the most potential upside in 2026? William Koefoed: Yes, I'll take this. It's Bill. I would go back a little bit to some of the commentary that I made earlier. We're really excited about EMEA's growth and continued trajectory. Again, I think Tom mentioned CPM Express. I mentioned IFRS Express specifically for EMEA on the commercial side, and we see that as being a really big opportunity. We see EMEA enterprise as well as a big opportunity, obviously, with the legacy replacement opportunity there. And again, there's a lot of change going on, on the ERP stack there, too, which is actually tailwind in our favor. I mentioned Asia Pacific. And in the U.S., they've been our biggest driver of AI sales so far. I think that will continue to extend to other geographies. And then as Tom mentioned, just the whole opportunity that we have to continue to grow the core, to continue to offer capabilities around Agile Financial Analytics and then as I mentioned earlier, our AI portfolio. So it's hard to choose your favorite child. We love them all, and we think they're all great opportunities for us to grow. Operator: Next question comes from the line of Brett Huff with Stephens Inc. Brett Huff: On a nice quarter. I wanted to follow-up on the Agentic AI comments you made. But first, given the market is still anxious on how long it will take enterprise AI to get ROIs, congrats on those really good proof points in the forecasting business. I thought those are notable. But the follow-up question is talking more about how your agents will or won't or how they'll interact with agents from other software firms. Do you view a world where there'll be kind of Uber software or Uber agents that coordinate things across workflows? Do you aspire to have that particular position? Or is this a battle or more of a cooperation as you look beyond the 4 walls of just your data architecture? Thomas Shea: Thanks. I'll take that. It's something that I think about a lot and my evolving thought on this is OneStream has the right to be, if not the best, one of the best agents in the financial realm, meaning, because of the highly contextualized data, we want to be the best, most reliable, understanding, again, that if you're a CFO and you're trying to use a generic non-financially aware type of agent that doesn't have high context, you're going to get inaccurate results, 80%, 50%, you name it, whatever, which will become 0% useful for the CFO. And so we really feel that we have the right to be that -- in that domain, the agent set of choice. Now to your point, with agent-to-agent protocol, multi-agent orchestration, we're not naive to think that other vendors that have platforms, that have other highly contextualized information also have a right to have agents that are highly attuned and aware of that highly contextualized information. We will -- those eventually -- my -- I'm being a futurist now. My view is that we will see those of us that have platforms and highly contextualized information, our agents will work in coordination with some sort of multi-agent protocol at a higher level. And that's where I do think there will be a battle maybe by hyperscaler or there will be a real battle in terms of who wants to own that masterful entry point into the agent ecosystem and then pick the right agent for the right question and do that synthesis. So as this plays out, we're really focused at the moment on making sure that we have the right protocols in place to play in agent-to-agent communication and multi-agent orchestration. But more importantly, at this moment is delivering the ultimate value that our customers want from our agent set within the context of the CFO. Operator: Next question comes from the line of Derrick Wood with TD Cowen. James Wood: Bill, can you give us a sense how you've handicapped some of the risks around the government shutdown as you guided for Q4? And then looking beyond just with FedRAMP High authorization with DOGE behind us, just how are you feeling about building -- rebuilding momentum in the U.S. Fed? Do you think they'll have kind of a bigger appetite to come back and spend or modernize? Or how do you feel about the visibility there? William Koefoed: Yes. No, great question. I'm going to answer your second one first. Look, this Q3 was a challenge, obviously, as all software companies were kind of coming up to the end of the government's fiscal year-end. And again, I think we executed -- we were really happy to have SaaS conversions because obviously, that's the genesis of our business. And so that was something that we were certainly hoping for, and it's nice to have that behind us for sure. As we look forward, as you mentioned, we're the only kind of cloud CPM vendor that is FedRAMP High, and that gives us the opportunity to serve agencies within the government that require that level of security, and we feel exceptionally well positioned to be able to take advantage of that opportunity. And so we're definitely taking advantage of that as well as we're working to get AI FedRAMP High certified as well because the government has actually asked us and has strong demand for AI capabilities that, again, no one else has similar capabilities that we do in that arena. Look, as it relates to the government shutdown, I think we all hope the government shutdown ends quickly. We're obviously working with our customers to kind of navigate through it. And I think all of us on this call probably have our fingers crossed that it ends quickly. Operator: Next question comes from the line of Andrew DeGasperi with BNP Paribas. Andrew DeGasperi: I just wanted to ask without getting a guide for next year, like in terms of the balance of license and services and subscription, would you say that the license revenue sort of decline, is it going to be reflective of what happened this year? Or are you expecting a more muted kind of deceleration there? And I have a follow-up. William Koefoed: Yes. Well, you're our last call -- so we'll let you do the follow-up. Although I think the operator might have cut you off. But anyway, look, this was a big year, particularly this last Q3 for a transformation from license to SaaS, arguably our biggest year. You should expect to see overall SaaS migration over the next couple of years, and at which point we likely won't have very much license revenue remaining. And as I said before, on the PS&O side, I think you'll see that be some slight growth, but we certainly -- it was a big growth quarter this year. But if you recall from last year, we had a tough Q3 last year. So -- but I think on a run rate basis, our PS&O business is probably in pretty good shape where it's at. Operator: And our last question comes from the line of Mark Schappel with Loop Capital Markets. Mark Schappel: I have a question around the sales team. Just a question around the sales team, which has been obviously executing very well here. Could you just comment on any changes or fine tuning to the sales and marketing strategy that maybe we could expect in the coming quarter or 2? And also where maybe you plan to just prioritize additional sales investments? Thomas Shea: Sure. So as we've talked about, selling the -- I'll kind of go back to my overview of the opportunity that we have in front of us, right? We're selling the -- we have the legacy market that our sales team is geared towards, understands and knows and we've been selling for years and years. We also are introducing the steady pipeline of products. So what you can expect to see from us is a more concentrated effort on scaling across those different product lines, while we maintain a strong focus on our core business that we've been talking about. So the way that I view the investments in the sales and marketing team is in that scale-based approach to make sure that we're properly positioning all the AI innovation, the CPM Express. The good news is it's that straightforward to sell a more productized solution is contained, and we're excited because you get to really scope in and meet the customer in a use case-oriented fashion. Operator: That concludes the question-and-answer session. I would like to turn the call back over to the management team for closing remarks. William Koefoed: Yes. I'd just like to say thanks, everybody, for joining us. We look forward to seeing you at upcoming events, and hope you have a great rest of your day. Thomas Shea: Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Mr. Charles-Etienne Girouard, Senior Vice President and Chief Financial Officer. Please go ahead. Charles-Etienne Girouard: Thank you, operator. [Foreign Language] Good morning, all, and welcome to GDI's conference call to discuss our results for the third quarter of fiscal 2025. My name is Charles-Etienne Girouard, I am Senior Vice President and Chief Financial Officer of GDI. I am with Claude Bigras, President and CEO of GDI; and David Hinchey, Executive Vice President of Corporate Development. Before we begin, I would like to make you aware that this call contains forward-looking information, and we ask listeners to refer to the full description of the forward-looking safe harbor provision that is fully described at the beginning of our MD&A filed on SEDAR last night. I will begin the call with an overview of GDI financial results for the third quarter of fiscal 2025 and will then invite Claude to provide his comments on the business. In the third quarter, GDI recorded revenue of $615 million, a decrease of $25 million or 4% over 2024. This is comprised of an organic decline of 2% and a 2% decrease from business disposal in 2024. GDI recorded adjusted EBITDA of $38 million in the quarter, down $1 million from $39 million in Q3 2024, which represents an adjusted EBITDA margin of 6%, remaining consistent with Q3 last year. On a year-to-date basis, revenue reached $1.84 billion, a decrease of $82 million or 4% over the same period of 2024. Year-over-year revenue decline was primarily due to a 4% organic decline in revenue. Adjusted EBITDA in the first 9 months of the year amounted to $105 million, an increase of $5 million or 5% over the corresponding period of 2024. Our Business Services Canada segment recorded revenue of $144 million in the third quarter, while generating $10 million in adjusted EBITDA, down $1 million compared to Q3 last year. Adjusted EBITDA margin was 7% compared to 8% in Q3 2024. Our Business Services USA segment recorded revenues of $198 million in Q3, a decrease of 11% over Q3 2024. This segment experienced an organic decline of 12% in Q3, which reflects the paring down of low-margin accounts as well as the loss in Q1 2025 of the remaining 20% of a large client lost during Q1 of fiscal '24. In addition, revenue generated from one new customer in 2024 fluctuated based on the volume of recurring project works, which was lower in the third quarter of 2025 compared to last year. This segment reported adjusted EBITDA of $13 million, representing an adjusted EBITDA margin of 7%, an increase of 1% over Q3 last year. The Technical Services segment recorded revenues of $270 million compared to $269 million in Q3 last year. The segment generated adjusted EBITDA of $19 million, which is $1 million higher than Q3 last year, representing an adjusted EBITDA margin of 7% in both Q3 of 2025 and 2024. Finally, our Corporate and Other segment reported revenues of $3 million compared to $4 million last year and no change in negative adjusted EBITDA of $4 million versus Q3 2024. I would like now to turn the call to Claude, who will provide further comments on GDI performance during the quarter. Claude Bigras: Well, thank you, Charles-Etienne. [Foreign Language], and thanks to everyone participating in GDI's Q3 earnings conference call. I'm relatively pleased with GDI's performance in Q3 this year considering. Our Technical Services segment is continuing to fire on all cylinders. We recorded an organic growth rate of 4% and a record high adjusted EBITDA of $19 million for the quarter. We were able to deliver very strong results despite that we continue to see some clients delay project starts due to some uncertainty in the economy during the quarter. Project backlogs at Ainsworth remained near record high and as do the margins on the backlog. We feel that our Business Services segment performed well in face of the headwinds we are seeing in the commercial real estate in Canada and the United States. In Canada, even though our client churn is more than double our historic rate of 4%, we managed to limit our organic decline to 1%, while adjusted EBITDA came at $10 million versus $11 million last year. The business is holding up quite well despite the market pressures. Our Business Services USA segment recorded an organic decline of 12% during the quarter. We are still lapping the loss of the remaining piece of our largest client of Q1 2025, combined with the paring down of low-margin accounts, as Charles-Etienne was stating. We expect organic growth to stabilize during the first half of next year. Despite the revenue loss, adjusted EBITDA increased to 7% in Q3 versus the same quarter last year as we focus on margin protection and retention going forward and during the quarter. Our outlook for the remaining of the year is in line with what we announced in Q2. We expect some weakness in our Business Services segment and to a lesser degree, in Business Services USA segment due to the economic uncertainty. We are expecting business in this segment to recover well in the first half of 2026. Our Technical Services business is performing well and notwithstanding the global economic uncertainty, our outlook remains very positive. GDI had a solid quarter from a balance sheet perspective. We ended the quarter with a $26 million reduction in our long-term debt, net of cash, coming from a combination of free cash flow and $11 million reduction in net operating working cap and the sales of our noncore property in the province of Quebec for $8 million. Our leverage ratio sits comfortably in the mid-2s, which give us plenty of ammunition to fund on our growth strategy. GDI outlook for M&A is positive as we are dedicated to continue to grow through acquisitions. And we're very -- we are satisfied with the market adjustments we see in multiples. So that makes our activities more promising. I would like to thank our shareholders for their patience and support, and all of my team members at GDI are working very hard to deliver results but are focused on the long term to manage the business. Operator, please feel to open the line to questions for analysts. Operator: [Operator Instructions] Your first question comes from Derek Lessard with TD Cowen. Derek Lessard: Yes, Claude, I just have -- actually, my question is related to the Business Services USA segment. I understand the 12% organic decline. But I think in previous quarters, you had mentioned that you had several new clients or contracts that were coming on board that would help offset that. Just curious where you are in onboarding those contracts. Claude Bigras: Well, listen, you know what, actually, this year, our sales growth was interesting. Unfortunately, the client loss in end of 2024 and '25 was a significant loss that needs a lot of work to compensate. We have -- we still have this large client. But unfortunately, in the last couple of quarters, the quantity of work that we execute for this client was significantly lower than what we did last year. So again, the strategy is we're focusing on sales. Our sales team is everywhere we go. And we are focusing on sales. Now this being said, I don't want us to sell at any price. Our focus is margin protection. At the end of the day, this is what counts. So we're very, very focused on selling at the right price at the right client. Derek Lessard: Okay. That's helpful. And I guess maybe just curious on your thoughts on when you expect to -- in the same segment to restore sort of that historical organic growth or get back to that historical level. Claude Bigras: Well, listen, you know what, there is two parts to this answer. The first part is when we have passed the fourth quarter with our large client lost, with our sales strategy, we will get back to organic growth in a, I would say, mathematical way. So again, the strategy, Derek, is to really focus on sales at the right margin. This is the ticket, and growth will come in as we will have eliminated the loss of this large client. Operator: Your next question comes from Frederic Bastien with Raymond James. Frederic Bastien: Sorry, I missed Charles-Etienne's comment, but Claude, you mentioned or commented that you were satisfied with the multiple movement you're seeing for M&A. Can you expand on that? Just wondering how aggressive private equity may be in the sector still? Claude Bigras: Okay. I will be very blunt. Maybe my colleagues will look at me with big eyes, but at least I'll give you my honest answer. Okay. So what we've seen over the last couple of years is there was COVID, there was the surge of margins and profitability. Everybody would sell his mother in the trade and the multiples were just out of my mind. It was almost impossible to do an accretive transaction following COVID. And there was maybe three major players that were actually very active. And so -- but now we passed that. Unfortunately, the three major players are not playing anymore because they've been taken by creditors, almost. So that's behind us. But now we are seeing a more going back to normal approach. People have digested that they cannot expect crazy multiples like we've seen as far as 2 years ago, 3 years ago. So this creates for us an environment where we can entertain discussions that are reasonable. Again, I'm always saying is it's when you make the acquisition that you realize the value, not when you sell. Frederic Bastien: Great. And then as you look forward, which segment are you going to prioritize? I mean it's a tough question, right? Which channel do you prefer just to put more money into if it's worth these days? Claude Bigras: Well, listen, you know what, let's break it down into three parts because the strategy has some nuance in each part. Business Services Canada, it's sales and organic growth focused. And you know what, if we can extend our service offering through auxiliary service offering that can help us grow the business, we're all for it. In the U.S., again, our sales team is very active, and we see opportunities, like I said, I would say, accretive transaction going forward. Now I don't want to tease people, but I can tell you that we're very active. And on the Technical Services segment is, again, what I said to you guys last year is we're focusing on margin expansion. So far, I think it has delivered on what we were expecting. For sure, if we have good opportunities, we will look at it, but we focus more on the maintenance part instead of the project part. As you've seen, the revenue is a little lower because we went away from those -- I would say, the humongous project that create a lot of risk. So we no longer play in this place. So I think the margins demonstrate our, I would say, rigor in appraising and delivering on project. Frederic Bastien: My last question. How are you seeing buybacks in light of your share price right now? Claude Bigras: Well, listen, I think we feel there's an opportunity. So we're active on it. And as we go, we still have our NCIB in place. So -- and we are maneuvering according to our capacity -- I would say, the arrangement of the NCIB. So yes, for sure, it's an effective price for us as well. Operator: Your next question comes from Frederic Tremblay with Desjardins. Frederic Tremblay: Apologies if some of this was already discussed. I joined the call a little late. But on the Business Services USA, can you maybe comment on the sales team's efforts to win new business, including in higher-margin specialized areas like food sanitation and data centers? Has that focus been fruitful so far? Claude Bigras: Well, it's delivering. You know what, again, I'm very happy of what the sales team was able to accomplish this year. Mind you that if we have not done that, our margin -- not margin, but our top line would have decreased maybe 20%. So we were able to compensate a lot through our aggressive sales. But again, I'm saying it to everyone all the time, we cannot get into the web of selling at discount at these times. We will live with it for 4, 5, 6 years. So we sell, but we still need to keep the margin. So as you've seen, although we have a decline in business service, we did better margin-wise than last year. So that's the ticket. But this being said, I'm totally aware that growth is important and growth will be back, but I want to have a good growth. Frederic Tremblay: Yes, makes sense. And maybe just on -- still on that segment in the U.S., that one large customer that's seen quarterly fluctuations in their project work, I imagine that you do have some near-term visibility on the work associated with that customer. Is there anything you can point us to in regards to Q4 with that customer in particular? Is that still slow? Or is there a pickup that you're seeing relative to prior quarters? Claude Bigras: Yes. Well, listen, we were expecting in Q4 that -- I will just say that is a customer that's very active in data centers. So -- and the data center business overall is growing and it's active. But since we have all this -- everything happening in the U.S., it looks like there was a little bit of, I would say, downside, a downturn into the other operations, but we are very confident that it's, I would say, a short-term or a onetime reduction of work, and they will continue to grow. Operator: [Operator Instructions] Your next question comes from Zachary Evershed with National Bank. Zachary Evershed: Could you talk us through the customer realignment process and how that impacts your growth trajectory in the next 3 quarters? Claude Bigras: Well, customer realignment, again, we are replacing lost business for XYZ number of reasons. And I can share with you that if we were losing customer because of service delivery failure, I'll be a lot more nervous. We are dealing with price adjustments that we feel that are not healthy for us long term, but we're replacing this business through having growth in our sales force. Again, this is -- for us, this is a strategy. So the customer realignment come with acquiring new customers at the right price to continue to deliver on the margin. But we're very active also talking and working with our existing customers to adjust pricing. I don't want to be too technical, but as you may know, there was an inflationary period that is actually taking a token on our labor cost. So the increase in labor costs we're passing to our customer is significant increases to customers. So we're dealing with our customers to see how we can mitigate that. And so this is -- it's a little -- can I say this is there are periods in the life cycle of the business for the last year and maybe another maybe a couple of quarters, we are right in the middle of it, and I expect us to finish this part and renew our -- renew as much customers that are healthy for the business and also acquiring new customers for the long term. But we're working into it right now. Zachary Evershed: And then on the M&A front, the balance sheet has improved quite a bit. How high would you take leverage for the right acquisitions? And is there a different level that you turn off the NCIB? Claude Bigras: I don't comment very much on the NCIB, to be very honest. But for the -- for our debt level, we are in the mid-2s. So we have a lot of headways to work on. Depending -- I would say that our healthy place is probably from there to maybe in the mid-3s, maybe 4 if really worth it. But again, we're focusing on accretive transactions. There is no room for long-term investment returns these days. We're focusing on accretive transactions. And again, I don't want to be the teaser, but I can tell you that the team is working actively into this sector. Operator: There are no further questions on the phone line. I will turn it over to Mr. Bigras for some closing remarks. Claude Bigras: Thank you very much. Just in closing, I just want to make sure that we have a simple strategy, but yet that needs a lot of hell of a work to accomplish. In these times where there is uncertainties, where the real estate sector is a little bit into headwinds and everything, we're focusing on working with our clients, protecting margins, which is the most important part of the business. You know what, I can live with a 3%, 4% decline for a couple of quarters because we were not -- we were rigorous in the way we approach the way we create value in the business. So we are absolutely investing in sales and business development on top of it. So sales, business development, continuing to improve on our technical business, that does very well, and continue to protect the margin and develop on the business service side. Not complicated, but a lot of work. And again, in finishing, yes, we are feeling very confident on the M&A side. As I said earlier, we think that the multiples are getting into a more reasonable bracket for us to transact. So thank you very much for your time. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
Carolina Stromlid: Good morning and a warm welcome to the presentation of RaySearch Q3 2025 Results. My name is Carolina Stromlid and I'm new Head of Investor Relations at RaySearch. With me today are our Founder and CEO, Johan Lof; and our CFO, Nina Gronberg, who will take you through the highlights and financials of the quarter. After the presentation, we will open up for questions. So feel free to submit them in the chat or ask them live. With that, let's kick off today's presentation. Johan Löf: Thank you, Carolina, and welcome again, everyone. Before we go through the Q3 results and highlights, I'd like to give a brief overview of RaySearch and our business. So as you know, RaySearch is a pure software company and we develop software for cancer treatments. We have 4 platforms: RayStation, which is our treatment planning system; RayCare, which is the oncology information system; RayIntelligence is our analytics tool for exploring population data; and RayCommand is the treatment control system. So if you look at the comprehensive cancer center. We have usually the radiotherapy treatment in the basement, you see the treatment machines down there. In the comprehensive cancer center, we also perform surgery for cancer and we deliver chemotherapy and other systemic therapies. So comprehensive cancer center can deliver all the types of treatments that are available for cancer. And RaySearch has so far during our first 25 years been mainly focused on radiotherapy or I would say only focused on radiotherapy. So we do the treatment planning for radiotherapy and also with RayCare, we manage the workflows, et cetera, for delivering radiotherapy. We have recently added a new function in RayStation for liver ablation planning and delivery. So there is a room in this clinic picture where you see liver ablation to the far right. And this is the first time we actually go outside of radiotherapy because liver ablation is interventional radiology. And going forward, we will take care also of the other aspects of cancer treatment. Next year we are entering into chemotherapy where we add chemotherapy planning into RayStation and chemotherapy management into RayCare and further down the line, we will also support surgery in the same way. So our long-term goal and vision is to provide the comprehensive cancer center with all the tools necessary to do whatever goes on in a center like that. So we will support comprehensive cancer care. Many patients receive a combination of treatments. Breast for example, you usually first perform surgery to remove the tumor or the breast and then you irradiate lymph nodes and after that you deliver chemotherapy. So many patients have had a combined treatment like that and I would say there's hardly any software support for that situation. So we want to be able to cooptimize and coordinate such treatments in the future. This slide shows the long-term development for RaySearch in terms of revenues. We go all the way back to 2008. I show this slide because I want to emphasize the importance of looking at RaySearch long term because as I have repeatedly stated over several years is that our quarters fluctuate in terms of revenues. That has been quite common for a long time even though maybe we see a little bit less of that than in the past, but it's still a characteristic of RaySearch because there are some big deals that have fallen on either side into one quarter or another quarter. So it is important to look at RaySearch over a longer period. And if you look at this slide, you see that it's a pretty stable growth over the years. The magenta colored bars are the support revenues so they are steadily increasing and they are now about 39%, 40% of the total revenues. There is a dip that you see in 2020 and 2021 that were of course during the COVID years where we were quite badly affected. But overall, over a longer period, we can see that there is a steady growth. So even if we had a somewhat weaker Q2 this year, Q1 and Q3 are record quarters in terms of revenues. We have all-time high this quarter, but Q1 was very close as well. So basically we have 2 all-time high quarters this year so far and 1 a little bit weaker. So I just want to remind everyone that one has to have a longer-term perspective on RaySearch development. Okay. So now over to the latest developments. So I'm happy to report that Q3 was a strong quarter for RaySearch with record high net sales and improved profitability. I think Q3 demonstrates the strength of our business model and the importance of maintaining this long-term perspective. While revenues can fluctuate between quarters, this quarter confirms the company's continued solid performance. We saw continued strong interest for our solutions in the quarter supported by the deliveries to 6 major particle centers in Asia. Net sales grew by 13% to SEK 332 million reaching the highest revenue we have ever recorded. The increase in net sales lifted operating profit by 44% to SEK 89 million with an EBIT margin of 27%. Adjusting for costs from our global employee conference, EBIT was SEK 103 million corresponding to a margin of 31%. Recurring support revenue continued to grow reaching SEK 130 million in Q3 and which represents 39% of total revenues. So let's move on to the operational highlights of the quarter. Overall, customer activity remained strong with order intake increasing by 70%. Many of our existing customers expanded their installations during the quarter to add more systems and functionality. Roughly half of our license sales continued to come from the installed customer base demonstrating steady demand from the existing customers. Interest in RaySearch solutions remain high across all regions with an increasing number of clinics choosing RayStation and RayCare over other systems. I can mention a few notable examples in Q3. Stanford Healthcare in the U.S. placed a new order for advanced proton therapy. [ AKMS ] Oncology selected RayCare and RayStation for its new cancer center in California. Keimyung University Dongsan Medical Center in South Korea will install RayStation and RayCare at its new proton center. RayStation has been installed at 3 new proton centers and 2 carbon ion therapy centers in China. Auckland City Hospital in New Zealand is expanding its radiotherapy capacity with additional RayStation licenses. The replacement of Philips treatment planning system Pinnacle, which will be discontinued by 2027, continued in the quarter. The German health provider Med360 will deploy RayStation across 10 clinics for Elekta and Accuray treatment machines. And in France, several clinics will replace both Pinnacle and Eclipse with RayStation. Another example of customer activity was the annual ASTRO conference that took place in San Francisco at the end of September. This is a very important event for us and we had a great interest in our offering. Finally, in September, we celebrated an important milestone. RaySearch marked 25 years as a company. For the first time since the pandemic, we gathered all our employees from around the world with an internal conference. This created valuable opportunities for knowledge sharing while also strengthening our company culture and engagement. Together, we will continue to build on this, improving cancer treatments for patients worldwide. In September, we launched a new version of RayIntelligence, which is our oncology analytics platform. It's cloud-based and we have built it with modern technology for scalability and accessibility. It comes with interactive dashboards that you can use to visualize data and understand correlations, et cetera. It's seamlessly integrated with RayStation and RayCare meaning that it listens to everything that goes on in these systems. So without the user having to do anything, RayIntelligence will capture the information that's being generated in RayStation and RayCare. There is also a very powerful SQL scripting interface for customer queries and in-depth data exploration. Some examples of use cases for RayIntelligence is that you can get an overview of the clinical operation. You can get an overview of everything that goes on in your department. You can monitor machines, treatments, toxicities. You can also track treatment quality and look at your population of patients over time, what are the side effects and what are the tumor control probabilities, et cetera. In our systems, we have several machine learning or AI models in certain algorithms and RayIntelligence can also be used to monitor the performance of these machine learning models. RayIntelligence is also a very powerful tool to generate reports that takes data from RayStation, RayCare, but also external sources. This is an example of a dashboard where you follow the treatment planning in a specific clinic. So you can track it over time. You see the time axis in 1 diagram there. You can track it on tumor type so how many plans did we create for breast, how many for prostate, for lung, et cetera. There is also statistics here for the different treatment planners. So how many -- I mean which person did the most plans and who did the least, et cetera. So this is just an example of things that you can see and visualize with RayIntelligence. It's also important to note that although RayIntelligence comes with a large number of predefined dashboards that we have made, the user can have tools in RayIntelligence to create their own dashboards. So it's a very powerful addition and complement to RayStation and RayCare. So in the next slide, we try to visualize how RayIntelligence can be used to gather data. RayWorld, the combination of all our systems are called RayWorld, and we want RayWorld to be a learning system. So what this slide illustrates is that those little squares or rectangles are data points that are being automatically at the back end captured by RayIntelligence from RayCare and RayStation and that data is put in the cloud, in the data warehouse in the cloud. It can be a cloud on-premises, but it can also be a cloud in the cloud, so to speak. Based on this data, we achieve clinical insights. We feed back information. Those networks, neural network symbol there, represents machine learning models going back to our systems, but there are also other data points represented by those dots that are insights that we feed back to improve our algorithms. So we have several algorithms as we rely on historical data like deep learning segmentation and deep learning planning. So that is to improve the performance of, for example, RayStation. We can also improve the operational efficiency of the clinic. So RayIntelligence will help determine bottlenecks in the workflow and then you can take action to remove those bottlenecks. We also want to provide clinical decision support by following the patients over time and knowing exactly what we did to these patients and what the preconditions were. We can improve and we can give recommendations to the clinical teams on how to treat the next patient. And combined, all of this will then improve outcomes and treatment outcomes for our patients. So with that, I would like to hand over to Nina to tell us about the financial development. Nina Grönberg: Thank you, Johan. In quarter 3, we saw continued high activity in the market both from new and existing customers and across the regions. Order intake increased by 17%, which brought the rolling 12 curve upward again, up from the smaller drop that we had in the last quarter. And we had high order intake from support contracts in the period. The order backlog ending at SEK 1.617 billion was also affected by that we had 6 Asian particle sales turning into net sales in the third quarter. High net sales gave us a book-to-bill ratio in the quarter of 0.9 and for the last 12 months it was 1. Despite headwind from the strengthening of the Swedish krona, net sales grew with 13% in the quarter and since the SEK 332 million outcome beat the previous record that we had from quarter 1 this year if only with SEK 0.5 million, we did mark out a new record level. License sales growth was 40% and support sales grew with 8%. The organic growth was 19% mainly coming from new orders, but also from the already mentioned particle sales in Asia, sales that was previously recognized in our order backlog. The high net sales drove EBIT up with 44% to SEK 89 million in the quarter and strengthened the margin to 27%. If we adjust for the costs that we had from our internal conference and a very small currency effect in the quarter, EBIT was SEK 103 million and the EBIT margin 31%. Year-to-date net sales was up 11% and 15% organic-wise. And the year-to-date EBIT margin was 21%. Moving on to the rolling 12 development of net sales and EBIT and also the perspective that we believe give a better and more relevant description of RaySearch business performance. We see that net sales for the last 12 months amounted to SEK 1.292 billion and that gave us an annual growth rate of 14% over the last 2 years. And the rolling 12 EBIT of SEK 274 million means a solid margin of 21% and this, I want to point out, is despite that we've had large effects from nonrecurring costs and currency losses during 2025. Recurring revenue from the support contracts was, as mentioned, up 8% amounting to SEK 130 million in the quarter and corresponding to 39% of total net sales. Year-to-date the support contract growth was 13% and amounting to SEK 385 million and that corresponds to 40% of the total net sales. Rolling 12 development pictured with the blue line in this graph show the steady increase that we have in our support revenue over time. Moving on to the cash flow development. Cash flow in quarter 3 was minus SEK 82 million and strongly impacted by the higher working capital. Though this is not a satisfying outcome, I want to break it down for you and I want to point out that the picture is brighter than it first looked like. There is mainly 3 things that has impacted working capital in the quarter. One of them being the already mentioned Asian sales, which were to large extent prepaid, and that is a good thing. I mean we get paid before we deliver anything and that is something that is common when it comes to our sales in the APAC region. But it also means that no cash flow is generated later on when the sales is recognized. Secondly, we have sales with longer payment terms. In some cases, these longer payment terms is related to tenders and framework agreements and that is something that gives us good and profitable sales, but where we have to accept that we get paid a little bit later. For example, in the last 2 quarters, we had strong sales in the French market and there we have these kinds of contracts. And then we get a smaller portion of the payment when we deliver, but we also have to wait with the invoicing until customer has finalized their testing. In other cases, we have accepted longer payment terms or later invoicing since we can benefit from it in terms of price or in terms of long-term value from the customer relations. And third, a portion of the cash flow outcome is always related to timing of the sales in relation to quarter end, a timing that was not in our favor in the third quarter. Cash flow was also affected by quarter 3 being summer months, which means vacation payouts. Last, but not least, I want to remind you that we have a cash balance of SEK 323 million when we exit the quarter. We have no loans and on top of that, a nonused overdraft facility. Breaking it down further to you and looking at the 3 items in our balance sheet building up the main part of the working capital; the contract assets and the contract liabilities, which is receivables and liabilities we have towards our customers. Here we have been used to having a net that is negative and that means that we have more prepayments from our customers meaning they pay us before delivery than the customers owe us because we have delivered and not get paid. And that is an extremely good position I must say. And now in September, it turned the other way around, but as I see it, we're still in a rather good shape. And as with net sales, we will have fluctuations in these items as well going forward depending on the mix of the customer contracts. And we will of course continue optimizing the working capital in relation to the business. And with that, I hand over to you, Johan, that will give a summary of the quarter. Johan Löf: Thank you, Nina. All right. To summarize the quarter, we achieved record high net sales. Our profitability improved significantly. We continue to see increasing interest in our solutions. There is still a very large potential within our existing customer base giving us the opportunity to sell additional systems as well as additional modules to them. With our leadership in innovation, strong partnership and an expanding and loyal customer base, RaySearch is very well positioned for long-term growth. So we will now open up for questions and I will hand over the word to Carolina. Carolina Stromlid: We will start with questions from our analysts and the first question comes from Mattias Vadsten at SEB. Mattias Vadsten: I think I will start with 3 questions. I think first one, as has been discussed in this case before and in conference calls, the upselling potential is quite massive as it looks and this effect, if I do my calculations, has been quite sort of substantial both over time, but also in particular I would say in 2024 and into 2025. So if you could just confirm this is the case? And also if it is something special happening driving this recent mix? And yes, how the sort of setup looks there going into the future here and into 2026, '27? That's the first question. Johan Löf: Okay. Let's take them one by one, please. Then you can ask the second if you may. Also this quarter, we had about 50% of the license sales from the installed base and the other half from new customers. So this seems quite constant. It's just a behavior of our customers. We have a campaign that we're starting in just a couple of regions where we allow customers to use the systems. We unlock all of RayStation's functionality for a limited period of time and have the customers try out everything that -- all the modules that you can buy in RayStation. They are also free to use that clinically. And after this trial period, which we are experimenting with, but it's about 6 months; they have to decide whether they want to buy it or not because the modules are shut down after that trial period. And it has been very well received in the markets that we have initiated it. We want to do it on a small scale to start with in these countries just to gain experience and then based on that experience, we will open it up to other markets. But we believe that that should benefit the sales to our installed base. Did that answer your question? Mattias Vadsten: Yes. When was this initiative started just as a follow-up? Johan Löf: I didn't hear what you said. Carolina Stromlid: Did you have another question? Mattias Vadsten: Yes. First, a follow-up to this question I asked just now. When was this initiative started? Johan Löf: The letter was sent out maybe 2 months ago, something like that. I don't remember exactly, but it's quite recent. Mattias Vadsten: Okay. Good. Next question is I think you point out, also very well in the presentation, a strong delivery quarter in terms of licenses this time, also new customers sales exceeding orders last 12 months in this line and order backlog, therefore, falling vis-a-vis last year and previous quarter for licenses specifically. So just how you view this and sort of how to think about the future with regards to this? That's the second question. Johan Löf: Okay. The reduction of the order backlog was a direct consequence of those deliveries. But as you may have noted, the order backlog and the order intake for 1 quarter is a very bad predictor for the revenues for the next quarter or future quarters because most of the order intake is still -- or most of the revenues are still RayStation revenues. And most of those, except for the special particle centers, et cetera, most of that order intake is directly converted into revenues. So let's say that we have a strong Q4 quarter, then it would be strong both in terms of order intake and revenues. So that's just the nature of the business. Carolina Stromlid: Do you have any other question, Mattias? Mattias Vadsten: Yes. I have 1 final question, then I will allow other analysts. Carolina Stromlid: We will move over to Kristofer Liljeberg at DNB Carnegie. Kristofer Liljeberg-Svensson: It's Kristofer, I think you have some problem in tech. Carolina Stromlid: We'll try with Oscar Bergman from Redeye. We can come back to the phone questions again and move over to questions posted in the chat. Johan Löf: Okay. I can start with those. Lots of different questions here. There's 1 question. Could you give some color on the share of previous Pinnacle clinics accounting for the license sales in the quarter? Yes. About half of the new license sales to new customers were by converting Pinnacle clinics to RayStation and the other half was converting other systems and that will be then Monaco and Eclipse. This was posted by [ Daniel ]. And he also asks, could you elaborate on the revenue model of RayCare? Is it similar to RayStation in terms of license fee plus support revenue? That was the first question. And yes, it is, but it is a bit higher. So you can assume about 30% higher for a certain clinic, but it's of a certain size. And the RayCare installation would be about 25%, 30% more expensive than the RayStation installation. And then the second question and is how is pricing determined? Is it based on patient throughput and users? It's mainly based on patient volume or patient throughput as is stated here and connections to machines. So the more machines linacs you have, the more expensive RayCare becomes and also how many patients you want to treat with RayCare, that also affects the price. So that's the difference between RayStation, which is mainly based on the number of users. A question from another person here [indiscernible]. Could you come back on Philips discontinuation? How well are you positioned to benefit from this? Is it already visible in your order intake or should we wait until 2027? So I would say that we are very well positioned and we are focusing very hard to convert the remaining connected sites. And it's been visible, I would say, so we don't have to wait till 2027. This has been visible for a few years actually. But it's intensifying now as the clinics cannot wait until 2027. They have to work well before the New Year's Eve of 2026 so they cannot have an interruption. Oscar Bergman has asked several questions so I will go through those. Can we check that they can ask questions? For example, Kristofer has reached out. Carolina Stromlid: No. We seem to have some kind of technical issue so I think it's better to take them written. Yes, it's posted in the chat. Johan Löf: Great. So the first question from Oscar Bergman. The EBIT margin was at 27% and 31% adjusted is above your target that I had previously argued is quite conservative. Are you looking to increase your EBIT margin target now as you have done before when you have exceeded the target? Okay. I agree that it looks quite promising that we will achieve at least an EBIT margin of 25% in 2026 given the current performance. We haven't changed that. Clearly we let it stay as it is, but we will communicate new targets later on, but then that will be communicated in conjunction with the press release or report. But for now we will stick to the at least 25% EBIT margin target and we feel quite confident that we will be able to fulfill that target. Second question is end-of-life Pinnacle. Can you elaborate a bit more on the sales funnel here, specifically your market share of winning these accounts? And also what is a more realistic timeline for these centers to have finalized that transition or should we assume that some centers will still be doing this in December of next year? As I said earlier, I think they will do this well before December next year because there are few months of preparation, et cetera, when you move from 1 system to another before you can start to treat patients. I think we are well positioned. It's very hard to know exactly our share, but I think we have more than 50% of these accounts I think that we win. Number three, I understand a lot of resources are going to getting these Pinnacle clinics. Once that window is closed, how quickly can you shift going after non-Pinnacle clinics. Is there any risk of a temporary slowdown after the Pinnacle opportunity? And as I also stated before, 50% of the new sales are other sites and they are a conversion of Eclipse and Monaco. So that is already running and it varies between different markets. For example in Japan, this Pinnacle conversion has pretty much already happened there. All the new license sales are from converting other systems in Pinnacle. So yes, I don't think there will be a temporary slowdown. We are already converting at a pretty -- converting other systems at a good pace. Number four, a 96% gross margin, about 4 percentage points above the average that we had for many years. Were there any one-offs or something like that that gave this strong margin? Yes, there were 2 things that happened. There were less computers being sold through us. We do offer our customers to provide them with servers and hardware necessary to run our products and we have a decent margin on that as well. But since less of those this time in this particular quarter that helped because it's obviously a lower margin on the servers and the software. The other thing was that the deliveries to the particle centers in Asia didn't come with hardware at this point. So that also helped. So I think that's probably an unusually high gross margin. We can't expect that every quarter going forward.. Number five, the final question here. In Q2, you had received 4 new RayCare orders year-to-date and you mentioned that you expect 4 or 5 more during the second half of 2025. Can you give some update on this is the question? We achieved another 2 orders this quarter for RayCare and we will see what happens during the rest of the year. What we can say about RayCare right now is that the interest has intensified greatly and I think we'll see good orders during 2026 for RayCare. Let's see here. [ Carlos Murrian ]. When will RayCare really start to be material to license sales? Is 2025 proving demand for the product? Okay. I guess I just sort of answered that. RayCare when it really start to be material, we have to look 2, 3 years out. But then it will be I think a large revenue contributor. Okay. There is another comment here is that there is problem with the sound. They can hear analysts, but not us, which is a bit unfortunate. I have a question here from Kristofer Liljeberg. It seems it doesn't work to ask questions on the line so here are the ones from me. Number one, will you be able to track how customers are using RayStation modules during the campaign? The answer is yes. Do you expect working capital to come down again or continue to increase? Nina Grönberg: Yes, that's for me. As I also said during the presentation, it will fluctuate also going forward. But of course I see that the items that we have on the receivable side in the working capital, some of them or a big portion of them will get paid during quarter 4 and quarter 1 next year. But I mean the working capital will also be dependent on the deals or the sales that we do later on here in quarter 4. And right now I don't know how those agreements will look like. So I have no clear answer to that. It will be better I can say. Johan Löf: Kristofer's third question is high gross margin from lower hardware sales. Is it temporary or can it be start of a new trend? As I explained before, I think it's temporary. Number four, how do you view deal flow in Q4? In general, we have good momentum can answer to that. Number five, Seems on track to reach EBIT margin target for next year. How do you view investment needs after that? Okay. Number five, I think we will revise our EBIT margin targets up for the future without quantifying that. But we will reach we hope and we are quite confident that we reach the current EBIT margin target. Before that, we're going to define a new EBIT margin target maybe 3 years out. And in general, we believe that this business will be very profitable going forward. Those were all of Kristofer's questions. I can take 1 more question here. How is RayCare integration progressing with other Varian hardware? When could it be expected an integration of Halcyon? And are you working with other vendors such as Hitachi and United Imaging? That's a good question. We are having discussions with Varian on integrating RayCare also with Halcyon. It's hard to say exactly when that will be clinically available. It will be a couple of years from now, but we have very constructive and fruitful discussions with Varian on this. And then the second part of the question was are you working with other vendors such as Hitachi and United Imaging? We work with many other vendors not United Imaging, but we work with Hitachi on both their OXRAY machine and the proton machine. OXRAY is ordinary linac. They have PROBEAT, which is a proton machine. We work with LEO Cancer Care, we work with IntelliRay, we work with Accuray, we work with [indiscernible], we work with Panacea, we work with [indiscernible]. I don't know if we have mentioned LEO Cancer Care. So we are working. Within the next 12 months, there will be quite a large number of additional interoperability interfaces for new machines for RayCare and within 18 months, there will be even more. So this is progressing very well. I take 1 more question. Are there any discussions with Elekta regarding integration of RayCare? We talk to Elekta from time to time about this and we would very much like to integrate RayCare with their machines. But I cannot say anything more on that currently. Carolina Stromlid: And that concludes today's Q&A. A recording of this presentation will be available shortly on our investor website. And if you have any additional questions, you're very welcome to reach out to us. Thank you for joining us today and we look forward to seeing you again on February 12 for our year-end results. Have a great Friday. Johan Löf: Thank you. Nina Grönberg: Thank you.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the nLIGHT, Inc. Third Quarter 2025 Earnings Call. After today's prepared remarks, we'll host a question and answer session. [Operator Instructions] I will now hand the conference over to John Marchetti, VP, Corporate Development and Investor Relations. John, please go ahead. John Marchetti: Good afternoon, everyone. Thank you for joining us today to discuss nLIGHT's Third Quarter 2025 Earnings Results. I'm John Marchetti, nLIGHT's VP of Corporate Development and the Head of Investor Relations. With me on the call today are Scott Keeney, nLIGHT's Chairman and CEO; and Joe Corso, nLIGHT's CFO. Today's discussion will contain forward-looking statements, including financial projections and plans for our business, some of which are beyond our control, including the risks and uncertainties described from time to time in our SEC filings. Our results may differ materially from those projected on today's call, and we undertake no obligation to update publicly any forward-looking statement, except as required by law. During the call, we will be discussing certain non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release and in our earnings presentation, both of which can be found on the Investor Relations section of our website. I will now turn the call over to nLIGHT's Chairman and CEO, Scott Keeney. Scott Keeney: Thank you, John. Q3 represented another solid quarter of execution for nLIGHT with total revenue at the high end of our guidance range and both gross margin and adjusted EBITDA beating our expectations. Third quarter revenue of $67 million grew 19% year-over-year and were once again driven by record aerospace and defense revenue of $46 million, with defense product sales growing more than 70% year-over-year. I am particularly pleased with the expansion of our product gross margin, which came in at a record 41% and increased from 29% in the same quarter a year ago. Our adjusted EBITDA was also above our expectations at more than $7 million in the quarter. The expansion in our gross margin and the subsequent growth in our adjusted EBITDA demonstrate the leverage that is inherent in our operating model. In Aerospace and Defense, we remain focused on 2 key markets: directed energy and laser sensing. And revenue from both markets outperformed our expectations in the quarter. In directed energy, we are uniquely positioned with our vertically integrated and industry-leading high-power laser technology, developed over the past 2 decades, and spanning the entire technology stack from chips to components to full laser systems and beam directors. All of which are designed and manufactured in the U.S., have generated revenue at nearly every level of vertical integration in the directed energy market, and we have established ourselves as one of the most comprehensive suppliers to the U.S. government, other prime contractors and foreign allies. During the third quarter, we continued to make solid progress on our HELSI-2 program. As a reminder, this is a $171 million program to develop a 1-megawatt high-energy laser with a completion date expected in 2026. The shipment of critical components towards the HELSI-2 program was a significant driver of our record defense product revenue in the quarter and is expected to be a substantial contributor to growth through the remainder of the year and into 2026. We continue to transition our latest generation of amplifier products into advanced production by leveraging nLIGHT's experienced manufacturing teams and implementing quality and control processes. This transition, while not without risk, is progressing well and is critical as we continue to optimize our amplifier production line for higher volumes. Our work on the Army's DE M-SHORAD, Short-Range Air Defense program is nearing completion, and we look forward to delivering this 50-kilowatt high-energy laser and beam director to our partner. Once delivery is completed, the system will begin field testing. Overall interest in U.S. directed energy programs remains high, particularly for counter-UAS applications, and we expect new contracts to be awarded in the coming quarters from different agencies as part of the President's Golden Dome executive order, which specifically highlights non-kinetic missile defense capabilities as an area for development. With a mandate to build these systems in the United States, we believe we are well positioned to benefit from these efforts over the coming years, and we are hopeful that the coming quarters will provide additional details on the scope and timing of these initiatives. We've also continued to have success in the international markets for directed energy. We began shipping to a new international customer last quarter, and we have a growing pipeline of new global opportunities as allied nations look to accelerate directed energy programs for cost-effective counter-UAS and other threats. Our laser sensing markets are also performing well. Our laser sensing products include missile guidance, proximity detection, range finding and countermeasures, and we have been incorporating in several significant and long-running defense programs, all of which are poised to grow in 2026. During the third quarter, we signed a new $50 million contract for an existing long-running missile program that incorporates one of our laser sensing products. nLIGHT has been a long-term supplier into this program, which our customer expects to remain a key priority associated with the nation's munitions restocking efforts. Our historical performance on these programs and our early success in multiple classified programs has increased both the number of prospects and the size of our sensing pipeline. In addition, further opportunities under Golden Dome initiatives have emerged and could also become significant contributors to our growth in 2026 and beyond. Commercial revenue was slightly ahead of our expectations at $21.2 million on a sequential increase in microfabrication sales and relatively flat results in our industrial markets. We have been pleased with the stability of our microfabrication markets year-to-date and have been encouraged by the growth in our advanced manufacturing products, where we see alignment with our aerospace and defense customers and our technology remains differentiated. Let me now turn the call over to Joe to discuss our third quarter financial results. Joseph Corso: Thank you, Scott. Our third quarter results were characterized by another quarter of strong execution. Healthy revenue growth, a favorable mix of business and continued execution from our manufacturing and operations teams drove meaningful upside to our gross margin. That upside, combined with operating expense discipline, resulted in significant improvement to profitability and cash flow, demonstrating the leverage that is inherent in our model. Total revenue in the third quarter was $66.7 million, an increase of 19%, compared to $56.1 million in the third quarter of 2024 and up 8%, compared to the second quarter of 2025. Aerospace and defense revenue was a record $45.6 million in the quarter, up 50% year-over-year and 12% sequentially. A&D growth was driven by record aerospace and defense products revenue, which grew 71% year-over-year and 32% compared to last quarter. Development revenue of $19.1 million grew 28% year-over-year as we continue to execute on multiple directed energy programs. The quarter-over-quarter decline of 8% was the result of several smaller programs having been completed in the prior quarter. We expect A&D revenue to continue to grow sequentially in the fourth quarter. Third quarter revenue from our commercial markets, which includes industrial and microfabrication, was modestly ahead of our expectations at $21.2 million, a decrease of 18% year-over-year, but up slightly compared to last quarter. Revenue from our microfabrication markets was in line with our expectations at $11.6 million, while revenue of $9.6 million from our industrial markets was slightly better than expected as an increase in demand for our additive manufacturing products offset continued declines in cutting and welding. While we are pleased with the overall stability that we saw in our commercial markets in the third quarter, we do not believe that the overall demand picture has significantly changed from what we described in prior quarters. Total gross margin in the third quarter was 31.1% compared to 22.4% in the third quarter of 2024 and 29.9% last quarter. Products gross margin in the second quarter was a record 41%, compared to 28.8% in the third quarter of 2024 and 38.5% last quarter. Third quarter products gross margin was positively impacted by a favorable customer and product mix driven by record revenue from our A&D markets and an overall increase in volume. Development gross margin was 6.4%, compared to 4.7% in the same quarter a year ago and 13.1% last quarter. The sequential decrease in development gross margin was largely the result of some smaller, higher-margin programs that finished in the prior quarter and did not contribute to the third quarter results. Going forward, we expect development gross margin to remain in the 8% range. GAAP operating expenses were $28.1 million in the third quarter, compared to $24.4 million in the third quarter of 2024 and $22.7 million in the second quarter of 2025. Included in our third quarter GAAP operating expenses were higher stock-based compensation expenses associated with previously announced performance shares and a restructuring charge of approximately $1.7 million as we further reduced our activities in China and in cutting and welding. Non-GAAP operating expenses were $17.5 million in the quarter, down from $18.3 million in the third quarter of 2024 and up from $16.8 million last quarter. We expect non-GAAP OpEx to remain in the $18 million range in the fourth quarter. GAAP net loss for the third quarter was $6.9 million or $0.14 per share compared to a net loss of $10.3 million or $0.21 per share in the same quarter a year ago and a loss of $3.6 million or $0.07 per share in the second quarter of 2025. On a non-GAAP basis, net income for the third quarter was $4.3 million or $0.08 per diluted share compared to a non-GAAP net loss of $3.7 million or $0.08 per share in the third quarter of 2024 and non-GAAP net income of $2.9 million or $0.06 per diluted share last quarter. Adjusted EBITDA for the third quarter was a positive $7.1 million, compared to a loss of approximately $1 million in the same quarter last year and a positive $5.6 million in the second quarter of 2025. We ended the third quarter with total cash, cash equivalents, restricted cash and investments of $116 million. We generated $5.2 million in cash flow from operations despite continuing to invest in working capital ahead of growth, and we were free cash flow positive in the quarter. Turning to guidance. Based on the information available today, we expect revenue for the fourth quarter of 2025 to be in the range of $72 million to $78 million. The midpoint of $75 million includes approximately $55 million of product revenue and $20 million of development revenue. We expect sequential growth in A&D in the fourth quarter, and we expect full year 2025 A&D revenue growth to exceed our prior outlook for A&D growth of at least 40% year-over-year. Overall gross margin in the fourth quarter is expected to be in the range of 27% to 32%, with products gross margin in the range of 34% to 39% and development gross margin of approximately 8%. As we've mentioned previously, as a vertically integrated manufacturing business, gross margin is largely dependent on production volumes and absorption of fixed manufacturing costs. Finally, we expect adjusted EBITDA for the fourth quarter of 2025 to be in the range of $6 million to $11 million. With that, I will turn over the call to operator for questions. Operator: Your first question comes from the line of Greg Palm with Craig-Hallum. Greg Palm: Congrats on the results. I was wondering, first, if you could just address HELSI-2, I mean, based on the results, the guide, I mean, is there a chance that you're pulling ahead the completion date here? I know you've talked about completion in 2026, but curious if that time line has changed at all just based on the volumes that you're able to complete. Scott Keeney: Greg, it's Scott here. Thanks for the question. No, we're on track is the bottom line. We will announce progress results when we are able to do so, but we're on track for 2026. Greg Palm: And then as it relates to product, so your guiding revenue up quite a bit sequentially, but gross margins down. I know you're coming off of a pretty tough compare, I guess, sequentially when you put up 40-plus percent product gross margins. But just can you give us a little bit more color what's going on? It doesn't sound like mix is going to change all that much? Joseph Corso: Yes. No, Greg, thanks for the question. As we've talked about in the past, you can have some pretty -- what seems like a pretty big swings from a gross margin perspective when you're still talking about revenues at the levels that we are at. Really not much in terms of Q3 to Q4 on the gross margin guide, probably 150 or 200 bps of it is related to actually freight and duties, right, as we've had the higher cost of materials that are going to -- we're now going to start to feel in Q4. And then the rest is really just mix within each of our end markets. The mix within defense, the mix within commercial can change in any given quarter. And then there's just a handful of other items that as we forecast in any given quarter that are there. But generally speaking, we're pleased that gross margin has expanded, and it remains really a function of 3 things: higher volume mix, where we are and then just overall how we're levering the factory. So we're pretty happy with where we were in Q3 and not much to think about for us in Q4. Operator: Your next question comes from the line of Ruben Roy with Stifel. Sahej Singh: This is Sahej Singh on for Ruben Roy. First off, congrats. You guys are past your breakeven point, which I think was $55 million to $60 million and turning profitable, so congrats on that. HELSI-2, I think if I do the math is, you said it earlier, $171 million contract with 3-year estimated time line. So annualized, that's about $57 million ceiling per year, which is about $14 million lower than what you're operating on, on a trailing 12-month basis within Aerospace and Defense products. So 2 questions there, and then I have a follow-up. It seems like a fixed firm price contract with the moves you're making on amplifiers. Can you give us some sense of how much incremental margin benefit you're seeing from that this quarter and expect to see maybe through the course of next year as you're ramping down on that contract? And the second part to this is as that contract ramps down, do you see sensing tied to Golden Dome and the classified programs and maybe international sales more than offset that HELSI-2 contract revenue loss, which I imagine will be probably starting second half of '26? Joseph Corso: So there's a lot there. So help me if I don't get it all right, I can follow up. I would say on the HELSI-2 contract, first, it's a good way to look at it, right, it's $171 million contract, but it's not going to be recognized linearly, right? So it's a cost-plus type contract. So it really depends on the type of activities that we are engaged in at any given period of time during that contract. So you shouldn't think about that linearly. Certainly, it is a big driver of the A&D products revenue that we have been generating and amplifiers are the key component that we are selling into that contract. Now more generally, as we think about products gross margin expansion, we've really focused on products that enable us to drive incremental gross margins of meaningfully north of 50%. And so amplifiers and other products that we are selling are meeting that today, and we expect that to continue to expand. I think the last part of your question just around the trajectory of HELSI-2 into 2026, you're absolutely right, right? At some point in the back half of 2026, we'll start to see the revenue that we're generating from HELSI-2, everything around HELSI-2, start to trail off. But we've got plenty of other programs, both in directed energy and in laser sensing that will make up for that reduction in the second half revenue. Sahej Singh: Very helpful. And then the second -- the follow-up I have is -- on DE M-SHORAD, which I guess is now ramping down, if I'm not wrong, and please correct me if I am, it's an R&D contract, which means it probably sits in advanced development. That said, advanced development seems to be ramping quite nicely also on a trailing 12-month basis. What's driving that growth? And I guess, to what degree should we look at that as a leading indicator for future sales on the A&D laser products, as you're mentioning into '26, '27, let's say? Joseph Corso: So you are correct that DE M-SHORAD is ramping down. So we are at the very end stages of delivering that product to the customer. So that's not really contributing meaningfully at all to revenue this quarter nor will it contribute to revenue going forward. The advanced development segment of our business includes all of the development revenue that we do, including HELSI-2 and other programs. And while not all of the programs that we are working on that are classified as advanced development go into -- will ultimately end up as programs of record, it is a good indicator that the activities that we have in directed energy and in laser sensing are putting us in a good position so that when those programs do transition or there are new programs, where there are opportunities to become program of records that we're well positioned to capture them. But you can't draw a line directly from our advanced development revenue to what long-term defense product revenue will be. Operator: Your next question comes from the line of Jim Ricchiuti from Needham & Co. James Ricchiuti: So the question I had is just relating to the previous question. If HELSI-2 does wind down in the second half of the year, you've talked about a pretty full pipeline. If you -- when would you have to see new orders come in, should be able to offset some of the hole that we could see from having completed HELSI-2. In other words, is it -- do you anticipate orders coming in, in the next couple of quarters that would allow you to fill a potential hole related to HELSI-2 in the back half of next year? Joseph Corso: Jim, based on what we are working on today, the hole is already filled. What is somewhat dependent upon timing of bookings and how quickly we can get to work on a handful of new programs will determine how much we grow in 2026. James Ricchiuti: Could you also maybe just clarify, I just maybe misheard. On the laser sensing contract that you alluded to, is this a follow-on piece of business? Scott Keeney: Yes is the short answer. It's an ongoing program of record that we have been supporting for over a decade. James Ricchiuti: So Scott, this basically just extends that. And then one final question. I know all of the questions have been around the A&D business, but it's interesting to see, I guess, what, a second quarter of sequential improvement in the microfabrication area. You're characterizing it as stabilizing. What is leading to some of the stabilization? Where is it coming from? Joseph Corso: Yes, it's coming from -- certainly, in microfabrication, that has always been a business that is difficult for us to predict. It's largely book and ship in the -- during the quarter, it's a really long tail of customers. And the last couple of quarters, we've seen some stabilization in that business. So it's difficult to point to 1 or even 2 things that are driving that business, but we're pleased to see stabilization there. Similarly, on the industrial side of our business, the quarters have been, frankly, a little bit better than we had expected, which is a welcome development for us. But what we'll say is our overall view of the commercial business as we go into 2026 is the same as we've been saying now for a couple of quarters, right? That business is expected to again decline in 2026. James Ricchiuti: And just with respect to microfabrication, the seasonality of that business tends to fall off a little bit in Q1. But the levels that we're seeing Q2, Q3, is that a reasonable level moving aside from the seasonality we might see in Q1? Joseph Corso: Yes. Jim, you're absolutely right. That is probably the most seasonal of our businesses. And in the last couple of quarters, we've seen that plus or minus $10 million of revenue. I think that a good range for us is probably $8 million to $12 million. We don't have better visibility than that. And obviously, China microfab business has declined precipitously over the last couple of years, and we've seen continued sequential declines in that business as well. Operator: Your next question comes from the line of Keith Housum with Northcoast Research. Keith Housum: Congratulations on a great quarter, guys. I think I heard you guys say the amplifier transition continues to progress. One, I guess, is that correct? And then once that's complete, how should we see that reflected in results? Will it make for more efficient and easier recognition of revenue? Or is it going to be lower cost? Or what's going to be the financial statement impact when the transition is complete? Joseph Corso: Well, I'm not sure the amplifier transition is not complete per se. I think what is going to be complete is the amplifiers that are delivered into one particular program, which is HELSI-2, and that will happen over the course of 2026. Generally speaking, we have a lot of programs into which we are delivering amplifiers domestically. And as we've said the last couple of quarters, there's also opportunities for us that we are working on with a host of allies internationally. So we expect our amplifier business to continue to grow. And so that is one of the reasons that you are starting to see some of the margin expansion is due to the fact that we are selling higher volumes of amplifiers. And at the same time, we're working hard to take what is a really difficult product that is pushing the limitations of physics and make it more manufacturable. So I think over time, you're going to see both revenue growth and margin expansion as we start to mature our ability to manufacture those amplifiers. Keith Housum: That's helpful. Appreciate it. Your restructuring charges in China cutting and welding, is that more to rightsize these businesses based on your expectations going forward? Or what's the reason behind that? Joseph Corso: Yes. No, that's exactly what it is, right? I mean we were operating in Shanghai for a very long time, not an easy transition to move assembly of our lasers from Shanghai to Fabrinet and to the U.S. And so there's lots of ongoing support activities that are required to do that. And so you're seeing some of that in that restructuring charge. And then there's also a bit of expectation that the cutting and welding business are going to continue to decline. And so we want to make sure that we are rightsizing our investments for our expectations of those markets going forward. Keith Housum: Appreciate it. And then I'm not sure if it's a true statement or not, but is there an opportunity for you guys in the counter-drone technology space? Scott Keeney: Sure. Yes, absolutely. That's one of the big applications for directed energy. Keith Housum: So we're still in relatively early innings in that area as well. But obviously, it gets a lot of press that we read today. Scott Keeney: Correct. And direct energy goes well beyond counter drones. Operator: [Operator Instructions] We have a follow-up question from Greg Palm with Craig-Hallum. Greg Palm: You said something that I thought was pretty important in terms of programs next year that could offset or that could make up the absence of HELSI-2. So I just want to make sure we're clear. Are those programs that have been booked? Or is that still in the pipeline? Joseph Corso: Those are programs that have been booked, Greg. Greg Palm: And then I'm just curious, can you talk a little bit about -- are those directed energy? Are those laser sensing? And I don't know if I missed it, but the 2 confidential laser sensing programs, one of them was supposed to go to LRIP by the end of this year. Is that still the case? Has that begun? And what's the status of the second one? Scott Keeney: Good. So let's see your first question is the work for '26 that is key that we're highlighting is in both directed energy and in sensing first. Let's see your second question was around. Greg Palm: Yes, the 2 major sensing programs that you -- the confidential ones that we've been talking about for the past, well, multiple quarters. Scott Keeney: Yes. The summary is they're both progressing. I want to be pretty sensitive to the specifics of the time line, but they're both progressing that supports the outlook that we're providing generally in the business. Greg Palm: But -- and then to be clear, going back to my first question, there are programs -- these are not the programs that are necessarily supposed to offset, it could help, but there's new additional programs that have been once booked, that is going to help offset that loss in HELSI-2 business. Joseph Corso: Yes, Greg, so let me parse it a little bit more finely for you. So there are programs that we are on today that are not HELSI-2 that we expect to continue to grow. There are new programs that we've won, right, that will plug the hole that we will see as HELSI-2 trails off. Those are both directed energy and laser sensing. And then there are other very high probability of win and go programs that we expect in 2026 that will drive growth in defense beyond what it is today. Hopefully, that helps. Operator: Your next question comes from the line of Brian Gesuale from Raymond James. Brian Gesuale: Really nice job on the quarter. I'd like to maybe talk a little bit when I've spent some time in D.C. the last few weeks, and it just seems like there's a lot of opportunities around directed energy. Could you maybe take -- give us the thoughts on the pipeline, both domestically and globally? And then maybe talk about your capacity because it seems like demand is pretty vibrant right now. Scott Keeney: Yes, that's right, Brian. I've been spending a lot of time in D.C. also. And I think there is a lot of new work that's going on. It's a little frustrating, obviously, with the details around the shutdown on some of the details. But at the senior level, we are seeing very good engagement across all levels, whether it be from Pentagon to the services and really across the breadth of direct energy from the lower power systems through the higher power systems. So we are seeing continued progress in the U.S. programs and that is supported, it's reinforced by also some of the international programs. I think over the last quarter, we've seen news out of Israel of the demonstrations of the success of Iron Beam out of the U.K. We've seen success out of Dragonfire, and there have been other international efforts that both are opportunities for us as we engage internationally, but they also have played a role in reinforcing what's going on in the U.S. So high level, yes, direct energy remains a very important area for us in addition to sensing. Brian Gesuale: Fantastic. Is there any thoughts on the urgency with some of the things that are happening in Europe? Do you see more rapid adoption there over the next few quarters, particularly with the government shutdown or it seems like the domestic market has accelerated a lot when I talk to a lot of the customers and look at some of their demand outlook over the next year or so. Scott Keeney: Yes, I think that's right. And I think in the coming weeks, you'll learn more about the acquisition reform that's being promulgated to address that. So I think we're all eager to see some of that formally launched to change the way that at least the U.S. pursues procurement to more rapidly implement some of these systems. So I think we will see some of that. I think there is urgency around the world actually to get the technology implemented in new ways. Operator: Your next question comes from the line of Troy Jensen. Troy Jensen: Sorry, can you hear me? Scott Keeney: Yes. Troy Jensen: Sorry about that. So first of all, congrats to another great print for you guys. Just a quick question. I know you're getting lots of questions on the development revenues here, but can you just give us the number of customers that are in your development product line or revenue line? Joseph Corso: We're probably working in total on a dozen, just plus or minus a dozen programs. They're all of obviously different sizes and at different periods of time, but that's a pretty good number. Troy Jensen: And then just on the sensing stuff, I did -- as you were going through your prepared remarks, Scott, it kind of felt like you're upticking on that. I guess most of the strength in A&D over this past year or so has been on the directed energy side. Would that be a true statement? Do you feel like you're upticking? Or are these contracts just kind of sustaining? Scott Keeney: On the sensing side, Troy, you mean? Troy Jensen: Yes, sensing specifically. Scott Keeney: Yes. Yes, I think you read that correctly. I think that direct energy, there's a greater awareness of the set of applications in directed energy and what's going on. Sensing, it gets a little more challenging to describe how lasers are, I would say, supplementing, augmenting radar and other systems, but that is a very important area and listed as one of the critical technologies by the Pentagon and one that we're very well positioned for. Operator: We have a follow-up question from the line of Ruben Roy with Stifel. Sahej Singh: Just trying to understand, so your comment on HELSI being an R&D contract makes sense, while it's an advanced dev. And of course, it is my mistake there. But the jump up in revenue really looks like it's coming from your products within A&D. And I know you guided advanced dev to $25 million next quarter. So I'm assuming that's either -- I'm assuming that's mostly HELSI. But can you maybe talk through the A&D product side and just help us understand what drove this jump this quarter? I think someone asked whether it was government shutdown or are you expecting this to sort of sequentially improve? Joseph Corso: Yes, we are expecting A&D products to continue to improve. When we sell -- so we sell a variety of products that are booked as in the products segment of our financial statements. Amplifiers that we sell into the HELSI-2 program, which is a cost-plus development program, those amplifiers are reflected in our revenue as product revenue. There are also laser sensing products that are being sold that are A&D product revenue. And so you start to look at that, and that's why you see the growth in the A&D product side of the revenue. Operator: There are no further questions at this time. I will now turn the call back to John Marchetti for closing remarks. John Marchetti: Thanks, everyone, for joining us this afternoon. And as always, thank you for your continued interest in nLIGHT. We will be participating in a number of conferences over the next several months. So we look forward to speaking with everybody as we continue to go through the quarter. And thank you again for joining us today. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Target Hospitality Third Quarter 2025 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the call over to Mr. Mark Schuck. Please go ahead. Mark Schuck: Thank you. Good morning, everyone, and welcome to Target Hospitality's Third Quarter 2025 Earnings Call. The press release we issued this morning, outlining our third quarter results can be found in the Investors section of our website. In addition, a replay of this call will be archived on our website for a limited time. Please note the cautionary language regarding forward-looking statements contained in the press release. This same language applies to statements made on today's conference call. This call will contain time-sensitive information as well as forward-looking statements, which are only accurate as of today, November 6, 2025. Target Hospitality expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today's date, except as required by applicable law. For a complete list of risks and uncertainties that may affect future performance, please refer to Target Hospitality's periodic filings with the SEC. We will discuss non-GAAP financial measures on today's call. Please refer to the tables in our earnings release posted in the Investors section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures. Leading the call today will be Brad Archer, President and Chief Executive Officer; followed by Jason Vlacich, Chief Financial Officer and Chief Accounting Officer. After their prepared remarks, we will open the call for questions. I'll now turn the call over to our Chief Executive Officer, Brad Archer. James Archer: Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. We continue to build on the progress we've made in advancing our strategic growth initiatives, which focus on expanding and diversifying Target's business portfolio. This focus has led to notable operational achievements for 2025, including multiple long-term contract awards across various end markets. Since the second quarter, we have added over $55 million in committed revenue contracts, bringing the total value of new multiyear contract awards announced in 2025 to more than $455 million. These contracts accomplish multiple elements of our growth objectives by strengthening Target's business portfolio and expanding our reach in new end markets. Target's ability to deliver highly customized solutions that meet specific customer needs highlights our unique value proposition and has opened new growth opportunities in rapidly expanding markets. Strong long-term growth trends and sustained momentum reinforce these opportunities, including the multitrillion dollar investment cycle in data center and AI infrastructure, power generation and critical mineral development. The strengthening market fundamentals have laid the groundwork for a robust and expanding growth pipeline, offering distinct opportunities to continue advancing our strategic growth initiatives. Turning to our segments and specific growth opportunities. Our HFS segment continues to support our world-class customers evolving labor allocation needs by delivering premium services through our extensive network. Target's unique vertically integrated operating model, combined with the scale and efficiencies of our HFS network allow us to support our customers throughout business cycles. Additionally, these attributes continue to support customer renewal rates exceeding 90%, with the average existing customer relationship exceeding 5 years. This proven operating model is key to Target's success, and has served as a blueprint for potential new customers, illustrating the benefit and distinct value propositions of our vertically integrated accommodations platform. These distinctive capabilities and highly customizable solutions have supported multiple contract awards in our WHS segment this year. In February, we announced the Workforce Hub Contract to support the development of critical minerals in Nevada. Construction began this contract has been expanded several times to support community improvement and contract modifications, resulting in a 19% increase from the original contract value. These enhancements highlight the importance of this community to the project's success and demonstrate how Target's operating capabilities enable us to deliver tailored solutions that meet specific customer needs. These unique capabilities and customizable solutions supported the data center community contract we announced in August. We have completed the initial construction mobilization of the 250-bed community and initial occupancy is beginning to increase. As a reminder, this community has the potential to expand and accommodate up to 1,500 individuals, a sixfold increase from the initial community. Our customers' growth plans are accelerating, driven by rapidly growing demand for AI infrastructure. As a result, we are finalizing the first community expansion to keep pace with anticipated customer activity levels. We expect this expansion to add several hundred rooms to the community and plan to provide additional details soon. With increasing demand for AI infrastructure, the pace of data center development and capital investment is accelerating. To meet this demand, estimates suggest that over $7 trillion in global capital investment will be required over the next 5 years as large-scale data center infrastructure becomes increasingly remote, a significant challenge in expanding these projects is attracting and retaining the skilled labor essential to their success. Target's unique capabilities in creating highly customized, all-inclusive communities address this challenge and provide integrated solutions for our customer-specific needs. Aligned with these attributes, Target recently launched its Target Hyper/Scale brand, highlighting our ability to provide a central hospitality solutions supporting multiple facets of the data center value chain. This focused initiative showcases Target's unique ability to build communities that enable quick time-to-market solutions that can rapidly scale alongside customers' dynamic workforce housing needs. These factors have created the most significant commercial growth pipeline we have ever seen. Our reputation as the leading provider of remote hospitality solutions uniquely positions Target to support this rapidly expanding end market demand. We are excited about these growth opportunities, which we believe establish a vital long-term commercial vertical capable of accelerating Target's strategic growth objectives. Now moving to the Government segment. We completed the planned ramp-up of our Dilley, Texas assets in September, and the community is now fully operational and capable of supporting up to 2,400 individuals. The successful reopening of this facility highlights the importance of our decision to keep this community ready to reopen alongside our partner. We continue to actively remarket our West Texas asset and remain confident in this community's ability to provide a vital solution aligned with the government's policy goals to expand available bed capacity. In summary, we have made significant progress toward our strategic goals by expanding and diversified in Target's business portfolio. We are encouraged by the strongest and most active growth pipeline we have ever seen, supported by solid market fundamentals and long-term growth trends. We are well positioned as we pursue these opportunities, which offer multiple pathways to expand our business portfolio and continue advancing our strategic objectives. I will now hand the call over to Jason to discuss our financial results in more detail. Jason Vlacich: Thank you, Brad. Third quarter total revenue was approximately $99 million, with adjusted EBITDA of approximately $22 million. Our government segment generated approximately $24 million in revenue during the quarter. The declines compared to the previous year were mainly due to the termination of the PCC Contract partially offset by the reactivation of our Dilley, Texas assets. Additionally, revenue for the quarter included approximately $11.8 million in reimbursements for certain closeout costs related to the PCC Contract termination. We do not expect any further payments related to the PCC Contract in future periods. We completed the planned ramp-up of the Dilley community in September, and it is now fully operational. As a result, subsequent quarters will reflect revenue contributions aligned with the entire 2,400-bed community. As a reminder, this contract is based on fixed monthly revenue regardless of occupancy. It is projected to generate approximately $30 million in revenue in 2025 with over $246 million over its expected 5-year term. Excluding the impact of the PCC Contract closeout payment, we anticipate increased contributions from the government segment in the coming quarters following completion of the Dilley ramp-up. Regarding our West Texas assets. As a reminder, we have decided to keep these assets in a ready state while actively remarketing them. This approach, similar to our strategy with the Dilley assets, will involve carrying costs of approximately $2 million to $3 million per quarter until a new contract is potentially awarded. Turning to our HFS and all other segments. These segments generated approximately $39 million in quarterly revenue. Target's customers continue to value our premium service offerings and extensive network scale. These qualities, combined with Target's operational efficiencies enable us to provide unmatched solutions across our network in a competitive market. Additionally, we remain focused on finding opportunities to improve margin contribution while meeting customer demand. Moving on to the expanding Workforce Hospitality Solutions segment, or WHS. This segment, which includes our Workforce Hub Contract and the data center contract generated approximately $37 million in revenue in the third quarter, primarily from construction activity related to the Workforce Hub contract. As announced today, the importance of the Workforce Hub contract led to additional modifications and scope expansion during the third quarter. The increased scope of the contract raises the total contract value to approximately $166 million, reflecting a 19% increase from the original contract value. These community improvements will lead to more construction activity, which we expect to be substantially completed by the end of 2025. However, this will shift some previously forecasted services revenue into 2026 and slightly impact margins as construction revenue has a lower contribution profile. As we finish construction, we expect increased services revenue to begin in 2026 and continue through 2027. The scope expansion and contract modifications highlight our ability to deliver customized and tailored solutions for our customers, creating long-term revenue streams that support large-scale remote operations. Regarding the data center contract, we are pleased with the progress of this community and have completed the construction and mobilization of the initial 250-bed facility. As a reminder, this contract is expected to generate approximately $43 million in committed minimum revenue over its initial term through September 2027, with approximately $5 million of revenue in 2025. As we discussed, we are finalizing the first community expansion to support our customers' growing demand. This expansion will have limited impacts in 2025, but will increase revenue in future years. We plan to share additional details once the expansion terms are finalized. Recurring corporate expenses for the quarter were approximately $11 million. As a matter of practice, we continually look for opportunities to optimize our cost structure and enhance margin contributions. Total capital spending for the quarter was approximately $29 million with net capital spending of approximately $15 million. Net capital spending reflects the upfront customer payments we received for the construction and mobilization of the initial 250-bed data center community. Target's strong business fundamentals and durable operating model supported robust cash conversion, resulting in over $68 million of cash flows from operations and $61 million of discretionary cash flow for the 9 months ended September 30, 2025. These fundamentals are reflected in the strength of our balance sheet and our ability to maintain significant financial flexibility through prudent capital management. We ended the quarter with $30 million in cash and 0 net debt resulting in total available liquidity of approximately $205 million. This strong liquidity position further enhances our financial flexibility and positions Target to continue executing its strategic growth initiatives. This momentum and positive operating environment support our reaffirmed 2025 outlook, which includes total revenue of $310 million to $320 million and adjusted EBITDA of $50 million to $60 million. Target is well positioned with a flexible operating model and an optimized balance sheet as we continue to evaluate a robust growth pipeline, which we believe offers the greatest opportunity to accelerate value creation for our shareholders. Most importantly, as we pursue these opportunities, we will remain focused on maintaining the strong financial profile we've built while maximizing margin contribution through our efficient operating structure. With that, I will hand it back to Brad for closing remarks. James Archer: Thanks, Jason. We continue to make significant progress on our strategic growth initiatives to expand and diversify our business portfolio. This year, we have announced long-term contracts within our existing segment and expanded our reach into new end markets, supporting the unprecedented surge in AI infrastructure and critical mineral investment. These achievements have led to over $455 million in new multiyear contracts in 2025. Additionally, we are in advanced discussions on other opportunities to further expand our contract portfolio, supporting AI infrastructure development. We remain focused on maintaining this momentum as we evaluate the strongest and most active growth pipeline we have ever seen, driven primarily by the extraordinary increase in data center and AI infrastructure investment. As market fundamentals and demand strengthen, we are actively exploring opportunities encompassing over 15,000 beds, underscoring the depth of demand in this end market. Target's unique capabilities position us to become an essential partner providing critical solutions vital to the success of this rapidly expanding marketplace. We are excited about these opportunities and believe they offer multiple ways to further our strategic goals and accelerate value creation for our shareholders. Thank you for joining us on the call today. And once again, we appreciate your interest in Target Hospitality. We will now open the call for questions. Operator: [Operator Instructions] And your first question comes from Scott Schneeberger from Oppenheimer. Scott Schneeberger: I guess, first question would be on repurposing of the Pecos, West Texas assets. Could you give us an update, please, on what you're hearing with government customers? And if there are other customers with whom you are speaking, please share perhaps some insight to the extent you would on the potential repurposing of those -- of that asset? James Archer: Scott, this is Brad. Yes, let me just touch quickly on the government and then give you some color around the assets kind of in West Texas. But really on the government, there's no new developments from our last call. We continue to have active dialogue with the government on the West Texas assets. Look, we believe these assets provide a solution aligned with the government's objective and their sentiments have not changed around the use of this equipment. With that said, let me touch on the Permian Basin, as you suggested, and really West Texas in general. As we are in discussions on several large data center projects as well as the large-scale power projects, that would energize them. Several projects in that area have been announced already, and we expect several more to make final investment decisions very soon with others in the pipeline that we're talking to. The capital spend in this area will be large. It's very big. And it will require many thousands of skilled workers coming into these areas. I say all of this to tell you, there is no other company in our industry, that is better positioned to take advantage of this unprecedented spend we're beginning to see in West Texas. The opportunity set in West Texas maximizes our chances to put underutilized or idle assets back on lease for long-term projects. And look, I would tell you, I have very little doubt. The majority of the growth you will see in West Texas will come from data centers in the large-scale power projects that are required to energize them. This doesn't mean that we will not try to take care of the government as well. But as you are well aware, and we've talked about this many times over the years, our assets can be repurposed across many industries. And fortunately, for us today, it's a good problem to have. There are multiple paths to maximizing our assets and utilization other than just the government, right? And that pipeline continues to build. And again, fortunately, a lot of this work sets right in the Permian basin. Scott Schneeberger: Great. I appreciate that. Following up on that, a question for you and then probably one for Jason, thematically on that segue. The Target Hyper/Scale brand, could you speak to what you're doing there as far as kind of putting a brand on your initiative there, how you're going forth with that marketing approach? And Brad, that would be for you. And then, Jason, just on that theme, could you please speak to -- just the revenue and EBITDA run rate in the third quarter, what's expected for fourth quarter on the data center contract and maybe how you think about that run rate in 2026? James Archer: Yes. So Scott, let me take the Target Hyper/Scale kind of question and why we did it. Look, the unprecedented capital spend in this industry just across the U.S. and not just Texas, we feel requires a more focused and dedicated approach. We spent 2 years really researching this opportunity, the markets. We've hired several new people that are dedicated to this effort, that have a background in the data center world. And just based on the scale of the opportunity that's in front of us and that we see really long term. We thought it was right to really have its own brand and focus there on the hyperscalers, the GCs that are there. This is a different group that are now being forced to move remote, right? A lot of these over the years have built in big cities. Most of them now are being built remote. So the education there takes time because they've never had to use facilities like us that they're being forced to look at today. So again, we think that branding fits within that and who you're dealing with is different than we've ever dealt with in the past. So we think that branding -- it's been well received by our customers and potential customers, and we think that will continue to be the case. Jason Vlacich: And I think on the second question regarding the -- I think you said the data center contract run rates and revenue and adjusted EBITDA. So we anticipate on that contract to recognize about $5 million of revenue this year. I would say from a run rate standpoint, it's more forward-looking beyond this year. Approximately, I would say, the balance of that contract, which is $43 million less than $5 million will be relatively evenly split between 2026 and 2027. The margin profile on that is very similar to Dilley because it's a lease and services agreement where we own the assets and we operate them, and it's exclusively for one customer. So as a matter of fact, a lot of the opportunities that we're looking at in our pipeline are very similar to that type of a margin profile that we're experiencing at Dilley. Now Dilley, from a run rate standpoint, you'll see will come to life in Q4. But essentially, it's approximately $50 million a year on the full 2,400-bed community at a margin profile very similar to the previous contract. Operator: And your next question comes from Greg Gibas. Gregory Gibas: Congrats on the results. I wanted to ask how maybe does your existing data center community contract compared to the other opportunities you're in advanced discussions with? From, I guess, a high level, how would you say it kind of stacks up to the relative scope and size of the opportunities that you're seeing? James Archer: Yes. And just to kind of across the board, I would tell you the scope of these are on an average well above 1,000 rooms that we're looking at if you're talking size, right? They go into these areas for 5, 6, 7, 8 years, they continue to scale up, it doesn't start like 1,000. It's very similar to how we're building this first contract. 250 and then we're looking to continually increase that. This next increase will -- we think, will be several hundred beds, right, followed on by more increases until they reach capacity on the construction side. And then it kind of levels out for quite a while on that. But that's very similar to the buildup. Now look, some of these are a little smaller, and some of them are much bigger. It just depends on what they're doing. What we're seeing today is a lot of the -- not only are we dealing with the data center piece, we're dealing with the power piece as well, which just adds more of a need for rooms, right? Gregory Gibas: Got it. That's helpful. I appreciate that. And maybe for Jason, to dive into kind of the implications of guidance. Could you maybe speak to the quarter-to-quarter dynamics or expectations implied there? You already mentioned the data center contract and $5 million expected this year. But anything else as I think about Q4 versus Q3 from a modeling perspective? Jason Vlacich: Yes. I think Q4, you're going to see the full ramp-up for the Dilley contract, right, which as I said, is annualized $50 million a year in revenue, approximately 40% to 50% margin is what you could anticipate there, divide it up in a quarterly amount for Q4. The item that you're not going to see recur is the $11.8 million that we recognized for the PCC closeout payment. That's kind of the biggest delta between Q3 and Q4 is going to be that combined with now we're fully ramped up on Dilley. And I think everything else will be relatively steady state. Gregory Gibas: Great. That's helpful. And if I could, I wanted to ask, given you were named on that $10 billion, WEXMAC DOD award. Wondering if there's anything you could share related to, I guess, how you could serve their efforts and then maybe what level of capacity you're positioned to provide? Jason Vlacich: Could you repeat that again? We didn't quite get all of that. Gregory Gibas: Yes, sorry. Just given you were named on that $10 billion WEXMAC DOD award, wondering if there's anything you could share related to how you can serve their efforts and maybe what level of capacity you're positioned to provide? Jason Vlacich: Yes. Look, first, we don't know exactly what's going to come out on those bids, but we're positioned there, right? We're on the contract vehicle, which was the first step. We'll see what comes out. And if it works for us, we'll definitely go after it, right? If we have available assets or we can structure it another way, we will take a look at that if it fits us. But we first wanted to get on the contract vehicle and then take a look at any bids that come from that. Operator: And your next question comes from [ Rajiv Sharma ]. Unknown Analyst: This is Raj. I wanted to ask about the workforce EBITDA. What can we -- how much of a shift in EBITDA can we see -- can we expect from this year to the next year? And also, could you talk about the community enhancements, the detail around that? Does that entail higher bed pricing or new service modules or client-funded CapEx? Jason Vlacich: Yes. So I'll take the first one right off the bat. So the community enhancements are not going to increase the number of expected beds. We're still going to be around 2,000 beds. So it doesn't impact any of the economics around the services piece that will largely kick in beginning next year. It's strictly related to the construction, the majority of that, we anticipate to be recognized this year as we hopefully have the construction substantially complete by the end of this year. I'll stop there and see if there's any other follow-up on that. Otherwise... Unknown Analyst: Go ahead. Yes, I'm sorry, go ahead. Yes. No, I wanted to understand the community enhancements, what does it entail? Jason Vlacich: Well, it doesn't entail building out more beds, and it certainly doesn't increase the economics on the services piece. The services piece, which is the balance of the contract that's roughly $75 million or so that will start to kick in next year through 2027. I would look at that as relatively evenly split between the 2 years at a margin profile closer to 30% on the services piece going forward as opposed to the construction piece where our margin profile is closer to 20% to 25%. Unknown Analyst: Got it. And then did I hear it right? So the Dilley facility is fully ramped now to 2,400 beds. Is that -- and the ramp of steady-state utilization, that is happening in Q4. Jason Vlacich: Yes. So we completed the ramp-up at the beginning of September, and you'll see the full quarterly economics on the 2,400 beds in Q4. Unknown Analyst: Right. And then just on the Pecos the PCC, any active RFPs or renewal discussions you are engaged in that could replace or supplement that? Jason Vlacich: Yes. As I mentioned earlier on the call, lots of activity in the Permian Basin, West Texas, right? So we have multiple paths there to utilize that equipment other than just the government on that for all of our equipment. And look, to be clear, we're already utilizing some of our existing assets for the first data center. And we expect to use more of those assets in the future. We've always been very good. Look first, we're going to utilize our existing assets, right? We want to drive utilization and put those back to work. So that's our first look all the time. And we've been very good about that, and we'll continue to do that. Unknown Analyst: Okay. Great. And then just lastly, can you elaborate on the Target, the Hyper/Scale? How does that differentiate from the core workforce? And what type of clients or geographies are you targeting first? James Archer: Yes. And again, lots of focus on the data center, right, huge spend. We brought in some, if you will, specialists, folks that have worked in the data center business for many years as well. So we built a team up around this. We thought it needed more focus starting to prove that. That's a good decision for us. It's been well received in the industry. When you talk about the client, a lot of the clients that we're talking to today have never been where they've needed -- where they work remote, if you will. And now they realize, hey, we're working remote. We need this. It's a bigger education process. It is a little bit different of a customer as well than, if you will, the oil and gas or your industrial customer or your mining customer. They've just never done this. So -- it's more about -- I wouldn't say a different type of quality, kind of that works across all industries, but it's definitely a bigger education process. And it is a little bit different customer set than we've ever dealt with in the past in a good way, right? They're very receptive. They want to take care of their employees like our other customers do. And the great thing is they've got great counterparties on the other side of these contracts that we're working on. And their goal is to get this done on time, right? So they don't mind, again, spending the money, getting the rooms close to location, and it's all about safety and kind of derisking their project for them. Mark Schuck: Yes. Raj, this is Mark. Just to kind of put a fine point. I think you asked, too, if there was any differentiation around the Hyper/Scale brand. And look, to be clear, it fits squarely in Target's core competencies, as Brad described, it is just really an intentional focus on the customers and the applications that Brad described. James Archer: Yes, buildings are the same, right? Like our same fleet that is being used for HFS can be used for the data centers as well, and we're doing that today. So that doesn't change to Mark's point. Unknown Analyst: Congratulations. Operator: [Operator Instructions] And your next question comes from Stephen Gengaro. Stephen Gengaro: So a couple for me, and I'm sorry if I missed any of this. I missed the beginning of the call. But I think going into next year, there's about 6,000 idle beds. I think that's roughly the right number. Can you -- can you talk about given what's going on with the government shutdown and the potential timing for new awards. Can you talk about any color on kind of the timing on some of these contracts, both within the government and outside the government and how they may come together as we start thinking about how '26 starts to unfold? Jason Vlacich: Well, I would just say on the beds, we have about 8,000 available beds going into next year, right? We've utilized some of those to build out the initial 250-bed data center community. In terms of timing, very difficult to nail down exact timing. But in terms of the data center opportunities, we're already in advanced discussions on expanding that contract. As a reminder, we said at the forefront of the call, and also in our announcement, the land base can accommodate up to 1,500 beds. That's obviously going to be driven by customer demand. But again, we're already in advanced discussions on increasing that bed count from 250 to several hundred more in terms of the opportunities. I would say the pipeline, and Brad can certainly elaborate. It's growing in the area of data centers, the government we talked about, the opportunity set there. There's still a high degree of interest. The West Texas assets are still on the acquisition list for the government, obviously, the administrative process is something you can't exactly nail down from a timing standpoint in terms of approvals and when a contract award might come. But we are keeping those assets in a ready state. We continue to incur the cost to do that of $2 million to $3 million a quarter, because there continues to be a high degree of interest, but the timing is a little difficult to nail down. James Archer: Yes. Stephen, if you missed the first part of the call, one thing I talked about on another question, was just -- there's multiple paths here for us to maximize our assets and utilization other than the government in the Permian Basin, while we still expect to take care of the government, and they're very interested in this facility, the demand, as you know, covering the Permian is increasing a lot, right, for data centers and the large-scale power projects. Several have been announced, several more in FID that we think gets announced. Some that we have NDAs signed with that haven't been announced that we think comes along as well. So we think we sit in a really good spot in the -- especially in the Permian and West Texas in general to increase utilization throughout our units that are sitting idle or underutilized. So again, it's not a one-legged stool here just on government. And I think fortunately for us, we sit in a really great position to act up on some of these projects. Stephen Gengaro: Is there -- so when we think about like the availability of your capacity and when we think about the data center growth and what's going on in some of the critical minerals side, and obviously the government, is there any urgency from any of those customer bases as it pertains to a concern about lack of capacity in -- if they don't contract assets in the near term? James Archer: 100%. When you look at how -- we'll just say the data centers are built, you'll see one large one being built and then pretty quickly behind that, they cluster around each other, right? So they definitely get -- there's a lack of qualified skills out there, whether that's electric or that's mechanical or whatever. And they're fighting a lot of times for that same person, right? So they get signing on equipment quicker than the next guy with -- because there's limited capacity out there, right? It can help derisk their project. But the answer is absolutely, yes. And look, that fear, if you will, is well founded on their part. There's not a lot of excess capacity out there. And every day, there's new projects that are being announced, which just continue to increase that. Stephen Gengaro: Yes. That's helpful because I hear clearly on the power gen side, and I was just curious if that urgency and sort of filtered down to take your business from at least part of the customer base. James Archer: Absolutely. Stephen Gengaro: Great. And then just the final question I had was the economics of the different pieces, it sounds like the data center side from our prior conversations is kind of in a pretty similar to Dilley, like should we expect kind of those similar type economics as other opportunities surface? Jason Vlacich: Yes. I mean I would say a lot of the opportunities we're looking at in our pipeline have economics from a margin profile standpoint, very similar to Dilley. A lot of these are take-or-pay assets that we own and will operate exclusively for the customer. So those economics will tend to be very similar to the Dilley economics. Stephen Gengaro: And actually on that -- I'm sorry, just one quick one. I think I know the answer to this, but on the longer-term deals, when you look at inflationary costs that we've seen, especially on things like food and labor, you are protected against a lot of that, I believe, in the contracts. Is that true? James Archer: It varies, right? In some on a go forward, we might have some type of cost increase across the years. And then some -- we're pretty limited on that, but we try to do that with the right type of rate -- operational efficiencies. And we've been very good about that. Operator: There are no further questions at this time. Brad Archer, you may continue. James Archer: Yes. Thanks to all of you for joining our call today and for your continued support of Target Hospitality. We look forward to speaking to all of you again in the New Year. Operator, that will conclude our call for today. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you very much for your participation. You may now disconnect. Have a great day.
Operator: Thank you all for joining us this morning. Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information, and actual results could differ from the conclusions or projections in that forward-looking information, which include, but not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and amounts of estimated future production, cost of production, capital expenditures, future metal prices, and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties, and factors, which may lead to the actual financial results and performance being different from the estimate contained in the forward-looking statements, please refer to Allied Gold's press release issued last night announcing quarter 3, 2025, operating and financial results. I would like to remind everyone that this conference call is being recorded and will be available for replay later on today. Replay information and the presentation slides accompanying this conference call and webcast are available on Allied Gold's website at alliedgold.com. I will now turn the call over to Peter Marrone, Chairman and CEO. Peter Marrone: Operator, thank you very much. And ladies and gentlemen, let me begin this conference call by pointing to the quote at the bottom of the first slide of our presentation, and I would like to repeat that quote. Let's not react to speculative headlines and geopolitical matters. We continue to operate normally. We refer to Mali in particular, and particularly in light of recent headlines. Let me begin by talking about the people of the country. They are industrious, entrepreneurial, and overwhelmingly in the country across the population, there is support for mining. Similar to many countries, the politics, geopolitical circumstances go on. Mostly, they are stable, sometimes changes occur. But business goes on, and this is especially true for mining. Recent disruptions in fuel supply into the capital of the country, affect only the capital, and there are signs of improvement. Regional governments and internationally support has been offered. And national efforts to counter the factors that have disrupted the fuel supply have received local, regional, and international endorsement. Prolonged fuel shortages do risk civil unrest and other challenges. But so far, this has not occurred and fuel supplies have begun to enter the capital. While there has been unexpected government change in the country before, and this is true for many countries, it has not been the result of external forces, and that seems to be true now as well. And in those times of government change, I remind everyone that mines have continued to operate normally, production and cash flows were generated. We have no reason to believe that this is not true now, and we attribute that to the industrious and entrepreneurial nature of the people, who support business as usual regardless of political affiliation or affinity and regardless of localized conflicts. So with that then, our Q3 was certainly ordinary and normal course. We had solid production of just over 87,000 ounces that sets us up for a strong Q4. We had strong cash generation, just under $110 million of adjusted EBITDA and our operating cash flow of just under $200 million. We made significant progress on the Sadiola Phase 1 expansion and the Kurmuk development. Our all-in sustaining costs of $2,092 per ounce were down 11% as compared to the second quarter. As we had indicated with our second quarter conference call, we would expect, and we expect further reductions in Q4 with higher grades at Sadiola, particularly with the Phase 1 expansion completed over the course of the next few weeks into December. Operations are performing well, we're operating normally at Sadiola, and that carries strong momentum into the fourth quarter. At Agbaou production quarter-over-quarter from Q2 to Q3 was up 43%. We expect that sustained production to continue into Q4 and into next year. And at Bonikro, we're on plan, grades are where we expect them to be, recoveries and throughput improved. And again, we expect that that will continue into this quarter and the quarters to follow. We had adjusted EBITDA to conclude of $110 million, cash flow of just under $200 million and cash balances at the end of the third quarter of just over $262 million. What to expect then in Q4 and beyond? Sadiola and Bonikro will be notably higher. We indicated up to 40% higher in Q4 over Q3. We are almost halfway through the quarter, and we can see that production ramp-up progressing very well. Our Q4 costs are expected to improve. Momentum from that is expected to continue into the first quarter of next year and throughout the year. And we stand by the guidance of a production level for 2025 that is greater than 375,000 ounces, that sets us up for a consistent 100,000 ounces per quarter at improved costs, leading to improved financial performance and then Kurmuk kicks into production by the middle of the year. With that, ladies and gentlemen, let me pass the call to Johan, our Chief Operations Officer to go through our production in more detail. Johannes Stoltz: Good morning, Peter, and good morning, everybody. Thank you very much, Peter, for the headlines. I would like to start off with the -- on Slide 3, the operations, and starting off with Sadiola. The operations were stable and on plan. I was at Sadiola last week and operations are running normally. We're not seeing any logistic disruption and consumable inventories, including fuel remains at normal levels. The operation is running normally with noticeable improvements. Production is on track to meet the full year guidance with Q4 expected to be 40% higher than previous quarters. Phase 1 expansion remains on schedule for completion in December, enabling us to treat up to 60% fresh ore in the mill feed. Bonikro was on plan with higher grades, better throughput and recoveries. The stripping and maturity of Pushback 5 and Pushback 3 will provide us access to higher grades at lower cost in Q4. Agbaou production increased 43% quarter-on-quarter, as Peter also alluded to, and driven by higher grades and throughput and operational improvements. Overall, operations were on plan, positioning us higher production and lower unit cost in Q4. If we go to the next slide regarding the Sadiola Phase 1 expansion progress. The Phase 1 expansion remains on schedule and continued to advance through Q3 and into Q4. Mechanical installation of the new mill and crushing circuit is complete. The mobile pebble crusher is on site and ready for the December commencement. Engineering and pre-leach thickener is on its way to support higher fresh ore processing with Phase 1 nearing completion. We expect new commission circuit to be ready to receive ore late in the fourth quarter. At that point, Sadiola will be able to process up to 60% fresh ore through the plant, which will materially lift throughput rates, improved recoveries, and lowering processing costs. This expansion will bring additional flexibility into the operation and pave the way for lower cost and improved predictability. So in short, Phase 1 is on plan, commissioning begins in December, and it will set up structural setup change for Sadiola production and cost base. Moving over then to the Kurmuk progress. Kurmuk continues to advance on schedule. Engineering and the substantial complete and the site extension is well underway. The plant construction, including the mechanical erection, concrete works, and the key infrastructure such as water, the water dam is advancing. Logistics are active. Long lead equipment is on site. Initial ore supply has been established from both Ashashire and Dish Mountain. The plant capacity has been approved to the 6.4 million tonnes per year, which enhances the long-term production profile. Looking ahead, priorities to complete the mechanical and electrical infrastructure works, build up to the 3-month high-grade stockpiles, connect the power line, and advance to the pre-commissioning. Upcoming priorities include the completion of the construction, build the high-grade stockpiles, as alluded earlier, provide the line connection and for -- and the pre-commissioning. We maintain on track for first gold by mid-2026. And with this, I'd like to pass over to our Chief Exploration Officer, Don Dudek. Thank you. Don Dudek: Thanks, Johan, and good morning. Hello, everybody. One thing I want to emphasize for Sadiola, and it's something we tend to forget because of time. But this deposit has produced over 8 million ounces of gold, and we have 10 million ounces of mineral resources on the books. Because of the robustness of the system, we see the potential or we have an exploration goal to add another 3.5 million ounces of resources within the next 5 years. Including within that is about 1 million ounces of oxide inventory and resources. Our exploration strategy underpins our long-term production profile for this project and supports mine life extension at attractive returns. The oxide zones are located near infrastructure, and oxide boosts flexibility and profitability within our operations. Our drilling is focused on near-mine targets. And really, we're targeting those zones, which have higher-than-average grades, which again supports the long-term plan. And they also provide an optionality for production that will again service us over the long term. We have 19 years of mineral reserves, and we see this increasing over time, just again based on the robustness of the system. When you look at these systems in West Africa, a lot of the large gold zones, they really don't -- we haven't found the limits of them, and the limits are more defined by operation cost profile versus running out of mineralization. So that's something very important to keep in mind. In this last year, we've seen significant success at 4 different zones. And again, that was touched upon in the exploration news release. And these discoveries, as noted before, validate the scale and the scope and the potential of this mineralized system. Going forward, drilling will remain active into year-end, and continue through 2026 and beyond. We are prioritizing the targets with the highest potential, and again, with a focus on oxides. We're initiating new geophysical surveys over a 2.5 kilometer stretch of productive stratigraphy, that already has produced a couple of recent near-term gold deposits. This area has never been systematically tested. And as we march ahead with the drill, we keep on finding more mineralization. Our results from this work will be summarized in an updated mineral resource estimate in Q1 2026. And this update will capture new discoveries, oxide additions, and extensions. Furthermore, we plan exploration updates for Kurmuk in Ethiopia late this month, and for our project group in Cote d'Ivoire in early '26. With that, I'll pass things off to Jason to discuss the Q3 financial performance. Jason LeBlanc: Great. Thanks, Don. Good morning, everyone. In Q3, the business delivered another solid quarter of financial results. Adjusted net earnings were $0.29 per share and adjusted EBITDA came in at almost $110 million, reflecting strong operating performance and improving costs across the portfolio. We generated $182 million in net operating cash flow during the quarter and ended with a cash balance of $262 million, giving us strong liquidity into Q4 and as we finish up the construction of Phase 1 at Sadiola and at Kurmuk in Q2 next year. All-in sustaining costs were $2,092 per ounce, an improvement of 11% quarter-over-quarter despite higher royalties from gold price. So overall, Q3 delivered strong cash flow generation, improving costs and higher margins. More importantly, we're positioned for a stronger Q4 with a combination of increased production, lower unit costs and higher gold prices that will result in a step change in cash flow generation to end the year. As just mentioned, most imminently in Q4, we have our best production quarter of the year, driven by production increases at Sadiola and Bonikro in the range of up to 40% over Q3. At Sadiola, we wrap up the Phase 1 expansion and have the benefit of new oxide zones to complement higher-grade fresh ore that can now be processed through the new mill at a higher throughput rate than before. At Bonikro, our intensive stripping campaign over the last year is finishing up and the mine starts a higher-grade mining sequence with modest waste removal in Q4. But our improving performance doesn't end there. As we look to 2026, the operating and financial performance will transition to a higher sustainable platform with the completion of our development projects. Importantly, the predictability and operational flexibility of Sadiola and our Cote d'Ivoire complex improved prospectively. In Cote d'Ivoire, we moved to more direct ore extraction at higher grades with less waste movement. At Sadiola, we're able to primarily rely on the abundant higher-grade fresh ore reserves as primary plant feed for up to 60% of throughput. Oxides fill the balance of the mill compared with being the primary feed source in this and recent years. Furthermore, new oxide discoveries represent optionality to potentially increase production levels at Sadiola up to 230 ounces per year in the medium term. And finally, at Kurmuk, first gold is fast approaching. This will be a step change for Allied, adding a new long-life, low-cost asset that significantly increases group production and cash flow. Kurmuk is expected to be transformational to our portfolio and financial profile. On the chart here, you can see the production growth we're expecting in coming years. This will correspond to impressive top line growth in today's gold environment, the more impressive will be the leverage effect we see in EBITDA and cash flow generation, because of our fixed overhead and decreasing unit operating costs or AISC. With that, I'll hand things back to Peter for his wrap-up. Peter Marrone: Thank you very much, Jason. So in terms of -- just to conclude the presentation, upcoming milestones with our Sadiola exploration update, as Don mentioned, we have demonstrated value creation short term and long term, finding more oxides and expanding the already robust inventory of fresh ore. We have updates coming for our other mines. That includes an exploration update for Kurmuk in November and for the Cote d'Ivoire complex in January. Expect that we will have completed the Sadiola Phase 1 expansion late this year, literally over the course of a few weeks now. That has a huge impact on operational flexibility because of that abundance of fresh ore. We have an analyst and investor site visit at Kurmuk, which is expected early in Q1. We have the Sadiola Phase 2 expansion update, how we intend to progress to get to that 350,000 ounces to 400,000 ounces per year, which we plan to deliver in January next year. We have had a team in Mali and in Cote d'Ivoire last week on our reserves and resources to complete their work, so that we can provide an end of year reserve and resource update, including the impact of Oume on the Cote d'Ivoire complex. And of course, including in that is Kurmuk, which we expect in February. Our Q4 results, of course, are expected soon after the completion of the quarter, in late January or early February. We will provide an update on Agbaou and its reserves and resources, which we expect in the second quarter. We start Kurmuk operations in the middle of the year. I should say with respect to Agbaou that of course, the objective there is an extension of mine-life. Ladies and gentlemen, we've committed to improving improvements in block models and mine plans, our mining efforts, our processing, creating organizational effectiveness that begins with hiring senior local persons to manage our operations. All of that is now in place. We do not identify here the results of that, but those results include improving production and costs this quarter, the quarter that we are now in and into next year. New equipment, better utilization, better mine plans, confident operators, access to higher grade ore, enhanced mining access, and flexibility. And that positions us for a strong fourth quarter and an even stronger 2026 across all measures, including production, costs, and cash flow. Operator, perhaps at this point, we can open the call to questions. Operator: [Operator Instructions] And your first question comes from Carey MacRury from Canaccord Genuity. Carey MacRury: Hello, good morning, Peter and team, and congrats on the good quarter. I guess my first question is just on Sadiola Phase 2 -- Phase 2 -- or sorry, Phase 1 is almost complete. It sounds like you're adding more oxide. When realistically -- like how should we think about the timing of when you'd actually commit to Phase 2 in terms of putting a shovel on the ground? Peter Marrone: Yes. So let's begin with first principles, Carey. As I said a few moments ago, in -- either with our year-end results or in advance of that, so that would mean in January, we will provide an update on what we intend to do with Phase 2. We have a feasibility study for a new plant up to 10 million tonnes per year, and that gets us that production platform of 350,000 ounces to 400,000 ounces. That would idle the existing plant. We would commit to expenditure by the end of 2026, and we would be in production by late '28, early 2029. As I mentioned, that would also mean that we will have decommissioned the existing plant. But over the course of the last 15 months to 18 months, we've been looking at an alternative. It's something that we were very familiar with as a management in Yamana. We're looking at how can we take the existing plant, further modify it to increase its throughput, not to 10 million tonnes per year, but something in between the current level to 10 million. How do we improve recoveries so that we get to a similar production level in the range of 350,000 ounces per year, but with 2 improvements. The first is potentially less capital. And the second is better capital efficiency. In other words, we're not committing to that capital completely upfront. We're just about complete on that technical work. And with the completion of that technical work, we have Board meetings in December, and we expect then that in January at the latest with our fourth quarter results, we will provide you with our take on what is the best course for us, taking all factors into account, what is the best capital efficiency, delivers the best results and the greatest certainty. Carey MacRury: And then maybe just reserves and resource price is pretty low compared to -- we were sitting at $4,000 an ounce. I guess within your portfolio, are there any specific assets that really have better optionality at maybe not $4,000, but higher prices than reserves and resources? Peter Marrone: Yes. Really good question. And that one really applies to Agbaou. So part of the effort on Agbaou is a 3-part program that we've undertaken to improve mine life. And one of -- the first part of that is can we look at the pit design at a higher gold price. And we're looking at a $2,000 pit design. What does that do in -- and of course, the infill that follows from that and what does that do in terms of extending mine life. The other 2 components, of course, is a possible underground and regional exploration opportunity. We'll have more to say on that into next year, as I mentioned, but you should expect that for that asset, we will be using a $2,000 gold price for reserve estimation. We're reviewing what our peers are doing more generally to see what they have already done or what they're planning to do. So we are evaluating at this point, where I'm personally leaning, but we have to have lots of discussions with management is a $2,000 gold price for reserves across the board to complement what we're already doing at Agbaou and $2,300 for resources. Operator: And your next question comes from Justin Chan from SCP Resource Finance. Justin Chan: Congrats on the quarter. I'll consolidate. I have 2 -- instead of one question, a follow-up, I'll just -- if you wouldn't mind, I'll ask 2 separate questions. Just one is on -- just on the accounting. Is the 2 prepays that were mentioned at the end of September in the documentation, were those included in cash flow from ops, just to make sure my model is accounting for everything correctly. That's my first one. Peter Marrone: Yes, that's right, Justin. There weren't much… Justin Chan: Okay. Appreciate the color. Peter Marrone: Hey, look at maybe the EBITDA, they're not… Justin Chan: And then the second one is, I mean, there's a lot of headlines over the weekend, especially just on supply chains and fuel availability in Mali. I was just curious if you guys could give some color on maybe what you're seeing on the ground. Sometimes there's obviously a difference between what media says and what the actual operators are seeing? So yes, could you give us your perspective on the current operating situation? Peter Marrone: Yes. I tried to address that at the beginning, Justin. I think it would be wrong for us to talk about what is the geopolitics of one thing or another other than to say that, look, it's business as usual. There is a fuel disruption. There are many reasons for that fuel disruption in -- that it has affected the capital. Interestingly, as that -- the first of these articles was published on Friday of last week, we understand that roughly 200, 250 trucks filled with fuel came into the capital. And that's about a week supply, and that's typically the way that the capital runs. So the best that we can say at this point is that there is no disruption to fuel supply lines or other supply lines relating to the mines. There has been some disruption as a result of some insurgency activity in and around the capital. It does appear to us as if there is some alleviation of that. And I repeat what I said before, this is a business-as-usual situation. We in the country, those who are familiar with the country, those who are familiar with countries such as this have seen this sort of thing before. But at the end of the day, the best way that I can describe it is regardless of disruptions, business must go on and does go on, and that's what we expect here. Operator: And your next question comes from Mohamed Sidibe from National Bank Capital Markets. Mohamed Sidibe: Just maybe to start with the Q4 guide that you gave with Sadiola and Bonikro being potentially up to 40% higher. What would it take to see, I guess, both operations be closer to that 40% mark? What are the key drivers that we should look for Sadiola and Bonikro? Peter Marrone: I'll turn it to Johan in a moment, but bear with us, Mohammed. We are ahead of our expectations for the quarter so far. In the case of the Cote d'Ivoire, we're more than 5% ahead. In the case of Sadiola, just a few percentages ahead. But again, on a production platform, we expect to be greater than Q3. So I think you should expect that we will be able to meet the expectations of getting close to or at that 40%. Johan, I will summarize by saying that in the case of Sadiola, it is these oxide discoveries that were made earlier this year that you're bringing into production, going through the development process and bringing into production. But of course, by the end of the year, it's the Phase 1 expansion that completes and being able to process some of a greater percentage of fresh ore. And in the case of Cote d'Ivoire, all that effort that's been undertaken to date, including, for example, at Agbaou, where we had waste removal that was very significant in the second quarter that increases production. We're going to higher grades at Bonikro as a result of that waste removal. And that's what accounts for that higher level of production. Johan, did you want to supplement that with anything more specific? Johannes Stoltz: Peter, you've summarized most of it. I want to say that the hard work from the team started in January up to now, created flexibility within Sadiola. You've alluded to the oxide deposits and also the mill start-up that will enhance the throughput in Sadiola with higher recoveries. So more predictable, more flexibility was given into the Sadiola as well as into the CDI complex that enable us to move ore to and from between the various plants that set ourselves up to where we are currently. We're ahead of the Q4 numbers. As you alluded, we're halfway through the quarter already and a positive trend. The teams are doing well. The plans are coming together nicely. Looking forward to the end result, definitely very close to the 40% mark, if not slightly higher, Peter. Mohamed Sidibe: And then just if I can move on, maybe on exploration. I think you provided a pretty good update at Sadiola with a lot of outside potential on your exploration target there. But I wanted to maybe shift to Cote d'Ivoire and the visibility at Agbaou and Bonikro. I know there's an update that is coming, but how do you currently look at those 2 assets in terms of mine life remaining? And what do you envision them to ultimately be as a potential source of production for you guys? Peter Marrone: Again, at this point, we have not completed the work, but Oume contributes comfortably to Bonikro's increase in mine life. We publicly have said we want to get to at least 180,000 ounces per year from the complex. So roughly 50% from Bonikro and 50% coming from Agbaou. Oume contributes very meaningfully to that mine life extension. It looks as if we'll be above the 10 years for Bonikro. Agbaou is a bit more complex, because it's further behind in terms of the exploration effort. But with what we're doing, looking at and doing drilling into reachable through added reachable underground, what we're doing with the pit shell with a $2,000 gold assumption and what we're doing with the broader outside of the compensated area exploration effort, we'll begin to demonstrate. We won't get with that update next year. I don't believe that we'll get to 10 years of mine life for Agbaou, but we'll begin to demonstrate that it's more than the roughly 2 years of mine life that we currently carry. And we think significantly in excess of that. I believe in our MD&A with our second quarter, we indicated that we were looking at 4 years to 5 years of extension. That was our objective. We expect that the exploration results and the other efforts that we're undertaking for with technical services will demonstrate at least that. Finally, then, what's our objective? Our objective is at least 10 years of mine life at 180,000 ounces per year. But we're refining that objective. We're trying to get to 200,000 ounces per year at least that 10 years of mine life. With that, this becomes a meaningful asset, a very meaningful asset. It will not have the prominence. It does not have the Tier 1 status of Kurmuk and Sadiola, but it does -- it is meaningful. It does contribute to the share price. By my estimation, taking the existing mine life as we show it based on reserves and resources and getting to 10 years of mine life at 200,000 ounces per year, by my estimation, it adds somewhere between $8 and $10 per share. I think that's pretty significant. Mohamed Sidibe: And then I guess, finally, with -- you've strengthened your balance sheet with the forward sales agreement, the rates post quarter as well as the good cash flow from operations there. As you're heading into the completion at Kurmuk, better 2026 on free cash flow, the sector is getting, I guess, a little bit harder in terms of M&A. Could you maybe share your thoughts on further consolidation down in West Africa or M&A opportunities that you may be looking at from the acquisition side? Or is that more of a 2027 event and Kurmuk remains a main priority alongside Sadiola? Peter Marrone: What a question. So if we gone back a year ago, Mohammed, I would have said, of course, we should be looking at acquisitions, what are the opportunities in Africa, in other developing parts of the world, that's where we still think there's the best juice, where that we think the best value. But frankly, over the course of the last several quarters, we've had a bit of an epiphany. When we look at Kurmuk, that's a real prize. It's a Tier 1 asset. I repeat what I said before, it's a Tier 1 asset. And we're now looking at how we expand its throughput to match the size that we already carry for the SAG mill to that 6.4 million tonnes per year from the 6 million tonnes per year. That gets the production platform to over 300,000 ounces per year. And with all-in sustaining costs, as we've described them, that means that we're generating some impressively robust cash flows. From a production point of view, mine life point of view and from a cash flow point of view, it is a Tier 1 asset. And the same would be true for Sadiola. I can't think of very many mid-tier companies that are underpinned by 2 Tier 1 assets. And so that epiphany to which I referred is that we're going to keep our eyes on the prize this year. Keep your eyes on the prize. We don't think that there is anything that is as compelling as engaging in the completion of these efforts that we have inside the company that get us to that roughly 800,000 ounces of production beginning next year to 600,000 ounces and then a few years after that to that 800,000 ounces. We think that that is what delivers the best value for shareholders. We've become a real catch at that point as well, and that has not escaped us. Operator: And your next question comes from Ingrid Rico from Stifel. Ingrid Rico: I have, I guess, 2 follow-ups on Sadiola. And I appreciate the comments, Peter, on the progressive expansion options and how you guys are evaluating that? But I noticed in the press release, I think it was that you will be proceeding with a pre-leach thickener and you're going to be adding that in 2026. So I guess my question would be, one, on what sort of cost budget do you have for that? And two, what would it do with the recoveries or the improvement on the circuit by adding that thickener? Gerardo Fernandez: Hello, Ingrid. Its Gerardo. Yes. It's a small CapEx ticket. It's about $7 million to $8 million. What it does is allow us to manage the density better, so we can increase the proportion of fresh rock up to 90%. And depending on the flexibility from oxides also can lead to increased throughput. So the beauty of it is it works -- it's necessary for both scenarios, the full expansion or the progressive expansion. So we decided to go ahead and start engineering and start the construction next year, so we can see the benefits as soon as possible. Ingrid Rico: And then just, I guess, more near term and sort of the grade expectation that we could start to see as the Phase 1 expansion is completed and you're able to put more of the fresh ore in. Should we think of grades picking up Q4 and into 2026? And what sort of grades should we be looking for with that Phase 1 completed? Peter Marrone: Yes, we should -- you should expect to see the grade improves. Gerardo or Johan, do you want to address where we expect the grade to be? Gerardo Fernandez: Maybe I can comment long term. Ingrid, if you look at the inventory of fresh rock in Sadiola, that is in the range of 1.8 grams per tonne. Some areas are higher than that, some areas are lower, but that's the bulk of the -- or that's the average of the -- bulk of the reserves, which is the fresh rock. So long term, that's what we should be tracking towards. And in terms of oxide, there is an upside to connect with what Don was describing with the new opportunities to add moderate grade or high-grade oxides, which allowed the plant to increase capacity and recoveries. Maybe Johan can comment on the short term. Johannes Stoltz: Great question, and Gerardo, I think your numbers are spot on around the 1.7 grams to 1.8 grams a tonne. We do find these honeypots around the Sadiola property with higher oxide grades. But if we look at the average over the life of mine, it sits around [indiscernible]. Peter Marrone: And Ingrid, we're not complete the quarter yet. But if we go over the course of the last couple of weeks, so it's a meaningful part of the short term of the quarter. We are experiencing, because of some of those honeypots, as Johan described it, we are experiencing grades that are better than what we had planned. Ingrid Rico: And if I can squeeze just one last question on Kurmuk. And I appreciate that we're going to get that update on the exploration very soon. But just how should we think -- and maybe just some comments, if you can, on the infill drilling and how that's shaping up for grade reconciliation and looking into the grades as you start sort of commissioning and ramping up next year? Peter Marrone: Don is on the line. Don, did you want -- Don is remote. So if you're available, Don, did you want -- can you answer that? Don Dudek: Yes. So we're not doing a lot of infill drilling. We're mostly focusing on extending the resources down dip, down plunge, along strike. And so really trying to bulk out the reserve pits as we see them today. We are seeing continuations of the mineralized zones, and yet have not found the limits of the system. And then we're also looking for other optionality things. We've talked about [ Sekenke ] before, which is a 7-kilometer long gold and soil trend. We've been drilling at the south end of that for a good part of the year. And we have a few other targets that we're moving up the list. We've talked about this for Sadiola in terms of optionality. And again, newer close to surface discoveries will provide more optionality for Kurmuk going forward. So the update near the end of this month should -- we'll present all of that. Peter Marrone: Maybe to complement Don's comments and addressing your question, Don was referring to what we're doing now looking into the future, but we -- what was done in the past in 2024 and into the beginning of 2025 was to do confirmation drilling, especially around Dish, not much in Ashashire, but heavily in Dish. And that information has been modeled. We have ore exposure now with the mining at both deposits, and we're confirming the interpretation of the geology and the drilling is also confirming the grades and the mineralization as we had it in the plan. So it's very positive from that perspective on risk management and setting us in a good position to the -- start our operations next year. Ingrid Rico: So looking forward to that Kurmuk update later this month. Operator: [Operator Instructions] And your next question comes from Luke Bertozzi from CIBC. Luke Bertozzi: Just to follow-up on Ingrid's question on the pre-leach thickener at Sadiola. Can you give us any indication of when that pre-leach thickener could come online? Should we be expecting that to impact 2026 production? Peter Marrone: Yes. Look, towards the end of 2026, we haven't issued our guidance, so we cannot quantify how much the impact will be or disclose it. We have an idea, but bear with us when we issue guidance, we'll reflect it there. Jason LeBlanc: Luke, we've indicated that we see Sadiola in its current form before the second Phase partial or whole expansion being in a range of 200,000 ounces to 230,000 ounces per year. This is part of the plan to get that higher level of production. We'll have more to say on it as we complete some of the work to the end of this year when we give our guidance for the next year. Luke Bertozzi: The rest of my questions have been answered. So, I'll leave it there. Peter Marrone: Operator, are there any other questions? Operator: No, there are no further questions at this time. So I would now like to turn the call back over to Peter Marrone for the closing remarks. Please go ahead. Peter Marrone: Ladies and gentlemen, thank you very much for your participation on this call. We look forward to several of the milestones that we mentioned being provided. Any questions or comments, please do reach out to any of us. And we look forward to seeing many of you on -- in-person at our site visit at Kurmuk in January. Thank you very much.
Operator: Welcome to the SIGA Business Update Call. Before we turn the call over to SIGA management, please note that any forward-looking statements made during this call are based on management's current expectations and observations and are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. SIGA does not undertake any obligation to update publicly any forward-looking statement to reflect events or change circumstances after this call. For a discussion of factors that could cause results to differ, please see the company's filings with the Securities and Exchange Commission, including, without limitation, the company's annual report on Form 10-K for the year ended December 31, 2024, and its subsequent reports on Form 10-Q and Form 8-K. With that, I will turn the call over to Diem Nguyen, Chief Executive Officer of SIGA. Diem? Diem Nguyen: Good afternoon, everyone, and thank you for joining today's call and review of our business results for the third quarter of 2025. I'm joined by Dan Luckshire, our Chief Financial Officer, and we appreciate this opportunity to provide an update on our company. After the update, we'll be happy to answer your questions. With 9 months of the year behind us, we've continued to make progress across several key initiatives aligned with our mission to support governments in building and maintaining robust preparedness plans in the event of a potential smallpox outbreak, whether accidental, deliberate or naturally occurring. Our work is focused on helping to ensure that in an event of such a crisis, rapid and large-scale deployment of antiviral treatments can be accomplished to save lives. Having prepared the strategies, particularly for Category A threats like smallpox, with provisions for stockpiling medical countermeasures can enable immediate action. In today's dynamic and increasingly complex global landscape, bioterrorism continues to be a significant concern, underscoring the importance of proactive preparedness. TPOXX' strong safety profile makes it an ideal choice for mass distribution under emergency conditions. The third quarter was relatively quiet as SIGA's financial strength was demonstrated in our strong second quarter performance, which included $79 million of product revenues. These quarterly fluctuations are consistent with the nature of SIGA's business model where our financial performance should be assessed beyond quarters. For the 9 months ended September 30, 2025, product revenue totaled approximately $86 million, including $53 million of oral TPOXX and $26 million of IV TPOXX sales under the 19C BARDA contract, with the delivery of U.S. Strategic National Stockpile, or SNS, and the $6 million of oral TPOXX sales to the international customer. As of the end of third quarter, there was approximately $26 million of outstanding orders remaining from the U.S. government. This outstanding balance relates to the March 2025 U.S. government order of IV TPOXX, which we expect to deliver in 2026. Importantly, we continue to be engaged with the U.S. government regarding future TPOXX development, manufacturing and procurement. As a reminder, year-to-date, SIGA has been awarded $27 million for pediatric formulation development and IV tech transfer activities. Since September, SIGA has been actively engaged with the U.S. government regarding the future procurement of TPOXX. While the details of our conversation with government officials remain confidential, we're encouraged by their continued interest in maintaining access to TPOXX as a critical medical countermeasure for smallpox, particularly amidst the disruption and uncertainty of the ongoing government shutdown. Antivirals remain essential for bioterrorism preparedness and play a vital role in any comprehensive plan, enabling quick action when it matters most. I'd also like to highlight an additional point of interest. Our approach to pricing and manufacturing has historically been well aligned with administration's priorities. The U.S. government has always received our lowest price for TPOXX compared to international purchasers. And all of our active pharmaceutical ingredients or API and finished drug product are produced in facilities located in the U.S. On the international side of our business, we continue to have discussions with key stakeholders on critical role biodefense plays in shaping resilient global health security frameworks. Our goal is to help ensure that countries around the world are equipped to respond swiftly should a smallpox outbreak occur. Given the growing risk of bioterrorism, many countries and regions have developed preparedness strategies and have allocated larger budgets to executing those strategies where others are working to do so. In our view, strategic stockpiling supported by sustained investment in crisis preparedness is critical to global health security. Discussions around potential contracts with both existing as well as new customers are ongoing as we maintain current relationships and look to expand our customer base. Based on our engagements this year and interest from key stakeholders across strategic markets, we expect multiple international sales in 2026. I'd also like to share a brief update on the referral procedure for TPOXX, known as Tecovirimat-SIGA in Europe, commenced by the European Medicines Agency or EMA in July. As we previously explained, the EMA raised questions about our product's efficacy in treating mpox following a review of the data from mpox clinical trials, including PALM007 and STOMP. We have submitted comprehensive science-based responses to questions posed by the EMA, which were focused primarily on mpox. The EMA's Committee for Medicinal Products for Human Use or CHMP will meet next week, and we expect it will either issue an opinion or request for additional information. While we will not speculate on what the CHMP will do, we are confident in the responses we put forth and believe TPOXX is a safe and effective drug for its approved indications. We remain ready to address any additional questions and provide greater clarity as needed from the CHMP. As always, we encourage stakeholders to view TPOXX through the lens of the comprehensive data and gravity of the disease it's designed to treat, namely smallpox. As a reminder, TPOXX is highly targeted and was developed as a smallpox treatment with the goal of reducing mortality. In preclinical trials, Tecovirimat significantly reduced mortality and viral load across four pivotal studies in non-human primates and two in rabbits. Safety has been demonstrated in about 10,000 TPOXX recipients across more than 20 clinical trials, which is critical when we need it for mass distribution. Turning to our late-stage pipeline. We continue to advance TPOXX post-exposure prophylaxis program, or PEP, for smallpox. Collaboration with CDC continues. As a reminder, the CDC is analyzing samples collected to support the study's immunogenicity objective. Based on TPOXX mechanism of action, we believe TPOXX will not have any impact to JYNNEOS immune response when administered concomitantly with JYNNEOS. Therefore, we continue to move forward toward an FDA submission. While the government shutdown does impact near-term timelines for this project, based on current expectations, we continue to target the FDA submission for the PEP indication in 2026. Also in our pipeline, our pediatric program continues to move forward in partnership with the Biomedical Advanced Research and Development Authority, or BARDA, within the U.S. Department of Health and Human Services under the Administration for Strategic Preparedness & Response, or ASPR. This initiative is designed to address an important unmet need, providing a treatment option for children too small for the current oral formulation of TPOXX. We're targeting to submit a IND as soon as the end of the year with Phase I trial targeted to begin shortly thereafter. As we approach year-end, our key priorities remain unchanged, sustaining financial strength and executing our strategic initiatives with discipline and focus. Despite the expected lumpiness of our financial results quarter-to-quarter, our company continues its track record of generating substantial cash flow. Since 2020, we've returned approximately $230 million to shareholders in the form of dividends and share buybacks, all while incurring net 0 debt. We believe our approach continues to position us well for long-term success where our core areas of focus has delivered meaningful long-term value for our shareholders. In closing, we believe SIGA continues to build on its strong foundation of strategic focus, financial discipline and strength and long-term government partnerships. Our differentiated TPOXX franchise and history of performance reinforce our path forward, one that supports global health security and creates long-term shareholder value. With that, I'll turn it over to Dan to review the financial results in more detail. Dan? Daniel Luckshire: Thanks, Diem. As noted earlier in the call, SIGA's product sales for the 9 months ended September 30, 2025, are approximately $86 million, including $53 million of oral TPOXX and $26 million of IV TPOXX sales under the 19C BARDA contract and $6 million of oral TPOXX sales to an international customer. The sales under the 19C BARDA contract relate to TPOXX deliveries to the U.S. Strategic National Stockpile, or SNS. Product sales for this time period outpaced sales over the comparable period last year of $54 million. In addition to product sales, the company has research and development revenues of approximately $5 million for the 9 months ended September 30, 2025. With respect to the 3 months ended September 30, 2025, as Diem mentioned, it was a relatively quiet quarter, which follows a strong second quarter in which the company had $79 million of product revenues. As previously noted, given the nature of the business model of SIGA, fluctuations in revenue amounts between quarters is not unusual. As a supplemental note, there are $26 million of remaining outstanding orders as of September 30. This amount reflects the $26 million of IV TPOXX order received in the first quarter of this year under the 19C BARDA contract, which is targeted for delivery in 2026. Pre-tax operating income for the 9 months ended September 30, 2025, which excludes interest income and taxes, is approximately $33 million. For the 3 months ended September 30, 2025, pre-tax operating loss is approximately $10 million. Net income for the 9 months ended September 30, 2025, is approximately $29 million. In turn, fully diluted income per share for this period is $0.40 per share. For the 3 months ended September 30, 2025, net loss is approximately $6 million and net loss per share is $0.09. The company continues to maintain a strong balance sheet. At September 30, 2025, the company had a cash balance of approximately $172 million and no debt. This concludes the financial update. At this point, I will turn the call back to Diem. Diem Nguyen: Thank you, Dan. With that, we'd like to open the call up for questions. Operator: [Operator Instructions] And your first question comes from Jyoti Prakash at Edison Group. Jyoti Prakash: My first question is related to the U.S. RFP process for TPOXX. You mentioned disruptions with the U.S. government and the recent shutdowns. What kind of potential impact, if any, do you see on the ongoing RFP process and the timelines for TPOXX Stockpiling? Diem Nguyen: Sure, Jyoti. It's nice to hear from you. We are fortunate at this time that the headcount reductions at the world's furloughs has not materially impacted operational activities or performance of our existing government contracts. Many of the people we work with continue to engage given the nature of what they do as well as importance of national security. There are some instances in which activities with the government employees outside BARDA have been impacted. In these cases, the impact has not been material to our operational -- operations to date. The one area that we would like to highlight that we do see some impact is with the CDC. There is a possibility of delays in the CDC completing the analysis of our samples from the trial supporting our PEP program. The CDC was originally targeting to complete analysis later this year, and that could potentially slip given the timelines of the government shutdown. I mean, regarding the new procurement contract for TPOXX, as we noted in our prepared remarks, we continue to engage with the government officials regarding TPOXX development, manufacturing and procurement. While the headcount reductions for furloughs do expose contractors to some potential delays and occasional choppiness in terms of customary interactions, we believe the key drivers of the procurement activity will be ultimately driven by the views and actions of leadership within the U.S. government. And this includes ASPR, HHS, DoD as well as Administration as well as Congress over the long term. And we are encouraged by their continued interest in maintaining access to TPOXX as we believe and they do too, that it's a critical countermeasure for smallpox. Jyoti Prakash: Thank you and to continue to be in active dialogue with the U.S. government. But if you just hypothize that the RFP may be slightly delayed. Are there any mitigation strategies or operational steps that SIGA is looking to implement or can implement to secure the longer-term outlook? Obviously, your cash position remains strong, so nearer term may not be as much of a concern. Daniel Luckshire: This is Dan. I'll take that question. You're right in that. You mentioned that we have a strong cash position. And just to reiterate, it's $172 million at September 30, and there's no debt. So, we are in a very strong position. Just to give you a frame of reference, that cash balance is more than 4x the current annual rate or annual run rate for operating expenses. So, that affords us a lot of flexibility. And so, what I would say generally is given this position, I would just generally say that over the past decade, SIGA has been consistently adapted to different environments and we'll continue to be adaptive with an eye toward finding the best mix of pursuing opportunities and managing risks. Jyoti Prakash: And I just have another couple of questions on the financials. We appreciate that Q3 was a slightly quieter quarter for the company, but you did record $0.9 million of products revenue. Can you elaborate on what these revenues came from? And are they related to the CD&D, for instance? And secondly, we saw that the cost of goods as a percentage of sales was relatively higher in this quarter versus what we've seen in the previous quarters. Can you just explain what could be the reasons for this? Daniel Luckshire: Right, right. So, in a quiet quarter like this, you do -- then you sort of have, sort of, some technical outcomes that don't necessarily reflect any type of trend. What you're seeing on the revenue side is really the way the accounting works is certain -- in limited circumstances and certain types of reimbursement activities are treated as product revenues, and that really ties into the -- for example, the IV tech transfer. So that's what you see on the product revenue side. And then, on the corresponding cost of goods sold, you see the expenses related to it. What you also see is that, a lot of cost of goods, as you would expect, are variable costs related to production costs for inventory. But there is a small amount percentage-wise that's attributable to, sort of, semi-fixed costs, such costs or expenses such as stability, storage, security. And even when we don't -- it's a quiet quarter, we don't really have much in the way of product deliveries. We still have those expenses show up each quarter. So that's what you also see coming through the cost of goods sold. So that's why you sort of see -- when you look at it on a margin basis, the margin is very different than what you normally see. But again, I would highlight that this is more of a technical outcome and that it does not reflect any type of trend. Operator: [Operator Instructions] There are no further questions at this time. I'm pleased to turn the call back over to Diem. Diem Nguyen: Thanks, Marissa. I'd like to thank everyone for making the time to join today's call and for your ongoing interest in SIGA. We look forward to speaking to you again in our fourth quarter call. Have a great evening. Operator: This concludes today's conference call. Thank you so much for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Upland Software Third Quarter 2025 Earnings Call. [Operator Instructions] The conference call will be recorded and simultaneously webcast at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the third quarter 2025 earnings release, which was distributed today at 8:05 a.m. Central Time. If you've not received the release, it's available on Upland's website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir. John McDonald: Thank you, and welcome to our Q3 2025 earnings call. I'm joined today by Mike Hill, our CFO. On today's call, I will start with our Q3 review. And following that, Mike is going to provide some detail on the numbers and guidance. After that, we'll open up for Q&A. But before we get started, Mike, could you read the safe harbor statement, please? Michael Hill: You bet, Jack. During today's call, we will include statements that are considered forward-looking within the meanings of the securities laws. A detailed discussion of the risks and uncertainties associated with such statements is contained in our periodic reports filed with the SEC. The forward-looking statements made today are based on our views and assumptions and on information currently available to Upland management. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements. On this call, Upland will refer to non-GAAP financial measures that, when used in combination with GAAP results, provide Upland management with additional analytical tools to understand its operations. Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our financial results, which are available on the Investor Relations section of our website. Please note that we are unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. With that, I'll turn the call back over to Jack. John McDonald: All right. Thanks, Mike. So the headlines in Q3, we beat our revenue guidance midpoint, and we met our adjusted EBITDA guidance midpoint. Our Q3 core organic growth rate was 3%. Q3 adjusted EBITDA was $16 million, which resulted in adjusted EBITDA margin of 32% and free cash flow for the quarter was $6.7 million. We welcomed 97 new customers in the quarter, including 14 major customers. We also expanded relationships with 168 existing customers, 13 of which were major expansions. The new and expanded relationships continue to be spread across our AI-powered product portfolio. As we announced previously, in Q3, we successfully refinanced our debt, which moved the maturity of the debt out 6 years to July of 2031. We also added a $30 million revolver. So it really puts us in a place with well-restructured debt and ample liquidity. Our net debt leverage is now down to 3.8x, and we are on track to achieving our net leverage goal of 3.7x by the end of the year. And we plan, of course, to use our ongoing free cash flow generation to continue to delever our balance sheet in 2026 and beyond. On the product front, in Q3, we earned 49 badges in G2's Fall 2025 market reports, reflecting strong momentum across our portfolio. I'd note that Upland RightAnswers and Upland BA Insight are now available in the AWS Marketplace with BA Insight featured in the new AI Agents and Tools category. This expanded presence makes it easier for customers to discover and purchase and deploy these AI solutions, simplifying the purchasing process and accelerating enterprise AI adoption. We were also recognized in Forrester's Customer Service Solutions Landscape, their Q3 2025 report. That study highlights leading vendors who are advancing customer service operations, and we believe that our inclusion reflects the impact of products like Upland RightAnswers in helping companies resolve issues faster, improving agent productivity and delivering more consistent, high-quality customer support and of course, positioning products like Upland RightAnswers as a key enabling technology in these broader Agentic AI customer service deployments. And again, across the product suite, we continue to deliver innovation that boosts productivity, data intelligence and customer outcomes. InterFAX added AI features to improve the discovery of fax content. Adestra rolled out enhanced bot-click detection and a Raiser's Edge NXT integration and Second Street introduced a QR code generator to extend its competitions platform. On the sales -- on the bookings side, we also closed a number of attractive deals this quarter, but 2 new major AI deals that I would highlight. The first was a $2 million multiyear agreement with a Fortune 100 tech company, which adopted RightAnswers as the foundation for an intelligent generative answer engine for all employees, integrating AWS Bedrock AI and S3 to reduce support costs and drive self-service. Another one I'd highlight is a $1 million multiyear deal with a global pharmaceutical company that selected our AWS Bedrock-powered BA Insight platform to replace a legacy enterprise search system, thereby cutting cost and improving search accuracy and governance. And again, these are the results of the work we've done over the past couple of years in AI enabling the portfolio, and we're seeing some of our products really getting slotted in as enabling tech for these broader enterprise AI implementations. So we see that as something to really look at in terms of whether the plan is working. And again, these are early green shoots, but meaningful ones. So in summary, our Q3 results -- reported results support and illustrate the dramatic improvements we've made in the business. We've streamlined our product portfolio with a focus on markets where we can drive growth and profitability. We're generating positive core organic growth. And now look, quarterly results will fluctuate as they have in the past, but the long-term trend reflects progress. As I've described, we're seeing big new customer wins, validating our product market fit and validating our AI product strategies. Now we just need to continue to stack these wins going forward. Our adjusted EBITDA margins have dramatically expanded. We continue to see strong free cash flow. Mike is going to talk a little bit more about this, but with a target of around $20 million this year and increasing next year. And again, we've strengthened our balance sheet by paying down debt, extending the maturity of our debt by 6 years, lowering our debt leverage and with forecasted continuing deleveraging. And again, we've boosted our liquidity with the new revolver. So with that, I'm going to turn the call back over to Mike. Michael Hill: All right. Thank you, Jack. And I think Jack covered a lot of these points on the financials for the quarter, so I'll just make a few additional comments here. On the income statement for Q3, revenues were as expected when taking into consideration our recent divestitures. Q3 gross margins increased from Q2 as expected as a result of the higher margins realized in our ongoing product lines. Our adjusted EBITDA and adjusted EBITDA margin came in as expected with our adjusted EBITDA margin of 32%, up from 21% from the third quarter of 2024. And we still expect full year adjusted EBITDA margin of around 27%. For the third quarter of '25, GAAP operating cash flow was $6.9 million. And as Jack mentioned, free cash flow was $6.7 million. Our full year 2025 target free cash flow remains at around $20 million. And on our balance sheet at the end of Q3, we had outstanding net debt of approximately $217 million, factoring in approximately $23 million of cash on our balance sheet, which is about a 3.8x net debt leverage ratio to trailing adjusted EBITDA, and we're on track to hit our target of 3.7x net debt leverage by year-end. For guidance, for the quarter ended December 31, 2025, we expect reported total revenue to be between $46.4 million and $52.4 million, including subscription and support revenue between $44.1 million and $49.1 million, for a decline in total revenue of 27% at the midpoint from the quarter ended December 31, 2024, this year-over-year decline is primarily due to the divestitures completed earlier this year. Fourth quarter 2025 adjusted EBITDA is expected to be between $13.8 million and $16.8 million, which at the midpoint is a 3% increase as compared to the quarter ended December 31, 2024. Fourth quarter adjusted EBITDA margin is expected to be 31% at the midpoint, which is a 900 basis point increase from the 22% adjusted EBITDA margin for the quarter ended December 31, 2024. For the full year ending December 31, '25, we expect reported total revenue to be between $214 million and $220 million, including subscription and support revenue between $202.5 million and $207.5 million for a decline in total revenue of 21% at the midpoint from the year ended December 31, 2024. This year-over-year decline, as I mentioned, is primarily due to the divestitures completed earlier this year. Full year 2025 adjusted EBITDA is expected to be between $56.5 million and $59.5 million, which at the midpoint is an increase of 4% from the year ended December 31, 2024. Full year adjusted EBITDA margin is expected to be 27% at the midpoint, which is a 700 basis point increase from the 20% adjusted EBITDA margin for 2024. Now additionally, I'll note that we lowered the midpoint for our full year 2025 total revenue and adjusted EBITDA guidance ranges by $800,000, primarily as a result of lower forecasted perpetual license revenue, but I'll point out that the midpoint of our subscription support revenue guidance range remains unchanged. So to recap, our product portfolio is now much more focused around the KCM market. Our core organic growth rate is in a positive multiyear uptrend from negative 2% 2 years ago to negative 1% last year to now around positive 1% this year, and we are targeting 3% next year and 5% plus thereafter. Big new customer wins have validated our product market fit in several key markets, and those major wins have validated our product AI strategy. Our adjusted EBITDA margin is in a significant multiyear expansion trend to over 30% here in Q3, noting that our margins are always highest in the back half of each calendar year. And when we zoom out, we see adjusted EBITDA margins expanding further from 20% last year in 2024 to our guidance midpoint this year of 27% to a target of 29% plus next year, a target of 31% plus in 2027 and then, of course, our long-term operating model target of 32%. Cash flows remain strong as we continue to target around $20 million of free cash flow this year, as I mentioned, and we're targeting an increase of about 10% next year, so targeting around $22 million of free cash flow next year. We have significantly strengthened our balance sheet, improved our liquidity, paying down $242 million of debt since the beginning of last year, refinanced our debt, extended the maturity by 6 years out to July 2031, added $30 million undrawn revolver, providing us with ample liquidity, and we are forecasting continued deleveraging with our free cash flow generation. So with that, I'll pass the call back to Jack. John McDonald: All right. Thank you, Mike. Let's open the call up now for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Scott Berg with Needham. Scott Berg: I guess, I got a couple. You guys had a much better core organic growth quarter here, as you called out. I think Jack mentioned targeting 3% next year, 5% next year. Maybe it was Mike, I apologize, I didn't write down who it was. But tell me 1 quarter is never quite a trend. I guess what are you seeing in the current sales pipelines and the opportunities that you're working that gives you confidence that those targets look reasonable to achieve over the next year or 2? John McDonald: Yes, I think you're right. One quarter doesn't make a trend. And of course, as I indicated, things will bounce around quarter-to-quarter. But as Mike pointed out, the long-term trend is positive, right? In '23, we were negative 2%, in '24, negative 1%. For full year '25, looking at positive 1% and then again, targeting 3% for full year '26. So I think the overall trend is good. The green shoots that we're seeing that give us confidence in that outlook are some of the larger deals I talked about. For a number of years, we were not getting those larger deals. And now with the work that's been done to AI-enable the product portfolio and to position some of our core knowledge and content management products as key parts of enabling tech and these broader enterprise AI implementations and driving partnerships with some of the biggest players in the market, the Microsoft and Amazons of the world. We're starting to see some of these in Google. We're starting to see some of these larger opportunities. So I mentioned a $2 million multiyear deal for a Fortune 100 tech company, a $1 million multiyear deal for a major pharmaceutical company. It's the opportunities in the pipeline for those larger deals that give us optimism as we go into next year. Scott Berg: Helpful there. And then I guess I wanted to ask a clarification on the fourth quarter guidance, Mike, you mentioned license revenue is going to be down about $800,000 in the quarter than prior expectations. Is that a deal that just flipped subscription and you won't take the revenue in the quarter? Or is that something that moved out? Just maybe help understand what that movement is relating to. Michael Hill: Yes. Most of that $800,000 is a perpetual license revenue that we had originally projected, forecasted that doesn't look like it's going to happen. So that's just pure license revenue, Scott. Now there's a small bit of professional services revenue as well that won't show up either to kind of combine to make that $800,000. And of course, that falls to the bottom line on EBITDA. So that's why subscription support revenue guidance at midpoint remains the same. Scott Berg: Helpful, Mike. And I'll just sneak one last one in here is on the quarter. Any change to gross revenue retention trends or maybe net that helped drive the 3% growth number? Michael Hill: We -- so we don't report on net dollar retention rates during the year. That's a year-end metric. We did see -- excluding the divestitures, that was 99% at the end of last year, at the end of 2024. And we're targeting to remain in the upper 90% here this year. So I think those trends are sort of intact and consistent. Operator: Our next question comes from the line of DJ Hynes with Canaccord. David Hynes: Congrats on a nice quarter. It seems like pretty down the middle print. Good to see the improving growth in margins. And Jack or Mike, I appreciate your comments. Jack, maybe just one for you. As you look at the opportunity and think about the growth matrix going forward, how much should come from installed base versus net new? And I guess the follow-up to that is like does the presence of a couple of these key products in the AWS Marketplace help with either of those efforts more than the other? John McDonald: So in terms of growth from the installed base versus net new, if you look at our net dollar retention rates over the past few years, they've trended up from low to mid-90s to upper 90s. And so that's providing a solid foundation for growth. And now we just need to stack some of these growth deals with new customers on top of that to get to growth targets. And so as we look at where that's going to come from, it's really around our knowledge and content management product portfolio, which is roughly 75% of our revenue and products like the ones we've talked about, RightAnswers, BA Insight, Panviva, Qvidian, InterFAX and others will play a key part in that. David Hynes: And then a follow-up just on AWS, the marketplace. Like is that a tool that's more powerful for making it easier for existing customers to buy more? Or is it like a discoverability that may help with landing new customers? John McDonald: Yes, it's a little bit of both. And so it's positive on both fronts there. And then there are broader partnerships, right, with some of these major players whereas folks are going in and doing these agentic enterprise AI implementations, having a knowledge solution that is auditable and reliable and not prone to hallucination is key. So some of these sort of headless knowledge management opportunities where we are part of a broader enterprise AI implementation. I think that's going to be a promising area for us over the next couple of years here. Operator: And our last question comes from the line of Jeff Van Rhee with Craig-Hallum. Jeff Van Rhee: Jack, on the sales and sales execution, you guys are constantly trying to refine the process. Just maybe spend a second there, what's working, what's not? How are you tweaking the process at this point? John McDonald: I think what's working is upgrading the sales force, bringing in more expert domain sellers on the field side. What's working is the SEO strategy that we began rolling out a few years ago. So we're getting higher quality leads into the hands of those salespeople and our SDR team has been doing a nice job there. What's working in early stages, but we're starting to see some promising results from is the use of intent data from platforms like 6sense to refine our outbound motions. And frankly, it impacts our inbound motions as well to really focus in on prospects that are in the market actively looking for solutions. I'd say what's working is the investments that we're starting to make in channel and specifically in working more closely with larger partners like Amazon and Google and Microsoft to play our role in some of these larger enterprise AI implementations. So I think those are all green shoots on the demand gen and sales side. It's not going to be perfect every quarter, and we've got sales cycles to deal with and all of that. So as I mentioned before, it will bounce around quarter-to-quarter. But I think the long-term trend here, as we talked about, is positive. Jeff Van Rhee: And maybe just a similar question on the development side. Obviously, with the remaining portfolio trying to drive up those retention numbers, you want to stay on the leading edge of innovation. How do you feel about the pace of new product introductions? Kind of any call-outs there in terms of trend that gives you some measurables around how quickly you're innovating versus maybe what you were a year or 2 ago? John McDonald: Yes. It's a dramatic improvement. It really started with the center of excellence in India as a core for our development effort. Obviously, our development efforts are broader than that. We've got onshore teams as well as offshore teams in India and elsewhere. But the work that's been done across the board in terms of solidifying the foundations, increasing uptime and availability and reliability of the products, in terms of introducing AI into the product portfolio and smartly and efficiently AI enabling these products where it makes sense. In terms of the partnership with product management to make sure we're prioritizing the right items in the road map to meet the demands, both of existing customers and of new prospects. It's been a steady improvement over the past 3 or 4 years, like Dan Doman and his team. Dan is our Chief Product and Operating Officer and his team, a tremendous amount of credit there. And it's been steady progress, one foot in front of the other. And now we look back on what's been done over the past 3 or 4 years, and it's really starting to bear fruit. And we're seeing it, frankly, again, in getting a shot at these larger deals and starting again to land these million-dollar deals, multimillion dollar, multiyear deals, which we frankly hadn't seen for a while. So yes, that's the picture there. Jeff Van Rhee: Good. And maybe last, if I could sneak, the last one in here on the perpetual reduction. Was that presumably as a new customer? And is that an instance where that revenue is gone or just pushed out? If it's gone, was it a competitive deal you just lost? If so, why? I know that's maybe 5 questions, but if you can tackle that, that would be great. Michael Hill: Jeff, yes, it wasn't just one customer. It was just the perpetual license revenue. We typically have a Q4 uptick. We just didn't see it this year. And it's really -- it's not some big story or some big target that went away. So it's just a little bit less on the perp license side. Operator: That concludes the question-and-answer session. I would like to turn the call back over to Jack McDonald for closing remarks. John McDonald: Okay. Well, thank you so much. We look forward to seeing you on the next earnings call. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Cars Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Katherine Chen. Please go ahead. Katherine Chen: Good morning, everyone, and thank you for joining us for the Cars.com Inc. Third Quarter 2025 Conference Call. With me this morning are Alex Vetter, CEO; and Sonia Jain, CFO. Alex will start by discussing the business highlights from our third quarter. Then Sonia will discuss our financial results in greater detail, along with our outlook. We'll finish the call with Q&A. Before I turn the call over to Alex, I'd like to draw your attention to our forward-looking statements and the description and the definition of non-GAAP financial measures, which can be found in our presentation. We'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses, adjusted net income and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with our earnings press release and in the appendix of our presentation. Any forward-looking statements are subject to risks and uncertainties. For more information, please refer to the risk factors included in our SEC filings, including those in our most recently filed 10-K, which is available on the IR section of our website. We assume no obligation to update any forward-looking statements. Now I'll turn the call over to Alex. Alex Vetter: Thank you, Katherine. We were pleased to achieve record revenue and drive strong customer and product momentum in the third quarter on our path to reaccelerating growth. Revenue of $182 million reflected continued contribution from websites, trade and appraisal solutions and marketplace. Dealer count increased for the third consecutive quarter as we reached a new 3-year high with marketplace, in particular, outperforming expectations. Top line strength, combined with our strong operating model, enabled investments for innovation, while also producing adjusted EBITDA margin of 30%, up over 160 basis points year-over-year. And resulting cash generation supported another $19 million of share buybacks in Q3 for a total of $64 million year-to-date. It's clear that our consistent execution is delivering compounding benefits, and we feel confident there is more improvement to come. Our strong focus on 2025 growth initiatives continue to deliver measurable progress for the business in the third quarter. First, sales velocity and driving unit volume has lifted marketplace and solutions performance. Under new sales leadership and enhanced go-to-market strategy, we added 270-plus dealers year-over-year with subscriptions up across all our leading products. In total, we powered 19,526 dealers in Q3, our largest customer base since late 2022 and only a few hundred dealers away from an all-time record. New franchise dealer sign-ups also increased appreciably quarter-over-quarter in Q3, complementing the share gain amongst independent dealers that we achieved in the first half of the year. Dealers consistently cite our unique consumer audience, data insights and differentiated product suite as key factors that are motivating them to join our platform. Second, our phased marketplace repackaging exercise intended to align pricing with product value and enhance platform benefits for dealers launched in early summer. By bundling media products and features in new Premium and Premium Plus packages, we are helping dealers drive up to 14% more leads per listing versus base packages. And we anticipate adoption of Premium Plus to accelerate with growing dealer awareness of these benefits. Finally, our product team remains at the forefront of helping consumers, OEMs and dealers navigate the changing auto retail landscape. We are putting AI-powered search and recommendations in the hands of marketplace shoppers and simultaneously enhancing lead conversion for dealers through advanced analytics. Through our appraisal and wholesale capabilities, we are also directly helping dealers address used car scarcity and specifically how to profitably source attractive late model inventory. And we continue to be the only platform with integrated B2B wholesale and B2C retail capabilities, a key value proposition as dealers look for innovation and operating leverage. Our multifaceted AI-first platform makes us essential for both consumer and dealer customers. We are seeing clear signals of traction in our platform strategy. Starting with marketplace, we fired on all cylinders in Q3 with momentum carrying into October. We drew 25.4 million average monthly visitors, up 4% year-over-year, leveraging better optimization of our visitor acquisition strategy to attract strong consumer demand. Traffic year-to-date was 488 million visits through the end of Q3, setting a new record. Our leading editorial and brand expertise is evident from third-party data that shows that we were most cited public automotive marketplace across AI tools like Google AI overviews and ChatGPT with double the citations of our closest peer. And we continue to leverage our strong brand and steady stream of in-demand content as an integral part of our product and marketing strategy in this evolving landscape. AI is central to our product innovation road map as we enhance the quality of our marketplace to deliver a best-in-class personalized shopping experience for car buyers. Carson, our newly launched natural language search assistant gives users an interactive experience more akin to a conversation you have with an AI agent to complement traditional search results. Carson currently assists 15% of searches and search refinement on web and mobile today. Compared to the average shopper, AI users also save 3x more vehicles to revisit later, a sure sign that we're fueling deeper consumer engagement. Just like we were a pioneer with AI integration on the Cars.com website, our next milestone will be integrating Carson into our #1 most downloaded automotive marketplace app. Mobile apps are our highest converting channels, and we believe AI-powered targeted search results may lift conversion even further as we drive search efficacy and our marketplace flywheel. For dealers who subscribe to our marketplace, we continue to deliver high-performing tools for their sales and marketing teams, embedding into their tech stack to drive engagement, conversion and ultimately, sales. Shopper alerts, which we launched in the third quarter to fast follow our new lead intelligence reports, proactively flag shopper engagement and buying indicators to dealers. Over 50% of marketplace customers have already used this feature at least once in its first 2 months of launch. And as you can see from customer feedback, shopper alerts are quickly becoming a key part of dealership workflow, helping salespeople identify the best prospects to close more sales. With such an enthusiastic response, we're quickly iterating to provide richer data and AI-driven insights directly into dealer CRMs, both with incumbent players and through new investments in disruptive technologies as we unlock the full potential of our platform with more AI and SaaS-based solutions. Turning to our trading and sourcing solutions. AccuTrade and DealerClub continue to scale in Q3 as dealers increasingly gravitate to tech-first products that advance the industry's long-term goal of improving profitability. The recent success of digital dealers who rely heavily on acquiring vehicles directly from consumers has put an even finer point on the importance of a diversified vehicle acquisition strategy for driving up GPUs. AccuTrade and DealerClub address this gap by allowing dealers to acquire from either Service Lane or other trusted dealers backed by the most accurate vehicle values in the industry. Accu Trade grew to 1,150 subscribers in Q3 and DealerClub increased its active users by nearly 40% quarter-over-quarter. We're also pleased to share that AccuTrade surpassed 1 million quarterly appraisals, a milestone that points to enthusiastic and growing customer engagement. Importantly, over 50% of vehicles acquired via AccuTrade are between 1 and 5 years old, highlighting the attractive pool of in-demand late-mile inventory that dealers access when they expand beyond traditional and physical auctions. New this quarter, dealers can now easily analyze their AccuTrade activity via profit funnel and trade capture reports, seeing how much profit is made on AccuTrade versus non-AccuTrade cars and conversion rates on appraisals. We're excited to see these products and features further scale as we continue to innovate. Lastly, total subscribers for Dealer Inspire and D2C media websites reached nearly 7,900 in Q3. We have grown website subscriptions for 5 straight years, an impressive feat that speaks to our differentiated technical capabilities and support model. Similar to marketplace, website customers are also benefiting from our AI leadership. Our dealer websites also support discovery and data processing by popular AI search tools, and we are now proactively enabling customers to improve their own site visibility. By building more consultative relationships and innovating on behalf of customers, we're confident we can further expand our market share. Across marketplace, websites and appraisal and wholesale, we delivered triple-digit dealer count growth for the second straight quarter. We also achieved ARPD growth on a sequential basis, consistent with our expectations that repackaging and cross-selling would lift performance beginning in Q3. We're on pace to surpass all-time records for both direct dealer customers and ARPD before the end of 2026 on our way towards greater targets as we expand and enhance our product offering. While dealer revenue was at its healthiest level in several quarters, we did see some variability in OEM and national revenue, which was down 5% year-over-year in Q3. Specifically, 2 OEM partners significantly adjusted their media investments during the fall due to factors like internal agency changes that are unrelated to our performance or value. I'll also note that both of these customers remain advertisers on our platform, and we're in active talks to win a greater share of their forward spending. As we discussed in prior calls, our OEM revenue pipeline is strong. Planning discussions for 2026 have been positive and our unique ability to drive better Tier 1 to Tier 3 outcomes via our marketplace is a winning asset for automakers as they compete for consumer demand. We're confident that this segment can resume its growth trajectory in the coming quarters and continue to be a strong contributor to revenue and margin expansion. Looking at this quarter as a whole, I'm pleased that our steady execution is showing up in the P&L and in positive trends that point to more gains ahead. We're driving our business forward, growing revenue and gaining customer market share, all while continuously innovating. Q3 is the right step in the right direction, and we're focused on finishing the year with a healthy exit rate so that we can deliver even better results as we continue scaling our leading platform. And now I'll turn the call over to Sonia to discuss our third quarter financial results. Sonia? Sonia Jain: Thank you, Alex. We delivered a strong third quarter across multiple key financial metrics, producing record revenue, adjusted EBITDA expansion and robust cash generation. Consistent execution of 2025 growth initiatives has been our top priority, and our new revenue trajectory reflects the positive changes we've implemented year-to-date. We're also confident that as these improvements compound in our subscription business, both revenue and margins will accelerate in the coming quarters. Starting with our revenue discussion. Third quarter revenue was $181.6 million, up 1% year-over-year and in line with our expectation for low single-digit growth in the second half of the year. Dealer revenue was up 2% year-over-year, driven by favorability from repackaging activities and better customer count. Our ongoing repackaging work resulted in successful renegotiation of additional OEM website agreements and the phased launch of new marketplace packages in Q3. As Alex mentioned, our top 2 marketplace peers now bundle more media features for better vehicle merchandising and promotion, helping dealers attract and convert in-market shoppers. Migration of legacy preferred customers into new Premium and Premium Plus packages was 100% complete as of the end of October. I'll also note that we've seen very few cancellations attributable to this exercise, another encouraging signal of the value dealers see in our marketplace. Marketplace, our most scaled solution, is also the tip of the spear for customer acquisition and cross-selling and key to winning dealer market share over time. It's therefore encouraging to see that marketplace continues to be the biggest quarter-over-quarter contributor to dealer count growth and is the linchpin for our net gain of over 300 dealer customers since the start of the year. We have multiple levers to inflect ARPD, driving new customer growth as well as upgrading package tiers and cross-selling against our installed base. And this is amplified by our improved pricing. We saw early signs of these levers in action in Q3 with ARPD up 1% quarter-over-quarter, and we are optimistic that trends will improve as these positive changes gain further traction and annualize. Overall, dealer revenue growth more than offset near-term noise in OEM and national revenue, which was down just under $1 million or 5% year-over-year. As previously mentioned, lower spending by 2 customers accounted for almost the entirety of the OEM revenue decline in the quarter, and we're already at work rebuilding the revenue pipeline with those partners. More broadly speaking, media investments did taper in September as the industry digested large-scale changes like strong pull-forward demand from expiration of EV credits and continuing shifts in production as well as downward revisions in SAAR. Given last September was our best month of OEM revenue for 2024, we also had a challenging comp that accentuated this late quarter trend. We're observing that OEMs continue to prefer more flexibility in the current operating environment. And as such, we expect their ad spending may fluctuate through the end of this year. However, we remain confident in our audience and value delivery and in our ability to power growth in this segment. Turning to our cost discussion. Third quarter operating expenses were $165 million, down 2% year-over-year. Compared to the prior year period, cost efficiencies in headcount and lease-related expenses as well as lower depreciation and amortization fully offset new dealer club costs and slightly higher marketing and G&A spend. Adjusted operating expenses were $150 million, down 4% year-over-year for substantially similar reasons. For the following line item detail, all comparisons are on a year-over-year basis, unless otherwise noted. Product and technology expenditures decreased $1.6 million on a reported basis and $1 million on an adjusted basis, fully offsetting dealer club costs through lower compensation and third-party fees. Marketing and sales increased $1 million on both a reported and adjusted basis, reflecting marketing investments. And general and administrative expense was up $2.8 million year-over-year on a reported basis, but was roughly flat on an adjusted basis. The reported increase was primarily due to increased third-party costs that were partially offset by savings from the lease amendment completed in Q4 2024. Net income for the third quarter was $7.7 million or $0.12 per diluted share compared to net income of $18.7 million or $0.28 per diluted share a year ago. The difference in net income is primarily due to changes in the fair value of contingent consideration for prior acquisitions that were included in the prior year period. Adjusted net income for the third quarter was $30.4 million or $0.48 per diluted share compared to $27.7 million or $0.41 per diluted share a year ago. Adjusted EBITDA of $55 million in the third quarter grew 7% year-over-year, benefiting from both higher revenue and cost controls. Third quarter adjusted EBITDA margin of 30.1% demonstrated strong revenue flow-through, benefit from the cost management initiatives described earlier and timing of certain costs. Now on to key metrics. Dealer count was up in the third quarter based on strength across all of our major product brands. Websites grew sequentially by 67 subscribers with most of the growth coming in the U.S. AccuTrade grew by 82 subscribers sequentially, about half of whom came from the enterprise deal announced last quarter. Third quarter ARPD was $2,460, up 1% quarter-over-quarter and down slightly year-over-year. Recent customer and product mix shifts like faster independent dealer growth and lower media attach rates continue to have a near-term leveling effect on this metric. However, as previously discussed, we have multiple ways to inflect ARPD over time. First, new customer acquisition and continued up-tier migration will both benefit from new marketplace and website rates. A good example is Marketplace Premium Plus adoption, which grew 50% month-over-month from September to October as dealer awareness increased. Second, moving website customers up-tier remains a substantial opportunity. Recall, roughly 70% of marketplace customers are in a premium or better subscription relative to just 50% for websites. Third, cross-selling additional products like AccuTrade or media add-ons to marketplace customers can be as much as a 60% jump relative to current ARPD. The multiplier effect is especially evident when looking at customers who utilize all 4 of our brands and have an ARPD that is 3x higher than our reported average. With these levers at our disposal, we are confident in future ARPD improvement as we expand our platform's reach. Now over to cash flow and the balance sheet. Net cash provided by operating activities totaled $115 million for the first 9 months of the year compared to $123 million for the comparable period last year. Recall that the earn-out for the D2C acquisition has a contractual step-up from year 1 to year 2 and accounts for the majority of the variance in operating cash flow. Free cash flow was $94.5 million year-to-date, down slightly year-over-year from the acquisition items mentioned above. Year-to-date, share buybacks totaled 5.2 million shares for $64 million as we utilized more than 2/3 of free cash flow for our repurchase program. Last quarter, we raised our full year repurchase target to $70 million to $90 million, and we're pleased to be on pace to finish the year towards the high end of that range. We also paid down $5 million of our revolver in Q3, bringing debt outstanding to $455 million as of September 30, 2025, equivalent to a total net leverage ratio of 1.9x. Notably, this is also the first time that we have sat below the low end of our target net leverage range of 2 to 2.5x. Total liquidity was $350 million as of September 30, 2025, which provides us ample capacity for capital allocation priorities and other avenues of value creation. And now we'll conclude with outlook. We are reaffirming our expectation for low single-digit revenue growth year-over-year in the second half of 2025. We expect to achieve this target through continued execution of our growth initiatives, namely improved dealer count and product adoption and repackaging for marketplace and websites. As in the prior quarter, this outlook assumes today's macroeconomic conditions as a stable baseline for the remainder of the year. Considering third quarter trends and historical fourth quarter performance, we believe that some degree of discretionary media investment is subject to greater variability, both to the upside and the downside from factors like pull-forward consumer demand, inventory levels, new model launches and manufacturer incentives. We are also reaffirming adjusted EBITDA margin outlook for fiscal 2025 between 29% to 31%, reflecting disciplined cost management, high contribution margin from pricing initiatives and revenue growth. Looking ahead, we remain focused on execution and are confident we will deliver improved operating and financial results. And with that, I'd like to open the call for Q&A. Operator? Operator: [Operator Instructions] Your first question is from Tom White from D.A. Davidson. Thomas White: Two, if I could. I guess, first off, just on the drivers of revenue in the third quarter. It was impressive to see that you delivered a bit of kind of upside versus kind of expectations on revenues despite national kind of declining sequentially when I think we all have our fingers crossed that it might be up a little bit. So just can you help us -- I guess what I'm trying to understand is on dealer revenue, kind of the -- obviously, you guys are doing stuff on repackaging and product. But maybe first off, just like on the industry backdrop and you added dealers again for the third straight quarter. It sounds like you're going to add dealers again, and it sounds like marketplace is kind of maybe one of the main areas where you're adding dealers. I don't know, how would you kind of characterize how dealers are sort of navigating the current just kind of industry backdrop? Like are they leaning into you guys on marketplace because they're -- they need to find new sources of demand? Is it because of maybe the word is getting out that some of the new media stuff that you're adding to the higher tiers is really attractive. Sorry, it's a long-winded question, but just maybe just trying to unpack that a little bit. And then I have a quick follow-up. Alex Vetter: Tom, thanks for your question. I'll start, maybe then Sonia can give some color on the revenue mix. But I'll start. Obviously, manufacturers have got some near-term headwinds that certainly are impacting their business. We feel good about the business because overall enthusiasm for our audience, particularly the concentration of new car shoppers that we have in our marketplace, remains scaled, healthy and strong. And so the vast majority of our OEM partners are leaning in, not only this year, but also next year. We did have some pullback in the quarter from 2 OEMs that were temporary in sentiment, not performative, meaning that they had their own internal issues that delayed their investments with us in the period. That's why we feel fundamentally bullish about the business overall and our ability to continue to grow OEM revenue heading into next year and beyond. I think on the dealer side, it is a little bit of a mixed bag right now. I think dealerships are struggling with softening demand. And the vast majority of dealer investments are chasing impressions and clicks across the Internet. And I think the smart dealers are realizing tapping into in-market car shoppers who are actively in market is a much surer path to sales. And so we're pleased with dealer adoption not only in the quarter. And as you noted, that growth continued into October. And so we're feeling good about dealers realizing the strength of our scaled audience. Certainly, some of the product innovation that we're doing on the AI front has garnered some dealer interest as well. But ultimately, we feel like the market is realizing our strength and our value. Sonia, do you want to comment on the revenue buildup? Sonia Jain: Yes. Thanks for the question, Tom. Just to add a little bit more incremental color. I mean, I think we're pretty pleased to see growth across all of our dealer product lines. Repackaging was probably the most immediate benefit to the quarter as you think about revenue. We had repackaging in marketplace with upgrades into premium and then the launch of our new Premium Plus package. And also, we continue to work on optimizing our website packages. I think the new dealer customer adds we've had in kind of really since the beginning of the year with the exception of January, we've grown dealer count month-over-month is really just adding additional fuel to how we think about the opportunity to continue growth on a go-forward basis as we upgrade and cross-sell those incremental new dealers coming into the mix. Thomas White: Okay. That's really helpful. Maybe just a quick follow-up on that. I think I heard you say that in marketplace, maybe 70% of the dealers were on something other than just sort of the base tier, but it was lower in websites. So I guess as you think about -- how should we think about like what products you might maybe add to higher tiers in website to kind of get -- to get folks to upgrade? Is it more like kind of media add-ons? Or just any color you can share there and maybe a time line for how you expect that to roll out? Alex Vetter: Yes. Look, I think one of the strengths of our platform strategy, Tom, is that our innovation can take place on our marketplace, and then we can deploy that technology to our dealer partners on their website. So one of the big benefits that our website customers enjoy over the last year is the fortification of our cloud infrastructure to make sure dealer websites are meeting and beating core web vital standards because we're able to leverage our larger infrastructure to optimize speed and performance. That's sort of an underlying benefit of our platform model. I think if you look at what we've done on Cars.com with launching Carson and OpenText, generative AI search, we can now deploy that technology on dealer websites. So that's one of the utilities that we're looking ahead towards next year. But then obviously, just even indexing dealer websites into the LLM. We use Cloudfare technology to help index Cars.com listings into the AI models. And now that we have our dealer websites fortified with Cloudfare as well, we can do more for dealer websites and get their content indexed in the LLMs as well. So I think there's multiple benefits for dealers running on our backbone platform, but the product innovation is accelerating in the company, and we're excited to keep that going. Operator: Your next question is from Gary Prestopino from Barrington. Gary Prestopino: Sonia, really interesting when you're talking about the amount of entities that -- on dealers that have moved to repackaging and website that have moved to repackaging. You also gave some statistics on what the lift is in ARPD for some of these repackaging efforts, and I didn't quite get that. Sonia Jain: The lift to ARPD, I mean, I think overall, we're pretty happy to see the sequential momentum that we started to achieve in ARPD. So we saw quarter-over-quarter growth. And I think that puts us on strong footing as we look from Q3 into Q4 to continue to accelerate that. We didn't -- I don't think we gave specific color on the portion of ARPD that was driven by packages. But what may be helpful is to understand like the spread difference between a Premium and Premium Plus package. One of the key differentiators -- and those are marketplace packages, one of the key differentiators between those 2 packages is we bundled VIN Performance Media into the Premium Plus package. That's something that retails for around $1,500 a month, but obviously, for our Premium Plus customers since it's bundled, they're going to be getting a slightly better rate than that. But it will give you a sense for how we're trying to create differentiation, not just in price, but also in terms of the overall value delivery we're offering to dealers across our packages. Gary Prestopino: Okay. I thought I heard you say something about a 3x lift. So that's why I asked the question. And maybe I just typed... Sonia Jain: Yes. I did talk about that as like an example of platform value and how as we increase product penetration, we're able to really meaningfully lift ARPD. And I think the stat that I shared was that dealers who use our major product pillars will have a 3x higher ARPD than our reported average. Gary Prestopino: Okay. That's great. That's what I wanted to get to. And then Alex, in terms of both AccuTrade and DealerClub, it's good to see that these things are starting to get more traction. But in terms of appraisals versus actual sell-through to the dealer from the appraisal, can you kind of slap some metrics on that? And then in terms of DealerClub, I know it's real early, but if you could give us some indication of what kind of volume is going through DealerClub, that would be real helpful. Alex Vetter: Sure, Gary. Well, first of all, we were really pleased with the growing dealer participation in AccuTrade as well as the improving appraisal volume. It's showing what we believe is a very durable trend of dealers realizing that sourcing cars directly from customers is a far more profitable strategy than traditional or legacy auctions. And so that realization is helping every dealer recreate the advantage of creating more inventory in their own service lane, which increases our supply. And then also, it creates demand within their own dealership because now their customers need new cars. And so we think this is a very durable strategy that dealers are adopting. You're seeing dealers talk more at 20 groups about how they can source more cars directly. And we've got the tooling to enable them to do that at scale and on a very low-cost basis. When you think about the cost of an AccuTrade subscription, it dwarfs what buying cars at auctions is costing the industry. So again, very healthy trends on dealer adoption and appraisal volume. I think DealerClub obviously complements this strategy, which is enabling dealerships to trade cars amongst themselves as a collective as opposed to paying the mighty toll booth operator, the physical auction. And so dealer adoption on DealerClub, we're pleased with it. As you know, it's very early stage. We're barely getting started here with DealerClub, but we're pleased with the initial momentum that the platform is generating on a very low cost basis because it's part of our platform strategy, meaning that we're leveraging the infrastructure that we have today in-house. Dealers are pleased that now we're showing them their aged inventory from our marketplace in the club, and they can immediately launch those cars to a wholesale auction with limited to no additional data entry. And so stay tuned. We're going to continue to invest in the product platform and give dealers more tooling that makes their workflow even easier, but very pleased with the initial momentum, both with AccuTrade and DealerClub. Operator: Your next question is from Rajat Gupta from JPMorgan Chase. Rajat Gupta: I had one broader question on just the competitive landscape. One of your peers recently announced their intention to go private. We've had some tough results from some of our other public peers on the marketplace side, on the auction side, on the used car side. I'm just curious that if you're observing any changes in the competitive landscape, be it pricing, be it more adjacent players maybe participating in the market. And I'm curious if anything has taken a step change in recent months that you're seeing? And if anything, like how are you planning to navigate that? And I have a quick follow-up. Alex Vetter: Yes. Look, Rajat, thanks for the question. I think on the competitive landscape, while there could be changes in terms of public versus private, we look at the competitive landscape a little bit differently in that dealerships are trying to drive traffic to themselves directly, and they're spending inordinate amounts of capital trying to interrupt consumers, while they perform other tasks to drive them into their stores. The benefit of our platform strategy is we're the largest concentration of organic car shoppers that are spending their shopping time researching and deciding what and where to buy on our platform. And we think savvy dealers are realizing that interruptive advertising is less efficient than native marketplace traffic that we can source and drive consumers directly to their stores, particularly as average dealers are trying to compete with Carvana and larger platforms using Cars.com as a demand engine for their business, we think, is a no-brainer. And so I look at the competitive landscape more about how do we get dealers to spend less on Google or less in traditional media and do more digitally first and foremost. I've got tons of respect for my digital peer set. I know auto is a very competitive category, but we feel very confident because, again, we source the majority of our traffic organically or directly. And so we're a complement to dealers and their advertising mix. I also will say our platform strategy is differentiated. We're now powering north of 9,000 dealer websites, helping them optimize their retail presence online. We're giving them tools to operate their business more -- with more self-sufficiency, which we think we can help overall bring their profitability to new levels. And so we're excited about our innovation road map on AI and what that can do and help dealers add capabilities to their business. And again, like marketplaces are competitive, but we've got a much more differentiated and ambitious strategy. Rajat Gupta: Understood. Understood. That's helpful. And then within your dealer demographic, I mean, is it possible to provide a split across if it's a meaningful difference across like luxury, domestic or import on the franchise dealer side? I ask only because we're starting to see some of the European brands feel the brunt of tariffs. It looks like October started off a little weak for those brands. I'm just wondering if that can have any meaningful impact on churn rates, on RPD for your business. And just curious if you're hearing anything as well on that front. Alex Vetter: Well, listen, I know it's a very dynamic marketplace right now. As you know about our business that we tend to skew upmarket. The bulk of our dealers are franchise dealerships. The bulk of our audience tends to be late model, even new car shoppers. That's why we have a large OEM business, unlike our peers because manufacturers know that new car shoppers are also considering late model used. And so we tend to skew upmarket and therefore, don't feel some of the same pressures that perhaps some of the credit challenged or lower end of the market may experience. And so we feel very fortified heading into next year in that the bulk of our audience tends to be more affluent, higher household income. And then our dealer base also remains the stronger side of the market as well with franchise dealers making up the majority of our revenue mix. Rajat Gupta: Understood. Maybe just final one on capital allocation. You're starting to see like a return back to top line growth. You're seeing some good progress with like dealer additions. I'm curious if we can expect -- I'm just trying to see like how you rank order capital allocation today. Is buyback still the #1 priority? Are there other avenues that you're looking at? Sonia Jain: Yes. No, thanks for the question. I think we are still committed to share repurchases as an important portion of our overall capital allocation strategy. Pleased to see how kind of the growth in adjusted EBITDA, in particular, is helping to bring that leverage down. Our net leverage ratio continues to kind of improve. But we're tracking towards the high end of our share repurchase range based on how we've been buying back on a year-to-date basis, and we still see the upside there. Operator: Your next question is from Marvin Fong from BTIG. Marvin Fong: Very nice quarter here. I would like to start on AccuTrade a little bit deeper on that. So kind of consistent in the 70 to 80 dealer addition range in the last 3 quarters. Just like to kind of get a little more color on the pipeline there? And should we kind of think of this as a good pace of adds? Or do you think you can accelerate that? And is it going to be sort of lumpy with sort of the larger enterprise or larger dealers in there or you kind of expect [indiscernible]. And then can you just remind us on that large dealer group that added about half the adds this quarter, how many more stores are in their system that you haven't penetrated yet? Alex Vetter: Yes. Well, first of all, look, we're pleased to close an enterprise deal last quarter for AccuTrade. And that, I think, was about -- just about half the dealer count growth in the Q because we still have steady dealer adoption and growth. We're also basically continuing to see dealer group interest in standardizing their vehicle sourcing strategy, which we think is a big tailwind for AccuTrade because we can provide dealer groups consistent tooling that puts a process in place that they can manage their vehicle sourcing strategy with tools that give them enterprise leverage and consistency in how they run their operation. So we're seeing strong interest and continued dealer demonstrations and a healthy pipeline there. We're also hearing dealers asking us for more inventory syndication capabilities with AccuTrade. So that's on our innovation road map, which could be another tailwind. But we're overall pleased with the organic momentum we have in our dealer count. We think enterprise deals with larger dealer groups can continue to be a strong addition to our platform if we are able to secure more of these enterprise deals in Q4 and beyond. But this is a slow roll strategy that will scale over time, and it certainly adds meaningful ARPD and a high reoccurrence of revenue because the dealers that standardize with AccuTrade, not only does that revenue stay sticky in our platform, but it has a halo effect for our other subscription offerings as well, including DealerClub as well. So we're feeling good about the business. Marvin Fong: Got it. And second question is on AI, everyone's favorite topic. And I guess I'd ask it a couple of different ways. So first, are you seeing any meaningful traffic today that's coming from like a ChatGPT type service? And how -- if so, how is the behavior of those customers? Does it convert to leads any better than other traffic? Alex Vetter: Yes. Well, first of all, thanks for the question. On the AI front, we're very pleased. As we mentioned during the call, when you look at all the leading AI consumer engines, we are, in many cases, 2x our nearest closest publicly traded peer. And so that is a testament to the strength of the Cars.com brand and our decade-long commitment to independent expertise and editorial depth and breadth and quality. And so our strength there is being played back to us by these LLMs that recognize our authority. As you know, auto is a multi-touch omnichannel experience, meaning consumers are seeking out multiple destinations prior to purchase. Our brand strength and our authority in these engines, while it may not generate a ton of traffic today, it is amplifying our brand strength, which is why we had record traffic in Q3 and feel very strong about continued momentum of our marketplace. Consumers are going to seek out trusted independent expertise in auto and these new AI models are firming our brand strength. And so we feel very good about the advent of AI and what it can do for our business over time as well. Sonia Jain: I would just maybe add in addition to what Alex was talking about in terms of how we're showing up in the various like AI search tools, we're also really pleased with how leveraging AI and natural language search on our own marketplace is helping to drive increased consumer engagement. We see on the order of 3x more vehicles saved for consumers who use Carson. They're looking at 2x more listings. They return more frequently. So we're actually playing this as like it's a multipronged strategy, I really believe, to leverage AI to the benefit of the business, and we're seeing it translate into real engagement numbers. Marvin Fong: Right. And that was sort of my second part of the question, I guess, to Carson, are you able to see how many people who are using Carson or your other AI-related search tools, are they purchasing or more attribution can be given the Cars if they are using Carson compared to someone that's not using the AI tools? Or is it too early to say? Alex Vetter: Yes. Obviously, this is still a category where the majority of time is spent online and the purchase is offline. And we know that dealer CRMs grossly under recognize our value delivery. I mean there's only 5 million cars retailed every month in this country, and we know we're saturating the majority of car buyers on our platform. What I like about what we're seeing with Carson is that users are saving more vehicles in their search history. So they're coming back at 2x the rate of other shoppers. They're generating more leads compared to people that are using directed search as opposed to more exploratory. We also know that 70% of our users are undecided on make and model selection. So we're going back to OEMs who previously maybe haven't realized the power of our search engine that they can influence undecided shoppers on our platform. And we're seeing higher conversion rate of these users in terms of tangible leads to dealers. And so consumer engagement is critical to thrive in any marketplace, and Carson is showing us a lot more potential what we can do on the user experience front to connect brands and dealers to our audience using AI as an advantage. So I expect to see a steady quarterly stream of innovations here that both improve user experience and also drive down our operating costs. Operator: Your next question is from Khan Naved from B. Riley Securities. Naved Khan: Maybe just on the marketplace repackaging initiative, I know you've been using opt-ins for dealers to kind of migrate up to the higher tier. Are there -- is there any plan to kind of accelerate that maybe so that more of the dealers can migrate to the higher tiers? Or do you continue to see it as an opt-in move? That's my first question. And the second question I have is just around the traffic growth kind of -- can you just maybe talk about organic versus paid mix and AI overviews, if it had any impact at all, at least from the headline numbers, it looks like not, but just talk about how you're thinking about the traffic. Alex Vetter: Sure. Well, first of all, our sales -- I'll start, Sonia, and then you can maybe comment on the repackaging. I think our sales go-to-market motion is constantly showing dealers the strength of upgrading to our premium tiers. And we've got demonstrable data that shows the more dealers spend, the more value and market share they can get on our marketplace. And so that will be a rolling benefit for us to educate dealers on the strength of higher tiers. And as Sonia pointed out earlier, like we've got a lot of headroom to go there on the repackaging front. And I think we can also continue to introduce new tools and features that help dealers gravitate towards higher spending levels on our marketplace and even cross-selling other solutions. I think also on the AI front, this is early innings. We're really pleased with the initial response that we're seeing with consumers using AI in our marketplace. We also are pleased with how we're showing up, organically, in all the leading LLMs and the AEO optimization strategy, I'd say, is in the early stages here, but our brand strength and our unique content certainly give us distinct advantages to our peers. I don't know, Sonia, what else you'd add to that? Sonia Jain: No, I think, Alex, you covered it really well. I was just going to add on repackaging. We continue to be focused in on the opt-in model. It buys us better outcomes overall with the dealers when they're bought into the rationale and the expectation of why they're moving up-tier. And we've seen good traction with it, right? Like I think we cited a stat in earlier around Premium Plus and we saw a 50% increase in Premium Plus from September to October. So we'll continue to focus on the benefits of moving up-tier in terms of the value delivery creation. Operator: Your next question is from Joe Spak from UBS. Joseph Spak: Sonia, first question just on the guidance. The way you guide obviously give some decently wide ranges based on your disclosures. But if I look at sort of the past few years seasonality, it looks like 4Q EBITDA is about 10% higher quarter-over-quarter, which would mean something around $60 million, which obviously clearly falls within that implied range. I just want to make sure we're all level set. Is that sort of like a good level to calibrate upon? And what do you really think sort of drives the higher end versus the lower end here with basically 2 months left in the year? Sonia Jain: Yes. No, this is a great question. Thank you. I think in terms of adjusted EBITDA, what the benefit that we really saw in Q3, some of it came from revenue, some of the high flow-through on revenue. Some of it came from continued cost management. And then a portion of it was a little bit more timing oriented. So we feel pretty comfortable with our overall adjusted EBITDA range. But I would say getting towards the higher end of that range probably requires some -- a little bit more of that episodic revenue to come in. That tends to be a little bit higher margin. So it would require a heavier lift on, let's say, the OEM and national side of the business to get closer to the high end of the range. Joseph Spak: Okay. And the update there was there's still some pause, and I know they committed to that spend, but it could bleed into next year. Is that still a metric? Sonia Jain: Yes. We're seeing a little bit more like kind of like we talked about in September, some of that pressure has been continuing into October. Now as I mentioned, periodically, we will see as we get towards the end of the year, some of them will lean into those budgets a little bit more. And also, I think some of the overhang production numbers, where SAAR is sitting right now are probably a little bit of a drag on expectations as well. Joseph Spak: Okay. And then on Carson, and I apologize, this might be a very ignorant question, but I'm just trying to sort of understand all the AI stuff. Is it just trained on like the data you have access to, like your dealership customers? Or is it broader? And then out of curiosity, is there anything that prevents other AI agents from accessing the data you have on your site. It sounds like you actually want to feed that. But if you do, is there a way to guarantee that those other solutions almost like don't cut you out and go through your site and not around Cars.com. I don't know if that makes sense or I'm misinterpreting the technology, but if you could sort of... Alex Vetter: No. Joe, it's a great question. So thank you. So Carson, we're leveraging our data infrastructure to power and train Carson. We've got millions and millions of data signals flowing through our systems every day. And so Carson's intelligence continues to be self-thought and self-fed on all these automotive intentions and searches and behaviors. By the way, we put out a press release on Carson today, so you can read more about how consumers are interacting with Carson. Certainly, we let -- the large consumer-facing LLMs are able to train off our data as well. And so while there is risk that consumers can render answers on these other environments, what they do, do is attribute their knowledge to Cars.com. And we think that is incredible brand exposure and leverages our deep authority to make consumers aware that Cars.com has knowledge. And automotive is uniquely a multi-touch category, unlike a lot of consumer goods or low price point purchases, consumers may only seek out 1 to 2 destinations, but buying a car is the second largest transaction in people's lives. They're going to seek out multiple sources of information prior to purchase. And we certainly think the LLMs constantly referencing Cars.com as an authority is going to continue to generate traffic directly to us as consumers go to get additional information, research on which dealerships have the best reputations, what they could expect to pay, any OEM incentives that are available. There's just a lot of information consumption in this category that makes me certain that no one destination can disrupt the 20-year strength of our brand and our content expertise. Operator: [Operator Instructions] There are no further questions at this time. Please proceed with closing remarks. Katherine Chen: Thanks, everyone, for joining the call. We'll see some of you on the road very soon, and I appreciate the support, and have a good day. Thank you. Operator: Ladies and gentleman, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Welcome to Strategic Education's Third Quarter 2025 Results Conference Call. I will now turn the call over to Terese Wilke, Senior Director of Investor Relations for Strategic Education. Mrs. Wilke, please go ahead. Terese Wilke: Thank you. Hello, everyone, and welcome to Strategic Education's conference call in which we will discuss third quarter 2025 results. With us today are Robert Silberman, Chairman; Karl McDonnell, President and Chief Executive Officer; and Daniel Jackson, Executive Vice President and Chief Financial Officer. Following today's remarks, we will open the call for questions. Please note that this call may include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements are based on current expectations and are subject to a number of assumptions, uncertainties and risks that Strategic Education has identified in today's press release that could cause actual results to differ materially. Further information about these and other relevant uncertainties may be found in Strategic Education's most recent annual report on Form 10-K, the 10-Q to be filed and other filings with the Securities and Exchange Commission as well as Strategic Education's future 8-Ks, 10-Qs and 10-Ks. Copies of these filings and the full press release are available for viewing on the website at strategiceducation.com. And now I'd like to turn the call over to Karl. Karl, please go ahead. Karl McDonnell: Thank you, Terese, and good morning, everyone. We are pleased with our third quarter results, especially the sustained strength in our Education Technology and Services segment, supported by strong growth at Sophia and Workforce Edge. On an adjusted constant currency basis, SEI's revenue rose 5% from the previous year. We continue to advance our efforts to leverage technology, resulting in operating expense growth of less than 1%, operating income growth of 39% and a 400 basis point margin expansion. We did incur restructuring costs in the third quarter related to our ongoing productivity initiatives, which accounted for most of the difference between our GAAP and our adjusted results in the third quarter. Adjusted earnings were $1.64 compared to $1.16 from the prior year, an increase of 41%. Turning now to our segments. Our Education Technology Services division generated continued strong growth during the quarter with revenue and operating income increasing by 46% and 48% from the prior year to $38 million and $16 million, respectively. And notwithstanding our continued strong investment in ETS, which included a 44% increase in expenses, ETS' operating margin increased slightly on a year-over-year basis to 41.7%. Sophia Learning, our direct-to-consumer portal that offers high-quality college-level courses and has increasingly become a key component of many of our strategic corporate partnerships, grew both average and total subscribers and revenue by 42%, driven by strong growth in both consumer and employer-affiliated subscribers. ETS' share of SEI's operating income continues to grow and now represents 1/3 of consolidated operating income, reflecting progress with our employer-focused strategy. U.S. Higher Education total enrollment decreased slightly from the prior year, but was more than offset by higher revenue per student driven by fewer drops, less discounting and students taking more courses on average. This resulted in revenue growth of 3% from the prior year. Employer-affiliated enrollment once again remained strong, increasing approximately 8% from the prior year and now represents 33% of all U.S. Higher Education enrollment, an increase of 290 basis points from the prior year. In addition to the strength in our employer affiliate enrollment, U.S. Higher Education's health care portfolio generated strong total enrollment growth of 7% from the prior year. Health care is a critical part of our portfolio, representing half of all U.S. Higher Education enrollments and almost 40% of enrollment from employer partners. Recently, we commissioned a survey in partnership with The Harris Poll, which highlights the ongoing burnout facing the health care workforce and the projected shortfall of clinical health care workers. This research emphasizes the importance of investing in employees' growth and making continuous education a key part of strategies to retain talent. Full survey results can be found on our website at strategiceducation.com. U.S. Higher Education operating expenses decreased by $6 million from the prior year or a reduction of 3%. As a result, U.S. Higher Education operating income almost doubled from the prior year to $23 million, and its operating margin increased 520 basis points. Turning now to our Australia and New Zealand segment. ANZ's third quarter total enrollment decreased 2% from the prior year, driven by the continued regulatory restrictions on international student enrollment. Using constant currency, revenue decreased 2% to $70 million and operating income decreased from $15 million in the prior year to $13 million this year. Notwithstanding the decline in total international enrollment, we are encouraged by the continued progress with domestic enrollment growth and recent guidance from the Australian government that our international caps will increase 3% in 2026. Finally, regarding capital allocation, in addition to our regular quarterly dividend, we repurchased approximately 429,000 shares during the quarter for a total of $34 million. As of the end of the third quarter, we have repurchased over 1.1 million shares for $94 million, leaving us with $134 million remaining on our share repurchase authorization through the end of this year. And finally, as always, I'd like to take this opportunity to thank all of my colleagues here at SEI for their ongoing commitment and support to our students and our employer partners. And with that, Shue, we'd be happy to take questions. Operator: [Operator Instructions] And our first question will come from the line of Jasper Bibb with Truist Securities. Jasper Bibb: I wanted to ask two on U.S. to start. I guess, first, what drove the healthy revenue per student gain in the quarter? And what should we expect on a revenue per student basis over the next few quarters? And then second, a lot better margin than we anticipated in the U.S., too. Just hoping to get a bit more detail on the expense reductions there. Daniel Jackson: Jasper, it's Dan. On the revenue per student, Karl mentioned lower drops and higher seats per student. It was also some lower discounts, and I think we'll see some benefit from that through the balance of the year. So there'll be some upside on revenue per student at U.S. Higher Ed. Karl McDonnell: And on margins, Jasper, we've said before, we're in the midst of a pretty aggressive productivity initiative that's designed to essentially remake our entire expense base. We've got -- through technology and artificial intelligence notably, we've got six different categories that touch all parts of the organization. Our expectation is that we'll probably be able to save upwards of $100 million in operating expenses by the end of '27. Jasper Bibb: Okay. No, that's great. Could you maybe frame where you're at on that journey to $100 million in annual operating expenses? And is that only coming out of the U.S. business or that's company-wide? Karl McDonnell: It's company-wide. In my prepared remarks, I referenced the restructuring that we completed at the end of the second quarter, beginning of the third quarter. On a run rate basis, that equated to probably $30 million of expense reduction. So I'd say there's another $70 million or so over the next 2.5 years. Some of that, we're going to reinvest as growth capital to continue to support the various businesses and some of it will show up as increased margin. Jasper Bibb: Okay. That's great. For U.S., could you maybe frame the relative growth rates for Strayer and Capella at this point? And can you talk about how you're managing each of those businesses in the context of trying to get back to mid-single-digit enrollment growth at the segment level? It sounds like you might already be at mid-single digit for Capella and Strayer is declining. Is that accurate? Karl McDonnell: I'd say that Capella has been stronger. The weakness that we've seen at Strayer is primarily attributable, as it has been in prior cycles, to a reduction in non-affiliated students, but it's also a function of just, frankly, more efficient marketing dollars at Capella. So we don't necessarily -- we're not fixated on spending a set amount at both Strayer and Capella. We tell the U.S. Higher Education management team, solve for whatever is going to result in the overall highest growth for U.S. Higher Education as a division. And over the last 18 months or so, that's been much more effective at Capella. So we've worked to grow Capella at a higher rate of growth than Strayer, and we're seeing that in the performance that's playing out. Jasper Bibb: And then I wanted to ask about Australia/New Zealand, encouraging news on the international student caps. Are you still expecting that business to return to total enrollment growth in 2026? Karl McDonnell: Total enrollment growth, I would like for it to return in 2026. Definitely new student growth in 2026 when we anniversary the caps. It generally takes 4 to 6 quarters of new student growth to overcome any declines you've had over the preceding 4 to 6 quarters. So getting to total enrollment growth by the end of '26 would be a little bit of a stretch goal, but I would definitely expect new student growth beginning in the first part of '26. Jasper Bibb: Okay. Got it. Maybe I misremembered the comment from the last call. Last one for me. As you see it today, do you think the '26 for the company level would align with the notional framework you outlined a few years ago at the Investor Day? Karl McDonnell: Yes. We are very anchored on our notional model. Nothing that I see now at either the revenue line or the expense line, which we obviously control, leads me to believe that we won't be able to hit the targets that we laid out at our Investor Day. Operator: [Operator Instructions] Our next question will come from the line of Jeff Silber with BMO Capital Markets. Jeffrey Silber: I wanted to start with Australia/New Zealand. I know many folks on the line don't necessarily follow what's going on, on a daily basis. Can you just remind us exactly what has happened, what the changes were compared to what we thought might have happened a few months ago? Karl McDonnell: Well, the change is -- the change from when we bought it is that the Australian government has put in place hard enrollment caps for international students. And in our case, that resulted in a reduction of approximately 30% from what we had when there were no caps. And international students historically at Torrens represented about half of any new student cohort that we had. The change that we didn't further anticipate that happened at the beginning of this year is the government went further and put much more tighter controls and restrictions on the ability of an international student who already has a Visa and who is already in Australia from transferring to another institution, which frankly was the source of most of the growth that we had at Torrens because it's a very common practice in Australia for universities to charge a pretty significant tuition premium for international students. And we at Torrens effectively have tuition parity between international and domestic students. So there was a strong incentive for students to enroll at Torrens because they were going to save a significant amount of money. The change is that we, Torrens, have to essentially vet any transfer student the same way you would as somebody coming in offshore when they're just applying for Visa. So you have to vet things like the amount of finances that they have onshore, you have to vet their ability to return back to their country and their willingness to return back to their country when they're done with the studies. It's a significant headwind. And the product of that headwind is that far fewer students are transferring. But regardless whether it's the offshore students coming in for the first time or the international transfer students, we're going to anniversary these caps mid-'26. We've seen pretty strong domestic new student enrollment growth throughout '25. So when I was answering Jasper's question, I expect that we'll be growing new students in 2026. And hopefully, that will translate into total enrollment growth by the end of '26. But by the time we fully anniversary these restrictions heading into '27, we expect that business to be growing. Jeffrey Silber: Okay. That's really helpful. I appreciate it. Why don't I move back to U.S. Higher Education, and I appreciate you guys calling out your health care exposure. Can you just remind us -- I know there seems to be some concern on the street between what they call pre-licensure and post-licensure programs. Can you just remind us of the exposure in those two boxes? Karl McDonnell: We are not in the pre-licensure field in nursing. We are in the post-licensure with the RN to BSN program, and that's a FlexPath program, which is the largest program at Capella. And we've seen, I'd say, a little softness in that program. They are in the BSN throughout 2025. But we further believe that we're advantaged because that's also our largest program from an employer-affiliated enrollment standpoint. And as I've said in my prepared remarks, that part of our business remains strong. Jeffrey Silber: Okay. Great. And just one more. I know also there's some concern on the government shutdown, specifically those companies that might have exposure to military and veteran students. Can you talk about any potential impact you've seen and what you think the impact might be going forward? Karl McDonnell: Yes. To my knowledge, we haven't seen any impact. And when I think about our largest clients like CVS Health or Best Buy or Dollar General, they're not really impacted by the government shutdown per se. So as of yet, Jeff, we haven't seen any adverse impact. Daniel Jackson: Jeff, this is Dan. We have very few direct military students. So the exposure there is really insignificant. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Karl McDonnell for any closing remarks. Karl McDonnell: Thank you, everyone, and we look forward to joining you in February to discuss our fourth quarter and full year results. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Greetings, and welcome to HASI's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Aaron Chew, the Senior Vice President of Investor Relations. Aaron Chew: Thank you, operator, and good afternoon to everyone joining us today for HASI's Third Quarter 2025 Conference Call. Earlier this afternoon, HASI distributed a press release reporting our third quarter 2025 results, a copy of which is available on our website, along with the slide presentation we will be referring to today. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which are subject to risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those stated. Today's discussion also includes some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation. Joining us on the call today are Jeff Lipson, the company's President and CEO; as well as Chuck Melko, our Chief Financial Officer. And also available for Q&A are Susan Nickey, our Chief Client Officer; and Marc Pangburn, our Chief Revenue and Strategy Officer. To kick things off, I will turn it over to our President and CEO, Jeff Lipson. Jeff? Jeffrey Lipson: Thank you, Aaron, and thank you, everyone, for joining the call. Welcome to the HASI Q3 2025 Earnings Call. Before we discuss the prepared slides, I'd like to start the call today by reiterating 4 aspects of our business model and how they interact with recent market developments. One, the demand for energy continues to increase and virtually all forecasts expect this trend to continue. This demand will clearly result in greater supply, facilitating ongoing development by our clients, which in turn increases HASI's total addressable market. Therefore, the current underlying economic trends are a tailwind for our business. Additionally, if demand causes power curves to increase, our existing portfolio of investments will become increasingly more valuable. Two, the operating environment remains conducive to business-as-usual activities. Capital markets have experienced relatively low recent volatility, and our clients' pipelines continues to be active and growing. Therefore, the backdrop remains very supportive for expanding our investment volumes. Three, we continue to demonstrate that our business is able to achieve meaningful EPS growth in all interest rate environments. Since interest rates began to rise in 2022, we've been able to continue to grow our earnings with higher-yielding investments, prudent hedging strategies and opportunistic debt issuances. With 3 investment-grade ratings and our CCH1 co-investment vehicle, we have become even less exposed to changes in interest rates. If the yield curve steepens going forward, we do not expect any material impact on our profitability. And four, virtually all of our investment markets are currently providing attractive opportunities. Utility scale renewables and storage, distributed solar and storage, energy efficiency, renewable natural gas and transportation have all been active markets for us in 2025 and continue to be well represented in the pipeline. And we remain excited with the emergence of our pipeline of Next Frontier opportunities. In summary, these 4 items reinforce the framework of our successful business model, further evidenced by our outstanding results this quarter. We just completed the most profitable quarter in our history and closed the largest investment in our history as we continue to consistently achieve our goals and provide outstanding returns to our investors. Now let's turn to the slides, beginning on Slide 3 and highlight a few key metrics. Our adjusted earnings per share in Q3 was $0.80, the highest quarterly EPS we have ever reported. This result was driven by strong growth in all of our components of revenue, which Chuck will discuss in more detail. Adjusted recurring net investment income, the new financial measure we introduced last quarter is 27% higher year-to-date over last year. And our managed assets, which includes our portfolio as well as our partners' assets in CCH1 and the assets we have securitized off balance sheet, were up 15% year-over-year to $15 billion. And our year-to-date adjusted ROE also has experienced significant year-over-year growth, rising to 13.4%. We are reaffirming our guidance for 8% to 10% compound annual EPS growth through 2027 and noting that we expect to achieve roughly 10% adjusted EPS growth in 2025. As detailed on Slide 4, we continue to make progress in the key areas of value creation for our business: one, originating new investments; two, optimizing return on our existing assets; and three, managing our liabilities and lowering our cost of capital. First, in terms of new investments, as the box on the left indicates, both volumes and returns have been strong year-to-date. Not only did we close more than $650 million of new transactions in Q3 for a total of $1.5 billion through the first 3 quarters of 2025, but we closed on a $1.2 billion investment early in Q4 that has put us on a path to close more than $3 billion for the full year 2025, up more than 30% year-over-year. We will discuss this investment in greater detail later in the call. Importantly, it is not only volumes that have been elevated, but our returns as well, with new asset yield in Q3 greater than 10.5% for the sixth quarter in a row. Meanwhile, our pipeline remains above $6 billion, even after taking into account the large October transaction. Second, we do not simply create value originating investments, but also in how we optimize returns over the life of the investment. One example of this is the targeted asset rotation strategy we executed in 2024 through which we were able to monetize certain lower-yielding assets in our portfolio for a gain while generating cash that we were able to recycle into higher-yielding assets. In Q3 of this year, we refinanced the senior ABS debt within the SunStrong residential solar lease portfolio, resulting in significant paydown of our mezzanine debt investments and a meaningful cash distribution to the SunStrong equity owners, of which we are 50%. This distribution created significant earnings in the quarter as we began to monetize the increasingly valuable SunStrong platform. We have also maintained a strong risk return profile in our portfolio as evidenced by minimal annual realized loss rate of under 10 basis points. This low level of losses reinforces the predictability of our cash flow and our ability to effectively underwrite investment opportunities. And lastly, we maximize value in our business with our low-cost, diversified and efficient debt and capital platform. It's notable to highlight that even after refinancing a portion of our low-cost debt due in 2026 at today's higher market rates, the increase in our cost of debt was only 10 basis points at 5.9% in Q3. In addition, we opportunistically added $250 million in hedges in September that reduced the base rate risk for our next debt issuance. Turning to Slide 5. As I briefly mentioned a moment ago, we are excited to announce a new investment that closed in October but is significant enough to mention on our Q3 call. It is a $1.2 billion structured equity investment in a major component of what will be the largest clean energy infrastructure project in North America once completed in Q2 of next year. HASI's involvement in providing capital to this project is truly a milestone event for our company and a reflection of the transaction size we can now accommodate given our access to capital. Developed and managed by one of the world's largest developers and owners of clean energy and transmission infrastructure, the project has several components. Our specific investment is for 2.6 gigawatts of wind power supplied by the largest U.S. turbine manufacturer and backed by PPAs with a weighted average life of almost 15 years, including counterparties spanning energy majors, utilities, community electricity providers and universities. Consistent with our discussion last quarter, we are investing at a derisked stage as most of our funding will occur in the first half of 2026. The expected return on the investment is consistent with our typical return targets on recent utility scale investments. The total investment commitment is $1.2 billion. However, the net impact to HASI's balance sheet will be much lower due to the investment closing in CCH1, resulting in an initial proportional commitment of approximately $600 million. Subsequently, we may add back leverage to the investment, further reducing our long-term hold. As noted earlier, this is not included in our Q3 financials and will be considered a closed transaction in Q4 with the vast majority of funding expected in Q2 of 2026. Turning to Slide 6. Our pipeline remains above $6 billion, including a pro forma adjustment to remove the $1.2 billion project just discussed as other investment opportunities have replaced this amount in the pipeline. Our pipeline of new investments remains highly diversified with strong undercurrents of demand in each of our key end markets. Higher retail electricity rates are facilitating demand in our BTM asset classes, including not just rooftop solar, but importantly, energy efficiency as well. Meanwhile, residential solar leases are expected to gain market share from loans and cash sales following the expiration of the 25D ITC at year-end. And our business is largely focused on leases and serving this end market. In addition, the grid-connected end market is experiencing larger project sizes to accommodate the growth in U.S. power demand, clearly driven by data centers, but also domestic manufacturing and the expanding use cases of electrification in general. Likewise, demand underpinning our fuels, transport and nature end market remains strong with RNG facilities in construction or in development expected to double the current installed base in North America. And finally, our Next Frontier asset classes remain an exciting new opportunity. And with that, I will ask Chuck to discuss our financial results. Charles Melko: Thank you, Jeff. On Slide 7, we highlight our Q3 profitability. And as you can see, we had meaningful growth in many of our key metrics. Jeff already highlighted our record quarterly adjusted EPS of $0.80, and our year-to-date adjusted EPS is at $2.04, up 11% year-over-year. This growth is driven largely by our primary source of revenue, adjusted recurring net investment income, which grew year-over-year by 42% in the quarter and 27% year-to-date. We are growing the recurring earnings portion of our adjusted EPS, and our equity efficiency has also helped us increase our year-to-date adjusted ROE to 13.4% compared to 12.7% for the same period last year. This growth in our adjusted ROE is demonstrating the meaningful benefits from our CCH1 co-investment vehicle, which I will speak to in a few slides. One last point on our metrics. Our GAAP net investment income does not include the earnings from our equity investments. Therefore, the adjusted recurring NII will continue to be greater than our GAAP NII. Now that I have highlighted the key results for the quarter, some additional context is useful. Jeff mentioned our diversified business model earlier, and I will add that it is also versatile, where we can generate value in different ways, such as through recurring earnings from the underwritten returns on our investments and also optimization transactions where we capture additional value that is embedded in our portfolio, such as through project-level refinancing activities, which we saw this quarter. These optimization transactions may not occur every quarter, but we consistently identify these opportunities year after year. Now on to Slide 8. Through the first 3 quarters of this year, we have closed $1.5 billion of transactions, which is greater than the same period last year. And when incorporating the transaction that Jeff spoke to earlier, we are on track to meaningfully exceed last year's total closed transactions. While transaction closings on their own are not an indicator of profitable growth, if you take into account our ability to generate new balance sheet transaction yields at an attractive level above 10.5%, we're also setting the stage for continued growth in adjusted EPS and ROE. Even as interest rates and our own cost of debt have risen over the last couple of years, it is important to note that we have been able to maintain our margins through the increase in our new asset yields and our hedging program. We expect we will continue to maintain attractive margins as well in a declining interest rate environment given our approach to investment, funding and managing interest rate risk. Next on Slide 9, we are experiencing double-digit growth in our managed assets as well as our portfolio. They have grown 15% and 20%, respectively, from a year ago. This is the base of assets from which we generate our recurring income. As we have discussed previously, we are migrating to a business model that is less dependent on new equity issuance to generate earnings growth. And the factor in accomplishing this is our CCH1 co-investment vehicle. As of the end of Q3, CCH1 has completed funding of $1.2 billion of investments, leaving $1.4 billion of available capital for future investment with the potential to increase it to $1.8 billion with additional debt at the CCH1 level while keeping its leverage level below a debt-to-equity ratio of 0.5. Our portfolio yield is at 8.6%, up from 8.3% last quarter as we are starting to see the new asset investments with yields greater than 10.5% start to come through our portfolio. The portfolio yield is the largest contributor to the growth in our adjusted recurring net investment income that is illustrated on the next slide. On to Slide 10, we provide a buildup of our new financial measure that we introduced last quarter, adjusted recurring net investment income. We are now utilizing this metric in addition to our adjusted EPS to measure the profitability of our managed assets as a whole, inclusive of both the net investment income from our portfolio as well as the recurring fee income from the other assets we manage that are not on our balance sheet. Our year-to-date adjusted recurring net investment income of $269 million has grown 27%. This component of revenue is a consistent source of earnings generated from our existing managed assets. Turning to Slide 11. We highlight a few items that will contribute to managing our liquidity and liability structure and further reduce our cost of capital. Over the past couple of years, we have significantly broadened our sources of capital and between our bank facilities, commercial paper program and our investment-grade ratings, we have a capital platform that is well-positioned to fund our growth needs at an attractive cost. First to mention is a $250 million term loan that closed after quarter end that will provide another source of potential liquidity for the refinancing of our senior bonds due next year. As we reported last quarter, we retired a large portion of the upcoming maturity through a tender offer. With our current liquidity at $1.1 billion at the end of the quarter, this term loan and our access to the investment-grade debt market, we are well-positioned to retire the remaining notes outstanding. Next, in furtherance of our focus on managing our interest rate risk, we executed an additional $250 million of SOFR-based hedges related to anticipated debt issuances and now have hedged up to $1.4 billion of our future debt issuance. On to Slide 12. This slide is a good illustration of the changes we have made to the business over the past couple of years that is accelerating our growth and returns for shareholders. We have historically just provided the total adjusted ROE metric that is highlighted in the dark blue. And while it was steadily increasing over time, it is not painting the complete picture on where our business is headed. With the introduction of CCH1 last year and obtaining our investment-grade ratings, we have meaningfully changed the profile of our adjusted ROE for new transactions. It may take some time for the higher profitability from our incremental business to fully show up in our adjusted ROE given the previous transactions on our balance sheet. So we want to illustrate where our business is headed with the adjusted ROE from incremental business by period. As you can see with our current business model since the start of CCH1 early in 2024, our newer transactions are generating a higher adjusted ROE with year-to-date being 19.6%. We expect this trend to continue and even increase as CCH1 investments are funded from debt at CCH1. Over time, you will see our adjusted ROE increase to the higher ROE that we are generating from our new business. I will now turn the call back to Jeff for closing remarks. Jeffrey Lipson: Thanks, Chuck. Turning to Slide 13, we display our sustainability and impact highlights, noting our cumulative carbon count and water count numbers reflect the significant impact of our investment strategy. We also remain very proud of our recognition, our targeted advocacy activities and the generosity of the HASI Foundation. Concluding on Page 14. To summarize the themes of this call, we just completed the most profitable quarter in the company's history, and we expect our investment volumes to exceed last year's by more than 30%. Economic trends remain favorable to our continued profitable growth. This success is the result of a resilient business model that focuses on asset level investing with long-term programmatic partners. Our approach also relies on disciplined underwriting and reasonable assumptions, and the model is further enhanced by a diversified and prudent approach to obtaining access to attractive sources of capital. Combining all of these elements with a talented and dedicated team results in consistent success despite periodic market volatility. Thank you, as always, to our talented team for this outstanding quarter. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Jon Windham from UBS. Jonathan Windham: Great result, by the way. I'll be very specific. It sounds a lot like you're describing the SunZia project on Pattern Energy in New Mexico. Is there a reason you're not naming the project? That's sort of a quick question. And then any color you can talk about what sort of equity stake and the economics of it would be interesting. Jeffrey Lipson: Thanks, Jon. I appreciate the question. It is the SunZia project and as you described. And -- in terms of returns, I think we talked about it being consistent with returns on recent other transactions we've had in our grid-connected portfolio. So, I think that's probably the best way we could describe the return. And it is a preferred equity investment. So, it has some structure to it. It's not a common equity investment. Jonathan Windham: Right. This is similar to other wind investments you've made in the past, you sort of get paid first. That's on the equity stack. Jeffrey Lipson: Yes. That's correct. Operator: The next question comes from Chris Denginos from RBC. Christopher Dendrinos: Echoing Jon's comments on the solid quarter. I wanted to ask about the pipeline. And I think you mentioned $6 billion, so flat quarter-on-quarter, but you've got -- I guess, if you adjust in the $1.2 billion transaction in October, it'd be up significantly. So can you just maybe talk about the pipeline here? It looks like it's strengthened quite a bit quarter-on-quarter. And just curious what you're kind of seeing from that perspective, if there's any sort of demand pull forward going on as a result of? Jeffrey Lipson: Sure, Chris. I would say, as we discussed in the prepared remarks, we did replace the grid-connected pipeline, in particular, with enough new volume such that it didn't go down after this $1.2 billion transaction that we described. Beyond that, our pipeline disclosure is, of course, not precise. We say greater than $6 billion. So I know it's hard from the outside looking in to tell if it actually went up or down in the quarter. But it's certainly at above $6 billion at a level that we're comfortable we'll have enough to invest in, in 2026 to achieve our goals. And we're not seeing too much in the way of pull forward. I would describe what we're seeing as ordinary course. And as we talked about last quarter, folks executing on their pipeline, meaning our clients, everything they're working on now is grandfathered or safe harbor, but I don't really think this is the result of any kind of pull-through. Operator: The next question comes from Noah Kaye from Oppenheimer. Noah Kaye: I want to ask sort of a broader question around investments resulting from this announcement today, the $1.2 billion. We've historically thought about the business as making smaller investments spread across a large number of projects. This is a pretty big one. But of course, as you said, energy projects are getting bigger. You've talked about data centers as the Next Frontier asset class and they're getting just on the energy infrastructure, this type of investment. So, I guess, how should we think about this investment and what it signals for your appetite to take on larger single projects going forward? Jeffrey Lipson: Well, it's a good question, Noah. We've built the business on some small and modest-sized transactions over time, but we've always, at least after -- since 2020, supplemented that with some larger transactions as well. I think this transaction is a reflection in many ways of our access to capital through both being investment grade and our CCH1 relationship. The amount of capital we can bring to the table is more significant. So, we've become a player in these larger transactions. And when it makes sense, we'll do that. We're, of course, going to manage our risk accordingly. I talked about half of this being in CCH1 and some other pathways to a lower long-term hold level. So, we're certainly managing our risk. But in terms of your broader question of how we think about the business, I think you should think about the business as we're being active in both smaller transactions where we've historically found great value and continue to find opportunities, but also supplemented by some periodic larger transactions where it makes sense for us. And so, I think this is in many ways -- I use the word milestone, but it's we graduating into access to some of these larger transactions, which are going to be more frequent, as you mentioned, because of data centers and the grid-connected development focusing on larger projects. Noah Kaye: It is a milestone, and we want to recognize that. A housekeeping item, just the ABS, the SunStrong ABS refinancing. Can you kind of quantify what the benefit was to the quarter in that because the ROE expansion this quarter was pretty noticeable? Jeffrey Lipson: Sure. And I'm going to ask Chuck to do that. But before I do that, Noah, I'm going to clarify a little bit a few items around SunStrong. I expected us to get a question on it, and I don't want there to be any confusion about what this distribution was. So let me just answer that a little more broadly and say we often refer to SunStrong and folks talking about us refer to SunStrong in a singular capacity, but we actually own 50% of 2 separate entities. One of them is SunStrong Capital Holdings, which is an AssetCo that primarily owns solar leases, most of which have been securitized. And the distribution we received this quarter was the result of refinancing the ABS debt, which due to de-levering and the very strong performance of the underlying leases resulted in essentially a cash out refi. So, there was meaningful cash distribution to the equity owners. And going forward, as an equity owner in SunStrong Capital Holdings, we'll just get the normal distributions from the waterfall of the securitized assets. The refi was a bit of a onetime. Now separate from that, we own 50% of SunStrong Management or SSM, as we call it, which is truly an operating business that provides servicing to consumer and commercial loans and leases, including the legacy SunPower and Sunnova portfolios. Now SSM is an operating business. It has its own executive team. It's performing very well. It has a business plan, which includes ongoing growth in the platform and expansion ideas. And our accounting for our SSM investment is as an equity method investment that we hold at fair value. So to the extent the underlying value of SSM increases, that would positively impact HASI's earnings. So I just wanted to create that clarification of when we say SunStrong, what we actually mean. This distribution that we're talking about in the third quarter was from SunStrong Capital Holdings. So sorry for the deviation to your actual question, I'm going to defer to Chuck. Charles Melko: Noah, so our investment in SunStrong consisted of both mezzanine level loans as well as a small amount of equity. The total proceeds from the ABS that we received was around $240 million. And the composition of that was roughly about $200 million of it went to pay off our mezzanine loans. of which we're redeploying back into additional accretive investments. But then we also -- the other remaining $40 million was related to our equity, of which we did have some small investment, like I said. And of that $40 million that we received, roughly about $24 million of it was a gain in excess of our investment. So the impact to the quarter was $24 million. Operator: The next question comes from Davis Sunderland from Baird. Davis Sunderland: Congrats on an awesome quarter. Just one for me. I wanted to ask just how much the tax credit changes from Big Beautiful Bill have maybe impacted the types of investments you're seeing by asset class? And I guess the root of my question is just wondering if you've seen any opportunities in the last couple of months in discussions to step into a potential hole in the cap stack or any other ways that there have been puts or takes. Jeffrey Lipson: Sure. Thanks, Davis. I'm going to ask Susan to answer that one. Susan Nickey: I think at this point, with the extension of the tax credits for wind and solar, by and large, for 5 years with safe harbor and started construction and storage and some of the other credits that extend longer, I think we're still seeing the traditional combination of tax equity structures and transfer structures to dominate the market. So, we're still -- we still have this longer transition period before we expect to see a change in the capital stack to not include tax credits. Operator: The next question comes from Maheep Mandloi from Mizuho. John Hurley: Jack on for Maheep here. Congrats on the quarter. A lot of third-party ownership have talked about prepaid leases. Is that a kind of product that would interest you guys? And would you see similar yields as traditional leases? Jeffrey Lipson: Sure. Thanks, Jack. I'm going to ask Marc to answer that one. Marc T. Pangburn: Jack, that's something that we could certainly take a look at but haven't been presented any opportunities yet. So we'll have to defer on that until the future. Operator: The next question comes from Vikram Bagri from Citibank. Unknown Analyst: It's Ted on for Vik. Just looking at the principal collections, it looks like it was a larger quarter with about $382 million returns. Could you just give some insight into what the maturity profile and roll-off schedule of the existing portfolio looks like? Should we expect the pace of that to potentially increase as you approach the new wind investment? Charles Melko: Yes. This is Chuck. So, the $300 million number that you're seeing there, the biggest driver of why that's a little bit higher has to do with the SunStrong refinancing that I just mentioned. When I said that roughly about $200 million of the proceeds went to pay down the mezz loans that came through that line. So that was a little bit of an acceleration of normal amort profile that you'll see from our portfolio. But the way I generally think of it is that the lives of our assets, weighted average life is around 10 years or so. So you could expect looking at our portfolio that our amort in any given period will mirror that. Operator: [Operator Instructions] The next question comes from Mark Strouse from JPMorgan. Michael Fairbanks: This is Michael Fairbanks on for Mark. Just wondering if you could talk about how this large transaction and the $3 billion of volumes this year might impact the EPS growth algorithm in '26 and beyond. I know you reaffirmed the 8% to 10% range, but should we be thinking about a possible step-up in '26 from these volumes? Jeffrey Lipson: Thanks, Michael. Good question. Our cadence has consistently been to talk about guidance in February, and I think we're going to stick to that. So we're working diligently right now on our business plan with our Board. And I think we'll have more to say about '26 and '27 in February. Michael Fairbanks: Okay. Great. And then maybe just for a follow-up. It looks like SunZia was excluded from the greater than $6 billion pipeline, which makes sense. Just wondering if it was included in that number last quarter? Jeffrey Lipson: It was. It was in last quarter's pipeline. That's correct. Operator: The next question is a follow-up question from Chris Dendrinos from RBC. Christopher Dendrinos: I just wanted to follow up here. And I think you mentioned during your prepared remarks, the really low rate of bad debt. I think bp Lightsource or subsidiary had reported a default with one of their suppliers. And I'm curious, I think you all have worked with them in the past. Is there anything related to that, that would impact you all? Jeffrey Lipson: Thanks, Chris. No, there wouldn't be. We do work with bp Lightsource. But again, we're monetizing project cash flows. And the challenge that you discussed has no impact on the project in which we're invested. Operator: Thank you very much. There are no further questions at this time. Ladies and gentlemen, that does conclude today's conference for today. You may now disconnect your lines at this time, and thank you very much for your participation.
Operator: Hello, everyone, and welcome to the GoPro Third Quarter 2025 Earnings Call. My name is Charlie, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Robin Stoecker, Director, Corporate Communications of GoPro, Inc. to begin. Robin, please go ahead. Robin Stoecker: Thank you, Charlie. Good afternoon, and welcome to GoPro's Third Quarter 2025 Earnings Conference Call. With me today are GoPro's CEO, Nicholas Woodman; and CFO and COO, Brian McGee. Today's agenda will include brief commentary from Nick and Brian, followed by Q&A. For detailed information about our third quarter as well as outlook, please read our Q3 earnings press release and management commentary, we posted to the Investor Relations section of GoPro's website. Before I pass the call to Nick, I'd like to remind everybody that our remarks today may include forward-looking statements. Forward-looking statements and all other statements that are not historical facts are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially. Additionally, any forward-looking statements made today are based on assumptions as of today. This means that results could change at any time, and we do not undertake any obligation to update these statements as a result of new information or future events. To better understand the risks and uncertainties that could cause actual results to differ from our commentary, we refer you to our most recent annual report on Form 10-K for the year ended December 31, 2024, which is on file with the Securities and Exchange Commission and other reports that we may file from time to time with the SEC. Today, we may discuss gross margin, operating expense, net profit and loss, adjusted EBITDA as well as basic and diluted net profit and loss per share in accordance with GAAP and on a non-GAAP basis. A reconciliation of GAAP to non-GAAP operating expenses can be found in the press release that was issued this afternoon, which is posted on the Investor Relations section of our website. Unless otherwise noted, all income statement-related numbers that are discussed in the management commentary and remarks made today other than revenue are non-GAAP. Now I'll turn the call over to GoPro's Founder and CEO, Nicholas Woodman. Nicholas Woodman: Thanks, Robin, and thanks, everybody, for joining us today. As Robin mentioned, Brian and I will share brief remarks before going into Q&A, and I want to encourage all on the call to read the detailed management commentary we posted on our Investor Relations website. The third quarter marked significant progress in our strategy to grow our business by developing our hardware and software offerings, and diversifying our hardware and software offerings. In Q3, we launched 3 new hardware products and several new software products that helped us exceed our Q3 revenue guidance. Our teams are executing with efficient precision, and we're excited to build on this momentum. As you'll hear from Brian, we believe we have turned an important corner, and we expect to return to unit revenue and profitability growth on a year-over-year basis this Q4 and for 2026. Our innovation machine is accelerating to increase our TAM beyond the 3 million unit action camera category. In Q3, we launched our highly anticipated MaX2 360-camera, our new ultra-compact LIT HERO camera and Fluid Pro AI, our new multi-camera compatible gimbal designed for creators that own multiple types of cameras and need one gimbal to meet their multi-camera stabilization needs. MaX2 360-camera opens up a new growth segment, which we estimate the TAM to be nearly 2 million units annually. We're excited to regain market share with the launch of our MaX2 360-camera, and we're fully further expanding our TAM with LIT HERO, with its playful aesthetic, ease of use and versatility, making it especially appealing to a younger demographic looking to capture and share moments on the go. Additionally, the low-light capable camera segment, which we estimate the TAM to be 2 million to 2.5 million units annually, represents a significant opportunity for GoPro as we do not currently participate in this market, but plan to. Our tech-enabled motorcycle helmets initiative is progressing and collaboration with AGV is already underway. Both teams are working closely to deliver innovative safety and performance features combined with the fun of effortlessly capturing immersive GoPro video while riding. We look forward to providing updates as development progresses. Starting with MAX2, what a game changer. Its industry-leading 360 technology combines with its True 8K video resolution to capture up to 21% more resolution than the competition. MAX2 also features convenient and durable twist-and-go replaceable lenses, making it easy to swap out a lens in the field without tools or calibration, an inconvenience inherent with competitive products. And we recently launched an innovative and expansive new line of 16 360-centric accessories and mounts that expand MAX2'S creative potential and versatility. Early customer feedback has been resoundingly positive with many praising MAX2'S superior image quality, ease of use and durability. And in September, GoPro won a 2025 Technology & Engineering Emmy Award in recognition of our innovative 360 technology, which is core to our 360 cameras and software. This is GoPro's third Emmy for innovations related to digital imaging and our first in the 360-technology category. We believe MAX2 will help grow share in the global 360-camera market. MAX2 is now available online and on shelf at retailers globally. We're also excited about a second new camera we launched in Q3, LIT HERO, an ultracompact lifestyle camera designed for "whatever, whenever" capture with its built-in photo and video light. LIT HERO opens up creative possibility in any setting, day or night, and delivers a fun retro-inspired look to the images it captures. And the third new hardware product we launched in Q3 is Fluid Pro AI, our advanced multi-camera, AI subject tracking gimbal designed for today's multi-camera content creators looking for a high-performance gimbal that meets their multi-camera needs. Fluid Pro AI is compatible with all GoPro cameras, smartphones and point-and-shoot cameras up to 400 grams, making it remarkably versatile for capturing smooth, professional-looking content while vlogging, capturing sports or documenting life's most meaningful moments. Fluid Pro AI represents an exciting opportunity for GoPro to participate in the global gimbal market. As we enter the holiday season, GoPro now offers a diversified line of 8 industry-leading camera SKUs that range from an MSRP of $199 to $649, more than 70 versatility expanding camera mounts and accessories and an industry-leading mobile app and subscription experience that adds enormous convenience and value to GoPro subscribers. And we're just getting started. We believe our current offerings serve as an incredible foundation to build on with the planned launch of several exciting new products in 2026 that we believe will result in revenue, profit and market share growth across our business. Turning to software. In Q3, we launched several new 360-related editing tools that make immersive 360 content creation easy for everyone. And we updated our Quik mobile app with several new 360 editing features, including AI-powered subject tracking, convenient POV and selfie modes and cloud-based 360 editing. These powerful new features significantly enhance the convenience and creative experience for MAX and MAX2 owners and GoPro subscribers. Our subscription model continues to exceed our expectations, contributing enormous value to both subscribers and our bottom line. We anticipate renewed subscriber and associated revenue growth in 2026, fueled by camera unit growth and the launch of new editing and content management features that we expect to significantly enhance convenience, capability and value. And we continue to see strong engagement from subscribers, opting into our AI training program, which will earn them 50% of the third-party licensing revenue we expect to generate on their behalf. GoPro subscribers have contributed more than 270,000 hours of video content during the AI training program's invitation-only outreach period, which began in July 2025. We are in discussion with several AI data licensees to address their demand for authentic real-world video content for AI model training. We believe this program represents a meaningful opportunity over time for both our subscribers and GoPro, and we look forward to sharing progress as the program continues to evolve. As Brian will detail, we've amended our Second Lien Credit Agreement to address volatility in tariff rates. Given our commitment and expectation to achieve the minimum $40 million in trailing 12-month adjusted EBITDA by year-end 2026, I'm personally backing our commitment with a $2 million equity infusion into the company. In summary, we're executing against our strategy, and we're seeing the results, improved product diversification via the launch of industry-leading hardware and software products and an expected return to unit revenue and profitability growth in Q4 2025. We expect to build on this momentum in 2026 with the launch of several new innovative and differentiated products and services that we believe will lead to consistent quarterly camera unit and revenue growth on a year-over-year basis and a swing from losses in recent years to solid adjusted EBITDA profitability in 2026. Many thanks to all of GoPro's incredibly talented, passionate and committed employees. Your execution is enabling us to realize our vision to the benefit of our customers and investors alike. Now I'll turn the call over to Brian to share some details on our financials and outlook. Brian McGee: Thanks, Nick. For the third quarter of 2025, revenue was $163 million and gross profit was 35.2%, in line with guidance. We achieved a second consecutive quarter of positive cash flow from operations of $12 million, a $14 million improvement year-over-year. Demand for our cameras as measured via sell-through was 5% better than we predicted. Channel inventory declined 30% from the prior year quarter and has reduced for 4 consecutive quarters as we prepare for the upcoming holiday quarter. As we look to the fourth quarter, our outlook is prefaced by highlighting by heightened uncertainty that exists due to volatility in tariff rates, consumer confidence, competition, component supply chain and global economic uncertainty. For the fourth quarter, we expect revenue growth at the midpoint of guidance of 10% to $220 million, non-GAAP net income per share of $0.03, plus or minus $0.02 and adjusted EBITDA positive $12 million compared to a prior year adjusted EBITDA loss of $14 million, a $26 million improvement. All of these expected improvements are due to the actions we took in 2024 to launch new products in the second half of 2025, reduce operating expenses, diversify our supply chain and drive product cost reductions, which were partially offset by higher tariffs. We estimate street ASP in the fourth quarter to be approximately $350, up slightly year-over-year. We expect unit sell-through to be down 18% year-over-year at the midpoint of guidance to 625,000 units and channel inventory to be nominally up sequentially. We continue to actively manage the balance sheet and expect to further reduce inventory sequentially in the fourth quarter. In addition, we expect to end the year with cash and cash equivalents in the range of $60 million to $65 million, along with an additional $50 million available under our ABL facility. We expect gross margin in the fourth quarter to be 32% at the midpoint of guidance, down compared to the prior year quarter of 35%, primarily due to tariffs. Excluding tariffs, gross margin in the fourth quarter 2025 would be approximately 37%. We expect fourth quarter 2025 operating expenses to be $63 million at the midpoint of our guidance range, a more than 25% reduction from the prior year quarter due to lower spending on wages from lower headcount, reduced marketing and lower engineering expenses. We expect shares outstanding to be approximately 177 million in the fourth quarter. As we look ahead to 2026, we expect the following: to grow units and revenue in 2026 based on both our existing lineup of products as well as new products and services expected to be introduced next year. Our expectation is to grow units and revenue each quarter in 2026 on a year-over-year basis. Full year 2026 operating expenses to be approximately $250 million, slightly down year-over-year to continue to offset approximately half of our expected tariff costs of $45 million in 2026 with modest price increases and continued supply chain diversification. Subscription ARPU growth of 5% and to end 2026, up 2% to 2.4 million subscribers. Our liquidity position to be more than adequate during 2026, and we expect to end 2026 with approximately $80 million in cash, plus or minus $5 million, along with an additional $50 million available under our ABL facility. To experience some margin pressure year-over-year due to tariffs and increasing component prices, which we expect to partially offset with improvements in supply chain. As detailed in the management commentary in our filing, we have amended our debt agreement due to changes in tariff rates. We expect adjusted EBITDA to be greater than $40 million in 2026, an improvement from losses of $18 million in 2025 and $72 million in 2024. In closing, we believe our strategy is working. We are in the midst of an innovation cycle with the continued launch of new products and services expected over the next several years. Combined with the initiatives we undertook in 2024 to reduce operating expenses and improve supply chain in 2025, we believe we will restore unit and revenue growth and deliver strong adjusted EBITDA of at least $40 million in 2026. Operator, we are now ready to take questions. Operator: [Operator Instructions] Our first question comes from Erik Woodring of Morgan Stanley. Erik Woodring: Nick, maybe if I just start on 4Q sell-through, I think it was saying that you expect sell-through to be down, I think it was 18% year-over-year. Can you just talk about kind of the puts and takes there? You launched 3 new cameras this year versus 2 last year. I think the timing of the launches this year was a little later than last year. So just why we're seeing sell-through down as opposed to others because there's no flagship camera. Just any detail you could help us understand there, please? Nicholas Woodman: Yes, you nailed it. I had to be a little hesitant. It's clear that we didn't launch a new flagship HERO camera this year in Q3 for Q4 sales. And what I can say is, that is strategic in preparation for 2026 launches. So a little bit of patience now, yields, we believe, significant upside in 2026. So it's a bit of -- we've got something special planned. So we appreciate market patience, investor patience, and we think that this decision is going to significantly help us grow units, revenue and profits in first half of 2026. And to give us a little more context, I have to be a little bit careful as it relates to competition, obviously, but we believe that by focusing on a bigger upgrade, we can have a more significant outcome than if we were to have launched a product in the third quarter of this year. Erik Woodring: Okay. All right. Super. Looking forward to that. And I was going to ask you a question on innovation. And so realizing you just made that comment, but I'd love if you could just talk where you think kind of the camera innovation can, needs or should go from here? Obviously, you got 360 into the market. That's great. You've launched a lifestyle camera. You have the gimbal system. You've talked about the motorcycle helmets. Again, without disclosing things that -- obviously, for competitive reasons, where do you think there are differentiated end markets or use cases that are compelling from here? Whatever you can share would be super helpful. Nicholas Woodman: It's clear that the opportunity for growth is in diversification and meeting more of the specific needs of the market, not through one SKU. Traditionally, the HERO camera, the product that GoPro was built on, was a bit of a Swiss Army knife that did it all for everybody. And that was terrific for a time. But as consumer and professional demands have grown and become more specialized, and we've seen the end customer want to not have a do-it-all Swiss Army knife as much as they want additional tools, multiple tools, multiple cameras that help them achieve more specifically the solution for whatever capture scenario they're solving for. So that's terrific for us because that can expand the TAM, help us relate GoPro to more end users and not burden any one product with the burden of doing everything for everyone. So what I would say is diversification, diversification, diversification. You're seeing that already in our product line, and you'll see that scale in 2026. And we believe that will result in TAM expansion, unit growth, subscriber growth and sustained profitability growth. Brian McGee: Yes. Nick, I think on top of that, GP3 processor is also market-leading in its capability and what we're able to do with that from an imaging and innovation perspective. So that's another area where we're leading with the product that will come out -- products that will come out with next year using that processor. Nicholas Woodman: Yes. What Brian just alluded to is 2026 will be the year of GP3. Our current cameras are based on a GP2 processor. And 2026 is the debut of our line of GP3-based processors that will take GoPro and the industry to the next level of performance. Erik Woodring: Okay. Super. And then maybe last one for me quickly, is just I appreciate all the color on 2026. I guess at a high level, kind of how are you -- or what are you assuming the world looks like in 2026? Obviously, there's a lot of uncertainty even as it just relates to like the holiday period coming up. So like what gives you the degree of confidence to kind of guide the way that you did? And how are you kind of embedding the world view in 2026 underlying that guidance? That's it for me. Nicholas Woodman: Yes, I'll start and then... Brian McGee: Go ahead. Nicholas Woodman: What I was just going to say -- to add to what I said about market demand for diversification, that's how we see consumers behaving today. That's -- all of our research shows that there's clearly an opportunity to diversify our product lineup to better meet the diversified needs of the market. That's what the road map delivers in 2026. And when you combine that diversification with the next-generation GP3 processor from GoPro, that is going to, we believe, make GoPro a market leader in all of the important categories that we're participating in. So the demand that we see for our products today, we see increasing as we enter this new era of performance and capability at GoPro next year. Brian, you can add to that. Brian McGee: Yes. I think on top of that, I'll add even in the fourth quarter of this year, which arguably is challenging with consumer and everything else that's going on, we remain on track for our sell-through and sell-in targets for the fourth quarter. So -- and now we have newer products in 2026 that are going to add to that. So that's pretty exciting as we look ahead actually to have both unit growth and revenue growth finally now in the fourth quarter as we have 2 new products or 3 new products in now -- this year and more coming next year. Nicholas Woodman: Yes. And just to be clear, the cadence of launching new products next year will be steadily throughout the year. So that's also something to look forward to as opposed to being so back-end loaded. Operator: Thank you. We have no further questions registered on today's call. So I'll hand back over to the management team for any further or final remarks. Nicholas Woodman: Thank you, operator, and thank you, everyone, for joining today's call. To summarize, we're executing well against our strategy to launch industry-leading hardware and software products with improved product diversification expected to restore unit revenue and profitability growth this fourth quarter and throughout 2026. Thank you, everyone. This is Team GoPro signing off. Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the JFrog Third Quarter 2025 Financial Results Earnings Call. [Operator Instructions] I will now hand the conference over to Jeffrey Schreiner, Head of Investor Relations. Jeffrey, please go ahead. Jeffrey Schreiner: Thank you, Nicole. Good afternoon, and thank you for joining us as we review JFrog's Third Quarter 2025 Financial Results, which were announced following the market close today via press release. Leading the call today will be JFrog's CEO and Co-Founder, Shlomi Ben Haim; and Ed Grabscheid, JFrog's CFO. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance and including our outlook for the full year of 2025. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our views only as of today and not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2024, which is available on the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our Form 10-Q for the quarter ended September 30, 2025, and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as a measure of JFrog's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Investor Relations website for a limited time. With that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim. Shlomi? Shlomi Haim: Thank you, Jeff. Good afternoon, and thank you all for joining the call. JFrog's focus as a foundational platform and system of record for software delivery continues to drive momentum in our business, and I'm pleased to report another solid quarter across all metrics. Our execution remains focused. Our investments remain strategic, and our customers continue to tell us we are helping them to meet the demands of the fast-changing technology market. In Q3, JFrog's total revenue was $136.9 million, up 26% year-over-year. Our operating margin was 18.7% in the quarter, demonstrating our ongoing discipline between expenses and strategic investments. Cloud revenue for Q3 equaled $63.4 million, representing 50% year-over-year growth. We experienced another strong quarter of cloud revenue growth driven by increased usage of conventional software packages and ongoing increases in usage of artifacts such as PyPI, Docker containers, NPM and models coming from Hugging Face for AI and machine learning. Our go-to-market teams are executing on a clear strategy of guiding cloud customers with usage overages toward higher annual commitments in order to build stronger partnerships and drive predictable long-term value for customers and for JFrog. Our enterprise sales motions continue to bear fruit with greater than $1 million customers growing to 71 compared to 46 in the year ago period, equaling 54% growth year-over-year. Customers spending more than $100,000 annually grew to 1,121 compared to 966 in the year ago period, equaling 16% year-over-year growth. In Q3, our 4 trailing quarter net dollar retention was 118%, demonstrating sustained growth among our customer base driven by strong cloud usage and fueled by our holistic software supply chain security offering. Ed will further discuss net dollar retention later in the call. Now let me spotlight Q3's wins, including cloud and security and discuss JFrog's AI and machine learning developments. First, addressing our cloud growth in Q3. Our ongoing growth in the cloud is supported by 2 vectors: our expertise in managing customers' binaries as they scale alongside AI-generated artifacts and our observation of emerging trends in AI software package volume. We believe Q3's cloud performance reinforces how customers view the JFrog platform and Artifactory at the core of their operations. JFrog is already positioned as the universal binary repository to manage all software artifacts and is becoming the model registry of their software supply chain. As software continues to be created at an ever-growing pace by both humans and machines, the volume of artifact rises, demanding not just intelligent storage but a robust binary delivery system and a single reliable system of record. As their delivery pace increases, our customers are adopting hybrid fit-for-purpose cloud strategies for their emerging AI workloads. They tell us they value cloud elasticity for AI adoption and deployment but remain flexible in their approach due to the unpredictable compute costs, advising us that it's still too early for them to go all in on the public cloud. Meanwhile, the volume of AI-driven packages is rising, fueled by our hug-and-face integration and native support for ML models, Docker, NPM, PyPI and other key components demanded by AI. We continue to monitor cloud adoption and AI-driven usage closely and believe it is still too early to bet on significant cloud usage growth. Our hybrid and multi-cloud offerings differentiate JFrog and uniquely position us to capture expansion due to AI, whether in the cloud or on-prem, delivering unmatched software supply chain, holistic platform capabilities and deployment flexibility. Next, to security. In Q3, again, we saw some of JFrog's largest customers wins, including new logos and significant multiyear contracts. Many of these deals included JFrog's holistic security solutions such as JFrog Curation and JFrog Advanced Security. We experienced this customers' purchasing behavior across multiple verticals and geographies. For example, we closed a 3-year deal with the United Kingdom's Customs and Revenue Agency with a TCV of $9 million. In a similar move, a key U.S. federal agency chose JFrog to shift left with JFrog Security Solutions and protect their software supply chain and 2,000 developers with an Enterprise+ subscription, JFrog Advanced Security and JFrog Curation as their open source software package firewall. In North America, our enterprise focus drove the closing of a net new customer deal with a TCV of more than $4 million for one of the world's top energy corporations. They were seeking to modernize and standardize software supply chain security and processes for their 3,500 developers choosing the core JFrog platform with JFrog Security Solutions in the cloud. The example wins give us confidence that the future of the software supply chain security and software governance market is being written not by point solutions but by holistic system of record that incorporate binary management and end-to-end security consolidated into a single platform. A unified platform is a growing requirement as companies have seen software supply chain attacks increases significantly over the past year. These attacks have become more sophisticated, targeting build pipelines, AI and machine learning software supply chains and exploiting vulnerabilities in software binaries. Recent NPM, PyPI and MCP attacks show hackers are keeping pace with technology but our security research team and the JFrog Curation solution have been praised by our customers for protecting them from this recent potentially devastating attacks. A cybersecurity lead at a Fortune 50 American company noted to us following the NPM attack. "Our JFrog Curation deployment provides a very effective and efficient supply chain protection. We were able to shut down recent provider attacks minute once discovered, and the control has proven 100% successful since." Nothing fuels us more than our customers' feedback, and we are committed to safeguarding their software supply chains and aiming to ensure digital trust across their software package life cycle. Hackers are targeting software supply chains. They know that binaries, software packages, containers and AI models are gateways into our customers' runtime environment. This is now a real threat to every organization. Without strong protection for your software supply chain and binaries, you remain exposed. Attacks are not a question of if but when. While one quarter doesn't define a consumption trend, Q3's adoption of JFrog Security solutions give us cautious optimism for broader long-term momentum. Now to AI and machine learning. We continue to gain traction in the market as the model registry providers and are being positioned as a system of record for AI delivery validated by some of the world's leading AI companies. In fact, Justin Boitano, VP of Enterprise AI at NVIDIA, noted at the JFrog Annual User Conference swampUP in mid-September that JFrog enables enterprises to securely build, manage and scale AI agents, the next generation of intelligent software from development to production. "AI agents are the next wave of enterprise innovation but they are also the newest and most critical software artifact to secure. This is no longer just about models. It's about industrializing intelligent autonomous agents. By integrating with NVIDIA AI Enterprise and streamlining deployment onto AI factories, JFrog is delivering the essential pipeline to rapidly secure, manage and scale these AI agents from development straight into production." Moving throughout 2025, JFrog has embraced the AI revolution, focusing on what we believe we do best, driving the next standards in the market as a single source of truth for AI software packages. We integrated JFrog ML into the JFrog platform, empowering data scientists and developers to build, test, experiment and deliver trusted models into production. We launched our MCP server alongside groundbreaking MCP security research. redefining how developers and AI agents interact with their software delivery platform. In addition, we introduced AI catalog, a new add-on to JFrog Curation designed to secure and govern both third-party and internally developed AI models, ensuring they are safe, compliant and aligned with company policies for responsible use across the organization. Our next generation of offerings in ML and AI as well as our DevOps and security products were highlighted for customers and analysts at swampUP in Q3. Every year, JFrog welcomes customers, prospects and partners to our swampUP conference, a key industry gathering for DevOps, DevSecOps and MLOps users. This year, JFrog innovations were front and center with pain solving solutions for customers. On stage, we announced a new way for companies to govern and trust their application with an innovative product, JFrog AppTrust. We were joined for the opening keynote by NVIDIA, ServiceNow, GitHub and Sona to showcase our partnerships in an industry-first DevGovOps solution. DevGovOps brings software development, security and GRC groups together, focusing on once again the key asset of any company, the software binary. As the complexity in the world of software increases, the requirements of security compliance and governance put pressure on development teams. The need to release fast and often, combined with high regulation requires automation and collection of evidence such as quality testing or security results to keep software flowing with confidence. With the new JFrog AppTrust product, companies will now have an automated way across platforms to manage governance as they deliver software faster than ever before. True to our vision of cross-industry collaboration and our commitment to build solutions that are too integrated to fail, AppTrust was launched in partnership with ServiceNow as the IT ops system of record with JFrog as the system of record for the software supply chain in the worlds of Rahul Tripathi, General Manager of ITSM at ServiceNow. The future of software built by developers and AI agents must include automated governance, achievable only through evidence-based quality gates and systems. JFrog AppTrust is paving the way to make that vision a reality. In security, we further showcased new abilities to secure developer extensions or the plug-ins developers use in their environments. This is a different type of supply chain attack and JFrog customers can now protect developer extensions in addition to their software assets. We also launched agentic remediation capabilities and demonstrated on stage how JFrog solutions use AI agents to detect vulnerabilities in source code, identify remediation methods, prioritize contextual path to fix problems and even protect against similar vulnerability in the future, first through our GitHub Copilot integration and soon available for other code assistance. Finally, we introduced JFrog Fly, the world's first agentic repository, reimagining software supply chain management in the era of AI. With JFrog Fly, AI agents become co-builders alongside developers, orchestrating artifacts seamlessly across the entire software life cycle. This allows developers to focus on what matters most, delivering software to production faster at scale and without friction. Small teams now enjoy a zero hustle AI-driven experience, tightly integrated with GitHub and native AI tools like Cursor, Cloud Code and GitHub Copilot. JFrog Fly's Agentic capabilities will be shared with selected users, giving developer teams the opportunity to experience AI-assisted software creation and delivery. These capabilities are planned for full integration into the JFrog platform, powering our customers in the new era of intelligent automated software supply chain practices built on an agentic binary repository. We believe that these product innovations share that swampUP are in the words of our customers, AT&T, a home run for our users. With that, I'll turn the call over to our CFO, Ed Grabscheid, with an in-depth recap of Q3 financial results and our updated outlook for the full fiscal year of 2025. Ed? Ed Grabscheid: Thank you, Shlomi, and good afternoon, everyone. During the third quarter of 2025, total revenues equaled $136.9 million, up 26% year-over-year. Our overachievement during the quarter was the result of strong go-to-market and operational execution, continued momentum in our cloud revenues, growing adoption in JFrog security products and expansion by customers within our enterprise-level subscriptions. As noted by Shlomi, third quarter cloud revenues grew to $63.4 million, up 50% year-over-year and represented 46% of total revenues versus 39% in the prior year. Our growth in the cloud was driven by increased usage across a broad set of package types, demand for JFrog Advanced Security and Curation and conversion of customers with usage above minimum commitments into higher annual contracts. During the third quarter, our self-managed or on-prem revenues were $73.5 million, up 10% year-over-year. We continue to proactively engage our on-prem customers to migrate DevSecOps workloads to our cloud or explore solutions better aligned with their specific use cases, including hybrid and fit-for-purpose deployments. In Q3, 56% of total revenues came from Enterprise Plus subscriptions, up from 50% in the prior year, driven by ongoing execution of our enterprise go-to-market strategy and broader customer adoption of the JFrog platform, revenue contribution from Enterprise Plus subscriptions grew 39% year-over-year. Net dollar retention for the 4 trailing quarters was 118%, consistent with the prior quarter, highlighting the continued adoption of our security core products and increased cloud data consumption, resulting in higher customer commitments. We continue to demonstrate that our customers view JFrog solutions as mission-critical to their software supply chain with gross retention that equaled 97% as of the third quarter 2025. Now I'll review the income statement in more detail. Gross profit in the quarter was $114.9 million, representing a gross margin of 83.9% versus 82.8% in the year ago period. We remain focused on cost optimization with the cloud service providers and continue to expect annual gross margins to remain between 82.5% and 83.5% for 2025. Operating expenses in the third quarter were $89.3 million, equaling 65% of revenues. This compares to $75.5 million or 69% of revenues in the year ago period. Our operating profit in Q3 increased to $25.6 million or an operating margin of 18.7% compared to $14.7 million and 13.5% operating margin in the third quarter of 2024. The continued balance between strategic investments and operational efficiency demonstrates our commitment to profitable growth. Cash flow from operations equaled $30.2 million in the third quarter. After taking into consideration CapEx requirements, our free cash flow reached $28.8 million or 21% margin compared to $26.7 million or 24% margin in the year ago period. During the third quarter, we completed payments totaling $5.7 million under a holdback agreement related to the acquisition of Qwak AI, which was completed in July 2024. Now turning to the balance sheet. We ended the third quarter of 2025 at $651.1 million in cash and short-term investments compared to $522 million at the end of 2024. As of September 30, 2025, our RPO totaled $508 million, a 47% increase year-over-year. This performance highlights the successful execution of our go-to-market strategy as customers continue to make larger multiyear commitments to our DevSecOps offerings. And now let's turn to the outlook and guidance for Q4 and the full year 2025. While we're encouraged by our strong year-to-date performance amid geopolitical uncertainty and ongoing macroeconomic volatility, we believe it remains prudent to continue to approach our forward outlook with measured caution. Our updated 2025 guidance range suggests sustained contributions from the JFrog Security core, steady expansion of customer commitments and adoption of the full JFrog platform. We continue to derisk our outlook by excluding our largest opportunities given the uncertainty regarding the timing of certain large customer deployments. We estimate our full year 2025 baseline cloud growth to now be in the range of 40% to 42%. Cloud revenue guidance continues to exclude any contribution from usage above annual customers' minimum commitments. Taking into account our strong year-to-date results and fourth quarter guidance, we are raising our expectation for net dollar retention to above 116% for 2025. For Q4, we expect revenues to be in the range of $136.5 million and $138.5 million, with non-GAAP operating profit anticipated to be between $21 million and $22 million and non-GAAP earnings per diluted share of $0.18 to $0.20, assuming a share count of approximately 125 million shares. For the full year of 2025, we anticipate a revenue range of $523 million to $525 million, representing approximately 22.3% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be between $87.3 million and $88.3 million and non-GAAP diluted earnings per share of $0.78 to $0.80, assuming a share count of approximately 122 million shares. Now I'll turn the call back to Shlomi for some closing remarks before we take your questions. Shlomi Haim: Thank you, Ed. The third quarter of 2025 is behind us. We committed and we delivered on innovation, on product execution and across every financial metric. Despite macro challenges, the JFrog team sold, over the past 3 quarters, we not only earned the trust of the enterprise, we reinforced our position as the definitive system of record for the software supply chain. As the world becomes powered by AI-driven software and every aspect of software creation and delivery is being transformed, one fact stands out, more software means more packages, more artifacts, more binaries, and that's exactly where JFrog stands front and center now and in the future. We're becoming the model registry of choice, securing the entire software supply chain of our customers from passport control at the gate to safe and trusted delivery. We manage the full life cycle of AI models, and we've introduced the world's first DevGovOps solution, preparing our customers for the ongoing tsunami of AI regulation and compliance. We continue to run our business with efficiency, focus and discipline while staying deeply energized by the opportunities ahead. This quarter was also a deeply meaningful one for our Israeli team as the war in the region came to an end and hostages were finally returned safely to their families after 2 long years. We stand in solidarity with the families of the remaining hostages still held by the terrorist Organization, Hamas, and we pray for their safe return home for proper burial. As we prepare for 2026, we are ready to leap forward in product, people and business. We remain determined to continue building on what we have created by developers for the developers of the modern software world. With that, thank you for joining our call and may the frog be with you. Operator, we are now open to take questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Cikos with Needham. Michael Cikos: Jeff, great to hear you on the call and for Shlomi, congrats on the strong quarter. I wanted to tap into cloud. And first, just to sanity check, the results super strong here. Was there anything one time? Or was this really just a confluence of a number of different pieces of the platform coming alongside the execution? Can you help us unpack that? Ed Grabscheid: Mike, this is Ed. I'll go ahead and start with that. There is nothing in the cloud revenues that is one time. This is a convergence of strong usage across multiple package types, geos and different verticals. In addition to that, we saw strong security. Security also is a leading driver of our cloud growth. So you had a combination of those 2 things happening but no one time. It was a very strong quarter. Michael Cikos: Excellent. And I did just want to tap in. I guess this is probably more for Shlomi but again, on the Cloud, we have a couple of quarters now of really strong growth. What is different, if anything has changed. But from an execution standpoint on the go-to-market, what have you guys implemented that continues to bear out here? How should we be thinking about that? Shlomi Haim: Mike, this is Shlomi, and thank you for the kind words. I think that what you see in the cloud is a strong and consistent execution, not only of our technology but also the go-to-market philosophy of working with our customers that have over usage, converting them to higher commitments, and that's translated to consistent cloud growth and less volatility. As you know, even when we guide, we provide you with the commitments-based guidance and consumption might come and go but we wanted to have an alignment between the go-to-market philosophy and the execution of our cloud business. That's on top, of course, to what Ed said that our cloud customers are now also embracing our security solution, which obviously gives us more room to grow and to expand. Operator: Your next question comes from the line of Sanjit Singh with Morgan Stanley. Sanjit Singh: Congrats, my congrats on the strong results this quarter. Shlomi, I was wondering if you could expand a little bit more on the theme on your script around the broadening of the types of artifacts that Artifactory is managing and storing and serving as a system of record. What does that mix start to look like between kind of traditional software artifacts, containers registries and some of the AI artifacts that are starting to come through? How -- can you speak to some of the underlying trends in terms of what Artifactory is storing and managing these days? Shlomi Haim: Yes, Sanjit. What we see, and we're obviously monitoring it closely is that artifacts or different type of artifacts that are heavily used by AI creators are seeing kind of a growth in usage in our cloud and on-prem customers. We see that obviously, Hugging Face is scaling up. This is the open source models hub for AI models but also languages that support AI development like Python with PyPI, NPM, Docker containers for distribution of models, all of them are aligned and correlated and growing together. It's still too early for us to say that this trend is actually going to lead to a higher consumption in the future. But it's very encouraging to see that our customers are using JFrog as the system of record for all packages, including AI models, and that obviously drives the higher consumption as we reported. Operator: Your next question comes from the line of Kingsley Crane with Canaccord. William Kingsley Crane: Really encouraging results. For Shlomi, the demo of JFrog Fly was really impressive at swampUP. The MCP capabilities are nice to see as well. It got me thinking AI is changing how consumers interact with technology. It's leading many companies to rethink their UI, their UX. How relevant is that for JFrog? And is that something that you're thinking about? Shlomi Haim: Yes. Thank you, Kingsley. The JFrog Fly release is a disruption to the entire software supply chain system of record. We understand that software in the future will be created not just by developers but also by agents. And therefore, whatever repository you want to build must come with a agentic capabilities. This is what we wanted first to have a JFrog Fly. The second thing based on our research with thousands of developers was that developers want to be focused on what they need to be focused on, create software, deliver software with trust fast and rapidly. JFrog Fly provide that. So instead of taking it feature by feature within Artifactory, we thought that what we will do better is to build a full agentic experience for our users, reimagining how software supply chain will look like and then slowly bring those capabilities into the JFrog platform, obviously, the enterprise market will adopt it one by one, feature by feature. The community and small team can run faster. So that's the idea behind Fly, and we are very excited to see how the market react to it. Operator: Your next question comes from the line of Koji Ikeda with Bank of America. Koji Ikeda: I wanted to ask on NRR and maybe pick on the metric just a little bit because it was flat at 118%. But when I look at the cloud growth, that's really, really strong and just knowing that NRR is calculated on the trailing 12-month metric, on a 12-month basis, that just really means that there's some new customers that are growing very fast. Is that the right interpretation on kind of looking at NRR versus the cloud performance? And if that is true, how sustainable is that growth from these new customers going forward? Shlomi Haim: Thank you, Koji. I'll start and Ed, feel free to chime in. NRR represent a tier of customers that are not committed to an annual NDR... Ed Grabscheid: NRR. Shlomi, let me go ahead and jump in here on the NDR. So first off, let me remind you that we had 3 of the largest customers closed during Q3 of last year. So we're building off of that. It's a trailing 12-month metric. But what I said in the beginning of the year, Koji, if you recall, if there was going to be an acceleration in net dollar retention, 2 things would have to happen. Number one, I want to see an uptick in my security. And number two, I want to see usage over minimum commit in the cloud, and both of those are happening. So you start on a trailing 12-month metric with a very strong base off of those 3 very large deals that were closed at the end of Q3, and we've continued to build on that. So we've actually expanded our net dollar retention rate, and we're very happy with where it is as it's stabilized quarter-over-quarter at 118%. Shlomi Haim: Yes. And Koji, sorry, I heard NRR and answered about the cloud monthly usage. Regarding net dollar retention, we also have to remember that part of the strategy of embedding our security solution into the platform will be a way to also expand our customers with a different persona. Getting our customers expanding with security actually addresses a completely different addressable market. Operator: Your next question comes from the line of Mark Cash with Raymond James. Mark Cash: Shlomi, if I could start with you. I also want to ask around Fly but more around if you see Fly opening up new customers or buying centers that you haven't serviced previously? And then what kind of go-to-market plans or tweaks would be required to drive market awareness versus maybe the market mostly thinking about JFrog more large-scale artifacts. And then if I could sneak one in for Ed. I'm just -- I mean, you beat by $9 million, raised by additional $6.5 million. So I guess maybe some of that comes with better visibility from RPO, cRPO strength but you're still taking a prudent approach you laid out. So what are the key drivers that give you confidence to raise by such an amount maybe compared to 90 days ago? Shlomi Haim: Yes, I'll start with Fly. This is obviously an opportunity but it's not our goal. Our goal is to make sure that everything that you have at the JFrog platform in the future will support both agents and developers as they manage their software supply chain. And why is that important? Because we know that in the future, the way that engineering team will be structured will be a combination of developers and agents. It will not be just developers. So software will be made by agents. And if you don't provide them, these agents will not have access to your repository, then they will have another system of record. So with Fly success, basically, what we see is how we fuel and power the entire JFrog platform. Now can small team use FLY and this will be another avenue of revenue generation? Yes, maybe. But our main goal is to make sure that we adopt this agentic experience across the platform and Fly is the North Star of adopting AI experience. Ed Grabscheid: Yes. And regarding the guidance and the confidence that I had moving into Q4, first of all, I only guide on the commitments. So I'm confident that what I'm providing to you 90 days after the last time I provided to you a guidance is the fact that I have the strong commitment. We saw a strong performance during the quarter. That's built into my forecast based on those commitment levels. And I've removed anything that's related to usage over the minimum commitments and feel very confident with those numbers provided. Operator: Your next question comes from the line of Miller Jump with Truist. William Miller Jump: Congratulations on the strong results. Yes. So for Shlomi, maybe for a couple of quarters now, we've heard about the demand for hybrid solutions correlated with AI. I'm just trying to reconcile this with the clear momentum that you're seeing in cloud. Like is this something that you're seeing shift the pipeline composition right now? And then if I could ask one for Ed as well, just throughout this year, maybe the last 2 quarters really, you've talked about the conversion of customers that are going over commit. And I'm just curious, like what are you seeing from the customers that do move on to new contracts? Like are they continuing to ramp up their consumption? How has that played out versus your expectations? Shlomi Haim: Yes. Thank you, Miller. I'll start. Well, first, what we see is what we reported in the past, and we see it still. In our pipeline, there are some big deals that part of them include cloud migration. So we hear from our customers that they need more certainty before they double down on the cloud and go there with the entire AI workload that is currently being built. So for sure, the fit for purpose that we reported in the past is still relevant. But you also know that part of our guidance philosophy, these deals are being derisked from our pipeline. And we are being very cautious with kind of hanging the expectations high when it comes to cloud migration and cloud consumption. In terms of the consumption, as I answered before to Sanjit's question, we see more software packages that are related to the AI world being used. And still, we want to make sure that this is a new behavior and not just a trend that will pass when people will decide whether they go with cloud or on-prem. Ed Grabscheid: Regarding what we see from the behavior of those customers that are above minimum commitments that go to a higher annual commitment, it's still not easy to do this. And the sales team has done a good job. That's strategically aligned with our philosophy. Budgets are still not fully aligned there yet. But for those customers, they're now secure and it gives them that confidence to flex up and down. So we continue to see strong usage across the board, especially in Q3. But we also know heading into Q4, it's a seasonably slower quarter due to the holidays. So that's also something that we take into consideration. Operator: Your next question comes from the line of Brian Essex with JPMorgan. Brian Essex: Congrats from me as well on these results. They are really nice to see the acceleration. Maybe for Shlomi, could you -- any way to quantify what kind of lift you get in the quarter or you had in the quarter from conversions to cloud? And maybe what percentage of your customer base is kind of remaining to convert? Shlomi Haim: Yes. So we are not disclosing this number, Brian. But what I can tell you that if you look at the report of the over $1 million customers, we have now 71. That's a growth of 54% year-over-year. I can say that the majority of them were not just using of more platform capabilities but also use it in the cloud. So while we are not disclosing it, the cloud for sure is a strong growth engine for the company. Operator: Your next question comes from the line of Shrenik Kothari with Baird. Shrenik Kothari: So Shlomi, definitely securing the software supply chain for AI models, continuous packages sounds like a critical pain point right now. I just wanted to hear your thoughts on what do you think about customers of truly allocating new budgets towards this and just the sustainability of these budgets? Or do you think it's getting bundled into existing DevSecOps and you are gaining from consolidation. You did note many attacks like the recent NPM and PyPI threats that are thwarted by Curation. Just curious how customers are thinking about the budgets going forward? And then I have a follow-up for Ed. Shlomi Haim: Yes, Fredrik, that's actually 2 different questions. First of all, there is a higher threat on software supply chain because hackers are after your software packages. And if you don't cover your software, it's -- as I said, it's a matter of when and not a matter of if you will be attacked. NPM, PyPI, MCP, in the past, you remember Log4j, these are all software packages and attackers are going there because this is binaries and binaries are also the asset that our customers have in the run time. So basically, if you are attacked from run time for the binaries, you have full access to the software supply chain. That's front and center for every CISO now. And the other question regarding new budget allocated to security in the world of AI, I believe the answer is yes. And it's not only the traditional security but also GRC budgets. So cyber risk organizations are also looking at what happened in terms of governance and regulation, a moment before AI is fully adopted by the biggest bank and the biggest car manufacturers and the biggest retail companies. And the gap between full adoption of AI to what we see now is basically trust, control, security and governance. So for sure, there is more budget there and more attention of CISOs and CIOs to make sure that software delivery driven by AI is not putting the company in a risk. Shrenik Kothari: Just quickly, Ed, a follow-up, Federal wins were a highlight. You mentioned meaningful TCV. So just in light of the strong Q3 and traction around security AI, the guide for Q4 does appear measured. You did touch upon it. It's coming from place of prudence but just implied is more kind of 25% to 30%. Is there more prudence coming from the Fed side? Anything that you can comment on deal timing, variability just given the prolonged shutdown? Ed Grabscheid: Yes. Thanks for the question, Shrenik. There's nothing related to a government shutdown that would change anything in terms of our sentiment going forward. We've managed this year with prudence. We're continuing to manage the year with prudence. There's a lot of factors that we take into consideration. I want to remind you, there is no usage over minimum commitments in our guide. We derisk for our largest deals as the timing of those deals are still uncertain but nothing has changed from our previous philosophy, and we're continuing to use that same philosophy in our Q4 and fiscal year guidance. Operator: Your next question comes from the line of Ittai Kidron with Oppenheimer. Ittai Kidron: Congrats, guys, really impressive. Maybe a couple for me. And just on this last comment that you made about that you don't give guide over the minimum commits. Can you tell us in the quarter itself this quarter, what was the upside from kind of spillover over the minimum commits? Ed Grabscheid: Yes. We didn't break that out, and we're not willing to provide that information. But if you think about what we've carried over from Q3 into Q4 sequentially, that is the commitment levels. Anything above that, I would consider to be usage over minimum commits. Ittai Kidron: Okay. And then Shlomi, for you. Clearly, you're doing very well. I'm kind of wondering internally, what percent of your sales force is running above quota for the year? And if that's running at a level that's higher than your normal internal averages. I'm just trying to think about, you're soon to finish the year, you have to start thinking about how you make tweaks and changes. I was wondering if you have any initial thoughts given the change in the landscape, AI, the breadth of your portfolio, do you have any initial thoughts on how you're going to tinker with comp as you go into next year? Shlomi Haim: Yes, Ittai. So obviously, we will not share some operational metrics but of course, we are tracking it. There are very important takers for the go-to-market team when it comes to the growth engine, when it's security, when it's cloud, cloud migration, AI and MLOps adoption, now DevGovOps and compliance. What you can see in the numbers, and this is not the first quarter, it's, I think, the fifth quarter in a row that we are consistently deliver what we are committed to is that not only the sales team is focused but also they use the methodologies of top-down enterprise sales, things that in the past, we didn't practice like 3 years ago or 4 years ago, when we used to sell to developers, there were no expansion. And now what you can see not only by the reports of the big numbers or the big companies but also the entire revenue growth and the consistent growth is that the team is focused on enterprise sales upmarket, know exactly how to expand the platform, and we are very pleased with the results. Operator: Your next question comes from the line of Brad Reback with Stifel. Brad Reback: Shlomi, I'll take the 5 quarters one step further and say the magnitude of the SaaS speed over those 5 quarters continues to get bigger. So maybe building on Ittai's question, is there any reason why you wouldn't accelerate sales and marketing headcount spend as we head into next year to take advantage of all this opportunity you see? Shlomi Haim: No reason. We are investing in go-to-market. We are investing in go-to-market in a responsible way. We want to see that what we deploy also comes out as the right ROI for our investment. And it's on all fronts. You can see the amount of releases from the product side, but you can also see the alignment on the go-to-market side when we deliver the numbers with such a strong bid. Operator: Your next question comes from the line of Andrew Sherman with TD Cowen. Andrew Sherman: Great. Shlomi, I wanted to ask about the security wins and pipeline, some good color there in the quarter. But for the Q4 pipeline and beyond that, how is that tracking? How much is that pipeline up? What's your confidence in closing some of these big deals? Have the sales cycles changed at all? How is the market kind of shaping up competitively for these deals, too? Shlomi Haim: Yes. Great question. We see a lot of opportunities in our pipeline, including security. Obviously, JFrog Curation following the incident of NPM is something that a lot of our customers are asking and inquiring about. The sales cycles are longer when it comes to security because no customer comes with 0 security coverage. So obviously, it's not just a matter of upgrading themselves but also displacing something that they used in the past. So the answer regarding the pipeline, it's growing, and we are very pleased with what we see there. It's also -- to remind you, it's only part of our Enterprise X and Enterprise+ subscription. So sometimes it's also drive an upgrade in the subscription. And through to our methodology, when it comes to mega deals, in the world of platform that also includes security, we are derisking it to make sure that we are not missing a quarter because the customer needs a bit more time to conclude the proof of concept. Overall, the sales cycles are a bit longer but not massively longer. I would say 3 quarters in average, sometimes it's 4 quarter really depends on how many persona are involved in what you need to adopt from JFrog. Operator: Your next question comes from the line of Jason Celino with KeyBanc. Jason Celino: Really wonderful quarter. The 2 wins you talked about that I thought were interesting, so the one U.K. customer and then the U.S. Federal Agency, did these deals directly benefit from the launch of AppTrust? I'm just trying to understand how AppTrust and the government opportunity might play as a catalyst. Shlomi Haim: Yes. So that was really a big win. And obviously, it was an RFP. So not only JFrog compete over this opportunity, and we are very proud of the team that delivered that, by the way, a very long process, obviously, in front of the government. AppTrust is not yet included. AppTrust was just announced last month, a few weeks, a baby product. We announced that together with ServiceNow. We are building the pipeline for AppTrust. And the DevOps landscape, governance is something that we know that will get even more demanding when AI will fit in. So not yet. But I will answer something that you didn't ask. There is a room to grow with all of our customers when AppTrust is in. Operator: Your next question comes from the line of Eamon Coughlin with Barclays. Eamon Coughlin: I would reiterate congrats on a great quarter. The strong enterprise customer adds really stood out in the quarter. Can you help us understand some of the key drivers there? Like are you spending more time engaging with your partner ecosystem? Is it a function of a more mature sales team? Just curious if there's anything you're doing to adjust a little bit of your sales motion or go-to-market motion. Ed Grabscheid: Thanks for the question. Yes, we're seeing great traction in the enterprise, especially those customers over $1 million. What we see, and Shlomi talked about this previously, security is becoming a driver of many of those large deals, and it's also in the cloud. So we see this expansion of the usage over the minimum commit and expanding to a bigger commitment, taking security on top of that. That drove many of the deals that we saw 10 customers that we had over $1 million during the quarter, 54% growth. It's the efforts of the go-to-market team, and it's really a 3- or 4-year investment that we made, and we're starting to see the fruits of those labor. Operator: Your next question comes from the line of Jonathan Ruykhaver with Cantor. Jonathan Ruykhaver: Congrats on the performance. I'm curious, so last week, OpenAI announced a private beta of security application called, I think it's Aardvark. But it seems to differentiate with an LLM-driven approach to vulnerability detection and remediation. And I'm curious if you could just talk about how this compares to X-ray's capabilities. But maybe I think more importantly, the announcement at swampUP around agentic remediation capabilities. How do you think this maybe further differentiates you from emerging competition? Shlomi Haim: Yes, Jon. Well, this was a very important announcement coming from OpenAI. And obviously, we saw it, and we work with OpenAI on a monthly basis, if not daily basis. This is great news because it's yet another proof that human security is -- sorry, human code creation is being covered by models. That's basically supporting the philosophy that what you need to invest in is to protect your binaries. The announcement from OpenAI is a solution that replaces static code analysis, basically code that is created in human language and not binaries. If it will drive something, I think it will drive more interest in what we bring to the market, which is a complementary solution to protect your entire software supply chain. So yes, LLM can provide your source code security, but not binaries, and that was the release from OpenAI. Operator: Your final question comes from the line of Rob Owens with Piper Sandler. Robbie Owens: Just a couple of quick ones for me. Where you talked about cloud migration and some of those in the pipeline. Taking the other side of that, the customers that aren't moving to cloud, what are some of the governors or some of the reasons that they're not moving to cloud at this point? I understand that having a hybrid architecture is part of your value proposition. But just contemplating that move to cloud and maybe some of the barriers to get certain customers to move. Shlomi Haim: Yes. That's a good question, Rob. So assuming that our customers -- enterprise big customers moving to the cloud from an on-prem setup means that they had their own projects. They understood the scope of these projects, and they wanted to move the workload to the cloud in order to kind of provide a better elasticity for the company. Now comes AI and they see a new workload. They don't know how much they will pay for storage. They don't know how much they will pay for data transfer when you train these models, where the data to train this model will be hosted. That takes a bit more time for them to analyze. Putting aside the cost predictability, they also have some security and governance concerns. Who is training this model, how this model is being exposed? What are we doing in order to protect the company from having any type of malicious models coming in. And this, I think, bring them to take a bit more time or at least this is what they tell us. They need a bit more time before they fully bet on the cloud like it used to be maybe in a process a year ago or 2 years ago. JFrog is positioned to capture the opportunity both ways. Either they will stay an on-prem customer, and we will support them and grow with them there or they will move to the cloud, and we will do it in the cloud with them on a multi-cloud basis or one cloud. Basically, the hybrid solution that JFrog provided is the fit for purpose that they ask for. Operator: There are no further questions at this time. I will now turn the call back to Shlomi for closing remarks. Shlomi Haim: Thank you, everyone, for joining us on this quarter results and earnings call. May the frog be with you. Take care. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Emanuel Hilario: [Audio Gap] New premium holiday menu focused on Wagyu and premium seafood, aligning with today's selective diners who are more intentional about what they choose to dine. At Kona Grill, we are strategically expanding our menu to reduce reliance on categories facing current market pressures. The brand has historically been centered around seafood, sushi, and our distinctive bar experience, but we are seeing headwinds across those core areas. Our menu diversification introduces broader culinary options that appeal to more frequent dining occasions and are less sensitive to economic fluctuations. Our Friends with Benefits loyalty program continues to gain momentum with over 6.5 million members. During the quarter, we added over 200,000 new members. Newly enrolled guests are showing the most repeat participation in the program. We are focused on growing a best-in-class program that fuels long-term business growth. Our key objectives with the Friends with Benefits loyalty program are: one, maximize membership size by converting members from other TOG marketing programs; number two, drive organic sign-ups through increased awareness and engagement; and number three, increase member engagement within the program to strengthen brand connection and repeat visits. We have also upgraded our brand websites, Benihana, STK, Kona Grill, and RA Sushi now feature fresh, mobile-optimized designs that are increasing both traffic and conversion rates. These digital enhancements, combined with our loyalty platform, position us to compete effectively as national chains ramp up promotional activity. Priority 2, capital-efficient growth. The newly redesigned Benihana location we opened in San Mateo, California, early this year has become the top-performing restaurant opening in the brand's 60-year history. This outstanding start validates the effectiveness of our redesigned restaurant format. In this redesign, we made several meaningful changes to the Benihana footprint. We relocated the sushi station to the back of the house to create more Techniaki table capacity, expanded the bar seating area, modernized the interior with a brighter, more contemporary look, and created a dedicated takeout station that improves overall restaurant flow. We are now implementing this learning system-wide, adding 2 to 3 Techniaki tables per restaurant to create meaningful capacity increases that directly boost revenue potential. This success gives us confidence that future locations can achieve $8 million in annual sales with a restaurant-level profit margin in the mid-20% range. Franchise momentum continues to accelerate. We opened our second Benihana Express location in Miami in the second quarter, with more in development. The Express format offers the full menu without Techniaki tables, generating strong franchise interest while enabling asset-light expansion. Over time, we expect franchise licenses and managed locations to represent over 60% of our total footprint. We are also expanding Benihana into more nontraditional venues. We currently operate in 3 professional sports stadiums, generating 9 million fan impressions annually, with additional airport and arena opportunities under discussion. Across our portfolio, we have opened 4 company-owned venues and 1 franchise location year-to-date, with additional fourth quarter openings planned, bringing our total 2025 openings to 5 to 7 new venues. In the fourth quarter, we already opened an STK in Scottsdale, Arizona, and plan to open a company-owned STK in Oak, Illinois, and our Kona Grill San Antonio relocation. Relocations remain a key strategy to unlock strong returns in existing markets. By prioritizing nearby high-quality real estate opportunities in areas that already embrace our brands, we can increase capacity, optimize traffic, and better position our brands for long-term success. For example, our recently relocated Westwood STK has delivered margin improvement over the previous location. Remodels are also showing promise and success. During the third quarter, we remodeled our dated Tampa Bay Kona Grill. With modest capital investment, it has delivered a significant turnaround in same-store sales performance. Priority 3, portfolio optimization. We have taken decisive action to strengthen our portfolio quality through strategic location optimization. After conducting a thorough evaluation of our Grill concepts portfolio, we closed 6 underperforming locations in the second quarter and 1 additional location in the third quarter within challenging trade areas. These were primarily older units, which would have required substantial capital investment. Looking ahead, we have identified up to 9 additional Grill locations to convert to either Benihana or STK formats through the end of 2026. These conversions represent an excellent capital allocation opportunity. They require about $1 million in capital investments, and the average STK generates over $1 million in annual EBITDA. Our first conversion of a RA Sushi location to an STK location has already happened in Scottsdale, Arizona, which opened at the end of October. After completing all planned conversions, we will operate all profitable locations that we expect to generate approximately $10 million in restaurant-level EBITDA and over $100 million in revenue, with all units maintaining positive cash flow. Priority 4, balance sheet strength. With approximately $45 million in liquidity, we have the means to invest in growth while maintaining discipline. Our Board authorized a $5 million share repurchase program last year, and we view our stock as an attractive investment. Additionally, we expect to further reduce discretionary capital expenditures in the coming year across all of our brands, allowing us to strengthen our balance sheet while enhancing financial flexibility. Finally, I'm optimistic about our fourth quarter. This is historically our strongest period, and we are better positioned than ever to capitalize on that strength. 2024 marked our first holiday season with Benihana in the portfolio, and we set records across every holiday with exceptional demand. This year, we have made targeted investments to capture even greater holiday demand. Our enhanced reservation technology, streamlined operational flow, and comprehensive team training initiatives position us to execute flawlessly during our busiest periods. A key operational focus is optimizing Benihana table efficiency. We are targeting a reduction from 120 minutes to 90 minutes table turns throughout the fourth quarter, which will significantly expand our capacity to serve more guests during the busy dinner periods. The items that I have outlined today are fundamentally execution-driven and within our direct control. We are not relying on macroeconomic recovery or waiting for consumer sentiment shifts. Instead, we are focused on strategic initiatives that position us to deliver strong results regardless of broader economic trends. Before I turn it over to Nicole for the financial details, I want to thank our teammates. Every day, they live our mission of creating great guest memories by operating the best restaurants in every market that we operate by delivering exceptional and unforgettable guest experiences to every guest every time. They are at the foundation of everything we do. With that, I'll turn it over to Nicole. Nicole Thaung: Thank you, Manny. As a reminder, beginning this year, we are reporting financial information on a fiscal quarter basis using 4 13-week quarters with the addition of the 53rd week when necessary. For 2025, our fiscal calendar began on January 1, 2025, and will end on December 28, 2025, and our third quarter contained 91 days. Let me start by discussing our third-quarter financials in greater detail before updating our outlook for 2025. Total consolidated GAAP revenues were $180.2 million, decreasing 7.1% from $194 million for the same quarter last year. Included in total revenues were our company-owned restaurants' net revenue of $177.4 million, which decreased 6.9% from $190.6 million for the prior year quarter. The decrease was primarily due to a 5.9% reduction in consolidated comparable sales and the closure of underperforming restaurants from the prior year period. Management license, franchise, and incentive fee revenues decreased to $2.8 million from $3.4 million in the prior year. The decrease is attributed to lower management license and incentive fee revenue at our managed STK restaurants in North America and reduced franchisee revenues due to exiting 2 license agreements. It is important to note that our sales at our managed STK in Las Vegas have notably improved quarter-to-date. Additionally, we exited our management deal with STK Scottsdale and converted a former RA Sushi to a company-owned STK. Now turning to expenses. We continue to implement targeted cost management initiatives, including strategic adjustments to our protein sourcing to reduce costs and a temporary hiring freeze that will optimize our labor structure. Company-owned restaurant's cost of sales as a percentage of the company-owned restaurant's net revenue increased slightly to 21.1% from 20.9%. This was primarily due to sales deleveraging, coupled with higher-than-anticipated inflation in certain commodity costs. This was partially offset by additional integration synergies from our Benihana acquisition. Company-owned restaurant operating expenses as a percentage of company-owned restaurant net revenue increased 140 basis points to 67.6% from 66.2% in the prior year quarter. This was primarily due to investments in marketing, general cost inflation, and fixed cost deleveraging driven by a decrease in same-store sales. Restaurant operating profit decreased to $20.1 million or 11.3% of owned restaurant net revenue compared to $24.5 million or 12.8% in the prior year quarter. On a total reported basis, general and administration costs increased $0.5 million to $13.3 million from $12.8 million in the same quarter prior year, driven by increased marketing expenses. When adjusting for stock-based compensation of $1.2 million, adjusted general and administrative expenses were $12 million compared to $11.2 million in the third quarter of 2024. As a percentage of revenues, when adjusting for stock-based compensation, adjusted general and administrative costs were 6.7% compared to 5.8% in the prior year. Depreciation and amortization expenses were $11.5 million compared to $9.4 million in the prior year quarter. The increase was primarily related to depreciation and amortization of new venues and capital expenditures to maintain and enhance the guest experience in our restaurants. During the quarter, we completed our regular assessment of the recoverability of the net book value of our fixed assets. A noncash loss on impairment may be necessary when the net book value exceeds the future expected cash flows of the restaurant, and can happen due to economic factors, end of lease, or restaurant performance. As a result of this assessment, we identified 5 restaurants that required impairment charges that totaled $3.4 million, mostly related to grills that we plan not to extend the leases on. Preopening expenses were approximately $700,000, primarily related to the preopening rent for restaurants under development and payroll costs associated with the preopening training team as we prepare restaurants scheduled to open in the fourth quarter of 2025. Preopening expenses decreased $1.4 million compared to the prior year period. Operating loss was $7.9 million compared to an operating loss of $3.6 million in the third quarter of 2024, mostly impacted by the $3.4 million in noncash loss on impairment. Interest expense was $10.5 million compared to $10.7 million in the prior year quarter. Provision for income taxes was $59.1 million compared to a benefit of $4.9 million in the prior year quarter. The increase in income tax expense is primarily the result of the establishment of a full valuation allowance against our deferred tax assets during the third quarter. This is a noncash income tax expense item that was recorded because of management's assessment of the future usability of our deferred tax assets and liabilities. Net loss attributable to Wes Hospitality was $76.7 million compared to a net loss of $9.3 million in the third quarter of 2024. The 2025 loss was primarily driven by the noncash loss on impairment and the noncash recognition of the valuation allowance. Net loss available to common shareholders was $85.3 million or $2.75 net loss per share, compared to $16.4 million in the third quarter of 2024 or $0.53 net loss per share. The previously discussed noncash loss on impairment and establishment of the deferred tax asset valuation allowance represent $2.02 of the third quarter 2025 net loss per share. Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. was $10.6 million compared to $14.9 million in the prior year, a decrease of 28.9%. We finished the quarter with $6 million in cash and cash equivalents and restricted cash. We have $28.7 million available under our revolving credit facility. And as of quarter end, we had $5.5 million outstanding on our revolving credit facility. Under current conditions, our term loan does not have a financial covenant. Now I would like to provide some forward-looking commentary regarding our business. This commentary is subject to risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We remind our investors that the actual number and timing of new restaurant openings for any given period are subject to factors outside of the company's control, including macroeconomic conditions, weather, and factors under the control of landlords, contractors, licensees, and regulatory and licensing authorities. Based on the information available now and our expectations as of today, we are updating the following financial targets for fiscal year 2025. Please note, this does not include the potential impact of tariffs on broader economic conditions. We project total GAAP revenues of between $820 million and $825 million, which reflects our anticipation of consolidated comparable sales of negative 3% to negative 2%. Managed franchise and license fee revenues are expected to be between $14 million and $15 million. Total company-owned operating expenses as a percentage of company-owned restaurant net revenue of approximately 83.5%. Total G&A, excluding stock-based compensation of approximately $46 million, adjusted EBITDA of between $95 million and $100 million, restaurant preopening expenses of between $5 million and $6 million; an effective income tax rate of between 1% and 4% when excluding the valuation allowance and the items subject to valuation allowance. Total capital expenditures, net of allowances received from landlords, of between $45 million and $50 million. And finally, we plan to open 5 to 7 new venues. I will now turn the call back to Manny. Emanuel Hilario: Thank you, Nicole. Before we open it up for questions, I want to emphasize how excited we are about the future of our business. Although the current environment is challenging, our future looks bright. With our strengthened portfolio and our expanded franchise capabilities, we are well-positioned to capture the significant opportunities ahead of us. We thank you for your continued support and look forward to sharing our progress in the quarters ahead. Nicole and I look forward to your questions. Operator? Operator: [Operator Instructions] We'll take our first question from Joe Gomes with NOBLE Capital. Joseph Gomes: So I want to start out the last couple of quarters, you talked about Benihana having 2 quarters in a row of same-store sales growth, in STK 3 quarters in a row of positive traffic. And I might have missed it, but I didn't hear that discussion today. I was wondering if you could give us a little update on those. Emanuel Hilario: I mean, I think probably the best thing to do is talk about maybe our traffic overall as a company. I think if I look at the third quarter, 2025, I think that's been our best quarter in traffic, actually, for the whole year. As a consolidated company, I think we were down 6.9% in traffic for the third quarter, whereas in the second quarter, we were down 7.5%. And in Q1, we're down 7.8%. So the third quarter this year was by far our best or better traffic quarter. The big difference for us in the third quarter, though, is that until the end of the second quarter, beginning of the third quarter, we had about 7% effective pricing in there. So that offset part of the traffic experience that we were having. And then, going into the middle of the third quarter around August, we began lapping some pricing from last year. And we just saw a lot of noise in the middle of August in traffic. So we decided to just hold off on the pricing. And so our pricing in the third quarter was only plus 4% for the quarter. So we effectively lost about 3 points of pricing in the third quarter. So I would say from my perspective or our perspective, we made significant or we're doing improvements on traffic, which is one of the reasons why going into the fourth quarter, and we put some pricing in effect right at the beginning of November, I think that we've basically put the pricing back on. And with the sequential improvement in traffic, I think we feel pretty good about the sales position going into the fourth quarter. Joseph Gomes: And what do you think is driving the traffic improvement in the fourth quarter so far? Emanuel Hilario: On the third quarter, I'd say the sequential improvement in the third quarter, I think, is really a testament to the value of the proposition and the marketing that we've been doing. We also, as I mentioned in my prepared statements, we do have some macro forces that haven't really supported sales. For instance, if you look at our across of our portfolio, our concentrations of restaurants are in California, Arizona, Florida, and Texas, and then we have the other, which is about 50% of our concentration of sales. And if I just look in the third quarter alone, I think there was a lot of macro pressures, for instance, in our California sales sequential between the second and third quarter actually got negative by 7 points. So there's some geographical pressures that came in that quarter since the third quarter. We've seen some of that loosen up a little bit, but certainly in September, we saw a lot more pressure in our traffic in California, which is, by the way, one of the reasons why we put the pause on our pricing actions, just because we saw the traffic in there. So again, I think that the combination of the sequential improvement in traffic in the quarters, and now I feel as if California is getting slightly better. And last but not least, as I mentioned also in my prepared statement, in the month of December, taking the turn times at Benihana from 120 minutes to 90 minutes creates a significant lift in availability and tables, and capacity to take more business. Joseph Gomes: And then one more for me, if I could sneak one in. Maybe just can you give us a little color on your efforts on the Benihana franchising side. I know that's something that you're hoping to see a little faster growth. So just want to get an update there. Emanuel Hilario: Yes. So I mean, we did open one in the second quarter in Florida. And then our activities on the franchising side have also yielded. We now have a deal that's almost done for some Benihana Express-type operations in California. We also have a potential franchise deal for the Bay Area that's also shaping up. So we've made significant improvements on the pipeline. So now our team is out there working with these potential individuals and closing these deals down. We've also made some improvements to our pipeline for license sites for STK. So we do have both the franchising move forward on the pipeline for Benihana and also STK, as we've gotten some more leads and are actually getting very close to announcing some additional license deals for STK. Operator: We'll take our next question from Anthony Lebiedzinski with Sidoti. Anthony Lebiedzinski: So Manny, I think also last quarter, you called out Las Vegas as being a market where you saw some, I think, softness. Can you comment on that? Did you see that as well? And have you seen any improvements fourth quarter to date? Emanuel Hilario: Yes. So I will caveat my response on Vegas on the fact that it's our experience. We only have, let's call it, 3 or 4 restaurants in that market, actually 4 in total. But our experience right now with STK is that it's actually improving for STK. So we've seen an improvement in our business on that side. Again, as I mentioned earlier, part of that has to do with the shifting in the conference and convention schedule. I think if you follow Vegas, you probably are aware that there was a shift in the convention calendar. So that's definitely benefiting us in the fourth quarter, having a more robust conference schedule. I think the other restaurants, though, I would say that it's more of a little bit of a mixed bag. So I haven't seen the same improvement that I've seen on the STK business. Anthony Lebiedzinski: And then you gave us some numbers on the loyalty program, which looks like it's doing well in terms of sign-ups. Can you give us maybe some details, as far as like what the average ticket or frequency or anything else, can you share about the loyalty members versus non-loyalty members? What do you see in terms of behavior from them? Emanuel Hilario: Yes, great question. So we have about 6.5 million people who are in the program. A lot of those members came through our conversion of memberships from other programs. So we have Benihana on the programs. We had Kona Grill Rock. And that's the case. So we brought everybody into the same common program, if you will, into that loyalty program. And since then, we've done about 200,000 sign-ups of new members coming into the program. We're early. So I'm going to give you what I've seen so far because of all the brands we have, Kona Grill is the one that has been on the loyalty program much longer than anyone else because we were already utilizing Konivor, which was the legacy program from Kona. And for that particular brand, it's actually been helpful. So we've seen a frequency increase in the use of the program. So we feel the early returns are very promising because we have members in that program who've been around for longer. And I think the new program and new activations that we're doing with it have driven a little bit more interest. But again, as I said earlier, it's early. I think we rolled it out only earlier this year. I think that we will continue to pick up momentum with it going forward. But again, I think that as I look at the overall story for the quarter, I think that the third quarter being our best traffic quarter for the company, I think it bodes well for all the initiatives and the actions that we're taking with marketing and everywhere else. Anthony Lebiedzinski: And then I guess my last question before I pass it on to others. In terms of recent price increases, I know it's still early on, but any early read on the reaction to the price increases? Have you seen any customer pushback to those higher prices? Or do you think that you'll be able to successfully pass those along? Emanuel Hilario: Yes. I mean, I think we start rolling out those price increases in late October in some places. And so we're really, really early on it. But, again, I think the way that we did our pricing increase this time is that we really tried to wait until we think the timing is a little better. I think this has actually started our seasonally better months, weeks, whatever you want to call it, actually, for the next 36 weeks is really our high season period for us. So I think putting the price right at the beginning of the high season is actually a good strategy for us. Have we seen any noise in terms of feedback? The answer is not. We follow it obviously through all our listening tools and social media, and everything. So we have not seen anything above and beyond what we usually see on the pricing. Operator: We'll take our next question from Mark Smith with Lake Street Capital Markets. Mark Smith: I wanted to dig in a little bit more into Benihana comps here in the quarter. They came down more than we've seen here recently. Can you just talk about traffic and tickets at Benihana? Emanuel Hilario: Yes. I think for the quarter for Benihana, as I mentioned earlier, that we had pricing coming off. Benihana was the one that had 5 points of pricing might have actually been a little higher than 5 points that we did not replace in the quarter. So if I look at their differential in same-store sales year-to-date to what we performed in the third quarter, I would attribute it mostly to the pricing, not taking the pricing action. And again, I want to reiterate this, if I look at our same-store sales by geography, California was by far the most impacted of all markets in our portfolio, and the Benihana portfolio does have a bit of weight in the California market, some of our higher-volume restaurants. So again, I think that I would say that the 2 items on the Benihana would be not replacing the 5 points in pricing that we came off and then the additional pressure in the California market. Mark Smith: And then just on the impairment that you took in the quarter, was all of that on Grill Concepts? Or was there anything on any of the other brands? Emanuel Hilario: Yes. I think the majority of the impact was on Kona Grill. And then we did have a very minor amount coming out of our STK in downtown New York just because that lease is up. We're in the last year of that lease, and we're moving the restaurants, actually relocating the restaurant around the corner. So that will be a reload. But right now, we just have some additional amounts in the books that we have to accelerate. And by the way, there were assets that we couldn't move over to the new location because a lot of the assets may move to the new location. Mark Smith: And then just talking about changing locations here. Can you just walk us through a little bit more on your, maybe the economics of the conversions? I think you said $1 million maybe on spend, but just the economics there and then, maybe your outlook on these that you plan on converting, how many maybe to STK, how many to Benihana. And I'm curious, sorry to throw a lot on you here. Do these come with a new lease signing? Or do you typically keep the lease terms that you currently have? Emanuel Hilario: Well, so a very good question. So the first one we did is Scottsdale. It was a RA Sushi restaurant. And in that one, we converted to an STK. It took us, I think, from beginning to end, somewhere between 6 and 8 weeks, to do the full conversion. The cost of the conversion, I'm putting it at about $1 million in a round number. And it was a very effective refurbishing of the restaurant, and we kept the majority of all the infrastructure. So it was very cost-effective in that. And the question on the lease is that one, actually, we actually got an extension on the lease by choice. So we got another 5-year option just because we like the real estate. When you go to that property, you'll notice that it's in an A plus, I'm going to call it A, I'm not going to give it A+, but let's call it A real estate with very good lease terms and a good presence there. And we've already reopened it. I would say that we just opened the door. We didn't really do much marketing. We're actually starting the marketing push in the next couple of weeks. And I've been so far been very happy with what it's happened there. Obviously, as you know, our model for STK, brand-new STK, is about $8 million in volume with margins around 20%. So I would expect that STK to be in that range of value. It's in a market that we've already been in. So we have pretty good experience there. So I feel pretty good about that one. Now we have other, I think, up to 9 other sites that we're looking at converting and the cost should be around that same $1 million type tag, if you will, price tag and the conversion cycle should be relatively fast, and we'll do the same thing in terms of taking advantage of existing infrastructure in electrical, HVAC, kitchen, plumbing, et cetera. So we think those will be very effective. Again, what really drives that decision is the quality of the real estate. That's one of the things that we're really happy about, The ONE Group is we have great real estate, and that's one of the things that having multi-brands like we do gives us a lot of flexibility and gives us an opportunity to really leverage the strength in the real estate. Mark Smith: Would there be much of a difference in the cost or maybe return metrics on converting to Benihana versus STK? Emanuel Hilario: I mean, again, another great question. I think the difference between Benihana and STK conversion is actually the mechanical cost because with the tables in the dining room, we have to do more upgrading on the exhaust system, and sometimes electrical systems if we add electrical tables. So it's a little bit more on the mechanical side. And it may take a little bit more time because we actually have a lot more engineering and architectural work into it. So it's a little bit different from a process. But our view on it is that the cost will still be around $1 million in either one. And so we don't foresee a lot of cost incrementality in there. Again, I mean, we have a lot of real estate in malls and other places that make a lot more sense for Benihana than STK. So that's part of our decision on Benihana is that Benihana is a great concept for mall-type locations. Operator: We'll take our next question from Jim Sanderson with Northcoast Research. James Sanderson: I wanted to go back to the issue of pricing. I think you mentioned you exited the third quarter with a global price of about 4 percentage points and that you took a price in November. What should we expect as far as the impact of menu price on fourth-quarter same-store sales? Emanuel Hilario: So I think the bigger part of that increase was Benihana around slightly above 5 points on pricing. So that will weigh in heavily. And then STK and the other brands, we had about 2 to 3 points on pricing. So the other ones are very modest. I would call that just cleanup pricing. So I would say, overall, somewhere around 4.5% to 5.5% on a weighted basis would be the impact of the new pricing layer. James Sanderson: And that probably will last for the next 36 weeks, give or take. Is that the right way to look at that? Emanuel Hilario: That's right. James Sanderson: Could you talk a little bit more about bookings? I think you mentioned in the press release that you were optimistic given the level of holiday bookings. Maybe you can tell us any comparison with respect to last year at this time? Emanuel Hilario: Yes. I mean, we actually just reviewed the books this morning. Nicole and I did a review of our bookings to progress right now. Frankly, since COVID, if I look at the month of November, looking into December has been one of the months where I've actually seen a significant amount of progress on the number of bookings that we've seen in events. Obviously, that also reflects a little bit of the fact that we have a very experienced. We have a very good sales team. So that team has become very good at working in the current environment of sales. And again, the convention business and a lot of the stuff that used to happen in the third quarter last year also got moved into the fourth quarter this year. So definitely, that helps bring up the books into the fourth quarter. James Sanderson: And can you remind us what share of the fourth quarter is related to holiday bookings or special events, that type of thing? Emanuel Hilario: I would say about 15% of our business comes from the group event business in the fourth quarter. James Sanderson: Also wanted to shift gears on Benihana. You mentioned a lot of changes taking place in the design of the store that you're going to be implementing. Can you give us a sense of when that change will be implemented across all Benihana stores? And any feedback on helping us understand how to quantify the increased capacity, how that potentially could benefit AUVs? Emanuel Hilario: So our planning for that is we typically say that our CapEx is about 1.5% to 2.5% of sales on existing stores. So we're not putting together a special allocation of capital for that. We will do that revamp within our typical allocated basket, if you will, of CapEx. And so it will take a little bit of time to do that. But our changes will be more around our priority, one is getting rid of the smoke in the dining room. So we do have some things that can help with that. So we're working on that right now for a lot of our restaurants. HVAC. I think I've mentioned HVAC in previous calls. And then the third priority is adding tables because on Fridays and Saturdays, we can really use more tables in the restaurants. So we'll be upping those tables as we go. And then I'd say the next level of priority, things like the artwork, is pretty compelling. The new artwork that we put in the San Mateo location, which we've defined for the brand, is actually very cool. So we really want to start working on that. And then over time, it's just the key with Benihana is to continue a very strong maintenance program, which we do have in place. We have a very high-quality facilities team that keeps these things maintained. But as time goes on, with our typical basket of capital, we'll try to take care of that. As you probably picked up on my prepared statements and on the press release, we're also tightening down and keeping down the amount of CapEx that we're using because we want to work on the balance sheet. So it's all about balancing all those things, and that's where we'll fund the capital B from our regular CapEx basket. James Sanderson: A bit of a follow-up question, just to make sure I understood the lower CapEx in 2026 that you mentioned. So, how should we put that into perspective based on the plan you have in place this year? How is that CapEx number going to change. Emanuel Hilario: Yes, very good question. So we're focusing our capital on the conversions, which are about $1 million per restaurant. And then on new brand restaurants of the world, we're only focusing on restaurants that we can do for $1.5 million or less on the whole cost of the restaurant. So we're really working our low-cost real estate inventory. And also the other thing, too, is we're not doing any new leases right now because we have a pipeline of about 12 leases. So we stopped doing leasing, and we're going to work through the existing pipeline of leases. James Sanderson: And last question for me. I just wanted to better understand the Benihana Express. I think you mentioned that it could eventually become a sizable portion of your portfolio. Can you describe any changes to what the AUVs are store margins and how that's different from, let's say, a larger Benihana? Emanuel Hilario: Yes. I mean, the box will be much smaller. So we're trying to keep the restaurant -- let's just hypothetically right now, keep it around 1,000 square feet. So the economics are different from a top-line perspective just because of size. And then there will be no tips on tables in the property. All the food will be ordered and picked up, and taken away. And then we'll have some tables in the property and chairs, but there will be very limited seating. And so it will be a much smaller compact box. And so expect revenues. Right now, Nicole and I talked about somewhere around $1 million to $1.5 million, but a very, very low cost of build-out because there's nothing really to put in there. So we'll probably build that for around $500,000 to $600,000 in cost. So it will be a very effective box. Think of it most as a fast casual grab-and-go, take your food back home, or you may choose to eat there, but it will be a more casual environment. James Sanderson: Just to follow up on that. How do we look at the cash return or the cash-on-cash return to franchisees with be reviewing? Emanuel Hilario: Yes. I mean, we think that because of the lower cost of goods and the fact that we'll be able to be effective labor in that box, it will be a very high ROI. I think the store level margins, even after royalties, can be in the 15% to 20% range. So it will be a very good return vehicle for potential franchisees. The ones that we're talking to are super excited about it, and we look forward to testing that model out. Operator: We have reached our allotted time for questions. I will now turn the call back over to Manny Hilario. Please go ahead. Emanuel Hilario: All right. Thank you very much, Brittany. As I always close my call here. I want to thank the team once again. I'm very impressed and very pleased as to how the team put above and beyond effort and really showed progress in the third quarter, as our traffic numbers show. So I appreciate that. And we look forward to a great fourth quarter in terms of traffic and sales. And as always, I appreciate your support of The ONE Group, and I look forward to seeing you out in one of our restaurants. Everybody, have a great day. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supremex Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Thursday, November 6, 2025. I will now turn the call over to Martin Goulet of MBC Capital Markets Advisors. Please go ahead. Martin Goulet: Thank you, and good morning, ladies and gentlemen. Thanks for joining this discussion of Supremex' financial and operating results for the third quarter ended September 30, 2025. The press release reporting these results was published earlier this morning via the Globe Newswire News services. It can also be found in the Investors section of the company's website at www.supremex.com, along with the MD&A and financial statements. These documents are available on SEDAR+ as well. A presentation supporting this conference call has also been posted on the website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Presenting today will be Stewart Emerson, President and CEO of Supmax; as well as Norm Macaulay, CFO. With that, I invite you to turn to Slide 37 of the presentation for an overview of the third quarter, and I turn the call over to Stewart. Stewart Emerson: Thank you, Martin, and good morning, everyone. I'm joined today by Norm Macaulay, Supremex' new Chief Financial Officer. Norm joined us mid-September and brings more than 20 years of experience as a financial executive with large private and public companies. We're very pleased to have him on board as the company will benefit from his leadership, skills and expertise in all matters related to corporate finance, M&A, process optimization. Welcome aboard, Norm. While the results may not have been where we wanted them to be, largely due to external forces, we have been under -- we have been uber active in building the business, returning value to shareholders and positioning ourselves to execute on our plan and long-term success. First, I want to draw you to -- draw your attention to our financial position, which is as strong as it has ever been. As you know, during the quarter, we completed the sale leaseback of two owned properties in a transaction that grossed $53 million. This transaction unlocks significant value for our shareholders who were rewarded with a $0.50 per share special dividend on top of the regular $0.05 quarterly payout. We also repaid a substantial amount of debt, leaving us with net debt of only $89 million at the end of Q3, which provides us with excellent flexibility to carry out our business strategy. Norm will discuss the net debt position in more detail shortly. Now let's look more closely at operations, beginning with the Envelope business. While revenue decreased 5% year-over-year, it was up 3% sequentially from Q2 as we battle significant headwinds. To provide color on those headwinds first, obviously, the Canada Post uncertainty continues to affect volumes, primarily in the high value-added direct mail and fundraising space. I wish I could give you an exact number, but it's difficult. However, looking at the DM-centric accounts and anecdotally, it's clear that the uncertainty of when a time-sensitive piece will arrive in the mailbox has taken its toll on volumes. Second, if you recall from last quarter, we highlighted a substantial volume decline with an important U.S. direct mail client, and that situation affected Q3 results considerably. More on that later in the commentary. Finally, economic uncertainty, instability and a slowing economy, both in Canada and the U.S. is not helpful to volumes, particularly in the direct mail and fundraising segment. Frankly, being minus 5% versus last year and up 3% sequentially can be viewed as a good outcome through our prism. We worked hard to manage costs effectively, augment our position in the Canadian market with a tuck-in acquisition of Canada's third largest producer. And while nothing is in the bucket, our relationship with the aforementioned U.S. direct mail account is solid. We continue to do work for them, and we are optimistic about 2026. I understand quarter-to-quarter is an important measure. And as I said a moment ago, we view a 5% decline in revenue as a pretty good outcome given the challenges. But to me, year-over-year is a better measure. And in that case, despite the headwinds created by Canada Post, which has persisted virtually all year and the slowing economies, that single U.S. customer reduction has accounted for more than 100% of the revenue decline year-to-year. In fact, net of the impact of one customer, U.S. units and revenue are up mid- to high single-digit percentages. And across the entire Supremex Envelope segment globally, units are down less than 1%, revenue is flat and average selling price is up year-over-year. Our team has done a tremendous job, both operationally and on the sales side to mitigate the effects in a tough environment on both sides of the border. A few moments ago, I mentioned the acquisition of the third largest envelope manufacturer in Canada, and I wanted to provide a little more context. In July, we acquired the assets of Enveloppe Laurentide in Saint Laurent, Québec, a suburb of a mere kilometers from our LaSalle envelope facility. Laurentide manufactured and brokered envelopes primarily in Eastern Canada. As planned, we ceased production at their facility on August 15 and integrated both the manufactured and brokered volume within our existing network in Canada. This highly accretive acquisition will improve absorption and will deliver meaningful synergies going forward. In a nutshell, while on the surface Enveloppe performance may not have been where we wanted or expected them to be, the team has done a good job navigating very choppy waters. Our underlying fundamentals are solid, and we have confidence in our ability to drive volume to maintain high levels of utilization and absorption across our highly efficient network. Turning to packaging. Although revenue was down, we sustained our momentum with double-digit growth in both folding carton and e-commerce solutions, while Paragraph's commercial printing activities largely for the direct mail market, not surprisingly, had a difficult quarter. In folding carton, double-digit growth both in the quarter and year-to-date was driven by continued strong performance in the health and beauty and over-the-counter pharmaceutical segments, new business wins from current and reactivated customers and revenue from the newly acquired Trans-Graphique folding carton business, which supports our strategic plan to enhance our presence in the food-grade packaging, where we see solid growth prospects. While the Enveloppe Laurentide transaction closed on July 14 and ceased production a month later, in this highly accretive transaction, we closed Trans-Graphique a week earlier on July 7 and ceased production 14 days later. As planned, most of Trans-Graphique's activities have been transferred to the Lachine facility, which will allow us to grow in the food packaging space, improve efficiency and absorption as well as achieve meaningful synergies. It should be noted that we exited both facilities by the end of October. In e-commerce and Specialty Packaging, momentum created by new customer wins and greater volume from existing customers produced well into double-digit revenue growth for yet another quarter and year-to-date. While the core of the packaging business continues to perform admirably both in terms of revenue and profitability, unfortunately, the less core commercial print business continues to have its challenges. We haven't really spoken about Paragraph's customer and product base in the past. However, like envelope, this business has meaningful reliance on Canada Post, direct mail and fundraising with respect to the inner components and couponing. Not surprisingly, these revenues have been materially impacted by Canada Post uncertainty, delivery of time-sensitive offers and promotions. And while we are focused, we just haven't been able to offset the precipitous drop in volume and revenue in the relatively small Québec market. As for profitability in the segment, the drop in Paragraph revenue took the wind out of our sale after an encouraging first half and strong revenue performance of 2 of the 3 legs of the business in Q3. This quarter's adjusted EBITDA margin of 10.5% is clearly not acceptable. The stark lack of volume and contribution from Paragraph has shaved off approximately 300 basis points of packaging margin on a year-to-date basis. I reiterate what I've said for several quarters now. We have high-quality assets, available capacity, deliver quality products and service, have a premium diversified customer base on both sides of the border as well as the right leadership in the right seats. Volume is magic in terms of absorption, and we continue to look for profitable revenue growth, but there's also more to capture within our network in terms of efficiencies and synergies. This is our priority. With that, I turn the call over to Norm for a review of the financial results. Normand Macaulay: Thank you, Stewart. Good morning, everyone. I'm very pleased to join Supremex, a dynamic, well-managed and financially disciplined company. Please turn to Slide 38 of the presentation. Q3 total revenue came in at $65.7 million compared to $69.4 million last year. Envelope revenue was $45.1 million, down from $47.5 million last year, but up sequentially from $43.8 million in the second quarter. The year-over-year variation reflects a 4.2% decrease in average selling prices, mainly due to a less favorable customer and product mix between the U.S. and Canada. Meanwhile, volume decreased 0.8%. And as Stewart mentioned, volume in Canada increased due to the Enveloppe Laurentide acquisition, while the U.S. decline was essentially related to one customer. Packaging and Specialty Products revenue was $20.6 million versus $21.9 million last year. The decrease is mostly attributable to lower revenue from commercial printing activities. This was offset by higher folding carton revenue, driven by greater demand from sectors more closely correlated to economic conditions, new business wins from existing customers and the contribution from Trans-Graphique, which was acquired in July. Revenue from e-commerce-related packaging solutions also increased driven by higher demand from existing customers and new customer wins. Moving to Slide 39. Adjusted EBITDA totaled $6.2 million or 9.4% of sales compared to $7.9 million or 11.4% of sales in last year's third quarter, but up sequentially from $5.8 million or 8.8% of sales in the second quarter of 2025. Envelope adjusted EBITDA was $5.3 million or 11.8% of sales versus $7.9 million or 16.7% of sales last year. The decrease reflects lower selling prices and the effect of lower volume on the absorption of fixed costs. These factors were partially offset by benefits from optimization measures in the Toronto area and procurement optimization initiatives. Packaging and Specialty Products adjusted EBITDA was $2.2 million or 10.5% of sales compared to $2.5 million or 11.3% of sales last year. The decrease is due to a less favorable revenue mix, partially offset by procurement optimization initiatives. Finally, corporate and unallocated costs totaled $1.3 million versus $2.5 million last year. The decrease is attributable to a foreign exchange gain this quarter as opposed to last year and to lower professional fees. Turning to Slide 40. During the quarter, Supremex recorded a $6.1 million gain on the sale-leaseback transaction, transaction, which resulted in increased right-of-use assets and lease liabilities, created a deferred tax asset, which gave rise to an income tax recovery of $3.1 million in Q3 2025. As a result, Supremex concluded the third quarter with net earnings of $9.1 million or $0.37 per share versus a net loss of $23 million or a loss of $0.92 per share in last year's third quarter in which an asset impairment charge of $23 million was incurred. Adjusted net earnings were $4.7 million or $0.19 per share in Q3 2025, up from $1 million or $0.05 per share a year ago. Moving to cash flow on Slide 41. Net cash flows from operating activities were negative $0.6 million compared to positive $7.6 million last year, mainly due to a lower working capital release this year compared to last. Turning to Slide 42. Net debt stood at $8.9 million as at September 30, 2025, down significantly from $38.4 million 3 months ago, reflecting a long-term debt repayment of $31.5 million using proceeds from the sale leaseback. Further, we used $13.5 million of the proceeds from the sale leasebacks to pay both the regular dividend and special dividend and $7.9 million to acquire both Enveloppe Laurentide and Trans-Graphique during the quarter. Our ratio of net debt to adjusted EBITDA was 0.3x versus 1.1x 3 months ago, well within our comfort zone of keeping our leverage ratio below 2x net debt to adjusted EBITDA. Our strong financial position leaves us with significant flexibility to finance our operations and future investments, including acquisitions as well as to return funds to shareholders. In this regard, following the launch of a normal course issuer bid program in August, we repurchased approximately 44,000 shares in Q3 for a consideration of $0.2 million. Subsequent to period end, we repurchased an additional 38,864 shares for consideration of $0.1 million. The NCIB program allows Supremex to purchase for cancellation more than 1.5 million shares, representing 10% of our public float until August 10, 2026. Finally, the Board of Directors declared a quarterly dividend of $0.05 per common share payable on December 19, 2025, to shareholders of record at the close of business on December 4, 2025. I now turn the call back to Stewart for the outlook. Stewart Emerson: Great. Thanks, Norm. Although our results were short of our potential, we're buoyed by the significant important improvements in our core business. Materially improved operations and the benefits of the tuck-ins completed partway through the quarter as we continue to methodically build the business for the long term. As I've said previously, we can't control the economy and the trade environment, but we will focus on making our envelope and packaging networks more productive and efficient while actively driving sales and seeking additional revenue opportunities. We have a solid foundation ready to be further built on. Our balance sheet is very strong, which provides us with the flexibility to execute our business strategy and sustain long-term profitable growth. We will also utilize our available capital and strong cash flow judiciously. First, by looking for acquisition targets that we can rapidly and efficiently tuck into our existing footprint to enhance absorption to drive profitability or towards transactions that grow reach in our principal markets while enhancing absorption to drive profitability. And second, we are committed to returning value to shareholders via share repurchase and a fair yet conservative regular quarterly dividend payout that reflects our confidence in the ability to sustain free cash flow growth. This concludes our prepared remarks. We're now ready to answer your questions. Operator? Operator: [Operator Instructions] The first question comes from Donangelo Volpe with Beacon Securities. Donangelo Volpe: Just looking at the two acquisitions, just shy of $8 million spent. Just curious on what was the split between the two on a revenue basis and kind of what their trailing 12-month revenue and EBITDA profiles look like? Stewart Emerson: Well, so the Enveloppe, Don -- sorry, the Enveloppe acquisition was a little north of $10 million and the folding carton was somewhere around just shy of $3 million. So these are splits there. Normand Macaulay: Those are on a TTM basis. Stewart Emerson: On a TTM basis, yes. And both businesses were profitable, but with the synergies of the tuck-in, highly accretive for Supremex in a very short period. Donangelo Volpe: Okay. Perfect. And then just pivoting over to the packaging side. Can you just provide a little bit more color on the underperformance from the commercial printing? Just curious how big this drag was and kind of what your outlook is over the coming quarters? Because how I'm looking at this is the folding carton and e-commerce packaging revenues are tracking above expectations. Stewart Emerson: Yes. So I mean, obviously, it was a significant drag with reference at both e-com and folding carton, both double-digit percentages, significant increases, but were more than offset by the decline in the commercial print operations. And I wish I had talked a little bit more about what's inside that commercial print business. As you can imagine, anything in direct mail and fundraising has internal components that go in it. And there's a fair bit of couponing. And that work is largely done by commercial printers and Paragraph was no exception to the rule. So if there's no direct mail going out, there's no post cards showing up in your mailbox or significantly reduced numbers, it has a drag on the commercial print sector and Paragraph's top two customers are direct mail customers. And it just overshadowed significant growth on sort of the core piece of the business, if you will. As Canada Post stabilizes and get this thing behind us and under our belt, that revenue should come back or a large chunk of it should come back. We're actively addressing the cost side of the business to align with the changes in revenue. Donangelo Volpe: Okay. Perfect. And then just pivoting over to, I guess, the geographic revenues. We were impressed with the revenues in Canada. It's relatively flat year-over-year. The decline was mostly attributable to the U.S. operations. I'm assuming it's through that one customer. So I'm just -- can you talk to some of the dynamics you're seeing throughout the start of Q4 so far? Has there been any positive commentary from that one customer? Or do we kind of expect the continued year-over-year declines over the next couple of quarters from the U.S. predominantly driven through that -- through the one customer? Stewart Emerson: There is a lot of questions wrapped up in that question there, Don. Donangelo Volpe: I'm going to be asking a million questions. Stewart Emerson: Yes. I was writing them down, but I presume you're talking envelope predominantly. But before I forget, I will reference packaging just a little bit. Both folding carton and e-commerce, they continue on a bit of a tear on the revenue side. While we don't provide guidance specifically, both of them got out of the gate in Q4 and the backlogs are really good. So we're excited there. On the envelope side, yes. So Canada envelope, I mean, it's a little engine that could. There's not a lot of direct mail envelope in Canada. So the postal strike doesn't sort of affect as much as a lot of people would expect. But the Canadian envelope business just chugs along. It got a little growth in average selling price, and it was buoyed by the 2.5 months, 2.25 months of Laurentide in the foundation, a little bit offset by some increased costs early in the acquisition that you sort of have to absorb, but the revenue of Laurentide certainly helped. And it contributed exactly on pace of what we would have expected given their TTM revenue. On the U.S. side, the team has done a heck of a job trying to offset and getting growth to try and offset, call it, customer pay, if you will, just to make it easier. And they've done a good job sort of offsetting it and the conversations with customer A are very encouraging. And as I said in my comments, it's not like we lost the customer. That's an important consideration. The customer changed some buying habits. Our share of the customer weren't at the same level that they've been previously. But we continue to do business for them. We continue to execute on their behalf. We're an important supplier to them, and we continue to be an important supplier. We think we're going to be an even more important supplier next year. Did I catch them all? Donangelo Volpe: You got them all. I appreciate that. And then, final one for me, if I may. Just like with the cleaned up balance sheet post sale leaseback, can you just talk a little bit on the M&A pipeline at the moment? Obviously, I understand that the focus is on the Packaging segment. I'm just curious on priority is Canadian focused or U.S. focused or if it's -- if you're kind of indifferent between the two? Stewart Emerson: Yes. So our stated strategy has been we'll look for tuck-in acquisitions either in envelope or packaging, which we did in Q3. We're not -- we're good at envelope. We're not afraid of envelope. And if we can shore up absorption in a particular geographic market, we're excited to do that. And we're in and out 3 months bang we're gone. So they're highly accretive very quickly. So with the balance sheet, we'll continue to look at some good tuck-ins. It doesn't really matter. It can be envelope for packaging. And on the packaging side, our stated strategy is predominantly Canada in folding carton, and that persists, then we've got a good solid pipeline. Operator: [Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Stewart Emerson for any closing remarks. Stewart Emerson: Thank you, operator. Thanks very much for joining us this morning, folks. We really appreciate you taking time out, and we look forward to speaking to you again at our next quarterly call. Have a great day. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Ladies and gentlemen, good morning, and welcome to the HELLA Investor Call on the results for the 9 months of fiscal year 2025. This call will be hosted by Bernard Schaferbarthold, the CEO; and Philippe Vienney, the CFO of HELLA. [Operator Instructions] Let me now turn the floor over to your host, Bernard Schaferbarthold. Please go ahead. Ulric Schäferbarthold: Good morning to everybody. Very warm welcome to our 9-month results call. And I'm here together with Philippe Vienney, our CFO; and Kerstin Dodel, our Head of IR. So starting off the presentation on Page 4. So if we look at our sales development, we are at end of September in line with what we expected. So positively, our electronics business is continuing to grow. We had a growth now in the first 9 months of 8.3%, specifically our Radar business, but as well our business in our product center, energy management is continuing to grow. On the Lighting side, we are not growing. So we are down 8.4%. We mentioned also earlier mid of the year that the end of some larger projects, but also the reduction on volumes on some programs in our order book is the reason for that. And I will come back to that and actions we have now taken for Lighting. On Lifecycle Solutions, our business is still down in the 9 months. But positively, we have now seen in the third quarter that we are back to growth. We had quite a decent development in that segment in Q3. So overall, sales is quite stable, FX adjusted. So a slight growth of 0.4%. And considering or looking at reported sales, we are at minus 1.1% considering the strong FX headwind we had. On our operating income margin, we are at 5.8% in the first 9 months. Overall, I can state we continue to have a strong cost discipline. We are implementing the structural programs we have initiated in the last 2 years. So overall, considering the environment, we are in line what we planned also in our budget. Net cash flow has improved on a year-on-year comparison is at EUR 68 million to the end of the year, 1.2%. We have reduced CapEx. And within that number, if we look at factoring, the increase in factoring is at EUR 23 million in comparison to last year, EUR 30 million less. If we move on to the order intake, we are good on track. The third quarter was again a good quarter in terms of order intake. We had a strong momentum, especially in the lighting business, 2 areas where we wanted to grow. More broadly in the U.S. and also in Asia and specifically China, we could win important programs. But as well in Europe, we were quite successful. We are now attacking the market as well in the mass market, so in the volume markets, and we were able to win significant program volumes for the European regions in the third quarter. On the electronics side, we continue to be very successful. So we are highlighting here some of the programs. But what I can state overall that within our Electronics business, we continue on a strong growth path, and this should also support our growth trajectory in the upcoming years. And to finish off, our Lifecycle was also quite successful in the last month. We are highlighting here some of the programs. So bus, agriculture remains important business areas and customer segments for us to continue to grow and as well here also to highlight to get broader in terms of our market reach. So we are happy to win also projects outside of Europe and to gain market shares there as well. So overall, we are on track in terms of our order intake achievements after 9 months. Going to Page 6, some highlights. So on the Lighting side, we continue to see that we are differentiating with our lighting technologies. We are present also in different -- on the different shows and fairs. Here, we are highlighting one, and we are advertising and showing our newest technologies also to the different customers. I think from my perspective, feedbacks are quite good. We are getting. So this should support our growth we are envisaging in the upcoming years. In the electronics, one important milestone now we had is the launch of our iPDM, so of our eFuse technology in one large platform. We are engaging ourselves much stronger now into the whole sonar architecture of the car. And this technology, which manages the power in the car and which is embedded in the sonar architecture and in the new E/E architecture overall of the car is a big milestone for us. And this is one very important technology we envisage will give a strong growth potential in the upcoming years, and this is why we are highlighting it here in a strong way. The other thing I want to mention is on the structural changes. So I mentioned we continue to reduce our cost base. In the last month, we announced the structural change in one of our plants in Germany, which now we are going into execution. Other than that, we are now in execution in terms of our new SIMPLIFY program. So this is a global program where we are reducing in all white-collar functions in the upcoming 3 years, around 15% on headcount. And so we are well on track. We already started on that program. The target is to be at least at 20% of reduction to the end of this year and around 50% on the reduction to the end of next year. And I can say that we are ahead of the target as of today, and we are trying to accelerate on that as well. And you can see that as well in the headcount development. If you only look at the last 9 months, we have already reduced close to 5% on headcount as of today in comparison to the start to the year at a quite comparable sales level, and we will continue on these adaptions. If we move to Page 7, let's say, one of the big challenges we are facing actually is the crisis on the shortage on Nexperia. So it's clear that if we look at our portfolio of products, we have a lot of Nexperia parts in our products. So in general, I can say we are strongly impacted. So we have organized our way -- us in a way also with task forces and are managing the situation in the way that we are building up the alternative suppliers. And in the meantime, for sure, we use -- we still use Nexperia parts. So our relationship today with Nexperia China is still stable, and we also managed to buy broker parts, which in the meantime, supports our supply. So far, I can say that the month of October was in line with our plan. So there was little impact. The start into the month of November showed a little more impact in terms of the full coverage against the plan. And the most difficult weeks now from our side will now be the next ones where in the meantime, where before being able really to ramp up the second sources, we are seeing some of the shortages. So we are working intensively also on the application on export licenses and also taking advantage and the support also on the OEM side, which are going for these applications as well. So this could help to support also on parts we have in China who could be exported to the U.S. and Europe and help there on the shortages. So far, China for us is not impacted. We have enough parts. So this is something difficult to quantify overall. But as I said, so far, the impact was very limited, and we have now to see how next weeks will be and specifically if with -- on the Chinese authorities, the customs and MOFCOM, we are able now to get the necessary applications to the exports to support Europe and the U.S., as I said. But as you can imagine, a lot of intensive work we are doing and managing the situation to keep our delivery promises to the customers. So having said that, we will move on with some more details on the financial results. Philippe will take over. Philippe Vienney: Yes. So good morning to all. So looking at the sales, so we are publishing sales at EUR 5.868 billion, so which is representing a decrease of 1.1% versus prior year. And excluding the exchange rate, this would be at plus 0.4% versus last year and versus the market, which is showing a growth of 3.8%. So here again, as I said, we have a good momentum in all region on electronics, whereas we are suffering on the lighting side with lower sales, which are affected by end of production on some programs and mainly in North America and Asia. And Lifecycle was reducing -- showing reducing sales, but which we are also -- where we are also seeing a good momentum in Q3 with some slight recovery. So looking at the sales per region and versus the market. So Europe, where we still have more or less 56% of our sales, we have a growth of 1% versus the market of -- which is showing a decrease of 1.7%. So we are overperforming versus the market for Europe. For Americas, where we have sales which are above the 20% of our sales, we are seeing a decrease of our sales of 1.1%, slightly impacted as well by the FX impact versus the market, which is reducing by 0.5%. So here also, we have the -- again, the impact of lighting, where we have this impact of some end of production series, which are not fully compensated by new launches. And we have Asia, which is also a bit above 20% of our sales. where we have a decrease on our published sales of 6.4%, also slightly impacted by the FX versus a growth in this region of 7.2%. So here again, we have the same topic on end of production of series project in lighting, but not fully compensated by new sales and new launches with local OEMs in Asia. And we still have, again, growth momentum in China on the electronics with radar and battery management. So now looking at the profitability per segment. So lighting, we are at EUR 2.7 billion of sales, which is representing an organic decrease of 7.3%, excluding the exchange rate. So here, I said again, we have the impact of end of production of some series projects in China and North America. We have some increase on the headlamps and rear combination lamps in Europe and Americas, but which are not enough to compensate the drop that we are seeing in Asia and North America on the rundown programs. So the operating income for Lighting is at EUR 73 million or 2.7%. So here, we are impacted by the volume drop, which is clearly impacting the gross margin and the operating margin, which we are partially compensating by lower material costs, also some reduced R&D cost and SG&A costs, but not enough to compensate the volume drop that we are facing where we still have to reduce and continue to reduce our fixed cost to absorb this and face this volume drop. Electronics. So we are publishing sales of EUR 2.5 billion or EUR 2.6 billion, which is representing plus 9.5%, excluding FX rates on an organic basis. So here again, we have growth in all regions and growth -- thanks to the radar business. We have also growth in the car access system in Europe and Asia. And we have also some growth, thanks to the battery management system as well in Asia. So good momentum on the sales in Electronics. And this is leading us to an operating income of EUR 196 million or 7.6% of operating margin. So here, we have the benefit of the volume, which is helping the gross margin and the operating margin. And we have been able to be stable on the R&D spend and also thanks to reduction of external spend and external provider. And we have also been able to maintain or even reduce the SG&A percentage in this segment. So all in all, leading to the 7.6% of operating margin. The Lifecycle, where we have sales of EUR 739 million, which is representing a decrease of 1.5%, excluding FX rates. So yes, as we said, we have a low demand, especially coming from the H1 and especially on the commercial business vehicles. But we see some recovery, a slight recovery in Q3. So especially also on the commercial business with some stable business on the after market. And this is leading us to an operating income of EUR 74 million or 10%. So here, we are impacted also slightly by the volume. And we have been able to maintain or even decrease the R&D expense and with SG&A, which are slightly increasing mainly due to distribution costs. Profit and loss for HELLA? Yes. So we have a gross profit of EUR 1.3 billion, which is 22.8% versus 23.2% last year. So here, we have the weight of the volume decrease in Lighting and Lifecycle, which is impacting us and not fully compensated by the improvement on the Electronic segment. On the R&D side, we are at 9.4% versus 9.8% last year. So here, we continue to see the benefit of our adjustment and structural adjustment on the R&D side and cut on the external provider, as I mentioned, for Electronic. On the SG&A, we are at 7.7%. So here, we see a decrease on the administration costs, where we have a slight increase on the distribution costs. So I think the good trend is the administration costs which are decreasing and showing some effect of the program which have been launched to reduce this cost. On the earnings before tax, so we are reaching EUR 208 million versus EUR 409 million last year. So here, we have the impact -- negative impact of all the restructuring programs, which are booked and are part of the EUR 129 million. To mention that last year, we also had some restructuring costs, but which were more than compensated by the sales of the BHTC business and the net gain that was booked last year. And this is leading us to a net income of EUR 108 million versus EUR 310 million last year. On the net cash flow, we are at EUR 68 million, so versus minus EUR 8 million for the same period last year. So here, we are increasing our net cash flow. So we have higher cash from operations. We are also having a good momentum on the working capital with some negotiated and good payment terms with suppliers. And we are also reducing our tangible CapEx. You can see that we are at minus 23% versus what was cash out last year and spent last year for the same period. So this is benefiting to our cash flow, leading us to have a EUR 68 million cash flow for the 9 first months of the year. With that, I think we are finishing the financial details, and we can go to the outlook. Ulric Schäferbarthold: Thank you, Philippe. So on the outlook, so on Page 17, if we look at volumes, so the actual outlook on S&P is 91.4 million cars. I would expect that specifically on Europe and Americas, we would see some reductions in the fourth quarter due to the shortages on Nexperia parts. China is quite stable in terms of volumes. This is also what we see actually now in the fourth quarter. On Page 18, so we confirm our outlook in terms of sales in the range of EUR 7.6 billion to EUR 8 billion. On the operating income (sic) [ operating income margin ] 5.3% to 6% and the net cash flow of at least EUR 200 million. We are stating that this assumes a sufficient supply situation on -- especially in Nexperia parts. As I said, in terms of -- today, if I look at the month of October and the start into November, the impact were limited, but I also mentioned that the next weeks will be the crucial ones. So summing it up on the key takeaways. So, so far, looking at the 3 quarters, from our point of view, a robust sales development in line in terms of profit and net cash flow, what we expected, strong focus on the structural changes we have done and still a good momentum on the order intake side. So we -- outlook I mentioned, we see us on track for the guidance we have given. And if it comes to the top priorities, so we continue to work on the structural programs. One important new program we have now initiated is in the lighting area. We have started a transformation program now with -- starting into the second half of the year. Mainly, we focus on 3 big topics. One is on the business growth. So we need to come back to growth again for that. We are broadening our reach and focusing significantly also on the regions where we see a strong potential, especially the U.S., but also beside of China, Japan, Korea, India. And we already see now in the third quarter, the first successes and programs we could book in quite a sizable numbers. So first, let's say, proof points are given, but I think this is a very relevant point to come back to growth. And on top of that, we are -- we have initiated the operational transformation. We see significant potentials in terms of reductions on our footprint or on our costs within the operations, including also the supply side and logistics. We have initiated a structured program on that, which is specifically for Europe and also for our Mexican operations. And the third element is the improvement in D&D productivity and efficiency where as well we initiated a program also with a focus on cost reductions on our technology, where we see also a big potential to reduce on the cost side as well here, too. So this should help to bring our Lighting business into a much better profitable situation in the years to come. Having said that, we are happy to take your questions. Operator: [Operator Instructions] And the first question comes from Christoph Laskawi from Deutsche Bank. Christoph Laskawi: The first one, coming back a bit to what you just said on the Lighting performance. Obviously, Q3 margin around 1% is very low. When you've implemented all the measures that you talked about, what do you think is in the midterm a realistic margin potential? Could it be around 5% plus? Or any thoughts on that would be appreciated. And then in contrast to that, electronics is actually quite strong in Q3 with 9% plus margin. Was there any specific one-timers in there or just really capitalizing on growth and showing the margin potential of that business? And then the third question would be on Nexperia. It sounds like you didn't face production shutdowns on your own yet, and you haven't cost any so far. Still you're expecting production cuts to come. Do you already see that in the schedules? Any volatility you can highlight there? And then just on the cost of going to brokers and others, those have been quite high in the semi shortage. Is this something which could be a meaningful impact on earnings in Q4, just the sourcing alternatives? Ulric Schäferbarthold: Thank you for your questions, Mr. Laskawi. So on the Lighting performance, our target is to come back to 6%. But this will not be possible on the short notice. So this is a target we have set ourselves. It will take until '28, '29. So before we are at this 5% level, you said, probably '28, '29 to come closer to the 6%. So we have now seen that, as I said, so we are struggling a lot because, first of all, we are not growing. Secondly, we have also been impacted now in the second half by a warranty topic, which was quite significant as well. So it is partially in the third quarter and will also hit the fourth quarter. So this is a topic which lasts now from the years '22, '23, where now finally, we got to an agreement with -- and the settlement with the customers. So we are close to, but this was an impact as well. And overall, on the full, let's say, second half, it will have an impact of around EUR 25 million, which is quite significant for the Lighting business. But the overall, let's say, if I look at Lighting, we are -- the business is declining. And this is something which will also continue into the next years and will be a headwind also in the next year before now we see with the momentum we have on the order intake, we will be able to grow again in the -- starting from '27. What I have to say positively is that in lighting, we are very strong in China. So the transformation also we need to do for Europe and specifically also our Mexican operations, we already have done in China and also the adaption to competitiveness. So I see us very strong in Asia today. And now we need to do the work we have -- we need to do in Europe and also South America. So we changed also the responsibility. So I have taken over in combination of tasks now from the 1st of July. And so we are now starting on this transformation program, as I said. On Electronics, I'm very pleased about how our business is developing also in terms of performance. So what we now see is basically that we see now the payoff of the business now where we see now the growth coming with the launches and the new programs, which are going into serial production. So the growth supports the profit development. And what we as well see is that the structural changes we have done in terms of -- on the cost side helps as well. So with that, we see immediately a very strong profit development. There was no really specific one-off in the third quarter. So -- but it was quite a good quarter. So I wouldn't say now every quarter will be the same. So also no negative impact, I have to say. But I have to admit also, it's a good development, and we are building on that and trying to continuously to improve on that. On the Nexperia, so I think that -- I stated so far with the coverage or with the stocks we had, with the coverage we had. We also bought some -- quite early on some broker parts. So this helped really to cover the period of time until now. We see now that some shortages on some products, they are already there. On the call offs, basically, you do not see yet that customers are changing anything. But for sure, on the -- in the systems, but for sure, we are in very intensive discussions with all of our customers. And today, the situation is as follows that the weekly -- the decisions are taken now on a weekly base, what can be produced and how much reduction will we see. And I mentioned the next weeks will show reductions. And the magnitude is still not absolutely clear. So what is in the next, let's say, 3 to 4 weeks. And it certainly will now also depend on how -- are we now able really to get exports on Nexperia parts with these exemptions or with export licenses granted now to the OEMs or to us. And we are already trying out the test shipments and working with MOFCOM and the customs, as I said. So there is some hope that now it should work and that certainly will help a lot immediately. But this is the uncertainty we have. If this is not working, I mentioned it, then the reductions on the volumes in the next weeks will be much higher. And on the cost side, on the broker so far, I would say, for sure, it goes fast. The last broker -- broker offers I saw between factor 600, factor 800, also factor 1000 I already have seen. The difference to the semi is that the original price is much lower. So there, we are only talking cents, but sure, if we are talking factor 500, 600 or higher, then you talk immediately some millions. So far, it has not such a big impact. The market today is still -- there are not so many volumes any longer in the broker market. So I would not expect that this should have such a hit, which is comparable to the semi today or to the semi crisis we had some years ago. But it's -- again, still we are talking some money. It's some millions we are discussing. That's for sure. But not comparable, as I said, to the semi crisis. Operator: And the next question comes from Sanjay Bhagwani from Citi. Sanjay Bhagwani: Maybe to begin with, so on the Nexperia situation, this morning, there seems to be several articles suggesting like -- so yes, I mean, on the Nexperia situation, this morning seems to be like several like constructive articles typically like quoting some of these Dutch ministers that things will be okay in the coming weeks and chip supply should resume. Is that providing some comforting messages to you as well? Maybe let's say, if there is a disruption, there can be just 1 week disruption or something like that? Or it's probably too early to look at these headlines or something like that? Ulric Schäferbarthold: So there are 2 things for me. One is does China now allow that Nexperia China -- the parts which are still produced at Nexperia China that we can export these to Europe. And this -- we are still working -- I mentioned it. We are still working on how process-wise, the application and the export needs to be executed. And this is where I said we are now just running now with custom, the discussions we have with MOFCOM doing these test shipments to try out how we have now to handle and practically do it. And there are some signs now. This I can at least also confirm that -- I hope that it will be possible soon. Let's put it like that. Still today, it has not worked out, but we are getting signals that there is hope that it could be possible. So that is one thing. So I would take that as a positive note, but still to be seen if then really it works out. Because just practically, I can tell you the custom were not aware that they are allowed to do. On the other hand side, MOFCOM is allowing it. So I think we are still, let's say, it's an administrational point, but you never know. So that is one thing. The other thing we are also working on, and this is as well, let's say, a critical path, we are still getting a lot of parts from Nexperia China, and they are dependent still on the wafers they get from Europe. And there apparently, they are not coming along. So that these wafers, which are needed for the further production, if they -- if China do not have any longer wafers from Nexperia Europe, they couldn't continue on their production. And they will run out at a certain point of time if there is no agreement. And this is the second path we are working on to get a solution between the 2, Nexperia Europe and China, to stabilize the situation so that Nexperia China is able to continue to deliver. And this is important because, as I said, we are working on the alternative suppliers. And for most of the suppliers, it can be -- we can find, let's say, good agreements and to ramp up quick. But for some of the parts, it will take a little longer, and this is why it's important to have a stability on Nexperia China as well. Sanjay Bhagwani: That's very helpful. And I think on the broker parts, you mentioned that so far, this has not been a major impact. But in terms of the pricing pass-throughs, I understand in the previous like chip crisis, you had to actively go and negotiate the price increases. In this case, is it easy to like kind of have some sort of indexation for these components now? Or this again, will be subject to negotiation if the, let's say, inflation becomes material? Ulric Schäferbarthold: So in the actual situation, because we need to be quick, we take the decision with the customer, so with our customer, with the OEM together. And the agreement is that in terms of who takes which part, we agreed that this will be then discussed later. But it's clear that we will have a comparison as it was in the semi crisis where we agreed on the, I would call it, pain share, who takes which proportion. So you can assume that what we have seen similar in the semi crisis should -- at least from our perspective, should also be true now for this one. Sanjay Bhagwani: And then my final one is on the Q3 margins. Just a kind of follow-up to Christoph's question, but more at the group level. So Q3 group margins have like sequentially gone down to, I think it's 5.3% versus H1 was 6%. So are you able to provide some color in terms of the Q4? Is it sequentially looking better as of now? And in terms of divisions, how the Q4 versus Q3 margins are looking? Ulric Schäferbarthold: So month of October was okay. It was in plan. So -- and normally, the months, October and November are very strong in the industry. So we have seen quite a good month in October so far, even we had this Nexperia situation. So the month of November will certainly be impacted now. And it's difficult to say on the margin -- so really to say now what does it now mean for the full quarter because it will depend on volumes at the end. And we will lose volumes. The question is how much. So I would not feel so comfortable now to say how it will go. I think in terms of our cost savings, all what we are doing there, we are in plan. At the end, it will depend on sales. Operator: [Operator Instructions] So it looks like there are no further questions at this time. So I would like to turn the conference back over to Bernard Schaferbarthold for any closing remarks. Ulric Schäferbarthold: So thank you to all of you who participated, and thank you to showing the interest on HELLA again. And I wish you a pleasant remaining day and after that, a good weekend. Hope to see you and speak to you soon. Bye-bye.
Operator: Good morning, and welcome to the Heritage Insurance Holdings Third Quarter 2025 Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead. Kirk Lusk: Good morning, and thank you for joining us today. We invite you to visit the Investors section of our website, investors.heritagepci.com, where the earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience. Today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and subject to uncertainty and changes in circumstances. In our earnings press release and our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, and we have no obligation to update any forward-looking statements we may make. For a description of the forward-looking statements and the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our annual report on Form 10-K, earnings release and other SEC filings. Our comments today will also include non-GAAP financial measures. The reconciliations of and other information regarding these measures can be found in our press release. With me on the call today is Ernie Garateix, our Chief Executive Officer. I will now turn the call over to Ernie. Ernesto Garateix: Thank you, Kirk. Good morning, everyone, and thank you for joining us today. We delivered strong third quarter results, having achieved net income of $50.4 million, up significantly from a year ago and maintaining the positive trajectory of our earnings. As Kirk and I have been discussing on our earnings calls over the last year, we continue to see tangible results from the successful implementation of our strategic initiatives, which were designed to generate positive and consistent shareholder returns by attaining and maintaining rate adequacy, managing exposure, enhancing our underwriting discipline and improving claims and customer service levels. This has created a significant amount of earnings power within Heritage, which continues to show through. As part of that strategy, we re-underwrote our personal lines book while taking needed rate increases to achieve adequate rates. This has led to a steady contraction in our policies in-force over the last 4 years, while our in-force premium increased from approximately $1.1 billion to an all-time record in the third quarter of $1.44 billion. At the same time, we improved both the quality and the diversification of our book of business. Looking out over the next 6 months, we expect our personal lines policy count to return to growth as we have now opened nearly all of our geographies to new business as compared to only 30% a year ago. We are already seeing our new business production ramp up with new business premium written for the third quarter of $36 million, representing an increase of 166% as compared to $13.7 million of new business written in the third quarter of last year. The decline in our policy count continues to moderate, having decreased by 6,800 policies in the third quarter as compared to a decrease of over 19,000 policies in the third quarter of 2024. In fact, our third quarter PIV count reduction was the smallest decrease that we have experienced since we deployed these strategic initiatives in June of 2021. While it takes time to open our territories, we are seeing good new business momentum continue across our regions. Based upon these factors, I believe that we are on a firm path to deliver full year policy growth in 2026. Importantly, we have long-standing relationships with agents and brokers across our geographies that we have maintained over the last 4 years despite slowing new business growth and re-underwriting our book of personal lines business. In the Northeast and portions of the Mid-Atlantic, we predominantly produce business through Narragansett Bay Insurance Company domiciled in and operated out of Rhode Island. Over the years, we have built a successful homeowners insurance business, which has expanded across the coastal regions of the Northeast and Mid-Atlantic. The company has strong relationships with independent agents based upon a trusted brand. Likewise, Zephyr Insurance operates in and serves the Hawaiian market. Although Zephyr initially focused on exclusively on Hawaiian hurricane wind risk, we subsequently expanded Zephyr's product offering to meet the needs of our customers in the overall Hawaiian market. Our organization benefits from the agility and the rapid market responsiveness typical of a regional enterprise, while also leveraging the economies of scale found in larger super regional companies. We have consolidated many functions to gain efficiency but retained the underwriting, marketing and customer service functions in each region to better address the unique needs of each market. Every region has its own unique dynamics and operating the business locally allows us to quickly adapt to changing conditions as well as provide outstanding customer service to our policyholders and agent partners. As we grow, our robust infrastructure allows us to write new personal lines business without adding significant administrative expense. We understand each of our markets and have built relationships with hundreds of master agencies, which represent thousands of agents throughout our geographic footprint. Our long-standing agency partners have expressed a willingness and desire to grow with us, which in turn provides confidence in our outlook for improved growth in the year ahead. We also remain focused on making decisions based on our data and analytics. This has been the cornerstone of our disciplined underwriting process across all of our geographies, which we will maintain as we grow and which contributed to the lower net loss ratio this quarter. As we grow, we will maintain our disciplined underwriting processes as well as rate adequacy and managing exposures. An example of our disciplined approach can be seen in the commercial residential business, which we reduced in the third quarter due to more competitive market conditions. I believe this further demonstrates the discipline of our management team. Fortunately, we have ample room to grow our personal lines business and can choose to be selective across the 16 states where we do business. We are also exploring expansion opportunities into new regions of the country as well as the delivery of new products to our existing markets. We have a long runway ahead of profitable growth of our business and deliver value to our shareholders. Reinsurance is a critical component of our business, and we have maintained a stable indemnity-based reinsurance program at manageable costs with an excellent panel of highly rated and collateralized reinsurers. Over the course of the third quarter, we continue to meet with our reinsurance partners who continue to support our growth and from whom we anticipate will offer incremental capacity as we look to our 6/1 renewal next year. Additionally, we are seeing the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily coming down, largely due to reduced litigation, which our reinsurers should begin seeing in the coming months. Given the improved litigation environment in Florida, the lack of reinsured losses and the capacity entering the reinsurance market, we are optimistic that reinsurance pricing will continue to improve looking ahead in 2026. We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance. To conclude, our business continues to gain momentum and the earnings power of the company is building. We are also growing capital, which will support our managed growth strategy as we expect to begin to deliver policy count growth in the quarters ahead. We are also now in a capital position to review our capital allocation strategy and believe our shares are trading below intrinsic value and do not reflect the many opportunities that we have to further grow the company. As a result, we restarted our share repurchase program in the third quarter, having repurchased 106,000 shares for a total cost of $2.3 million. I would also like to reiterate our dedication in navigating the complexities of our market with a strategic focus that prioritizes long-term profitability, shareholder value and customer service driven by our dedicated workforce. Kirk? Kirk Lusk: Thank you, Ernie, and good morning, everyone. Starting with our financial highlights. We reported net income of $50.4 million or $1.63 per diluted share in the third quarter, which compares very favorable to the $8.2 million of net income or $0.27 per diluted share that we reported in the third quarter last year. The increase was primarily driven by a significant reduction in losses and loss adjustment expenses, combined with a decrease in other operating expenses. For the 9 months ended September 30, we reported net income of $129 million or $4.17 per diluted share, which is a substantial increase from the $41 million of net income or $1.35 per diluted share that we reported for the first 9 months of 2024. Gross premiums earned rose to $362 million, up 2.2% from $354.2 million in the prior year quarter, reflecting the rate actions that we have taken, combined with organic growth in selected geographies as we open more regions for new business. This was partially offset by a decline in commercial residential business due to competitive market conditions. As Ernie touched on, we expect our growth to accelerate at a managed pace through 2026 as we ramp our new business efforts across our recently opened geographies. Net premiums earned were $195.1 million, down 1.9% from $198.8 million, resulting from increased ceded premiums. The increase in ceded premiums was driven primarily by a $4 million reinstatement premium for Hurricane Ian and an increase in the Northeast quota share program as written premiums from that program grew from the prior year quarter. The result was an increase in ceded premium ratio to 46.1%, up 2.2 points from 43.9% in the previous year third quarter. Our net investment income for the quarter was $9.7 million, relatively flat due to a higher portfolio value, offset by a lower interest rate environment. We continue to manage our investment portfolio while maintaining a conservative portfolio with high-quality investments that are durations liability matched. Our total revenues for the quarter were $212.5 million, relatively unchanged from our prior year quarter. As discussed, we expect our revenues to return to growth through 2026 as we ramp our new business efforts. Our net loss ratio for the quarter improved 27.1 points to 38.3% as compared to 65.4% in the same quarter last year, reflecting significantly lower net loss in LAE. Net weather losses for the current year quarter were $13.8 million, a decrease of $49.2 million from $63 million in the prior year quarter. There were no catastrophe losses in the current quarter as compared to $48.7 million in the prior year quarter. The reduction in weather losses was coupled with favorable reserve development as compared to the prior year. Our attritional losses continue to remain fairly stable as we believe is associated with the enhanced underwriting strategy over the last several years. Additionally, favorable net loss development was $5 million in the third quarter compared to adverse development of $6.3 million in the prior year quarter. Our net expense ratio for the quarter was 34.6%, a 60 basis point improvement from 35.2% in the prior year quarter, driven primarily by a decrease in policy acquisition costs. The reduction in policy acquisition costs was driven primarily by higher ceded commission income associated with both a larger amount of ceded premium under the net quota share program and a higher ceding commission rate due to favorable loss experience for that program. This resulted in a 1.2% reduction in policy acquisition costs, which was partially offset by a 60 basis point increase in the net general and administrative expense ratio. The net combined ratio for the quarter was 72.9%, an improvement of 19.6 points from 100.6% in the prior year quarter, driven primarily by the lower net loss ratio as well as the lower net expense ratio just highlighted. Turning to our balance sheet. We ended the quarter with total assets of $2.4 billion and shareholders' equity of $437.3 million. Our book value per share increased to $14.15 at September 30, 2025, up 49% from the fourth quarter of 2024 and up 56% from the third quarter of 2024. The increase from December 31, 2024, is primarily attributable to year-to-date net income as well as a $15.7 million net of tax benefit associated with the reduction in unrealized losses. The unrealized losses are related to a decline in interest rates that occurred through the third quarter. The average duration of our fixed income portfolio is 3.13 years as the company has extended duration from the prior year quarter to take advantage of higher yields further out on the yield curve while still maintaining a short duration, high credit quality portfolio. Nonregulated cash at quarter end was $50.1 million. In addition, combined statutory surplus at our insurance companies affiliates at quarter end was $352.2 million, which is up $93.4 million from the third quarter of 2024. The increase in statutory surplus provides for additional growth capacity as we open territories to get up to full capacity. Looking ahead, we remain focused on executing our strategic initiatives aimed at driving long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe that our diversified portfolio and distribution capabilities, along with our overall proactive management approach to exposures, rate adequacy and investing in technology will position us well for continued success. Thank you for your time today. Operator, we are now ready for questions. Operator: [Operator Instructions] The first question is from Mark Hughes with Truist. Mark Hughes: The growth prospects, you talked about the PIV growth in 2026. How do you evaluate the opportunity in Florida versus outside of Florida? Ernesto Garateix: Sure. So there's still plenty of opportunity for us in Florida. If you kind of go back to a couple of years, we derisked a bit in Florida, especially in some of the Tri-County areas. So there's plenty of runway for us in Florida. We understand there's more new markets in Florida, but our name has still been predominant with the agents, and that's why we talked quite a bit about our agency relationships, which remain strong. And the agents have been -- we've been working with the agents. They have reached out to us about continuing to write. So as we mentioned on the call there, $30-plus million of new business premium is something that is only gaining more momentum in Florida. Mark Hughes: Okay. Of that new business momentum, I think you talked about $36 million was -- how much of that was Florida? Ernesto Garateix: We have that number here. I'll get that for you. Mark Hughes: In the meantime, I'll ask, how do we think about the pricing or competitive environment in Florida? It looks like commercial property is really a tremendous amount of pressure. I know in homeowners, the pricing cycle is a whole lot slower. But what's your current anticipation in terms of pricing? I think you've talked about filing for maybe low mid-single-digit rate decreases in 2026. Is that still a fair assessment? And is that... Ernesto Garateix: That's still a fair assessment, right, we have a current filing with the -- pending with the OIR for a rate decrease. And the plan would be as well in '26, we've also planned for a single-digit rate decrease. Regarding commercial, you're right, there is more pressure, but I also remind people where the beginning point is when you're talking about CRs in the 70s, yes, they have pushed up slightly to 80%, but an 80% CR is still very profitable in the commercial lines arena. Kirk Lusk: About $17 million of that new business was Florida. Mark Hughes: Okay. So kind of consistent with your current mix. And then ceded premiums in absolute dollars, is this a good starting point when we think about the fourth quarter, the $166 million, $167 million? Kirk Lusk: Yes. It's probably going to be a little high. We had about a $4 million onetime adjustment in there due to reinstatement premium. So yes, I think if you look at backing off some of that, then you're going to be about where the number needs to be. Mark Hughes: So low $160s million. Is just reinstatement premium from Ian? Kirk Lusk: Yes, Ian and Milton -- sorry, it was Ian. Mark Hughes: Okay. So it shows up a couple of years later? Kirk Lusk: Yes. Mark Hughes: Okay. How much growth can you support with the surplus that you've got, the $352 million up pretty substantially? Will that be good enough for kind of what you're seeing in 2026? Kirk Lusk: Yes. Well, I think if you look at kind of where our change in statutory surplus is for the year, it's up about $66 million. And then if you assume that, that is 3:1 ratio, that type of stuff, that gives us over $180 million of net earned premium to write. And again, that's net written. So then you actually figure that, that number is going to be a little higher because of the ceded. And so therefore, I mean, you're looking at roughly well over $225 million, $250 million of premium that we can write based upon that increase in surplus. And then again, that doesn't include any improvements in that number in the fourth quarter. Mark Hughes: Yes. Yes, which I guess leads to the question, with your level of earnings and your strong capital position already, I think you talked about $2 million in buybacks in the quarter, but it seems like there's going to be a lot of excess capital floating around in pretty short order. What are the priorities there? Is that something you could act sooner rather than later on maybe further buybacks? Kirk Lusk: And again, one of the things we also mentioned is that the Board did authorize an additional $25 million worth of stock buybacks. And again, I think if you look at our capital priorities, again, it's one, it's using capital for growth because of the ROEs we're able to generate. Second of all is we do look at where our stock is trading. We still think it's undervalued. So therefore, stock buybacks is our second priority and then dividends after that with the ROEs, if we can't generate what we think are substantial ROEs. So that's kind of like the priority of our capital utilization. Mark Hughes: Yes. Yes, I hear you. Yes, your net income relative to your market cap relative to your capital requirements is pretty striking when you put all that together. Kirk Lusk: Yes. Yes, it is. Operator: The next question is from Karol Chmiel with Citizens. Karol Chmiel: I just have a follow-up question to Mark's question about the new business. So if $17 million of the $36 million was Florida, roughly $19 million was outside of Florida. Can you just maybe comment on where you're seeing the most momentum of those territories outside of Florida? Ernesto Garateix: Yes. So Virginia is a new growing state for us as well as growth in Hawaii. New York is also ramping up. And the one reminder there is that we did take additional 9%, which made us rate adequate in New York. So that started midyear. So that is only beginning and will kind of roll into '26. So additional states as California on an E&S basis also is another positive momentum growing for us. Karol Chmiel: Okay. Great. And just a quick question on this favorable development of $5 million. Is this still due to the reserve strengthening of last year? Kirk Lusk: Yes. It has partially to do with that, and it just also has to do with just kind of what we're seeing in the underlying portfolio. So again, we think that we're adequately reserved for sure. So yes, it does have to do a little bit with that where we did take a hard look at last year. Operator: At this time, there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garateix for any closing remarks. Ernesto Garateix: We'd like to thank everyone for joining the call and thank especially our workforce and our employees for all their hard work this year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Shrinal Inamdar: Thank you, operator. Good afternoon, everyone. Thank you for joining our third quarter 2025 results conference call. As usual, before we begin, I would like to remind you that we'll be making a number of forward-looking statements during this call, including, without limitation, those forward-looking statements identified in our slides and the accompanying oral commentary. Forward-looking statements are based upon our current expectations and various assumptions and are subject to the usual risks and uncertainties associated with companies in our industry and at our stage of development. For a discussion of these risks and uncertainties, we refer you to our latest SEC filings as found on our website and as filed with the SEC. In a moment, I will hand over to Leon Patterson, our Executive Vice President and Chief Business and Financial Officer, who will provide an overview of our recent business and partnership updates, along with financial results for our third quarter 2025. Following this, Dr. Sabine Mikan, our Senior Vice President of Clinical Development, will provide progress updates on our Phase I programs ZW191 and ZW251. We will then pass the call over to Dr. Paul Moore, our Chief Scientific Officer, who will provide a brief overview of recent R&D developments. At the end of the call, Leoni, Sabeen, Paul and Ken Galbraith, our Chair and CEO, will be available for Q&A. As a reminder, the audio and slides from this call will also be available on the Zymeworks website later today. I will now turn the call over to Leon. Leone Patterson: Thank you, Shrinal, and good afternoon, everyone. I'd like to start the call by walking you through recent progress on both clinical and preclinical programs within our wholly owned product pipeline. As you know, our team was pleased to present initial clinical data from the Phase I trial of ZW191, an antibody drug conjugate targeting folate receptor alpha at the ENA conference in October. Sabeen will provide a recap of the data we presented during our poster presentation later on today's call. We are encouraged by the preliminary Phase I data for ZW191, which provides early clinical validation of our ADC approach. And we are pleased to announce that we have dosed the first patient in the Phase I clinical trial of ZW251, a DAR4 ADC targeting GPC3 in hepatocellular carcinoma. Again, Sabeen will talk more about the trial design later on today's call. We also continue to present preclinical data of ZW1528, a bispecific inhibitor of IL-4 and IL-31 to address respiratory inflammation at the European Respiratory Society Annual Congress. Additional information can be found on the ERS Congress website, and a copy of the poster is available on the Publications page of Zymeworks website. Meanwhile, our partnered programs also continue to provide encouraging data at ESMO. Our partner, Jazz, presented a trial in progress poster on the DiscovHER PAN-206 Phase II study of zanidatamab in HER2 overexpressing solid tumors as well as a 2-year follow-up in first-line metastatic colorectal cancer showing durable responses and a favorable safety profile. In addition, yesterday, Jazz announced that the ITT population for the primary PFS and interim OS analysis of the HERIZON-GEA-01 trial will include the full patient population enrolled in the study of 920 patients. Also at ESMO, J&J presented translational findings from the first-in-human study of pasritamig in metastatic prostate cancer, linking T-cell phenotypes with clinical activity. These updates highlight the strong momentum in our partnered portfolio and the long-term value these collaborations continue to build. With this in mind, I'm pleased to announce that this quarter, we recognized a $25 million development milestone as revenue from our collaboration partner, J&J, in association with clinical progress of pasritamig, a first-in-class bispecific T-cell engager targeting KLK2 in Phase III studies in metastatic castration-resistant prostate cancer, which was an engineering -- engineered using Zymeworks Azymetric platform. As a reminder, we remain eligible to receive up to a further $434 million in development and commercial milestones from the J&J collaboration in addition to potential mid-single-digit royalties on global product sales. In addition, this quarter, we earned royalties of $1 million based on Ziihera net product sales by Jazz and BeOne Medicines. And we look forward to pivotal data from the HERIZON-GEA-01 study expected in the fourth quarter. I'd also like to highlight that as of November 4, 2025, we have completed share repurchases of $22.7 million of the remaining $30 million under our previously authorized share repurchase program. which reflects the leadership team's confidence in the company's outlook, the strength of our pipeline and our long-term commitment to shareholder value. This program was primarily funded from Ziihera development milestones and cumulative royalties received from Jazz and BeOne related to initial regulatory approvals in biliary tract cancer in both the U.S. and China, allowing us to efficiently deploy excess capital while maintaining full flexibility to fund operations and growth initiatives. This action reinforces our view that the stock remains undervalued, and it aligns with our disciplined, balanced approach to capital allocation designed to drive sustainable long-term returns. Turning now to our financial results. Total revenue was $27.6 million in the third quarter of 2025 compared to $16 million for the third quarter of 2024. The increase was primarily due to a $25 million nonrefundable milestone recognized from J&J in relation to clinical progress on pasritamig in Phase III studies in metastatic castration-resistant prostate cancer and $1 million of royalty revenues from Jazz and BeOne medicines. These increases were partially offset by a reduction in development support and drug supply revenue from Jazz and due to a nonrecurring milestone from GSK that was achieved in the third quarter of 2024. Overall, operating expenses were $49.7 million for the 3 months ended September 30, 2025, compared to $50.2 million for the same period in 2024, representing a decrease of 1%. The decrease was primarily due to a reduction in expenses from ZW220 and ZW251, zanidatamab and zanidatamab zovodotin and a decrease in personnel expenses. This was partially offset by an increase in preclinical and research expenses for our ZW209 and ZW1528 programs, progression of clinical studies for ZW171 and 191 and an increase in noncash stock-based compensation expense. Net loss was $19.6 million for the 3 months ended September 30, 2025, compared to a net loss of $29.9 million for the same period in 2024. This was primarily due to an increase in revenue, partially offset by a decrease in interest income and an increase in income tax expense. As of September 30, 2025, we had $299.4 million of cash, cash equivalents and marketable securities, which is a decrease in cash resources compared to $324.2 million as of December 31, 2024. Our cash resources as of September 30, 2025, did not include the $25 million milestone from J&J recognized in the third quarter and expected to be received in the fourth quarter. We remain well capitalized. And based on our current operating plans, we expect our existing cash resources as of September 30, 2025, when combined with the assumed receipt of certain anticipated regulatory milestones will enable us to fund planned operations in the second half of 2027, which is anticipated to take us through multiple catalyst events on our pipeline. These achievements underscore the strength of our foundational partnerships and the relevance of our platform across multiple products moving into clinical development by our partners. For additional details on our quarterly results, I encourage you to review our earnings release and other SEC filings as available on our website at www.zymeworks.com. With that, I'd like to hand over to our Senior Vice President of Clinical Development, Dr. Sabeen Mekan, to run through progress on our clinical development programs. Sabeen Mekan: Thank you, Leone, and good afternoon, everyone. I'd like to start off by providing a recap of the initial Phase I data for ZW191 as presented at the AACR-NCI-EORTC conference last month. As it pertains to the safety, we are encouraged by the tolerability profile that we've seen. The safety profile for ZW191 allowed us to escalate dose up to 11.2 milligram per kilogram, which is quite high for topoisomerase payload of this potency similar to deruxtecan. Across all treated patients, there was a low incidence of grade 3 or higher treatment-related adverse events and adverse events leading to dose interruptions or reductions were infrequent. The most commonly reported events were nausea, fatigue and anemia, which are generally consistent with our expectations for an ADC. Importantly, there were no serious treatment-related adverse events, no discontinuations due to adverse events and no deaths observed in this study. These findings support a favorable safety profile, particularly in a population that has been heavily pretreated. Overall, these data gave us confidence that this drug is well tolerated at clinically active doses, providing a solid foundation for ongoing and future studies. Moving now to the efficacy results. This slide shows the waterfall plot summarizing the best change in tumor size across dose levels. What we see here is also very encouraging. There are meaningful reductions in tumor size across multiple dose levels with objective responses observed at doses as low as 3.2 milligram per kilogram and the majority of patients continuing on treatment at data cutoff. Importantly, these responses were seen across the spectrum of folate receptor alpha expression, an important observation as we think about future development and patient selection. In participants with gynecological cancers dosed between clinically relevant doses of 6.4 and 9.6 milligram per kilogram, we observed an objective response rate of 64%. Taken together, these early data show promising antitumor activity across multiple dose levels and tumor types. reinforcing the potential of this program to be a best-in-class folate receptor alpha directed ADC. Based on the integrated assessment of safety, efficacy and pharmacokinetic data, we have selected 2 doses of 6.4 milligram per kilogram and 9.6 milligram per kilogram for optimization with approximately 30 patients planned in each cohort. Enrollment is expected to begin in this quarter, and this will allow us to further refine the balance between efficacy and safety and inform optimal dose registrational studies. We expect to share additional data at a future medical conference with a larger and more mature data set. Overall, early results support ZW191 as a potential best-in-class asset with promising early activity and a manageable safety profile. We continue to be data-driven in planning further development for registration and expanding into earlier lines of therapy and in combination. As we move forward, we -- our focus remains on disciplined clinical execution while exploring strategic partnerships that could accelerate development and expand global reach. Based on the encouraging clinical findings for ZW191, we are moving forward with the clinical development of our second ADC candidate, ZW251 and are pleased to confirm the dosing of the first patient in our Phase I open-label multicenter study of ZW251. The study is actively recruiting and aims to enroll approximately 100 participants across North America, Europe and the Asia Pacific region. The patient population includes advanced or metastatic hepatocellular carcinoma that has progressed after standard of care treatments where regardless of gpiin-3 expression levels and with measurable disease as per RECIST. Part 1 of the study will evaluate escalating doses of ZW251 to determine safety and maximum tolerated dose. Part 2 of the study includes randomized dose optimization at 2 selected doses of ZW251 in order to further evaluate safety and explore efficacy according to the RECIST evaluation criteria. I will now hand over to our Chief Scientific Officer, Dr. Paul Moore, to provide an overview of R&D developments. Paul Moore: Thank you, Sabeen. I'd like to just add a few final thoughts on the developments disclosed this quarter for both ZW191 and ZW171. Firstly, the initial data presented on ZW191 provides important translational insights that could help accelerate and reduce risk in the future development of ZW251 and other pipeline ADCs using our ZB06519 payload. As you can see on this slide, behind 191 and 251, we also have preclinical stage candidates targeting more novel antigens such as Ly6E and PTK7. Also, our NaPi2b program remains IND ready, and we continue to explore next-generation ADCs. Importantly, each of our ADCs has been tailored to factor in target biology by toggling drug-to-antibody ratio and the Fc modifications. Furthermore, we also ensure to utilize the most optimal antibody to deliver an internalized payload, whether this be a superior monoclonal antibody to benchmark as ZW191 or LE or a biparatopic antibody such as in the case of PTK7. Our approach of tailoring these parameters to target biology, patient population needs and preclinical safety efficacy data aims to ensure optimal therapeutic windows while minimizing off-target toxicities. Secondly, I wanted to touch briefly on our decision to discontinue the development of ZW171 and importantly, the valuable insights, both scientifically and operationally that we took from this experience. Internally, we hold ourselves to very high standards when it comes to our target product profiles. That discipline is important because we have a broad and productive pipeline, and we want to ensure our capital and our focus go to programs with the clearest path to meaningful patient benefit. Based on the totality of the dose escalation data, we concluded that as a monotherapy, this program did not fully meet our internal threshold to advance further within our portfolio as it was unlikely to support a benefit risk profile consistent with the desired monotherapy target product profile. It was not an easy decision as we continue to believe there is potential for mesothelin-directed therapies, including ZW171, perhaps in specific subpopulations in combination settings or through the right external partnership. So we felt it was the right choice to prioritize programs that more closely align with our long-term strategic and clinical goals. Our experience of taking 171 through dose escalation significantly strengthened our understanding of the T-cell engager design and provided clinical experience, which will aid us in executing future clinical trials for our next-generation T-cell engagers. For example, we were able to advance 171 safely and efficiently through dose escalation in under a year, which is a real testament to our team and technology. We also deepened our understanding of dosing strategies, routes of administration and investigator engagement, all of which we can apply to our next generation of trispecific T-cell engagers. The study also reinforced our hypothesis around the importance of co-stimulation for T-cell engagers, the use of our novel CD3 epitope and tailoring our candidates for patient characteristics and target biology. Our ongoing portfolio management is a reflection of our discipline, our high scientific standards and the strength of our portfolio. We will continue to hold ourselves and our target product profiles to high standards of success and remain focused on advancing the programs we believe can have the most impact for patients, partners and shareholders. With that in mind, we look forward to presenting 3 poster presentations at the SITC Annual Meeting this weekend with one showcasing the versatility and application of our innovative TriTCE Co-Stem T-cell engager platform to enable diverse targeting strategies across different target tumor types, one featuring a next-generation tumor targeted Mast IL-12 enabled by Iometric and the third covering new research co-authored with NeoGenomics on ADC resistant mechanisms using spperum models. Together, we believe these presentations showcase our continued leadership in advancing innovative and target oncology research. With that, I'll hand over to our Chair and CEO, Ken Galbraith, to conclude today's call and open up the call for Q&A. Kenneth Galbraith: Thanks, Paul. Over the last 2 years, we've redefined what this company can achieve by combining R&D innovation, smart partnerships and disciplined capital allocation to help deliver potential best-in-class therapies while helping to grow shareholder value. Our partnership-based model continues to generate value today while also providing opportunities for growing potential cash flows. We plan to continue leveraging partnerships across our wholly owned pipeline to bring in external capital and accelerate development. We believe this approach allows us to main control of our R&D innovation while helping to derisk clinical development and to help ensure that every investment we make has the potential to contribute meaningfully to durable value creation. As we look beyond important near-term events for our pipeline and partner programs, our long-term focus is on compounding returns from Ziihera and protecting and enhancing future cash flows that can be reinvested to drive the next wave of innovation. With this in mind, this quarter, we announced some changes to our Board of Directors to align governance and leadership with the next phase of our strategy. We welcomed 2 new directors in August and 3 members transition off the Board effective today. We'd like to thank those 3 directors for their service to Zymeworks. In October, we appointed Dr. Adam Schayowitz as acting Chief Development Officer to help advance our portfolio and strengthen our partnership-driven strategy. With this refreshed leadership, we believe we're well positioned to transit our scientific innovation into a scalable model that builds durable royalty streams and deliver sustainable long-term value for our shareholders. To close, I want to emphasize that our capital allocation decisions, whether investing in R&D, advancing partnerships or returning capital through share repurchases, all serve one purpose to help build sustainable long-term value. Our R&D priorities remain focused on programs with clear differentiation and strong scientific rationale, and we'll continue to fund those using partnerships to extend our reach and offset development risk. Those collaborations also aim to provide a meaningful revenue floor through milestones and royalties, giving us the flexibility to invest with conviction and discipline. This is how we plan to sustain momentum through focus, partnership and the power of compounding. I want to thank you for your continued support. I'd like to turn the call back over to the operator for the question-and-answer session. Operator?[ id="-1" name="Operator" /> The first question comes from the line of [Technical Difficulty]. Unknown Analyst: Can you hear me? Shrinal Inamdar: Yes, we can hear you. Yue-Wen Zhu: Perfect. Congrats on the progress. Two from me, if you don't mind. First one, we heard it from Jazz yesterday and I think earlier today as well. But wanted to get your thoughts perhaps on the update in the PFS analysis for HERIZON-GEA to include the ITT rather than the PITT population, your thoughts here and perhaps what drove that change? Kenneth Galbraith: Yes. Thanks, Charles. I think Jazz provided some guidance on that yesterday in their earnings call in the prepared remarks, I think in question-and-answer session. We don't have anything to add beyond what Jazz has shared other than that we're aligned with the regulatory strategy that they laid out for the readout of HERZON-01 and how to analyze that data. So I really can't add anything beyond that. Yue-Wen Zhu: Got it. Fully understood. And perhaps for my second question, I want to say congrats on the folate receptor alpha data at Triple meeting. That was quite impressive. Kind of also wanted to get your thoughts on what does this mean for GPC3, especially when we're thinking about a DAR4 construct in the liver cancer population. And similarly, if we see anything that comes close or is similar or even exceeds what we saw with 191, what would your thoughts be on potential development in-house versus partnership versus out-licensing of this asset in liver cancer? Kenneth Galbraith: Yes. No, good question, Charles. Yes, we're intrigued as your question suggests as well and looking forward to continued recruitment of ZW191 in dose escalation, moving to dose optimization, which provide a larger, more mature data set. At the same time, as we announced, we're recruiting patients now in the ZW251 study. So far, our clinical execution is as good as it has been to date with our prior programs. We're looking forward to that. I think in terms of what we think about that, I think maybe I'll give Sabeen and then Paul both a chance to add their flavor to that because it's a really, really interesting intriguing question for us as well. So I don't know, Sabeen, if you want to go first and I'll ask Paul to follow up. Sabeen Mekan: Yes. I can go first. So as you know, hepatocellular carcinoma is a population with very high unmet medical need, particularly post first-line setting. There are not many treatment options for those patients. And that's why we think we should be able to create a difference given the construct of our ADC and what we've observed in ZW191 based upon the clinical data that we've observed. One of the key concerns with the hepatocellular population is concern for safety because this patient population often is very fragile and they have underlying liver disease. So the concern for safety is very important. And it is for this reason that we have selected DAR4 for this ADC molecule. And given the safety profile that we've observed with ZW191, we're fairly confident that we should be able to have a good safety profiles and to be able to have a therapeutic window in terms of treatment for hepatocellular carcinoma patients. I'll pass over to Paul. Paul Moore: Yes. No, I think Sabeen really captured the key points. I think the tolerability -- I mean, from the 191 study, it was both the tolerability was really what we were hoping for, but we also got the efficacy. And we've gone with the DAR4, we know from preclinical studies that we can maintain the same -- we can get to the same activity level with that. So we were really being careful on just making sure we had the most tolerable molecule to develop in such a challenging cancer indication. And I think the data from the Phase I sort of supports that we're in the right direction with the way that we selected the payload. We were very careful in how we pick that payload in the sort of the space of the topisomerase inhibitors that it would support a tolerable profile while maintaining our ability to get good dose into patients, and you could see that from our data. I think ultimately, we want the molecules to be combinable with other modalities as well so that we can go up in line. But obviously, first, we want to establish the profile as a monotherapy, and this really energizes us now after seeing the 191 data to really chase after the 251. [ id="-1" name="Operator" /> The next question comes from the line of Yaron Werber of TD Cowen. Yaron Werber: Congrats as well on the folate receptor alpha. I got maybe a couple of questions actually on the pipeline. Maybe the first one, while we're staying on GPC3, B1 today on their call said that with their bispecific GPC3 4-1BB, they actually established proof of concept. So they're moving forward. That's definitely very encouraging. In terms of the payload that you're using is irinotecan and typically -- I'm sorry, a TOPO1 kind of based payload. That's not -- are TOPO1 typically used in liver cancer? And kind of maybe give us a little bit of a sense from the preclinical data, what are you expecting in terms of showing efficacy? And then secondly, for the next IND in the first half of next year, the DLL3 CD3, CD28 trispecific, we know DLL3 is a great target, and we've seen a lot of activity with both the bispecific on the market and the ADC. CD28 has not worked out so far in most other cases. So maybe what makes you more optimistic this time around? Kenneth Galbraith: Yes. I'll let Paul talk about the DLL3 and then maybe let Sabine and Paul both comment about CDC3, that's okay. Paul Moore: Yes. So yes, maybe I'll -- yes, I'll take the second question first. And then -- so great question, Yaron, on why do we think we can make CD28 work where others have had challenges, right? And so I think we do take precedents from the CAR-T space where adding in co-stimulation has shown benefits. So something like CD28 or 4-1BB that you refer to in the context of the B1 molecule. But -- and a lot of people have chased after that because of the attraction of getting that CD28 costimulatory signal to the T-cell to maintain or enable activity that you don't achieve just by having signal 1 through CD3. And I think what the challenge has been is actually getting that timing, that simultaneous engagement of CD3 and CD28 in the kinetics and the timing that you need to get that benefit. So that is what we took the challenge on when we developed a trispecific so that we knew that when we engage CD3, that T-cell could be then engaged with CD28. And no one's really developed a solution until what we think we have the solution for that. And so that's where we feel we can make an impact based on our preclinical data that gives us encouragement that we'll see that impact in the clinical setting. So it's a little bit to do with just the way we design it. Others have tried doing CD3 bispecific plus the CD28 bispecific. And in some cases, that may work. But we feel a more precise way is to hit the same T-cell with the primary and the secondary signal in a concert in a manner that can be done with a single molecule. So that's the DLL3. And certainly, we've presented data, we'll show a little bit more actually at SITC this week and that really shows the benefit that we can achieve with that above like a bispecific molecule, but doing it safely in the preclinical setting. For the TPC341BB, and I think also your question was about why do we think a chemo can work there in the liver setting. And certainly, it isn't a standard of care chemotherapy for liver cancer, but there is precedent for chemo working in liver cancer. It's just that it's not -- it just can't be tolerated. It's not just well -- given as a systemic treatment. So we think there is precedent there, and we think the way that we can deliver payload or chemo such as a topo inhibitor with our ADC gives us the opportunity to do it in such a way that we can thread the needle and get the right level of payload to the patient that can enable then the sustained exposure that will give you the benefit, but still with doing it within a tolerable profile. So that's kind of the preclinical hypothesis or the hypothesis and the preclinical data that we have has shown that when we've looked at like a scan of different HCCPDX models, we see 8 out of 10 or that sort of range of responses of models responding, but we can go up to like 100 mg per kg with this molecule in cynomolgus monkeys. So we have the safety tolerability profile with the evidence of efficacy with some glimpses that in patient population they can under certain conditions respond to chemo, we think we can open that window up with the ADC. Kenneth Galbraith: Sabeen, anything you want to add from a medical perspective with this patient population and the idea of chemo versus a payload delivery with an ADC construct? Sabeen Mekan: Yes. So I would like to say that chemotherapy has been tried in hepatocellular carcinoma with limited success, but there has been some incidence of success there, especially trying to localize chemotherapy that's been effective. And that actually makes us believe that giving cytotoxic in an ADC format, particularly with our higher internalizing antibodies and the fact that hepatocellular carcinoma has very high expression of GPC3 gives us confidence that we should have the therapeutic window that is needed in this patient population to be successful. [ id="-1" name="Operator" /> The next question comes from the line of Andrew Berens from Leerink Partners. Andrew Berens: Congrats on the progress. Just a question. I know Jazz is controlling the trial, but I was wondering, would the increase in the -- to the intent-to-treat analysis today also increase the number of PFS events that are necessary to trigger the analysis? Just try to put this announcement in context. Kenneth Galbraith: Yes. No, thanks for the question, Andy. I think I going to answer the same way before. I think Jazz provided all the guidance appropriate around that decision of the patient population that will be utilized for the ITT patient population, both from a PFS perspective and OS. And I don't want to go further than the guidance they've provided. Obviously, we've been working on the study for 4 years from a Zymeworks perspective and proximity data is very close. And so I'll just let Jazz provide that guidance, and we'll just have to wait for a future announcement and presentation to understand anything further beyond that. [ id="-1" name="Operator" /> The next question comes from the line of Stefan Wiley of Stifel. Stephen Willey: Just curious how we should be thinking about the starting dose levels of 251 relative to 191. I know obviously, different DARs, different target organs. But is there anything you can say qualitatively or maybe even quantitatively about how you're thinking about pushing dose here? And I guess, did that dose escalation schema for 251 change at all as some of the 191 data started to come in? And I just have a follow-up. Kenneth Galbraith: Yes. Good question, Steve. Sabeen, do you want to -- obviously, we haven't disclosed the starting dose yet. We'll obviously look to do that probably a similar way we did with 191. But Sabeen, is there anything you want to add about the dose schema for dose escalation for 251 as it relates to the 191 schema that now people have seen? Sabeen Mekan: So I would say that the schema for 251 is very similar to 191, although as you rightfully pointed out, this is a DAR4 as opposed to 191, which was a DAR8. So there are differences. And also with 191 was our first ADC into the clinic. So we were very conservative with our initial starting dose. And now that we've gained some clinical experience, particularly with regards to safety, I can say that we have more confidence in our starting dose, but we are not disclosing that yet. We will be disclosing that later similar to what we did with 191. Stephen Willey: Okay. That's helpful. And then -- maybe just a question for Paul. Just curious how big the universe of target antigens you think is for a trispecific format beyond DLL3. I know that target has a pretty exquisite expression profile between tumor and healthy tissue that obviously mitigates some of the concerns about amplifying off-tumor tox with a signal 2. But just curious where and how you might be able to leverage this format to other targets of interest. Paul Moore: Yes. No, thanks, Steve. That's definitely very much in our mind. And actually, I sort of alluded to we have actually a presentation this weekend at SITC and what we're going to show there is application of the technology to different targets and the way that we designed the molecule for the target. So the base molecule on the context of the CD3/CD28, we know sort of the positions of those molecules. We're not telling people really the secret sauce there and how they're in the geometry of the molecule. But what we also can think about is how do you then target the antigen and design the targeting of the tumor antigen in such a way to get that maximum window. So we are looking at that. We're looking at targets both in solid tumor and in hematological cancers. We can deploy against sort of the 2 plus 1 strategies. We can think about logic gated strategies as well. So there are ways with the Azymetric so versatile and flexible that we can put in multi binding sites to help us get more selectivity and targeting. We can share more of that. But that we're very much thinking about how do we tailor that so that we can have that therapeutic window. We don't rule out the use of masking. We do have masking technology. We're actually applying that to the IL-12 molecule, and that can also be adapted to our T-cell engagers. So we have that toggle if we feel we need it as well. But we just run it through, we test all the different permutations of the molecules, let the data drive and then we have the preclinical models that then allow us to understand the toxicity profile and the therapeutic window. So we're very excited about the application of that. And again, looking forward to pushing forward with the DLL3 program, but we do have other molecules coming behind as well. [ id="-1" name="Operator" /> The next question comes from the line of Brian Cheng of JP Morgan. Brian Cheng: Just 2 quick ones from us. So in a trial design for GPC3, we noticed that you're recruiting patients actively through the patients who have been through standard of care. So just one is, Paul, I'm curious what you saw in the preclinical setting that gives you confidence that GPC3 will be active in the post-IL setting, given that NIVO IPI got approved in the first-line HCC not too long ago. And then just on the biomarker side, I'm curious if you perceive a potential need for -- to develop a biomarker assay near term, is there a need for it today? Just curious what you think about that front, too. Kenneth Galbraith: I'll let Paul start on that. I think Sabine may have something to add also on those, but I'll go ahead, Paul. Paul Moore: Yes. No, thanks. So I think from the preclinical setting, your question was how do we -- what's our confidence that we can go behind other standard of care, right? So I think the expression level of GPC3, we've looked at that. And that doesn't -- we don't anticipate or any -- there's no proof that, that would be modulated by IL treatment. So I think the complementary mechanisms and how they work wouldn't really preclude us going with a targeted medicine that's going after GPC3. And we've got preclinical data in different PDX models. Some of those will be collected potentially after treatment, right? But I think just mechanically, we don't see that as a barrier. And I think one of the Yaron mentioned there's encouraging data with other GPC3 modalities that are also going behind -- they would be tested behind standard of care from those clinical trials. So we take encouragement from what others have seen with GPC3 targeted therapies using different modalities. We just feel the ADC modality could just give us an additional mechanism that -- and the power of that approach can just give us an opportunity for more meaningful differences in benefit there. So that was the thinking there. And then on the biomarker side, there, just like we did with folate receptor, we will look at GPC3 levels and make a decision on whether that would be something that we would need as we move forward in clinical development, and we'll collect that data as we go on that. And Sabeen can reiterate that or elaborate on that. Sabeen Mekan: So I'm answering a question regarding NIVO IPI being approved not too long ago. I don't think that changes our development plan. If you look at the treatment landscape for first-line hepatocellular carcinoma, the treatment is currently includes checkpoint inhibitors and VEGF and also checkpoint inhibitors plus CTLA. So prior to approval of NIVO IPI durvatremi has been approved as well. So it's the same mechanism of action, and it really doesn't have an impact on how we think an ADC, particularly a topoisomerase ADC would perform in this setting. So I think we remain confident with regards to that. And I think Paul answered all your questions regarding the biomarker. We are enrolling similar strategy to our 191 enrolling patients regardless of expression and be able to ultimately do a correlation of how the expression level relates to clinical activity. [ id="-1" name="Operator" /> The next question comes from the line of Mayank Mamtani of B. Riley Securities. Mayank Mamtani: Congrats on a productive quarter. Can you talk a little bit more about your expectations on durability for 191, just given what you've seen at the dose levels you're at? And at what point you'd also be able to explore combination, obviously, important in PROC, but also in other solid tumor types that you may want to explore there? And just kind of put it together, when you think you have a sort of partnership enabling package here, just your latest thoughts on that. And then I have a follow-up. Kenneth Galbraith: No. I'll just answer the partnership question quickly, and then I'll turn it over to Sabine, I think can answer part 1 A, B and C of your first question. But obviously, we found the data from 191, although early in initial clinical data, very interesting. I think there are others who are interested in other ADCs that are differentiated. We think ours clearly are. And so we'll continue to talk to parties who might have an interest in joining us and moving that forward that might allow us to accelerate development, might allow us to find a better ability to compete even on a time basis and explore the full potential of ZW191. So we'll continue to have those discussions. And as I think you've seen that data was very intriguing to KOLs and obviously, people on this call and especially to us. And I think there are potential partners where that data was also very intriguing. And so we'll continue to let the data mature, continue to collect more data and have ongoing discussions at the same time. And I'll let Sabeen answer the subparts of your first part of your question, if that's okay. Sabeen Mekan: So with regards to durability of responses, I think some of the key things when you look at efficacy is the number of patients who responded. So our overall response rate looks pretty encouraging, particularly in the doses we would like to take forward that is 6.4 to 9.6 milligram per kilogram. Key things that we noted were we have a pretty wide therapeutic index with responses starting at 3.2 milligrams per kilogram, that actually gives us a lot of confidence. And if you look at our swimmers plot that we shared in our poster, a few things that give us encouragement is that most of the responses, particularly at higher doses occurred early. And looking at the waterfall plot, the depth of responses, we had a pretty good depth of responses in terms of reduction in tumor size for the target lesions, even though our follow-up is relatively short. And vast majority of patients are staying on treatment. So combined with our safety profile, which would hopefully allow patients to stay on treatment for a long period of time, I think that would help us give the durability that we're going to need to achieve the PFS and OS that we -- that would be important in these indications. Mayank Mamtani: And then on the learnings from 171 to 209, were there any step-up dosing learnings you're looking to apply here as the DLL3 program gets into the clinic? I know you're not saying what dose levels you may start at, but I was just curious, the therapeutic window should be very different consideration given the target differences in mesothelin and DLL3 from an off-target toxicity standpoint. Any thoughts there would be great. Kenneth Galbraith: Yes. I'll let Paul talk about just learnings from our 171 program and how they're going to apply to our thoughts around 209. Paul Moore: Yes. And I think one of your questions was just thinking about the dosing and how we go about thinking about the step-up. And what we did for 171 was we used QSP modeling and we sort of leaned on prior clinical precedents to allow us to really nail what we thought was a good starting dose and then how we could accelerate through the dose escalation. And that approach we will use a similar approach for projecting the starting dose and the step-ups for 209. And what I would say is that those projections when we looked at the exposure levels in the PK, they seem to really fit nicely with what we had projected. So we're anticipating that we can use that again. Obviously, the target toxicity profile, the safety profile is a little bit different for DLL3 than it is for mesothelin. But we still think there's relevant learnings from the design of them -- from the clinical design. But then also there was also some design features in 171 that we're also carrying over into 209. I think that also gives us confidence then that we have that human experience with that approach that it sets us up well for 29. [ id="-1" name="Operator" /> The next question comes from the line of Robert Burns of H.C. Wainwright. Robert Burns: Just one, if I may. So one of the things that I noticed in the presentation for ZW191 was that you used an score categorization, low negative 0 to 74 intermediate 75 to 199 and high 200 to 300 versus the majority of the competitors are using a PS2+ method to define high versus low. So I was just curious about the correlation between those 2 different scoring methodologies so we could sort of assess them in a more apples-to-apples comparison. Kenneth Galbraith: Yes. Thanks for the question, Robert. I think I'll let Sabeen start addressing that question and then see if Paul has something to add to that response as well. But excellent question. Sabeen Mekan: So I would say that H-score is pretty well-known and very well-validated research method in evaluating expression levels of different targets, and it combines both intensity, which is usually measured in IC treatments for 1, 2 plus intensity as well as the number of patients with positive -- number of cells with positive scores. So it's a pretty well integrated method for evaluating the number of pay cells that express the target. And it has had a pretty good correlation with both TPS score, which is often used in certain assays that are ultimately commercialized as well as IHC scores. So that is why we use the H score. It's a composite, and it's got a pretty wide range from 0 to 300, and that gives us a pretty good evaluation across the range for the expression level. So one of the things that we did also do in our poster is categorize the H-score into 3 different categories, high, intermediate and low. And within those categories, the high category that we defined is correlates with high expression that of folate receptor that is used for treatment with ELAHERE. And that is a measure where we can evaluate how many of our patients responded who would have been candidates for ELAHERE versus patients who were low or negative and were not candidates for that treatment. Paul, if you want to add something. Please go ahead. Yes. Paul Moore: Yes. No, I think that's good. Yes. No, great, Sabine, you covered it. I think with the H-score, it just gives us a little bit more granularity across that than using the PS2+ score. But by having the H-score, the score the way that, that specimen sample is scored with the test, we can -- as Sabeen alluded to, we can also calculate the PS2+. That's doable. So you can -- we can take that data and analyze it whichever way we want. But we felt for this analysis, this was the appropriate way to show the H-score because it just gives people more breadth and understanding of the profile of the patients that we're seeing. Robert Burns: Yes. No, I completely understand that, and I appreciate the granularity. So just if you don't mind, like would it be an accurate assumption to say the patients that you defined as high expression per the H-score of 200 to 300 would fit the category of PS2 plus greater than or equal to 75? Or would there be some discrepancy between them? Sabeen Mekan: It should be a very high correlation. Robert Burns: I guess last question for me. Given the data that we've seen from RENA-S as well as the Eli Lilly compound, obviously, they're using a PS2+ scoring system. In those non-high patients, how do you think that ZW191 stacks up against those 2 compounds in the lower expressing or intermediate expressing folate receptor alpha patients? Sabeen Mekan: So as you saw from our data, we showed pretty transparently across a spectrum of H scores across low and negative that we observed clinical activity across folate receptor expression levels. We're looking at data from -- which we are pretty confident about, and we're showing pretty good activity. Given in our sample size, we had roughly around 2/3 of patients who were low negative roughly. which correlates very well to the number of patients who are not candidates for ELAHERE. And comparing our data to the competitors you talked about GES and Lilly, I think we feel pretty confident about our activity in the low negative patient population from what we've observed so far. Obviously, we're going to continue to follow our patients. We are enrolling very actively in our study with more patients in dose escalation and longer follow-up, and we are initiating our Part 2 dose optimization, which will provide us more data at the doses that we would like to move on. I think that would give us a lot of confidence in our activity across the spectrum for expression levels, including low and negative. Robert Burns: I can't wait to see the additional data for ZW191. [ id="-1" name="Operator" /> The next question comes from the line of Akash Tewari of Jefferies. Phoebe Tan: This is Phoebe on for Akash. On ZW191, it looks like a key differentiator between this and other next-gen folate receptor alpha ADCs is safety, specifically on Grade 3 cytopenia. Can you talk about the importance of this difference in terms of potential combinations maybe in earlier treatment lines? Kenneth Galbraith: Good question. I think we see a number of potential differences, differentiating factors between ZW191 and data we've seen from others. But I'll let maybe Sabeen talk specifically about the tolerability profile we've seen so far in our data set. Sabeen Mekan: The tolerability profile, we're very pleased, particularly with our safety event rate. Most of the safety events that we saw were pretty expected, as we mentioned, which were mostly not vomiting cytopenias. Our cytopenia rate is -- actually, we're very pleased with that rate because this is something that you would expect very typically from a topoisomerase ADC. And the rates that we observed for anemia, neutropenia and thrombocytopenia are well within expected for an ADC, particularly with the fact that we're going at relatively high doses compared to other ADCs with similar payload. So with that, we are confident that, that would help us drive efficacy. And at the same time, the safety profile with cytopenias helps us combine with treatments in earlier lines of therapy. As you know, in ovarian cancer, earlier lines of treatment consists of a combination of platinum, taxanes and bevacizumab. So that gives us a lot of confidence to combine with all of these treatments going in earlier lines of treatment, particularly some of the pitfalls that we've seen with other ADCs, cytofolate with combinations in earlier lines is neutropenia, and that often leads to reduction in doses to the point that it affects efficacy. And we're hoping with our safety profile and particularly the lower rates of neutropenia that we're observing, ZW191 should be able to be combinable with the platinum agents at a much more efficacious dose. So that's one of the key areas. The other thing that we're thinking about in earlier lines of therapy from a tolerability perspective, obviously, is the ability to treat patients for much longer, particularly in the maintenance setting. And I think these are all areas where we can differentiate. [ id="-1" name="Operator" /> The next question comes from the line of Jon Miller of Evercore. Jonathan Miller: I'll follow on a question on the DLL3. I guess we've seen some really great data from other T-cell engagers there even pretty recently. So I'd love what do you think are the key places where you'd hope to differentiate? What would make your molecule a best-in-class molecule in your opinion? And where do you think you can target that? And then I've got a follow-up. Kenneth Galbraith: Okay. Paul, do you want to... Paul Moore: Yes. No, I think absolutely. I mean, DLL3, a lot of excitement. It's a attractable target in solid tumors. We're getting encouraging response rates. For sure, we think there may be patients that could still -- that could benefit from -- that don't respond that don't have the T-cells that can really mount a response or a prolonged response. And that's really what we're trying to do here with our molecule. So really change the game and really get the next level of response and durability of response is really what we're hoping for. And we think by having the CD28 co-stimulation, it gives us opportunity to do that. So there may also be some benefits in the mechanism that can lead to thinking about the duration of response and the way that we dose the molecule. They could also be intrinsic in the design and the fact that we have that extra T-cell response, but that will away further analysis. But it's really more patients responding and longer responses. Again, that's the goal, Jonathan, and our data suggests that we can from a preclinical, we have a chance to achieve that. Jonathan Miller: Fair enough. I guess since you were talking earlier about being almost finished with your repo, I am curious, given the expected upcoming milestones from Jazz would be one on the GEA readouts, what is your expected use for future milestones? Should we be expecting that repo will make a return when you have cash inflows in that response? Or is that money spoken for, for your internal programs? Kenneth Galbraith: Really good question. I think as we started this last year, we do want to have the ability to always have an authorized stock repurchase program that then gives us the ability to allocate capital to reducing share count at what we think is attractive prices to boost TSR. So we always want to have that optionality. So I think you should expect that we will always have an authorized stock purchase plan in place. We get to decide when and how we use that for shareholder benefit. So I think you should just expect as we're getting to the end that we should always have one in place to be able to do that. It's not the only place we've been allocating capital over the past period of time. We have been allocating capital to R&D programs that make sense for us and when the data justifies it, continuing to move forward with additional investment as we are with ZW191. We've obviously talked a little bit about our strategy of maybe creating another area to allocate capital as capital comes in from milestones and royalties from Ziihera and hopefully eventually pasritamig. Having the ability to then decide to allocate that capital back into a royalty portfolio, given that those royalty portfolio we have right now, it earns very attractive annualized rates of return, we think, from holding it from development through commercialization and having the ability as some of those gains are realized through payments from our partners to put that back into an attractive royalty portfolio that could generate really interesting rates of return is something another piece of the puzzle and strategy that we've talked about putting in place, and we'll talk more about this in the weeks and months ahead. So I think you should see us in in the future, be disciplined on capital allocation. I think we'll obviously have a stock repurchase plan authorized, and we've obviously shown that we like to use it to generate TSRs. We'll allocate capital into R&D when we think is differentiated and productive and data justifies it. And I think we'll develop the capability, infrastructure and strategy and the interest to consider putting some of the cash flows that come out of our licensed products back into a royalty portfolio with potentially other licensed products, and we'll talk more in the future about the strategy and differentiation of how we think we can accomplish that. And I think all 3 of those together, having the optionality to allocate capital to those resources is important for us. I think getting the mix right is important for us. I think if we can do all 3 of those in the right way at the right time and the right mix, we can generate some very interesting long-term TSRs in Zymeworks. And that's what we've been working on and we'll continue to work on as our licensed products move from development to commercialization. [ id="-1" name="Operator" /> The last question comes from the line of Yigal Nochomovitz from Citi. Unknown Analyst: This is [ Shuan ] on for Yigal. Congrats on the progress. Maybe just a quick one from us. You spoke on it a bit already, but just wondering if you could provide additional color on potential time lines of third-party milestones beyond what might be expected from Jazz. Kenneth Galbraith: Yes. We haven't, as a practice, provided much guidance in that regard. Obviously, we've tended to wait until we've earned or receive milestone payments as we did this quarter with the $25 million that we earned from Johnson & Johnson with respect to pasritamig moving into Phase III studies. So for right now, I think we'll keep that guidance. I think as we move forward, especially with Ziihera into commercialization, we might provide some additional guidance around milestones from both Jazz and B1 as they become closer, more approximate and more probable just so people understand a little bit more about cash flows that might be realized in those licensed products and then obviously, then where that capital might be allocated to. So until then, you just have to wait and see, but not too long, I think. [ id="-1" name="Operator" /> This does conclude the question-and-answer section. I would now like to hand the call back over to Chair and CEO, Ken Gabre. Ken, please go ahead. Kenneth Galbraith: That's great. So thanks, everyone, for your time and attention and questions on today's call. Obviously, back in 2021, we designed and initiated a really important clinical study with zanidatamab, the HERIZON-G01 study. And we're really pleased that Jazz continues to be optimistic and confident of reporting out the top line data in this quarter. And we're as interested as anyone in understanding that data set and what the potential is for zanidatamab to be practice-changing in this patient population. And we're very pleased that we won't have to wait that long to understand that. And so please stay tuned and look forward to talking about that further with our partners, Jazz and B1 as appropriate. So thank you very much for your time, and we'll talk to you all very soon. [ id="-1" name="Operator" /> This concludes today's presentation. You may now disconnect.