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Operator: " Trenton Woloveck: " James Cacioppo: " Michelle Mosier: " Luke Hannan: " Canaccord Genuity Corp., Research Division Pablo Zuanic: " Cantor Fitzgerald Frederico Yokota Gomes: " ATB Capital Markets Inc., Research Division Andrew Semple: " Ventum Financial Corp., Research Division Operator: Good afternoon. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to Jushi Holdings, Inc.'s Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] I will now turn the call over to Trent Woloveck, Co-Chief Strategy Director. Thank you. Please go ahead. Trenton Woloveck: Good afternoon, and thank you for joining us today on Jushi's Third Quarter 2025 Earnings Conference Call. My name is Trent Woloveck, and I am the Co-Chief Strategy Director at Jushi Holdings, Inc. With me on today's call are Jim Cacioppo, our Chairman and Chief Executive Officer; Jon Barack, our President, Chief Revenue Officer and Corporate Secretary; and Michelle Mosier, our Chief Financial Officer. This call is also being broadcasted live over the Internet and can be accessed from the Investor Relations section of the company's website at ir.jushico.com. In addition to the company's GAAP results, management will also provide supplementary results on a non-GAAP basis. Please refer to the press release issued today for a detailed reconciliation of GAAP and non-GAAP results, which can be accessed from the Investor Relations section of the company's website at ir.jushico.com. Additionally, we would like to remind you that during this conference call, we will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives and future performance and business. Although Jushi believes our current estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. We caution you that actual results may differ materially from any future performance suggested in the company's forward-looking statements. The risk factors that may affect actual results are detailed in Jushi's 10-K and other periodic filings and registration statements. These documents may be accessed via EDGAR and SEDAR as well as the Investor Relations section of our website. These forward-looking statements speak only as of the date of this call and should not be relied upon as predictions of future events. Jushi expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Jim. James Cacioppo: Thank you, Trent, and thank you, everyone, for joining our call. Today, I will provide a high-level overview of our financial performance during the third quarter of 2025, followed by a discussion of our recent operational achievements and key developments. I will then turn the call over to Michelle to review our financial results in further detail before opening the question-and-answer period. To begin, we continue to build positive momentum in the third quarter, delivering revenue of $65.7 million. This represents a steady sequential increase of $0.6 million and a robust year-over-year growth of $4.1 million. I would note the third quarter has consistently been our seasonally slowest of the year. Retail revenue was slightly lower on a sequential basis by $0.7 million, but delivered a meaningful year-over-year increase of $3.3 million. The year-over-year growth was primarily driven by strong performance in Ohio and Virginia. In Ohio, we benefited from higher unit sales due to the addition of 5 new stores, while Virginia delivered strong same-store sales growth across our 6 store network. Although price compression remained a challenge across markets, Ohio's performance stood out, continuing to deliver despite this ongoing pressure. Wholesale revenue grew by $1.3 million sequentially with all markets contributing to quarter-over-quarter improvement. On a year-over-year basis, wholesale revenue increased by $0.7 million with Virginia as the one exception, where partners prioritize vertical sell-through, resulting in a softer annual comparison. Our third quarter sales performance reflects ongoing strength across both our retail and wholesale channels, fueled primarily by operational enhancements at our grower-processor facilities. These continued improvements have elevated both product quality and availability, enabling us to better serve demand across our network while achieving improved margins. Gross profit for the third quarter was $30.7 million, representing 46.7% of revenue. This marks a notable improvement from $28.9 million or 44.5% of revenue in the second quarter of 2025 and $28 million or 45.4% in the third quarter of 2024. The 220 basis point sequential increase in gross profit margin, along with 125 basis point expansion year-over-year highlights the continued positive impact of our operational enhancements on overall profitability. Net loss was $23.7 million compared to $12.3 million last quarter and $16 million in the prior year. Adjusted EBITDA was $12.8 million compared to $13.7 million in Q2 of 2025 and $10.3 million in Q3 of 2024. Cash flows provided by operations were $6.1 million in Q3 of 2025 compared to $1.9 million of cash used in Q2 of 2025 and $2.4 million of cash provided in Q3 of 2024. The improvements in operational efficiency and product quality across our facilities are now translating directly into stronger financial results, contributing to increased sales and enhanced margins. This progress stems from advancements in genetics, facility upgrades and improved operating procedures due to a material upgrade to our management team through promotions and new hires over the fourth quarter of 2024 and throughout 2025. Across our grower-processor network, I'd like to highlight two key achievements. First, our yields climbed to an impressive 84 grams per square foot across the GP portfolio, making a 13% increase year-over-year. Second, our potency levels have averaged 27% THCa, which is 10.5% above our 2025 target and an improvement over 2024. This combination allows us to better meet patient and consumer preferences, driving growth in both retail and wholesale sales. As mentioned, we saw strong momentum with a 23.2% increase in quarter-over-quarter and an 11.9% rise year-over-year in our wholesale channel sales. While wholesale sales have been down for some time due to lack of availability of products, our increased production capacity now enables us to satisfy increased internal demand across our retail network while continuing to support wholesale partners. Ohio continues to impress with a 2.4x increase in cannabis year-over-year, alongside continuous improvements in yield and potency. Our yield in Ohio is now around 92 grams per square foot with potency averaging 29% THCa. The improvements in our quality are resonating in the Ohio market as we expanded to 160 active wholesale doors in the third quarter, which is an 11% sequential increase. The successful improvement of both yield and potency as we expanded our cannabis reinforces our confidence in our ability to replicate these results as we continue to scale and particularly as we move forward with planned cannabis expansions in Pennsylvania and Virginia. I'm also pleased to report that we have successfully navigated and addressed the operational challenges in Massachusetts and Pennsylvania. Our Pennsylvania GP is performing as good as any of our facilities in the portfolio. It is our largest facility with the ability to produce products in every category except for a few small ones like soda type beverages, press pills and creams. Moving on to our ongoing projects. We continue to deploy high-return capital into our grower-processor facilities, especially in Pennsylvania and Virginia. These high ROI projects are a vital part of our long-term strategy and enable us to strengthen our supply chain for both medical and adult use in these markets. In Virginia, we continue to expand capacity to meet rising demand in the medical market. We expect to bring our seventh cultivation room online at the Manassas grower-processor in the first quarter of 2026. After that, we have the ability to add on additional cultivation room within the existing footprint. In parallel to support adult-use sales, we have begun design work on a new warehouse on our vacant land at the rear of our current facility that we will eventually connect. We are hoping to be in the position to begin construction of an adjoining building a couple of months after adult-use is approved, depending upon the speed of regulatory approvals. In addition, there is more vacant land to allow for additional warehouse expansion projects if market conditions warrant such an investment. In Pennsylvania, we will shortly finish Phase 1 of our two phase expansion plan to increase flower capacity and required support areas like increased dry room capacity. This phase includes reengineering and outdated cultivation space into 3 smaller single-stack cultivation rooms capable of producing to our much improved standards. Phases 2 and 3 have been combined into a single phase as we currently have more than adequate capacity for the medical market. The new Phase 2 is in the architectural stage. Phase 2 will substantially increase our capacity for adult use. This expansion is a reengineering of underutilized space in the current warehouse, which allows for a quick turnaround and lower capital investment to meet adult-use needs. These two expansions are expected to increase our total cannabis by approximately 35% once all phases are completed. As in Virginia, our grower-processor facility sits on plenty of land, which will allow us to address additional market opportunities if growth and profitability are robust. Turning to our retail operations. We expect to have added 8 new stores by the end of this year. These include currently operating locations in Toledo, Oxford, Warren, Mansfield and most recently, Parma in Ohio and Lynnwood in Pennsylvania. In addition, we are on track to open 2 additional locations by the end of the fourth quarter, one in Little Ferry, New Jersey and the other is outside of Cincinnati in Springdale, Ohio. Little Ferry will mark our first entry into New Jersey and Springdale will be our seventh store in Ohio. A third location in Mount Laurel, New Jersey remains on track to open in the first half of 2026. I would note that in New Jersey, our Little Ferry location was built through a license application versus acquisition and has approximately 45,000 cars passed the store per day. This location is down the street from those visited Costco in New Jersey and is next to the busiest private aviation airport in the United States. We also sold an underperforming store in the Nevada market this year. We are also actively assessing a few potential store relocations to optimize performance and position within our core markets. We have 3 or 4 solid move opportunities, which we should be able to execute upon in 2026. Our goal is to move between 5% and 10% of our stores a year as leases expire and/or better locations present themselves. With net store growth of about 30% in this 18-month retail expansion phase, our capital priorities have shifted to targeted production upgrades and capacity expansions on the grower-processor side of the business and the store moves on the retail side. Newly opened high-performing stores typically experience a ramp-up period of approximately 24 months before reaching stabilized same-store sale levels as customers and patients become increasingly aware of their presence. At the end of the third quarter, Jushi had 1,251 employees across 41 retail stores compared to 1,182 employees and 35 stores at the same time last year. We continue to add new locations while maintaining lean staffing levels and driving productivity improvements across the network. While our store count grew by approximately 21% year-over-year, headcount increased by only 6%, reflecting our ability to scale efficiently. This speaks to the effectiveness of our corporate and retail operating model and leadership, which continue to deliver strong results. As the smoke clears in the regulatory environment at the federal level and in our states as they transition to better programs, there is a proven opportunity for Jushi to use the operating leverage to increase profitability. Basically, we increased revenues at a higher pace than expenses, which increases margins. This growth and margin story should play out as we increasingly use the Jushi platform to expand through acquisitions. On the performance side, our retail business remains supported by multiple growth drivers. Store traffic and transaction volume trended upwards across our core markets, reinforcing continued engagement among both patients and consumers. Pennsylvania was a highlight with transaction volume rising 22% year-over-year, a direct reflection of our market penetration. We also saw continued growth of our private label share across several states, driven by the launch of 821 new product SKUs. This includes a wide range of offerings from emerging brands such as Hijinks and Flower Foundry as well as legacy brands such as Sèche, Tasteology and The Lab. Of note, we launched 355 SKUs under the Sèche brand and 209 under The Lab. Among our newer brands, Flower Foundry continues to grow its share, now accounting for nearly 10% of our total package sales in Pennsylvania and Virginia and 8% of our total package units in those states. Shayo, our partnership brand with Real Housewives Stacey Rusch is off to a great start. The rosin-infused fruit chews have already climbed into the top 10 edible brands in Virginia. Jushi branded product sales as a percentage of total retail revenue was 56% across the company's five vertical markets, an increase of 110 basis points compared to Q3 of 2024, while remaining relatively flat compared to the prior quarter. There should continue to be a positive uptick in our vertical penetration with improved product availability and better retail management. In adult-use markets, we are focused on broadening product assortments to remain competitive and drive higher basket sizes. We are effectively leveraging vendor support and localized campaigns to protect margin while increasing unit velocity. I would like to note that Jushi continues to be one of the largest third-party purchasers in our market. Additionally, our new retail leadership team has made a strong impact elevating in-store experience through better operating focus, merchandising, education and customer engagement. From a year-over-year perspective, our overall retail performance reflects the benefit of our new store openings and operational improvements across the platform. Units sold increased by 6.9% compared to the same quarter last year. In Pennsylvania, retail sales rose $0.3 million year-over-year with the performance varying across regions. We continue to see bifurcation in the market, particularly in Southeastern Pennsylvania, where the illicit market and the border markets in New Jersey and Delaware, especially in the Philadelphia area, remain a challenge. However, we are encouraged by recent legislative momentum and enforcement actions in the state, which could signal a shift in regulatory oversight and potentially pave the way for a more level playing field. As previously noted, Virginia retail sales rose by $1.5 million year-over-year with our BEYOND/HELLO market share growing by 1.5% sequentially. We continue to be a top quality grower in the market with the most innovative new brands. In Arlington, our stores saw significantly increased demand as enforcement actions intensified across the border in Washington, D.C. With ongoing regulatory scrutiny of unlicensed smoke, vape and hemp stores, we believe more of that demand will continue to return to the legal regulated channel, where Jushi is well positioned to capture it through our solid footprint in the Commonwealth. This DC enforcement against illegal activities and resulting increase in sales in the legal market may be a microcosm of what will play out across our footprint as law enforcement attention towards these illegal activities improves across the country. Let's now turn to the balance sheet. Late in the third quarter, we increased the mortgage on our Manassas facility with FVCBank, securing an additional $4 million in loan proceeds that funded high ROI growth capital expenditure in our facility. As part of the amendment, the loan maturity was extended to September 2030 and the interest floor was reduced from 8.25% to 7.5%. This reflects strength of our long-standing relationship with FVCBank and the continued confidence they have in our business. In addition, we received $0.2 million in interest on employee retention credit claims that had previously been factored, which provided further cash inflow to the balance sheet during the third quarter. To date, the IRS has paid $6.9 million of the $10.1 million of ERC claims, excluding interest. I would note that we have meaningfully increased our store footprint by approximately 24% year-over-year and substantially increased investment in all of our grower-processors without degradation to our balance sheet as some analysts openly worried about earlier in the year. Next, I would like to provide an overview of recent regulatory activity. Beginning with Pennsylvania, the state continues to face a significant budget gap with the reserve fund depleted to levels that likely means that it will not be adequate to cushion the next recession even if the worst shallow one. Unfortunately, there has been no progress towards passing the final budget. The legislature and administration remain at a standstill. However, there recently has been some progress on stand-alone cannabis regulatory legislation. Legislation to establish a dedicated cannabis regulatory agency separate from the Department of Health Senate Law and Justice Committee has passed the bill out 10:1 and is now expected to be voted on the Senate floor in mid-November. This is a critical step forward as a dedicated regulator is essential for proper oversight of the medical program and enforcement against unregulated intoxicating hemp products and the integrity of the legal market. Moving to Virginia. Today's election will determine the outcome of the governor's race and the makeup of the general assembly. We expect to have visibility on the results as early as tonight for the governor's race and maybe tomorrow morning for the House. We would note that beyond Governor Youngkin, there generally has been significant Republican support for an adult-use cannabis program in the past. We believe Winsome Earle-Sears may bring a more balanced and forward-looking perspective on adult-use cannabis policy than has been emphasized by the current administration. We remain highly confident that both houses of the legislature are aligned to launch a regulated adult-use market. In fact, the Chair of the Senate Finance Committee and the speaker of the House each have expressed a desire to implement adult-use sales as a new revenue source to offset lost federal funding. Based on those signals, we anticipate that adult-use sales could begin somewhere between July 1 to October 1, 2026. At the federal level, our most immediate priority is closing the farm bill loophole that has allowed intoxicating hemp products to proliferate in the market and serve as a front for illegal players. Both the House and Senate have passed their version of the agricultural appropriations bill and the Conference Committee is now working to reconcile the two. We expect this issue to be one of three major items addressed in the upcoming minibus legislation currently being prioritized by House and Senate Republicans. We want to take a moment to thank all businesses and partners who have supported our litigation strategy related to intoxicating hemp. We will continue to shine a light on bad actors in this space, and hopefully, we will create legal wins that lead to significant strides in distancing state licensed and highly regulated cannabis operators like Jushi from what has become the wild west of intoxicating hemp products. I would note we've established a history of well-managed and successful litigation outcomes, and we won't sit idly by in our markets where we see [indiscernible]. However, it is clear that our industry cannot solve this issue alone. We need the support of administrations, legislators, regulators and law enforcement to protect consumers and ensure a level playing field for compliant operators. We have already seen positive developments in Ohio, Pennsylvania and Virginia, where legislative and enforcement efforts are beginning to take effect. Conversely, in states like Nevada, burdensome taxes and regulatory regimes and the lack of any enforcement effort continue to allow the illicit market to flourish in an astonishing manner. Nevada clearly has entered the realm of one of the worst regulated states in the country. We are disappointed that the larger legal cannabis players in that market have not gotten more aggressive to induce change. On the topic of rescheduling, we continue to feel optimistic and appreciate the ongoing leadership from President Trump on this and other cannabis-related issues. And finally, looking ahead to incremental reform, in the months ahead, we expect to see the introduction of several key cannabis reforms, including the SAFR and CLIM Acts. These proposals are designed to improve access to capital and banking for state-regulated cannabis businesses like ours, which are important steps toward creating a stable, competitive and compliant national industry. With that, I will now ask Michelle to review our financial results before we open the call to questions. Michelle Mosier: Thank you, Jim, and good afternoon, everyone. I will now provide more detail on our third quarter results. As Jim mentioned, revenue for the third quarter increased by $4.1 million to $65.7 million as compared to $61.6 million in the prior year. Revenue in our retail channel was $58.8 million compared to $55.4 million. The increase was driven by strong sales performance in Ohio and Virginia. In Ohio, sales grew by $3.9 million, primarily due to new store openings. Revenue in Virginia increased by $1.5 million, reflecting growth across all stores. This growth was partially offset by ongoing pricing headwinds across various markets. Wholesale revenue was $6.9 million compared to $6.2 million in the comparable quarter in the prior year. The increase was due to higher sales across most of our markets, supported by enhanced production capacity and product quality, which enabled us to support both our own sell-through and third-party sales channel. This growth was partially offset by a $1 million decline in Virginia, where partners prioritize their own vertical sell-through. Gross profit was $30.7 million or 46.7% of revenue compared to $28 million or 45.4% of revenue in Q3 2024. The year-over-year increase in gross profit and gross profit margin was primarily driven by higher production volumes, improved product quality and stronger performance at our grower-processor facilities, particularly in Massachusetts and Ohio. These improvements were partially offset by persistent pricing pressures across our footprint, which resulted in lower average selling prices. As Jim covered earlier, the operational challenges at our grower-processing facilities have been addressed, and we're beginning to see improvements in gross profit as efficiencies take hold and higher production volumes support improved cost absorption. Operating expenses for the third quarter were $28.3 million compared to $27.8 million in last year's third quarter. The increase reflects various offsetting factors, including higher depreciation and amortization expenses primarily related to new dispensary openings and manufacturing facility build-outs and an increase in legal and professional fees, partially offset by lower share-based compensation, reflecting higher forfeitures as well as lower value of share-based compensation granted. Included in other income expense in Q3 is $800,000 related to our employee retention credit claims paid by the IRS during the quarter, inclusive of interest. We will continue recognizing the refund claims and income as the refunds are paid by the IRS. As of the end of the third quarter, we had approximately $3.2 million of remaining claims outstanding, of which $1.6 million was not factored. Based on the current interest rates we have received on process ERC claims, we expect to receive between $600,000 and $800,000 in additional interest in the remaining open claims. Also included in other income expense is a $6.3 million fair value loss on our derivatives for this quarter versus a $2.6 million gain a year ago. These are noncash adjustments that primarily reflect changes in our stock price during the period. During the quarter, the One Big Beautiful Bill Act was enacted, which reinstated 100% bonus depreciation and expanded the deductibility of interest under Section 163(j). While the legislation did not have a material impact on our overall income tax expense due to the need to treat the deductibility of these expenses as an uncertain tax position, the act did reduce the amount of cash taxes we would have otherwise paid for the period by approximately $900,000. With the anticipated expansion projects at our grower-processing facilities in 2026 and 2027, we would expect to benefit from the new legislation with lower cash taxes, thus increasing cash flow from operations. Our net loss for the third quarter was $23.7 million compared to $16 million in the prior year. Adjusted EBITDA was $12.8 million compared to $10.3 million in the third quarter of 2024, and adjusted EBITDA margin was 19.5% compared to 16.8% in the prior year. Moving to the balance sheet. As of September 30, the company had approximately $26.2 million of cash, cash equivalents and restricted cash. On a year-to-date basis through Q3 2025, capital expenditures were $13 million. For the full year 2025, maintenance CapEx is expected to be approximately $4 million to $5 million. Gross CapEx is anticipated to be in the range of $10 million to $13 million, which will be dependent on the regulatory environment and market conditions. As mentioned earlier on the call, we completed an amendment to our existing secured commercial loan with FVCBank, which remains secured by our Manassas grower-processor facility. The amendment provided an additional $4 million in proceeds, extended the loan's maturity to September 2030 and reduced the minimum rate the loan could bear from 8.25% to 7.5%. This additional capital is anticipated to support ongoing capital expenditures, working capital requirements and other operational needs. As of September 30, we had $194.3 million of principal amount of debt subject to repayments, excluding the $21.5 million related to the promissory notes issued to San Martino that remain in dispute and excluding leases and property, plant and equipment financing obligations. As of September 30, our term loans with principal balance of $47.3 million are scheduled to mature within the next 12 months. As of the date of the issuance of these financial statements, we have not yet secured financing. However, we have taken proactive steps to advance the current refinancing process, which we expect to be completed prior to the maturity of the term loans. Cash provided by operations was $6.1 million in Q3 2025 compared to $1.9 million used in Q2 2025 and $2.4 million provided in Q3 2024. The sequential increase was primarily driven by an increase from working capital. The increase year-over-year was due primarily to improved operating results. And with that, I'll now turn the call back to Jim for concluding remarks. James Cacioppo: Thank you, Michelle. We are pleased with the progress we made in the third quarter, both operationally and financially. Our continued investment in product quality, facility upgrades, and disciplined execution is clearly flowing through to stronger sales and improving margins. We have built real momentum across both our retail and wholesale businesses while maintaining efficiency and strengthening our balance sheet. At the same time, we are actively preparing for what is ahead. In Pennsylvania and Virginia, we are making high-return investment to meet today's demand and position ourselves for future adult-use expansion. And on the regulatory front, we are engaged at every level from litigation and enforcement support to legislative advocacy to ensure a fair and sustainable future for the legal cannabis industry. We remain focused on executing with discipline, scaling strategically and capturing the opportunities we see ahead as the industry continues to evolve, all while generating long-term value for our shareholders. Before we wrap up, I'd like to thank the team at Jushi. Their ongoing efforts across the business make everything we have discussed today possible, and I appreciate their continued commitment. Thank you all for joining us today and for your continued support. We look forward to sharing more updates in the future. Operator, please open the call to questions. Operator: [Operator Instructions] Our first question comes from Luke Hannan with Canaccord Genuity. Luke Hannan: Jim, I wanted to circle back on your comments on Virginia. You talked about a lot of the opportunity that you have in front of you as far as expanding cultivation there and being ready for adult use. And then you talked about the window where you expect adult-use sales to kick off should the election go in your favor and in cannabis' favor later today. But with that said, I'm trying to figure out overall, you also talked about the CapEx that you're incurring this year. I'm trying to figure out when it comes to being prepared ultimately for adult use next year and again, you fleshed out some of what that entails, what overall is -- how much larger is that CapEx budget going to be to be prepared for that? And will it be ready in time to be able to meet all the adult-use demand that you expect? James Cacioppo: Thanks, Luke. So the -- I would say that the retail side of the business was designed for adult use. So the vaults are very large. The parking lots are very large. There's only 6 stores in Northern Virginia that services 3.3 million people. So being able to service a large amount of people flowing through is very important, and that's done. And that's really hard to change if you know what I'm saying because you have an undersized store with undersized vaults. And so that's a real -- something we've been paying for along the way because the leases are higher than ordinarily would do what you would do for sort of a medical market or without such a head start, let's say, on the retail side in -- with the exclusivity we have right now. So that's a great -- we're in great shape. The grower-processor, we currently are producing more than we can sell in the medical market. And we had 4 rooms at the beginning of the year up and running. They're all about the same size. We've increased by -- we'll have increased by 3 rooms by the end of the first quarter so to 7 rooms. So you could do that percentage increase. The 6 room is not up and going. That we're just planting that soon and the seventh room is under construction. So that's a fair amount of capacity coming on. So there's only 1 of those rooms that had productive capacity thus far, which has put us into the oversupply situation right now. In addition, we have the ability to buy third party. Our understanding is there's 2 very good growers in the state. We believe at least one of them will have a fair amount of excess capacity. We have a very strong commercial relationship with them, and we'll be exploring that, obviously, if there's a shortfall from our capacity. And I'd point out in Ohio, we did not have enough capacity, but we were able to not miss sales because we've had third-party capacity in place. We've done this before, both in Ohio and Pennsylvania. So we feel pretty confident. You never know exactly, but we feel pretty confident that we will be the biggest seller of the product in the state. We believe that other people won't be able to absorb their capacity with their 6 stores in more rural environments, and we believe that it will naturally flow to us. So we feel like there's some protection there. In terms of getting the CapEx online, we can do an eighth room, which would then double our capacity from the medical market, right? So that's pretty good. And we haven't approved that yet. What we're doing is expanding the capacity, which will take a while, the CapEx project I talked about. We're not prepared to talk about the amount. We do believe we have support from the banking group that we have -- the bank we have, you've seen extend us more credit this quarter or this past quarter. And so we feel like we have their support, and we feel like we can increase the amount of bank financing we have. And we believe the equity component is something we can afford. And that CapEx project, we would not start until adult use is approved. We're not going to take that kind of risk given the size of our company. So that's how we're thinking about it. It's a risk reward where I'd love to have all the capacity in place and roll the dice and be paying interest on loans that I don't really need the capacity for. In some ways, I wish I was in that position, but we're not, and we have to be smart about the way we do things. Operator: Our next question comes from Pablo Zuanic with Cantor Fitzgerald. Pablo Zuanic: Jim, can you just give some context on the lawsuit against DoorDash and other retailers? It was just in Virginia, right? And are you planning to do that in other states like Pennsylvania? And I'm just trying to understand whether it's just going to be there? Would you expand it to other places? What type of feedback have you gotten from your industry peers? If you can just comment a little bit more. James Cacioppo: Yes. So the Virginia action was against DoorDash and I believe Total Wine and then some other party, I believe. And in each state, there are unique parties. That's the only state where we had entities like DoorDash and Total Wine. The other ones were you more normal way of violating laws kind of people as opposed to companies that should not be doing this and should know better, right? So I would draw that distinction. We pursued actions right now in Ohio, Virginia and Pennsylvania, I believe. Trent could speak more to this at some point. And -- but -- and we -- in Ohio -- Ohio, the governor actually has put a stop to it to try to get the legislature to move. We haven't done an action, but that may be coming along. And so we plan to pursue this in all of our markets. We've generated a lot of attention and support from people in the industry. And I believe you're going to see some copycat moves in other states as well. Pablo Zuanic: Okay. And then just regarding Pennsylvania, I don't know if you can comment, but where in that meeting that Mike Tyson was with Governor Shapiro and Senator Laughlin and other members of the legislature. Can you -- if you were in the room, can you give us more color about the -- I guess, the temperature in the room, how much of an impact did it make? It just seems that we've been talking about Pennsylvania forever, and they just seem -- just are not able to come together, right? But was this like an inflection point? Or am I exaggerating? James Cacioppo: Yes. So I would imagine it was not an inflection point. I was not in the room, but that's just not how the way the process works. I think it's a supportive thing. We're glad to see Mike involved and certainly involved in Pennsylvania. And -- there's another large company you could talk to that probably has a better insight and probably was in the room. And in terms of what we see in the process in Pennsylvania is we see right now a budget that -- I can't answer that because we're very close to the situation. We see a budget that for this year, which began on July 1 of this year, 2025. So this 12-month budget, they're several months past due, and it's very unusual to go this far. They've gone into the end of the first quarter in other years, but not often. So they're behind their duties -- and there's an election next year for governor. So we think this is a lot of politics. And we think there's actually -- my personal opinion, but I believe management team of Jushi all share the same opinion. I think we think there's broad support on both sides of the aisle and with the governor's office to do this. There are some folks in some powerful positions who may not like to see it because they're in the back pocket of pharma. We don't know. They don't tell you that. But it seems to us there are some people out there who make noise once in a while who have people paying them money to do so. There's also other people who just aren't going to vote for it. But we think there's broad support. And we would also note that this legislation that is working its way through the Republican Senate -- controlled Senate and it's a bipartisan situation. There was a 10:1 vote for this cannabis regulator for an adult-use market. It's a very important precondition and we believe that's important. And we also think there's some stuff they're doing to cut down on the illicit market as it relates to the hemp stores and the smoke shops and et cetera. So we think there are some important things going on. And as of note, they're on the Republican side of the aisle where they're generated from to -- that really are very important in the adult-use environment. So we're actually quite bullish on this happening at some point in the future. We just don't know the timing. And we are making -- we're putting our money where our mouth is. We are -- we've increased our capacity already for adult use. It's not fully online yet, but it's first planting is happening soon. And then there's more capacity that we don't have to build out right now, but we're preparing to build out to get in shape for that. And we may even pull that trigger sooner rather than later depending upon where it falls in our commitment stack of we have a lot of things we could do to grow the business. Pablo Zuanic: Right. Obviously, you're well positioned in Pennsylvania and Virginia if those markets go right. Look, just one last question, and it's a bit of a comment, but I'd like to hear your thoughts on this. I was at the Blackstone Conference recently and listening to some of the conference calls like the IIPR, there's this line of thought that even if there's no -- let's say, there's -- let's think of a scenario that there's no rescheduling over the next 12 months, okay? There's no change at the federal level. And then companies like yourselves need to refinance that next year sometime. What some companies are saying and even some banks are saying is that because of the attrition in the industry and some companies actually having to exit the industry or failing, right, going to receivership that the companies that remain are in a stronger position, and I would include yourselves in that group. And as a result, the banks are more willing to do business with the ones that remain. And as a result, companies are in better shape to negotiate terms to refinance that. I don't know. Is that wishful thinking? And again, we are talking at a scenario in which there's no changes at the federal level. James Cacioppo: Yes. I think that there are several banking institutions and credit counterparties that have gotten more comfortable with cannabis and we've been chatting with these folks. And it's a natural evolution in what I call like a credit market that's done very well in the past 24 to 36 months. There's a lot of private credit out there. It's one of the fastest-growing parts of the business in alternative assets. It is not one of. It is the fastest growing by far. For Blackstone, they raised $50 billion in a quarter or maybe year-to-date or something for their -- in their credit business. And so I think you just have a wind at your back in credit, and that causes people to look at cannabis. Banks are getting more aggressive. They feel the Trump administration and the Republicans want to loosen up some of the tightness they're under that goes way back to the global financial crisis. So I think it's hard to say what factors are causing people to loosen up a bit, but they clearly loosened up a bit in terms of how they're thinking about cannabis. So that's how I would comment on that. In terms of the remaining companies being better off because other people have restructured, I think there is some real truth to that. And I think the big truth to that is you're seeing a lot of grower-processors being closed down. So in Massachusetts recently, you've had several grower-processors closed down, which has helped the business. And that plays itself out. People get out of those leases. And I would say that if somebody is choosing to get out of a lease and a grower-processor sits vacant and already probably wasn't the best asset, I would imagine if they're getting rid of it. I would think that it's not coming back anytime soon in great shape. And there's not a lot of people looking to expand capacity. So I think some of it anyway, a good portion of it is probably somewhat permanent in terms of fixing the supply-demand balance on the grower-processor side. And of course, weaker stores will close as well. That's a less significant aspect. So I think we all are stronger. And in terms of whether the banks are doing that because of that reason, I doubt it. They probably as much -- they're probably as much scared by the fact that some people are going down because they think that way. So I would say it's more of the winds behind the credit market. Operator: Our next question comes from Frederico Gomes with ATB Capital Markets. Frederico Yokota Gomes: First question, just on the, I guess, the commentary on Virginia and the wholesale there is a decline of $1 million as, I guess, third parties prioritize their own vertical sell-through. Is this a trend that's expected to continue in that market? And I guess, could we see further decline in wholesale sales in Virginia because of this? James Cacioppo: No, I don't think. I think we probably bottomed out there based on what happened in the third quarter relative to the second quarter. But I don't think it's going to be a big decline or anything. It's not that big a business, quite frankly. But I think it's very simple. We had a real uptick last year when there was a change in control. I mean I could use the names, but Verano took over Columbia Care Cannabis operation, and they invested in it and turned it around, which was a smart move for them. And now they have capacity at -- the kind of capacity they want with decent quality, good quality, and that didn't exist before. That was definitely -- that was an asset sitting fallow. So that was probably the biggest uptick. But there's also another large player made a strategic thing throughout the country to sort of get more vertical. You just kind of see this stuff come and go. Not that big a deal to us really, but we comment on it, so you understand that. But I actually, to be honest with you, I'm actually glad to give up a little bit of wholesale business because I think adult use is going to come. We'll see what the election tonight. We think you'll have return -- we think you'll know by 8:00 or before 8:00 tonight. And adult use coming to Virginia, we want all that capacity coming on because we think we'll have demand for it in our system. Frederico Yokota Gomes: Great. And then second question, just on your entry into New Jersey. How do you view the retail market there and maybe opportunities to open additional stores, just given all the competitive pressures that we're seeing in that market, what's the strategy for retail in New Jersey? James Cacioppo: Yes. I would keep in mind the competitive pressure on when people talk about that. I mean, there was one large MSO that $100 million revenue store. I mean, what do you think was going to happen? I mean, we think it was going to go up or down or sideways. I mean it's pretty clear that was going to go down. And so like if you had this sort of a huge head start in the business on a retail basis, you've definitely got to mine that in the early days of adult use. But on top of that, they have -- all of these folks put in, to my knowledge, very large grower-processors. And they have excess supply and now other people opening, so it becomes that sort of vertical mess or building a business to satisfy wholesale demand. Most people wouldn't do that to a huge extent today. Some will, but most wouldn't. And -- but they made these investment decisions, what, 5 years ago or something like that, 6 years ago, they designed these buildings. So they did these huge buildings, which has proven to be not the best thing in the world if you only have 3 stores or whatever it is, 5 stores. So I think when you look at people that are in New Jersey, it's -- their prices are going down, right? And they're looking for places to put their excess capacity on the grower-processor side. And this head start that they had in retail, they were earning excess profits, excess revenues on these stores. They were tremendous stores. I applaud their ability to get into that state. We tried and failed. They did a great job, but that's going to go down, right? And so now how do we look at it? Well, we look at it like -- we won an application. And so it's a very cheap entry. We know how to build these things and run these things. It's geographically close to Pennsylvania and other areas that we have in the Northeast, so we can manage it quite easily. And as we said in the prepared remarks, it's a great location that we're opening up with 45,000 cars that pass by it per day, the #1 Costco store in the state. And the airport, Teterboro is right there, the largest private aviation airport in the world. So like -- I mean, those are all good factors. And our downside is we sell to one of those guys and probably make money if for some reason, it's not great. So I think that's good risk reward, and we decided to do it. Operator: Our next question comes from Andrew Semple with Venthum Financial. Andrew Semple: First up, congrats on the margin performance this quarter. Good to see margins reflating there. Could you maybe talk to what you're expecting to see for margins in the Q4 period? I know typically a seasonally weaker period of the year, we typically see more discounting. Are you expecting to see that again this year? And then I guess, more broadly in 2026, you are highlighting that margin pressures were driven by yield improvements and improvements to operations. Do you think you can hold this higher margin level ex the seasonality factors when looking more broadly next year? James Cacioppo: Okay. Well, Andrew, I have to thank you. I thought we had a good quarter. It's the first -- you're the first person. I think we're 4 or 5 deep that acknowledge that. Thank you very much for the acknowledgment. And -- but in terms of margins, they have improved. I think it's sort of a permanent improvement in terms of the quality of our grow going up and now our retail management team. We've replaced substantially a large percentage of our top retail team. And so we're very happy with the way we're running the business. So in terms of the fourth quarter, you do see higher sales, right? And we are a company that's smaller. So our corporate overhead is greater as a percentage. So that helps us. And then yes, you're right, there is discounting on the gross margin side. But we do have some wins at our back. Will they offset? I don't know. I'm not that concerned about it as I look at the company, a swing in the quarter. But I'm looking forward to the fourth quarter from a revenue perspective, certainly. And historically is we've done very well on an EBITDA basis there. I would also note on a year-over-year basis, we have a really weak comp. So that will be good for us in terms of EBITDA. So I feel really good about how I'm going to view the fourth quarter as a CEO and largest shareholder. But whether the margins are tick down or tick up, I don't know. And in terms of 2026, if we get adult use in Pennsylvania and Virginia, our margins should be substantially higher because we'll be just selling a lot more. We'll have higher revenues, higher margins and really -- I think we're the company most poised for taking advantage of operating leverage. So we have a system in Pennsylvania with 18 stores that can do a lot more revenue on the same lease base. We have a grower-processor that we're not expanding leases. We're not taking any more lease dollars down to expand it. So our margins will go up quite dramatically when PA goes adult use. And then in Virginia, the similar story plays out as well. Like I said, we have quite expensive retail leases and especially compared to the rest of our system because they were designed for adult use, which that means we're larger, better located stores that we signed these leases during COVID when nobody else would actually -- you couldn't get those kind of leases outside of COVID because they wouldn't do it with cannabis companies. So we got lucky in one way, but we got unlucky because we were able to sign these very large leases and then adult use hasn't come for a few years, right? So we've been living with that. Now there's still great stores, don't get me wrong, but I think there's definitely margin uptick there for sure. So I would say that if they go adult-use, very significant margin uptick, that's what I'm focused on because I think it's going to happen. The question is when, not if. And then in terms of -- as a business that just carries forward, I would say there'll be some puts and takes. The put would be in Ohio. In other words, Ohio will increase margins because we're growing same-store sales. We've opened all these stores. We don't think that they're going to peak before 2 years most of them because of the way it works when you put new stores on in a market where you can't advertise essentially. I don't even think you could do billboards there. So it's -- you got to -- people have to figure out that you have a store there and that it's a better product, but all the reasons why you shop someplace else closer, whatever it might be. So I think that will be a big uptick for us. I think we have some other businesses that have turned. Nevada is small, but I think that one has turned from us of being sort of a negative contributor to a positive contributor for a variety of reasons, including the asset sale and the turn in the GP. And so -- and then we have some easier comps, let's say, in the first and second quarter next year in Pennsylvania and in Massachusetts because the growth weren't as dialed in as they are. So as a full year basis, I don't know, but there's -- we know there's price compression in some markets. So we know that you're going to lose some sales for competitive openings in some markets. So there's offset. So that's how I would think about it overall. Again, I don't think as a stand-alone basis, the margin is that important to the value of the company because it's going to get -- when adult use happens in these two big states of ours, it's going to be like a tsunami washing away all of that thought process in terms of the amount of sales that you can generate. So -- and we're preparing for that. Andrew Semple: Understood. But still very helpful context there. And then maybe as my follow-up here, for the past several quarters, I think Jushi has been highlighting the number of SKUs, it's been bringing to market as part of the GP turnaround efforts. Could you maybe -- if you have any in top of mind, any of those SKUs that have been top performers for the company? What worked well with the launch of those products and how you're incorporating that into new products you're launching up and coming? James Cacioppo: Yes. So I would back up and go up 30,000 feet a little bit if you step away open the aperture. The reason why we do this is we feel the customer likes excitement, likes new things. And we also have internalized a great brand development team inside our creative department where we do it in a very efficient way. So we feel like we have sort of on a dollar-for-dollar basis, a really cost-effective way to roll out new products and new brands, and we feel like the customer wants that. And so those -- that's sort of what underpins the philosophy of rolling out all kinds of different things. A lot of these are expanding SKUs of existing products, bigger bags, ounce bags, half-ounce bags in certain categories, 2-gram vapes -- I don't think we're doing 3 grams, but we're looking at it, 2-gram vapes, all-in-one vape rolling all this out, doing rosin where we weren't doing rosin in certain markets, solventless product. So a lot of it is that gummies that are rosin based. So there's all these different SKUs, and you need to fill them out, right, to get up to 60%, 65% vertical sell-through in your market, right? Because if you don't offer all those SKUs, right, then you're not competing on the full shelf. So again, we're trying to compete on the full shelf of products, right? And so we think it's going to continue to happen in some of our markets like Virginia, where we don't have hydrocarbon yet where we've submitted for approval for hydrocarbon will shortly. So we want to offer all the SKUs possible. I would say Flower Foundry has been our biggest winner from a dollar perspective, where we brought out a brand that has higher potency and sort of replacing the bank, which had lower potency as our middle brand. And the reason why we chose to do that now is not just to put a new brand on something that was the same old stuff, but we have a ton of new genetics. So we were able to take advantage of excitement in the new genetics, which the customers love by putting it into a new brand because it is a lot better with better growth techniques and all the different things we've done in the facility to make it better yields and better potencies. So we're offering something better, so we put it in a new brand. So those are the kinds of things that you're seeing us do. And I would say if I had to pick my favorite right now would be Flower Foundry, not only where it is, but where it's going to go. A lot of great genetics in there and the customer is really liking it. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to James Cacioppo for any closing remarks. James Cacioppo: Great. So thanks, everybody, for joining the call. We appreciate your support and special thanks to our employees. Bye-bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone, and welcome to SSR Mining's Third Quarter 2025 Conference Call. This call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Alex Hunchak from SSR Mining. Please go ahead. Alex Hunchak: Thank you, operator, and hello, everyone. Thank you for joining today's conference call to discuss SSR Mining's Third Quarter Financial Results. Our consolidated financial statements have been presented in accordance with U.S. GAAP. These financial statements have been filed on EDGAR and SEDAR, and they are also available on our website. There is an online webcast accompanying this call, and you will find the information to access the webcast in this afternoon's news release and on our corporate website. Please note that all figures discussed during the call are in U.S. dollars unless otherwise indicated. Today's discussion will include forward-looking statements, so please read the disclosures in the relevant documents. Additionally, we will refer to non-GAAP financial measures during our discussion and in the accompanying slides. Please see our press release for information about the comparable GAAP measures. Rod Antal, Executive Chairman, will be joined by Michael Sparks, Chief Financial Officer; and Bill MacNevin, EVP, Operations and Sustainability on today's call. I will now turn the line over to Rod. Rodney Antal: Great. Thanks, Alex, and good afternoon to you all. Our third quarter results have us tracking to close out the year in the lower half of our production guidance, where we continue to expect a stronger fourth quarter. Our full year all-in sustaining costs are trending towards the high end of annual guidance, and this is largely due to the impacts of higher gold prices on royalties as well as the share price performance over the year-to-date impacting share-based compensation calculations. Generally, the third quarter results were in line with our expectations. Before working capital adjustments, we generated $72 million of free cash flow, and we maintain a very healthy cash and liquidity profile to support the continued investment in growth opportunities across the business. We also made great progress on a number of other initiatives in the quarter. The Cripple Creek & Victor technical report should be ready for publication in the coming weeks. This will provide our initial view of the potential at Cripple Creek, where the technical report will feature mineral reserves that are aligned with the already in progress Amendment 14 expansion permit. At Hod Maden, we have now spent $44 million advancing the project this year and remain on track for our full year growth capital guidance of $60 million to $100 million. A key milestone of the work this year will be the comprehensive update included with the new technical report. This will form the basis of the project and construction decision in the coming months. To this end, Hod Maden remains one of the most compelling undeveloped copper-gold projects in the entire sector and work completed to date reinforces our view of extremely attractive asset returns. Across the rest of the portfolio, we have continued to make great progress in advancing organic development projects, including Buffalo Valley at Marigold, Porky at Seabee and Cortaderas at Puna. We're seeing some very encouraging results from the summer drill campaigns across all of these targets, where we hope to emulate the initial success of adding the initial 3 years of mine life extension at Puna. Bill will speak more of this later in the call. And lastly, we continue to make good progress at Çöpler and remain fully committed to a restart. We are in close communication with the relevant government authorities as we seek approvals to bring the mine back online. Overall, it was a solid quarter and as expected with good progress made on a number of initiatives across the portfolio. So now I'm going to call -- turn the call over to Michael to bring you through the quarter 3 financials, starting on Slide #4. Michael Sparks: Thank you, Rod, and good afternoon, everyone. In the third quarter, we produced 103,000 gold equivalent ounces at an all-in sustaining cost of $2,359 per ounce or $2,114 per ounce, excluding costs incurred at Çöpler during the quarter. For the full year, production of 327,000 gold equivalent ounces is in line with plan, and we are on track to finish within our full year guidance of 410,000 to 480,000 gold equivalent ounces, albeit in the lower half of that range. As Rod noted, higher-than-forecasted royalty costs and share-based compensation, coupled with production in the lower half of guidance is pushing our AISC towards the top end of our full year cost guidance range. We ended the quarter in a strong financial position with $409 million in cash and total liquidity of over $900 million. Our strong balance sheet ensures capacity to fund our numerous growth initiatives across the portfolio, which includes Hod Maden, where we incurred another $17 million in capital during the quarter. We are very excited about the progress of Hod Maden and look forward to sharing an updated life of mine plan and construction decision for the project in the coming months. Let's move on to our quarterly financial results on Slide 5. In the third quarter, we sold 105,000 gold equivalent ounces at an average realized gold price above $3,500 per ounce. Net income attributable to SSR Mining shareholders was $65.4 million or $0.31 per diluted share, while adjusted net income was $68.4 million or $0.32 per diluted share. As highlighted in the table, free cash flow in this quarter was impacted by working capital movements, particularly inventory movements at Marigold and CC&V as well as prepayments associated with development activities at Hod Maden. Accordingly, free cash flow before changes in working capital was $72 million, highlighting our strong margins despite continued investment in growth initiatives across the portfolio. Now over to Bill for an update on the operations, starting on Slide 6. William MacNevin: Thanks, Michael. I'll first start with EHSS. We continue to advance initiatives aimed at ensuring our purpose and values are reflected in everything we do. I'll share some examples of this. We've seen improvements in how we're applying risk review and mitigation in both our planning and field execution. There's also been great progress on integrating progressive closure into our life of mine plans, which has the potential to reduce overall cost to the business. Now on to Slide 7 for Marigold. In the third quarter, Marigold produced 36,000 ounces of gold at an AISC of $1,840 per ounce. These results were in line with plan, and we continue to expect a strong fourth quarter, albeit slightly below our initial expectations for the period. As we have advanced mining at Red Dot Phase 2, we have encountered a consistent grade profile aligned with our internal models. However, the ore has had more fines than expected, resulting in the need for additional blending to ensure pad recovery performance. Our technical teams at both Marigold and CC&V have been working collaboratively this year to improve ore body knowledge, focusing on processing planning. Through these efforts, we're improving our approach to ore blending at Marigold to ensure that we appropriately deal with the final ore we are encountered. With respect to growth, we're advancing work on Buffalo Valley deposit with the goal of fully integrating the project into the Marigold life of mine plan. This work is progressing positively so far, and we expect Buffalo Valley will provide a meaningful mine life extension opportunity for Marigold and potentially complement our Mineral Reserve growth at New Millennium. Now on to Slide 8 for CC&V. CC&V had a solid quarter, producing another 30,000 ounces of gold with an AISC of $1,756 per ounce. Key to highlight is the mine has now generated nearly $115 million in asset level free cash flow since acquisition, an incredible result given the $100 million in upfront consideration we paid to the asset earlier this year. The CC&V technical report is well on track for completion within the fourth quarter, and we're excited to showcase the initial mineral reserve life of mine plan. for which CC&V has clearly established itself as a core operation in our portfolio. We expect this technical report will showcase a 10-plus year life of mine and also highlight significant mineral resource upside to further extend the mine life. The key bottleneck to converting these mineral resources to reserves is the advancement of permitting for additional heap leach capacity. And our teams are working hard to set up -- set us on the right path for success for decades to come. Now on to Seabee. Seabee had a challenging quarter, producing 9,000 ounces at an AISC of $3,003 per ounce. These results reflected our continued focus on underground development as we noted in quarter 2 as well as some lower grade-than-expected grades. We expect production to improve incrementally in the fourth quarter, but we remain focused on prioritizing underground development into year-end as we aim to improve available stope inventory moving forward. Work at Porky targets continues, and we had some good success with the drill this summer as we aim to improve confidence in the existing mineral resources at the project and also test further opportunities for growth. We're excited about the potential here and look forward to providing updates to the market next year. On to Puna on Slide 10. Puna continued its track record of solid performance in the third quarter, producing 2.4 million ounces of silver, an AISC of just $1,354 per ounce. With the initial extension to Chinchillas operations announced in the third quarter, we are working to advance other opportunities to extend mining at Chinchillas while also continuing to evaluate the Cortaderas target. We're excited about the potential here, and we'll provide further updates as warranted. On to Slide 11. Lastly, at Hod Maden, we spent $17 million on engineering and site establishment work in the quarter. Year-to-date, we have spent $44 million advancing preconstruction activities of the project and remain on track for our full year guidance range of $60 million to $100 million in growth capital. Our technical teams have continued to advance an updated technical report for the project as we move towards a construction decision in the coming months. And the results continue to demonstrate an incredibly compelling project that could represent one of the highest margin projects in the sector once in production. We look forward to providing more detail on these initiatives to the market in the coming months. Now I'll turn back to Rod for closing remarks. Rodney Antal: Great. Thanks, Michael. Thanks, Bill. Progress in the quarter was solid on a number of fronts, and we're well positioned for a strong close to the year with consolidated production aligned to our full year guidance. We're making great progress at key projects across the portfolio and with updated technical reports for Cripple Creek & Victor and Hod Maden on the horizon, where we are keen to showcase a bright future for each of those assets and their upside potential. And of course, with continued efforts towards a restart of Çöpler, we firmly believe SSR Mining still represents a compelling value proposition moving forward. So with that, I'll turn the call over to the operator for any questions. Operator: [Operator Instructions] The first question comes from Ovais Habib with Scotiabank. Ovais Habib: Congrats on a pretty good quarter. A couple of questions from me. Just first one, starting off with your expectations of Q4. As you guys said, Q4 is expected to be a strong quarter. Is this basically strength coming from Marigold and CC&V. And then just a follow-up question to that, in terms of Marigold and the fines you are encountering at Red Dot, based on how much you can blend, could some of that production expected in Q4 spill into Q1 of next year? Rodney Antal: Thanks, Ovais. Look, I'll answer some of the questions and Bill and Michael can go ahead and add any other color if they feel. The answer to your first question around the quarter 4, yes, that was right. Predominantly, it was coming from Marigold. As we've talked about before, a stronger fourth quarter was always sort of set up that way to be the primary difference to quarter 3. And I think Cripple Creek itself will be more of what you've seen. And then from the answer to your question around the fines, yes, it certainly presents us with the necessity to handle them differently in terms of their placement and having available more durable material to be able to blend. So that is what we're working through at the moment on how we get the best result for Marigold for the last quarter by managing through the ore placement. In some regards, where we don't have durable ore available, we'll stack that ore on the higher portions of the leach pad. But where we do, we're obviously stacking on the new leach cell that Bill mentioned last quarter that we completed. So that's the -- that will be the key to finishing strongly at Marigold for quarter 4. Ovais Habib: And then just at Seabee, obviously, grade came in lower than expected. Again, was this a negative reconciliation issue? Or were you not able to access the stope or stopes that you were expecting to mine from in Q3? I was a little bit -- I didn't really understand the justification of the lower grade. Rodney Antal: I'll hand that one over to Bill. William MacNevin: Yes, Ovais, Seabee in the quarter had a good quarter increasing the amount of development we were doing, which is our focus. So we do have more available stope material. At the same time, we did have some of the material -- we had an increased proportion of material from the Gap Hanging Wall and some of that material came in at lower grade than we had expected. So that was -- that happens at some times, but they were the drivers. Ovais Habib: And based on the development that you've done, obviously, you're expecting a better kind of Q4 and better understanding of the stopes that you have in hand kind of going into 2026? William MacNevin: Yes. We still have some more -- a lot of development focus ahead of us for Q4 as well. And we will continue to work diligently in both Gap Hanging Wall and Santoy to get the best out of the ore body that we can. There was no surprises in what we found, so to speak. Ovais Habib: And then just my last question, I guess, on Çöpler. Rod, you mentioned you guys are having discussions with the regulatory bodies and things seem to be progressing. Any kind of -- again, is it more on the remediation side or on the restart side that the focus has been -- and obviously, I'm guessing you guys are pushing pretty hard on the restart side. But what I'm trying to understand is also, is there any community support that you guys are getting right now that is, let's say, pushing the regulators to make some sort of a decision moving into 2026? Rodney Antal: Yes. It's less about the last point of your question, Ovais. I think if you sort of take a step back since the incident itself, the early work was on -- and I'll say it again because it's important on securing the site, returning the -- our lost folks back to the families. We moved into remediation, which really focused on the clearing out of the Sabirli Valley, which was done and completed. And then remember, in the last sort of 6 months, the efforts have been around providing the -- all of the technical aspects to the regulators for approval of the storage facility and the closure of the -- the final closure of the heap leach pad. So it's sort of been a normal sequence of events that you would expect to go through. And we've been in constant dialogue with regulators. It's not a new occurrence. This has been going on since day 1 of the incident itself. But we're closing off some of those technical aspects for the regulators to approve it. And that will be the key to getting the approval to start the operations. But as it happens, more recently, and particularly you've seen it in the press, so it's nothing that is not public. There has been definitely a higher level of public support for a reopening, very, very marches, a lot of senior local folks supporting a reopening in the press and on TV and within the media more generally. So that actual uptick is actually more naturally occurred because of the fact that the community, the local community, in particular, are hurting around economic activity with the mine shut. So it's probably a coincidence in timing, but it really doesn't have a bearing on the -- it helps, but it certainly -- it's not the driver of getting the government to give us the approval. Operator: The next question comes from Don DeMarco with National Bank Financial. Don DeMarco: First off, yes, encouraging to hear what you just mentioned about the high level of public support for the reopening. But to my first question, I think I'll turn to Hod Maden. Of course, as you mentioned, there's a go-forward decision that's pending in the coming months. Looking at the guidance, you've reiterated guidance, but it seems like you might be tracking the low end of the range. Is there any items that may have been in the scope this year that's going to be carried into 2026? Rodney Antal: You're talking in particular in terms of the spend of Hod Maden. Don DeMarco: Yes, that's right. You're at $44 million year-to-date. I think guidance is $60 million to $100 million. So it seems that you're on a pace to kind of hit the lower end of that range. Rodney Antal: Look, I think -- sorry, Michael is going to say something, but I'll jump in. He pause for a second. We'll actually probably be more towards the midpoint of that guidance range. It's sort of a ramp-up, a normal type of -- as you would expect, there's a ramp-up of spend. But the committed spend that we have for the work that we wanted to get through this year is well advanced. So we're on track to spend what we had allocated to the project. It just happens to be the timing of the cash out the door. Don DeMarco: Was there anything else on that? Rodney Antal: The work has actually gone along very well. The effort that we put in this year was all predicated on using that information for the comprehensive update to the tech report, which is all coming together. And that is really the basis of what we'd be using to make a project approval decision to move forward. So everything is moving along on track in those regards and very pleased with the work that's been done at the site. Don DeMarco: So we'll look forward to that go-forward decision. Will there be a mine plan that's published at around the same time? And is the go-forward decision tied into Çöpler in any way? Like do you first want to see the Çöpler mine restarted before you commit to building another mine in the country? So just 2 parts to that question asking about the report and the potential connection with Çöpler. Rodney Antal: Yes. Well, look, it will be a comprehensive refresh of the technical report, Don, which will publish. And we haven't -- remember, when we acquired the asset, there was a tech report available at the time that we said that we wanted to do the work to ensure that what was contained therein is a project that we could actually deliver to. So the effort around the time since we acquired it has been going through all of the technical components around flow sheets, process flow sheets, all the met models, the geomet models, the geotechnical work around the site. It's a complex site from that perspective. And then moving forward with the early stage, some of the earthworks and civil works that are going on right now to ensure when we look at the critical path tasks to get the project underway and on schedule once we finally release the new schedule, we've got a head start on it. So as I mentioned, all of that goes into the update as well as then the sort of market work around going out to market and getting new pricing in today's dollars for the project itself. So all going very well, as I mentioned. In terms of the dependency, I guess, around the project decision itself on Çöpler, I've said all along, we're treating them as mutually exclusive from that point. It's an entirely different project in an entirely different region of Turkey. It has a completely different set of stakeholder groups. If you remember, the project is fully permitted, and that's really important. So we're not waiting on any permits. And the efforts on the ground around ensuring we have good community relations and good social support have been going along with the project development itself because they're a completely different group. So we're not attaching a dependency on Çöpler to the Hod Maden decision. Don DeMarco: And then just as a final question, if we just take a step back, a question about your strategy. I mean, certainly, you've got a lot of organic opportunities within the portfolio and then there's potential other growth levers with respect to M&A. Can you share any bias whether for potential growth or how your strategy looks ahead over the next, say, 5 or so years? Rodney Antal: Really no change, Don. I think we've always been fairly transparent around the criteria that we look at from an M&A perspective. And M&A can be everything from strategic to bolt-on acquisitions like we had with Cripple Creek & Victor. There is a number of criteria that we look for, and it needs to fit within those criteria for it to be a strategic fit, and we've always been very true to that. And we'll continue to follow that because I think it does provide a discipline to the way we look at the business. So no change at all, building on the core jurisdictions we have, building on the platforms that we've got in Canada, U.S., Argentina and Turkey is sort of a first order of priority for us, and then looking for those value-accretive opportunities that might be available from time to time. So look, we'll stay true to that. I think it's good practice. And it means that when we bring something to market that we like, you know that it has gone through a fairly rigorous due diligence process, and it fits on strategy. Operator: This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good day, everyone, and welcome to the Lumentum Holdings First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please also note today's event is being recorded for replay purposes. [Operator Instructions] At this time I would like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead. Kathryn Ta: Thank you, and welcome to Lumentum's First Quarter of Fiscal Year 2026 Earnings Call. This is Kathryn Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer; Wajid Ali, Executive Vice President and Chief Financial Officer; and Wupen Yuen, President, Global Business Units. Today's call will include forward-looking statements, including, without limitation, statements regarding our future operating results, strategies, trends and expectations for our products and technologies that are being made under the safe harbor of the Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risks set forth in our SEC filings under Risk Factors and elsewhere. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-K for the fiscal year ended June 28, 2025, and in our most recent 10-Q to be filed by Lumentum with the SEC. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update or revise these statements, except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials have inherent limitations and are not to be considered in isolation from or as a substitute for or superior to financials prepared in accordance with GAAP. You can find a reconciliation between non-GAAP and GAAP measures and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and our filings with the SEC. Lumentum's press release with the fiscal first quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully. With that, I'll turn the call over to Michael. Michael E. Hurlston: Thank you, Kathy, and good afternoon, everyone. In Q1, revenue surged more than 58% year-over-year, while operating margins expanded by over 1,500 basis points. $533 million represents the highest revenue achieved in a single quarter in the company's 10-year history by significant margin. Our growth is powered by AI demand spanning our laser chips and optical transceivers inside data centers as well as the interconnect and long-haul networks that link them. In fact, we estimate that over 60% of our total company revenue now comes from cloud and AI infrastructure, driven both directly by hyperscale customers and indirectly through network equipment and optical transceiver manufacturers that embed Lumentum components in their solutions. There is a growing convergence between telecom infrastructure and AI data center-driven networking as our customers align traditional network equipment with the needs of intensive inferencing workloads. Having built the company on telecommunication subsystems, Lumentum has evolved into a leading provider of optics for scaling AI compute. On our last earnings call, we projected crossing $600 million in quarterly revenue by the June 2026 quarter or earlier. Today, our Q2 outlook shows that we expect to surpass this milestone well ahead of schedule, with the guidance calling for a revenue midpoint of approximately $650 million, 2 quarters earlier than we previously targeted. As a reminder, we have identified 3 major drivers of future growth: cloud transceivers, optical circuit switches and co-packaged optics. Of these, within our Q2 outlook, we are not yet expecting meaningful contributions from optical circuit switches and co-packaged optics. In cloud transceivers, we are set to resume sustained growth in fiscal Q2, and this upward trajectory should accelerate over the next 4 to 5 quarters. Before discussing our first quarter results in more detail, I want to address an important change in how we report our financial results. We will now discuss our financials as a single reportable segment, aligning with our current organizational structure. After several months with the company, I decided to reorganize in order to react more quickly to market and technology changes and move resources to the highest value opportunities. In that context, Wupen Yuen, who many of you know, is now the Head of Global Business Units, owning all product road map decisions. While this shift simplifies our reporting framework, it also gives investors more insight into our numbers by breaking the cloud and networking business down a bit. In that vein, we will provide revenue breakouts in our quarterly reports and commentary for 2 product types, components and systems. We define components as the individual building blocks that enable larger solutions such as laser chips, laser subassemblies, line subsystems and wavelength management subsystems. Systems in contrast are complete stand-alone products that deliver full functionality to the end customer, including optical transceivers, optical circuit switches and industrial lasers. We provide historical views of those 2 product types in our earnings deck that can be found on our Investor Relations website. Using this breakout, components revenue in the quarter was $379 million, which was up over 18% sequentially and up 64% from the same quarter last year. Our components products delivered strong broad-based growth across our laser chip, laser assembly and line subsystem product lines, driven by robust demand inside the data center and from data center interconnects and long-haul applications. We achieved another record in EML laser shipments, driven primarily by 100-gig line speeds and supported by an increase in 200-gig shipments. We also initiated CW laser deliveries for 800-gig transceiver manufacturers, marking an important milestone in our product road map. As we've shared before, our indium phosphide-based wafer fab has been fully allocated due to robust customer demand. However, I'm pleased to report that we have made better-than-expected progress on yields and throughput and now see line of sight to add approximately 40% more unit capacity over the next few quarters, setting the stage for calendar 2026 to be another breakout year for laser chip shipments and solidifying our leadership in indium phosphide-based light sources for the data center. Although still small in absolute terms, we saw sequential growth in our ultra-high power laser shipments as we continue the initial phase of our production ramp. we still expect a significant increase in shipment volumes in the second half of calendar 2026 as adoption continues to accelerate, and we are seeing opportunities to expand our customer base. We are seeing strong sustained momentum in our data center interconnect or DCI components, which support not only optical links within campuses, but also connections spanning up to 100 kilometers in scale across architectures. Shipments of our narrow line width laser assemblies for DCI transmission grew for the seventh consecutive quarter, rising over 70% year-over-year, demonstrating both robust market demand and our continued success in scaling manufacturing capacity. Shipments of our line subsystems for data transport also delivered strong sequential and year-over-year growth, benefiting from the same macro trend. We also saw sequential and year-over-year growth in coherent components for long-haul data transmission and achieved a record quarter for pump lasers supporting subsea and terrestrial networks. Finally, we saw a sequential rise in 3D sensing products, consistent with the seasonality of a new smartphone launch. Even in our Q1 historically peak shipment quarter, these products contribute less than 5% of total company revenue, underscoring that the broad strength of our components portfolio is driven almost entirely by the accelerating global build-out of cloud infrastructure and highlighting Lumentum's essential role in powering that expansion. In Systems, revenue was $155 million, down 4% sequentially, but up 47% year-over-year. Cloud transceiver revenue was roughly flat to the prior quarter as we used the quarter to increase manufacturing capability in Thailand to meet increasing customer demand. From this point forward, we expect to see the end of the fits and starts in production capability we have experienced in this product area, and we now forecast a period of sustained revenue growth. Our guidance into Q2 provides our first proof point that as new 800 gig and 1.6T products ramp in future quarters, we expect to see the revenue layering benefits that our larger transceiver competitors have experienced. Our initial ramp of optical circuit switches from Thailand is progressing well, and we remain on track for a rapid acceleration in manufacturing expansion over the coming quarters. As expected, we saw a sequential decline in industrial laser shipments, reflecting the continued softness in the broader industrial market. Looking ahead to the fiscal second quarter, we expect approximately half of our sequential revenue growth in absolute dollars to come from our components products, driven by broad-based strength across product lines serving cloud applications. The other half is expected from our systems products serving cloud customers, primarily reflecting the ramp of high-speed optical transceivers for data center applications and to a lesser extent, the early phase of our optical circuit switch ramp. As I highlighted at the start of my remarks, we are only at the beginning of our growth journey in cloud and AI infrastructure. Lumentum story has many chapters ahead, and we are entering a period of sustained expansion, fueled by the accelerating adoption of AI and the optical technologies that enable it. Our components products will remain the cornerstone of both revenue growth and profitability, while our systems products are scaling rapidly with cloud transceivers, optical circuit switches and other high-performance solutions. With expanded manufacturing capacity and the ramp of new products, we are confident in our ability to drive continued top line growth, margin expansion and long-term shareholder value. Now I'll hand the call over to Wajid. Wajid Ali: Thank you, Michael. First quarter revenue of $533.8 million and non-GAAP EPS of $1.10 were at the high end of our guidance ranges. GAAP gross margin for the first quarter was 34%, GAAP operating margin was 1.3%. GAAP net income was $4.2 million and GAAP net income per share was $0.05. Turning to our non-GAAP results. First quarter non-GAAP gross margin was 39.4%, which was up 160 basis points sequentially and up 660 basis points year-on-year due to better manufacturing utilization and favorable product mix as a result of increased data center laser chip shipments. First quarter non-GAAP operating margin was 18.7%, which was up 370 basis points sequentially and up 1,570 basis points year-on-year, primarily driven by revenue growth in components products. First quarter non-GAAP operating profit was $99.8 million and adjusted EBITDA was $127.6 million. First quarter non-GAAP operating expenses totaled $110.5 million or 20.7% of revenue, an increase of $1.2 million from the fourth quarter and an increase of $10.1 million from the same quarter last year. This year-over-year growth reflects annual employee cash incentives tied to company performance, along with ongoing investments to scale our operations in support of expanding cloud opportunities. Q1 non-GAAP SG&A expense was $41.5 million. Non-GAAP R&D expense was $69 million. Interest and other income was $3.7 million on a non-GAAP basis. First quarter non-GAAP net income was $86.4 million and non-GAAP net income per share was $1.10. Our fully diluted share count for the first quarter was 78.3 million shares on a non-GAAP basis. During the first quarter, our cash and short-term investments increased by $245 million to $1.12 billion. Our cash position benefited from a convertible notes transaction completed during the quarter, which contributed $306 million in net proceeds. Our inventory levels increased sequentially to support the expected growth in our cloud and AI revenue. In Q1, we invested $76 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details. First quarter components revenue at $379.2 million increased 18% sequentially and 64% year-on-year. Our first quarter systems revenue at $154.6 million was down 4% sequentially and up 47% year-on-year. Now let me move to our guidance for the second quarter of fiscal year '26, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for the second quarter of fiscal year '26 to be in the range of $630 million to $670 million. The midpoint of this range would represent a new all-time quarterly revenue record for Lumentum. Our Q2 revenue forecast reflects the following expectations: Components expected to be up sequentially with strong growth across our portfolio of products addressing cloud and AI applications and systems to also be up sequentially with strong growth from cloud transceivers and progress in the early phases of our optical circuit switch ramp. We project second quarter non-GAAP operating margin to be in the range of 20% to 22% and diluted net income per share to be in the range of $1.30 to $1.50. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 83.5 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy? Kathryn Ta: Thank you, Wajid. [Operator Instructions] Now Kevin, let's begin the Q&A session. Operator: [Operator Instructions] Your first question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Just making sure. Can you hear me? Wajid Ali: Yes, we can hear you. Samik Chatterjee: Sorry, getting used to the new system. So thank you, strong results. Congrats on the outlook as well. Maybe on the transceiver side, high confidence in relation to sustaining that growth going forward, and you're calling for a pretty sizable growth into the next quarter as well. Maybe just talk a bit about what's driving that confidence, maybe more in addition to the capacity ramp that you talked about? Is there more diversification on the customer front as well. That's giving you visibility into that consistent growth? And what's in particular driving the strong increase of about $60 million or so, I think that's what you're guiding to for the quarter-over-quarter sort of into the next December quarter? And I have a follow-up. Michael E. Hurlston: Yes, this is Michael. I think we've highlighted this for the last couple of quarters. Our improvements in execution is beginning to bear fruit. If you remember, we said that we've been really missing the front part of customer ramps due to some execution challenges. And that seems to have corrected off where we now are participating in the very early part of customer ramps. We have expectation to be shipping 1.6T transceivers sometime middle-ish of next year. and those will be at the early part of the customer ramp as well. So for the first time, we're getting this layering effect where we're not seeing a dip in revenue as we sort of see one cycle ramp down and the next one ramp up. We're getting this layering effect that I talked to in the call. That's predominantly with our largest customer, but we are seeing revenue from the 2 customers that we've talked about previously as well. But pretty much the majority of all of this is coming from our largest customer. Samik Chatterjee: Got it. Got it. And for my follow-up, Michael, you talked about the 40% increase in capacity for datacom chips. Wondering if you can just help me think through what that means on a revenue basis? I would assume the mix would tilt more towards 200-gig EMLs, but what is generally the plan in terms of usage of that capacity? And how should we translate that maybe into terms of what it means for revenue increases? Michael E. Hurlston: Yes. I think you have 2 effects, and those 2 effects will ultimately layer on top of each other. One is just the raw output, and we'd expect to see this 40% increase over the next couple of quarters. But then to your question, we also see a second effect, and that is that the 200 gig lasers will start to layer in. We talked about shipping 200 gig lasers in the last quarter. There's more in the guide. We'd expect to see about 10% of our mix in the early part of 2026, calendar 2026 be from 200 gig lasers. So you're going to get those 2 effects now sort of adding to one another, the fact that our capacity is increasing. And then the second issue is the fact that we would expect to see 200-gig lasers become a much more meaningful part of our mix in calendar 2026. Kathryn Ta: Kevin, I think we'll take our next question. Operator: Your next question comes from the line of Ryan Koontz with Needham & Co. Ryan Koontz: I wanted to ask about the continuous laser output, how -- that's a new product for you, how you think about that market opportunity. Is that something you're targeting for your own optical transceivers and what sort of customers lined up for that? Michael E. Hurlston: Yes, Ryan. I mean, we've talked about the CW lasers for a bit here. We have a 70-millowatt CW laser that really started meaning shipping in this quarter will be a reasonable part of our mix next quarter. We've characterized that as sort of a pipe cleaner, shipping to other customers in an effort to eventually bring CW lasers into our own transceivers. So we have a 100-millowatt CW laser that we'd expect. We're actually sampling it this month. We'd expect to be in full production in the middle of the year of 2026. That 100-millowatt CW laser is what we're going to use really in our internal transceivers. So as we've stated in previous discussions, we'd expect to be manufacturing the CW laser specifically to use it in our own transceivers, and that should happen sometime second quarter-ish of calendar 2026. Ryan Koontz: That's great. Exactly what I was hoping to hear. So -- and then shifting gears maybe to narrow line width lasers for the DCI element. Is that a different set of competitors? Obviously, a different set of customers, but can you kind of educate us a little bit on the competitive environment for the narrow linewidth lasers for Coherent? Michael E. Hurlston: Yes. I'll maybe give some comments and then throw it to Wupen. We are -- we have very strong market share here, right? I think our competitive landscape is more limited perhaps in this area than many of those we participate in. To your point, Ryan, the customer base is different. These are more of the traditional telecom guys that now have shifted and pivoted their business toward the hyperscalers. And so we're providing solutions to all of those guys in our narrow linewidth offering. But we have, Wupen correct me if I'm wrong, very, very high market share there and a strong competitive position. Wupen Yuen: Yes. Thank you, Michael. I think that's definitely true. I think that's a business we've had for the last 10, 15 years as a company. And then the challenge that laser capacity is not easy. And we have actually mastered that over the last 10 years or so. And you can see our continued progress in our revenue quarter-over-quarter. We're strongly positioned there. We do see some competition there, but again, the technology is going to be difficult. So we expect we're going to continue the strong market share position going forward. Operator: Your next question comes from the line of Mike Genovese with Rosenblatt Securities. Mike, your line is open. Please go ahead. You may have to unmute yourself. Michael Genovese: So as you increase indium phosphide capacity, the output of that, how should we think about the split between that going into components or that going into systems? Like what's the framework there? Michael E. Hurlston: Yes. No, the vast majority of our output will be sold into the external market. We are shifting our mix toward 200-gig EMLs. Wupen has been in the middle of that. And as I said, about 10% of our mix in the first quarter of calendar 2026, the March quarter, we'd expect to see at 200 gig. We will continue to sell the majority of our capacity out to external customers. The small amount of capacity that we've allocated to CW lasers just to prove that we can do it and as I say, pipe clean a little bit, we will probably end up reallocating that to internal consumption. And that percentage, again, is relatively modest, right? We'll sell most of our capacity into the external market. Michael Genovese: So I guess given that, and I realize this is a tough question to answer, but $1.40 outlook for EPS at the midpoint, it's a really impressive number. But it also -- could it even be higher I mean if we've got a really high-margin product leading to growth? Michael E. Hurlston: Yes. Look, I mean, we feel like we have a very dominant position here. I think in our last call, we talked about being sold out. That is absolutely the case. The demand far exceeds even as we continue to add laser capacity, demand is far outstripping our ability to supply. And so our challenge right now is making these allocation decisions. We're trying to allocate the capacity to the highest dollar value components we have and the highest margin components we have to your point, Mike. And that in order is 200-gig EMLs, 100-gig EMLs and then CW lasers for internal consumption. And we're going to mix as much as we can to 200 gig. The demand is certainly there. 100-gig EMLs. We're going to continue to allocate as much as we can to that. And then to the extent we can cleave a little bit off to improve our transceiver business, we'll do that as well. Wajid Ali: And Mike, just -- it's Wajid here. Just to add a little bit to that. So that 40% increase in indium phosphide capacity is focused on laser chips, which has, as you know, higher gross margins than many more of our other product lines. So as that flows through in the coming quarters, that will have a positive effect on our earnings per share. What you're seeing this quarter is without that increased capacity and increase gross margin contribution from the indium phosphide capacity we talked about in our prepared remarks. Operator: Your next question comes from Christopher Rolland with Susquehanna. Christopher Rolland: So congratulations, particularly on the guide, that was -- that's pretty incredible. And congratulations to Wupen couldn't have happened to a smarter guy. But in terms of the transceivers and that market, it's my understanding that 102 switches are not really ramping until next year. In fact, they won't have like qualified ASICs in a box until early next year. That's the precursor to qualifying 1.6T transceivers. So perhaps for Michael, as you see this playing out, I guess my first question is, are you going to strategically use your -- what seems like market-limited EML supply to drive new customers and new qualifications on the transceiver side. It sounds like maybe yes. And secondly, on the EML side, as in the first half of the year, would you expect customers to stockpile these ahead of these qualifications? Is this something that you see in the first half even before 1.6 starts ramping? Michael E. Hurlston: Yes, Chris, first, thanks for the kind words, and I fully agree. Wupen is the smartest guy in the industry. We're very lucky to have them. Look, a couple of remarks. Maybe first on the last piece of it, which is the stockpiling for right now, what we're seeing happen is demand, as we said on the last call, is far outstripping supply. Even as we add this extra capacity, we're in a situation where we are making allocation decisions almost on a daily basis. And it's really putting a lot of strain both on the business unit and on Wupen as we try to make those calls. In that regard, honestly, Chris, we're actually probably shedding customers rather than adding. We're trying to make our bets on the folks that we think are going to be good partners. We've gone out and worked a series of long-term agreements and the folks that are willing to step up and help us, we really want to help them. And so what we've actually tried to do is maybe counter to your question a bit, and that's consolidate supply and consolidate our customer base around a couple of folks that we think are going to be long-term winners. Those customers in return have given us multiyear commitments that give us a lot of confidence that our business is going to be sustainable even as we continue to ramp capacity through the next probably 6 or 8 quarters. So that's kind of the dynamic. Do you want to speak a little bit about 200 gig and the dynamic there because not all of it is 1.6T. Wupen Yuen: Correct. Thank you, Michael. Again, thanks for the comments. I really appreciate your kind words as well. So on the 1.6T front, right, you're correct, 102.4 switch until really, I would say, late Q2 next year calendar. And today, applications are actually mostly to the customers or through the customers who do not rely on that switch to take place. And there are 2 customers today can use the 200-gig EMLs optics in their systems today. And certainly, I think you have a good point there that are we going to leverage our laser supply position to increase our 1.6 module opportunities. We will say that the customer already know that we have such a laser in our portfolio. And therefore, I believe that they will have thought about it when they engage us on the module side. But again, like Michael said earlier, we will allocate our laser capacity based on the profitability metric more than to try to broaden our transceiver opportunities in 1.6T using our laser. Christopher Rolland: Very helpful, Wupen. And back to you, Michael, at OFC, I remember you were somewhat reticent to put on more indium phosphide capacity. And so as I think about the industry more largely, ,competitors are ramping 6-inch indium phosphide kind of as we speak. And it does seem like the early market is going to be for EMLs here, which are a large die because you put the modulators on there. But as we move to CW, it's a smaller die. And I'm just wondering do you think we might end up in an overcapacity situation, particularly when we -- competitors ramp and eventually we move to SiPho and CW. And what do you think the timing might be around that? And just putting all of this together into your decision to put more capacity on, what made you change your mind? Michael E. Hurlston: Yes. I mean, look, I think there's a couple of things, Chris. One, we're actually been able to squeeze more out of the capacity we have and the remarks that we had in the prepared remarks, we talked a lot about improvements in throughput and improvements in yield. And that's really what's helped us. We are still transitioning between our 3-inch and 4-inch. We made a decision to really focus on 4-inch as a sweet spot here at least in the near term. And that's what's led to most of the improvements you can see here. So we've not put a lot of additional capital into our fabs to expand output, that's number one. Number two, I think on the battle between CW and EML, it appears to us that CW is going to ramp with 1.6T but so will EML. And so the slope of the 2 ramps was hard for us to call but it looks like no matter how you slice it, the numbers will increase. So even if the mix shifts away from EML-based transceivers at 1.6T, the absolute numbers seem to be stratospherically high. And at least in the near term, we see no end in sight. We watch it every day, Chris, just like you're sort of cautioning but I think for the next 6 quarters, we're completely sold out, and we have long-term agreements, as I said, that we've worked out with our customers to ensure that they're going to take any capacity -- that the additional capacity we've got online. So we obviously think about it every single day, but I'd have to say, right now, our concern is not when will this roll over. It's how do we get and service the customer base that we have and the demand profile we're looking at. Wupen Yuen: And just one last comment in addition to what Michael said, right? The capacity we have in place are interchangeable between lasers and EMLs. No matter how the market share of these lasers change over time, we're able to serve the overall market. So that's also part of our investment decision in fab and kind of implementation decision along the way. Christopher Rolland: Yes. understood. Thank you guys, good strategy and congrats. Michael E. Hurlston: Thanks, Chris. Operator: Your next question comes from the line of Simon Leopold with Raymond James. Simon Leopold: I wanted to first ask about the OCS opportunity. I know you said that it's currently a fairly small market. But coming out of the ECOC show, it certainly sounded like the industry as a community was more upbeat. And I've heard second or third hand that you've suggested that this could be $100 million by your December '26 quarter. Now I don't know that, that's true. So I wanted to hear directly from you how you see this market evolving? And then I've got a quick follow-up. Michael E. Hurlston: Yes, Simon. Look, I would say, if anything, our confidence has increased that we will ramp through the calendar year to that $100 million a quarter target in December of 2026. Our engagement level with customers on this product is super high. Wupen and I are spending probably more time in this product category than any other. The number of use cases we're seeing coming from customers and potential customers is growing. And the virtues that you and I have talked about on a number of different occasions are really playing forward. So we are -- make no mistake, we are more confident in this market than we were probably last quarter at this time, and that confidence is building every single day. Simon Leopold: And then just as a follow-up, in the prepared remarks, you described the outlook for the December quarter as broad-based improvement. I would like to see if you could rank order, what does the biggest dollar increase come from sequentially in December versus September relative -- thinking about the datacom transceivers, the telecom devices, the datacom chipsets, where is the biggest dollar contribution coming from in your forecast? Michael E. Hurlston: Yes. Look, this is broad-based. I mean I think the thing that probably caught us flat-footed is the width of the customer demand. It's touching everything. We talked about pump lasers. We talked about narrow linewidth. We talked about the transceivers. We talked about even coherent components. So it is very, very broad-based. And every single one of our segments is up. Every single one of our segments is contributing to the growth that you see. If I was to specifically answer the question, Simon, I would say it is the transceivers. The transceivers are coming off the mat. We had, as we characterized, I think in the prepared remarks, fits and starts of the transceiver business. We finally see that turning a corner. I think last reported quarter, we got back to the level that we had when we bought Cloud Light in the guide, that number is up significantly. But the thing that we expected people to ask is just given not only exceeding $600 million, but doing so by a pretty wide margin in the guide, we had expected more questions on, hey, what happened here? Why are you guys so surprised? And what really did happen was just the width of the demand that we saw -- and our ability to service it, quite frankly, our execution has improved. I think Wupen's team has done a really, really good job getting in there and figuring out how to deliver these products. As we think about the forward look, that's going to be a challenge. Supply chain will be a big challenge. But it is -- has been a surprisingly, surprisingly broad-based demand signal. Operator: Next question comes from the line of Papa Sylla with Citi. Papa Sylla: Congrats on the very strong results. I just wanted to kind of -- it was asked differently, but I just wanted to double check on the supply-demand imbalance for EML specifically. I think it's very clear kind of demand is running ahead of supply. But I guess, how would you characterize the supply-demand this quarter versus last quarter, for instance? I understand you kind of increased investment and yield improve. But on the other side as well, it seems like CapEx is going up across the board. Just if you could help us understand kind of how has that balance changed from last quarter to now? Michael E. Hurlston: Yes. I mean I'll have Wupen give some color, pop-up. But I would say the following. I mean, in our -- in the guide our supply is going up more than 10%. So we definitely have some pretty good additive supply even into the guide. What I'd say, though, is the demand signal has -- the demand supply imbalance has increased. Last quarter, I think we characterized it as roughly a 20% shortfall relative to total customer demand even with this add, even with the add in supply, I would say that number has increased to 25% to 30%. We are quite a bit short right now relative to the customer demand. And again, we'll kind of have you talk to it a bit, right? You're making bets on who you think is winning and trying to consolidate through LTAs and other vehicles who our customer base will be as we look out in the next 6, 7 quarters. Wupen Yuen: Yes. Thank you, Michael. Absolutely true. I would echo that the demand and supply mismatch has increased in the last 3 to 4 months. It's getting worse. And we're seeing that all these newly announced projects that you see throughout the last several weeks, that results in extended horizon of the supply-demand mismatch as we can see. And that's the reason why we're able to sign up the long-term agreements with our leading customers. And we're also trying to be very careful in making sure that our devices are supporting the key hyperscaler customers, too. So those are the key kind of thoughts going into the allocation process. And we realize that we cannot make everybody happy, but we try to make sure that we strategically maximize our shipment to the most important customers. Papa Sylla: Got it. No, that's very clear. And just for my follow-up on margins. obviously, this quarter kind of very strong improvement. But I guess going into the December quarter, and if my math is right, given the sales guidance you provided and the operating margin you provided, you could be very close to what you gave out previously in terms of your longer-term target. I guess, is that kind of the right way to think about it going into the December quarter? And just for kind of a quick follow-up to the supply-demand imbalance, we've now kind of demand further outstripping supply, kind of what's your approach in terms of pricing at this point? Do you have now more levered to even increase further pricing on EML and further expense margin as well? Michael E. Hurlston: Yes. Let me have Wajid talk to the gross margins. I mean, in short, you're right. I think we're moving the margin line up. Pricing, obviously, is a lever. And when you look at that very, very carefully. I think what you see in the guide is sub-pricing, very targeted price increases happening. I think as you look out next year in 2026, our agreements with customers will include more pricing, more broad-based price increases, just given the supply-demand imbalance. We're still obviously trying to do we can to work with customers and make sure that they are happy with us as a supplier. But we are using this demand, supply imbalance to impact of the pricing. Wajid, do you want to talk a little bit about the margin? Wajid Ali: Yes. So I mean, our margins are certainly benefiting from the improved manufacturing utilization that comes with the increased revenue base. As we move into Calendar '26, we're expecting margins to continue to nudge up in line with the OFC model that we had provided, not just the pricing impact, but also what Michael talked about earlier with 200G EMLs becoming a larger proportion of our overall unit mix as our capacity improves on indium phosphide. And then as our growth drivers come into play in Calendar 2026, 1.6T, OCS and CPO, all of those product lines will contribute to improving our gross margins once again. So we're set up very nicely as revenues are expected to improve next year with these new product lines and increase capacity to further improve our gross margins and our non-GAAP operating margins. Operator: Your next question comes from the line of George Notter with Wolfe Research. Unknown Analyst: This is [indiscernible] on for George. I just wanted to double click on CPO. What do you guys see in terms of the demand outlook there? I mean, compared to the last few quarters? And then how is -- how or if -- how is that customer and market expanding, if at all? Michael E. Hurlston: Yes. Let me take it and again, I'll have Wupen add a little color. What -- I think between our last discussion and this one, 2 things are true. One, I think demand is stronger than we initially forecast. So we feel pretty good about the numbers in the second half of Calendar 2026. Remember, the ramp that we basically talked about is early stages Q3 of the calendar quarter -- calendar year. And then a more meaningful contribution in the fourth quarter of the calendar year. So the demand, the forecast seems to be getting better, timing is same, so no real change in the timing, but the forecast is better. The second thing that I'd say is that our customer conversations have magnified and multiplied. So we're getting engaged now not only with the priority customer, right, that's launching our Switch product, really taking advantage of CPO, but other customers as well. So we feel really good about the demand signal, no change in timing signal and the number of customer engagements has gone up since we last talked. Wupen, just overall on the technology, how are you seeing things? Wupen Yuen: Yes. Thank you, Michael. Definitely, we feel that the demand and interest has really increase in last quarter. Most recently in the OCP, that's a couple of weeks ago, that was a major topic of conversation during that conference. And to facilitate our engagement with our customers, we've been using this pluggable module or tunable SFP module, to conveniently engage also different applications or different customer sets across the supply chain to kind of broaden our visibility and engagement into that portfolio. And we're seeing now much heightened interest in that area, which we believe that later will translate into even more demand for our ultra-high power laser chips going forward. And we are more optimistic than last quarter on the general or industry-wide adoption of the CPO solution, including our lasers. Operator: Your next question comes from the line of Meta Marshall with Morgan Stanley. Meta Marshall: Maybe following up on Simon's question. Just as you guys ramp the OCS business to kind of that $100 million. Just trying to get a sense of kind of what are some of the milestones you're looking for. Or the -- is it kind of getting through their labs? Is it testing the hardware? Is it the software? Just kind of what are some of the key milestones we should be looking at over the next year? Michael E. Hurlston: Meta, let me just give you restate sort of how we see the revenue and then talk technically a little bit about the milestones. We've outlined sort of a revenue ramp of kind of mid-single-digit millions here in the December quarter, getting to double digit -- very, very low double digits in the March quarter and then accelerating to kind of mid $50 million, $60 million in the middle of the year and then getting all the way to that $100 million mark in the December quarter. As I said to Simon, we feel increasingly confident just given the level of customer engagement that, that revenue ramp will be there and perhaps there's even upside to it. What's going on right now? I mean the hardware is generally qualified. We've got -- we talked about 3 different customers with our OCS products. In all 3, that product is in their labs. We feel very good about the hardware piece of it and being through all the major gates relative to hardware qualification. Software is more difficult, right? There's a lot more software with this product than there is with anything that we've done in the past. We are on multiple, multiple calls with our customers working side by side to get the software in. But I would say that's the thing that keeps me up at night more than anything else is just getting our software right and getting that software qualified by the customer. We would expect to be qualified probably fully by both of our major customers in the first quarter, in the March quarter and then the third customer probably in the middle of the year. So we've got some more work to do on software, but that shouldn't [indiscernible] the revenue ramp that I just laid out. Meta Marshall: Got it. And then -- just in terms of the transceiver business, understanding kind of the ramp of that is primarily going to the first and major customer. But just is the expectation that kind of the vast majority of this ramp going forward will only include that kind of primary customer? Or just how should we think about any of the ramps of the additional customers of Cloud line at this point? Michael E. Hurlston: Yes. Look, I think we're still ramping the second and third customers as we've talked about. We're engaged with more customers now. But what we're really trying to do is bound this business. And when we talk about this, again, we've sort of said, hey, we see this being a $250 million a quarter opportunity for us -- and we think we can do that with reasonable margin by being somewhat selective. So Wupen's team is out talking to a good handful of customers looking for the most margin-rich opportunities that might be TRO type where the technical challenge is higher. 1.6T, obviously, the technical challenge is higher. And we think we can build on the success that we've had with our primary customer, add on here and there where we need to. But to sort of get to $250 million a quarter, we have line of sight to that. And we think we can do that more profitably than we have in the past simply by choosing the most margin-rich opportunities to go after. Wajid Ali: Yes. Meta, 1.6T margins are going to be significantly better than 800G margins. That's our expectation. And so a lot of that $250 million a quarter that Michael is talking about is going to come from the ramp of 1.6T products, which will have a materially better margin profile than our 800G products. So that will help us from both ends. Kathryn Ta: Kevin, I think we have time for just 1 more analyst question. Operator: Okay. Your last question comes from the line of Karl Ackerman of BNP Paribas. Karl Ackerman: Michael or Wajid, you noted that your growth of transceivers should accelerate over the next 4 to 5 quarters. Is that comment sequential or year-over-year? And then is there a way to frame the quarterly opportunity of transceivers among your 3 hyperscaler providers versus your initial expectations of $250 million a quarter? And how does your fab capacity build out in Thailand support that? Wajid Ali: Yes. I mean we obviously have line of sight to the opportunities in front of us are -- certainly lead to the $250 million a quarter. So we can see that. And what we're trying to do, as I said, is really balance it out now among the customer opportunities, which one to choose such that we can really get the highest margin profile out of the business. There's no question that the leading customer today will be the leading customer tomorrow and into the future. They really partnered up with us well. We're better understanding that working cadence and understanding the road map and really trying to gear our road map to that. But that doesn't preclude us from continuing to look and engage customers 2 and 3 and actually beyond customers 2 and 3. But Karl and you and I have had this chat a couple of times, I don't expect this business to run away, right? We don't expect this thing to grow unbounded. We want to grow in a margin-rich profitable fashion, and we have enough other growth drivers and the confidence in our co-packaged optics and our optical circuit switch is increasing at this point. So yes, we want to grow our transceivers. We think there's a great opportunity to do that. We think we can do that profitably as why you just said to the last questioner. But we're not -- we could take on a lot more of this business than we have if we went after it in an unbridled fashion. You asked in the last part of your remarks on sort of our fab capacity. The transceivers, as you know, is really manufacturing capacity. And we've added manufacturing capacity in Thailand to support that kind of sort of bounded number. We could add a lot more, as I said, the customer opportunity we're seeing is not dissimilar to the lasers is very, very strong. But our general view is let's limit it for now and let these other major growth drivers play out. And that -- the 3 growth drivers are on top of this broad-based growth you're seeing in all facets of our business. I mean everything seems to be firing right now. And I think we're not being given credit for the additional growth drivers that will layer into just the fact that the broad-based business is doing so very, very well. Operator: And this concludes the Q&A session. I will now turn the call back to Kathy Ta for closing remarks. Kathryn Ta: Thanks, Kevin. Thank you. That is all the time we have for questions. We look forward to connecting with you at upcoming investor conferences and at meetings this quarter. With that, I would like to thank you for joining us today. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Qualys Third Quarter 2025 Investor Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Blair King. Please go ahead. Blair King: Thank you, Briana, and good afternoon, and welcome to Qualys' Third Quarter 2025 Earnings Call. Joining me today to discuss our results are Sumedh Thakar, our President and CEO; and Joo Mi Kim, our CFO. Before we get started, I would like to remind you that our remarks today will include forward-looking statements that generally relate to future events or our future financial or operating performance. Actual results may differ materially from these statements and factors that could cause results to differ materially are set forth in today's press release and our filings with the SEC, including our latest Form 10-Q and 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. And as a reminder, the press release, prepared remarks and investor presentation are all available on the Investor Relations section of our website. So with that, I'd like to now turn the call over to Sumedh. Sumedh Thakar: Thanks, Blair, and welcome to our third quarter earnings call. With threat actors continuing to reduce time to exploit at a fast pace, I believe the future of cybersecurity is moving from attack surface management to risk surface management using Agentic AI-powered proactive risk management with business quantification and automated remediation. Against this backdrop, we continue to execute well in Q3 demonstrated by another quarter of solid revenue growth and profitability. Over the last couple of years, I've had the privilege of meeting with hundreds of CISOs, CIOs and security leaders worldwide. From these conversations, one theme has stood out, the need to operationalize cyber risk management in business terms to align budget spend with business risk. CISOs are looking for a practical approach to consolidate tools where possible and empower their teams to use best-of-breed where it makes sense. They want to seamlessly unify their security tool set into a centralized risk fabric that provides an alternative to single vendor platformization by operationalizing the management of multiple risk vectors to effectively measure, communicate and ultimately remediate the organization's risk posture. The Risk Operations Center, ROC, powered by Qualys ETM delivers on this ask. At our recently concluded ROCon, Risk Operations Conference in Houston, where we elevated the business risk conversation to feature a specialized CFO and Board track, our customers validated this approach. With the broadening of the agenda for ROCon the attendance was up 20% over last year's QSC event. While traditional security operations centers focused on detecting breaches after they happen, Qualys is pioneering the first Agentic AI Risk Operations Center, ROC, a new category in cybersecurity designed to centralize an organization's response to threats before they impact the business. Powered by our ETM solution, the ROC processes several petabytes of high-fidelity data every day, normalizes and correlates intelligence from both Qualys and non-Qualys sources and equips AI and humans to collaborate in real-time detecting and responding to threats at machine speed. This isn't about more alerts. It's about actions that close blind spots before attackers can exploit them. Unlike traditional continuous threat exposure management CTEM tools that simply highlight the exposure, but lack adequate native remediation capabilities. Our differentiated ETM solution combines CRQ, CTEM and native remediation operations to fix the risk that matter most quickly and at scale. By aligning security and IT decisions directly with business priorities, we are providing organizations with measurable proactive risk reduction that Boards and customers value. Early adoption is already validating the model with POCs continuing to convert the commercial deployments, underscoring both the scale of this opportunity and its parallels to the early days of VMDR. And we're not stopping there. Our R&D engine is continuing to deliver innovations, rapidly expanding our platform and positioning Qualys for a larger upsell opportunity. In doing so, Qualys is now extending several proven module native capabilities into ETM, empowering organizations to harness them seamlessly across the entire attack surface. By demonstrating -- by democratizing trillions of security exposures from both Qualys and third-party tools, including vulnerabilities, misconfigurations and identities aggregated by our ETM solution, we are unleashing a sophisticated predictive platform that leverages a combination of Qualys TruRisk framework, our TruLens threat management capabilities and a mission-ready Agentic AI workforce operating autonomously from discovery to remediation with full ITSM integration. This unique combination of capabilities identifies trending threats in real time, benchmarks threats against peers, assesses organizational impact and quantifies risks in clear, actionable terms that matter most to the business. As a result, security and IT teams can continuously prioritize ticket and remediate threats based on organization risks associated with emerging exposure, targeting specific industries, asset types and identity. We believe these most recent additions to our ETM solutions further advance our differentiation in the market, enhance security operations and significantly accelerate measurable outcomes for customers. Next up for our ETM solution, I'm particularly excited about yet another pioneering capability from Qualys, TruConfirm. TruConfirm flexes the power of our platform to confirm exploitability before customers become compromised. Using automated validation at scale, we remove the guesswork for customers by running safe exploits over the network to confirm whether the attackers will succeed in their breach attempts while closing the gap between theoretical and actual exposure. This approach further allows customers to be laser-focused on prioritizing only exploitable blind spots for the next logical step, which is automated remediation with TruRisk Eliminate. Our industry-leading capabilities are increasingly being recognized by our customers, partners and third-party analysts. Specifically at Black Hat, Qualys won Two Pwnie Awards for our outstanding contribution to threat research underpinned by our strong leadership in threat intelligence and triage. Equally important, GigaOm recognized Qualys as the leader in Patch Management, a market Qualys pioneered with over 140 million patches deployed in the last year alone. While some competitors are only beginning to validate this strategy, Qualys has advanced well beyond patching. TruRisk Eliminate closes the unpatchable gap, enabling IT and security teams to automate an array of compensating controls when patches are deemed too risky to deploy or simply not available. And with adversaries increasingly exploiting vulnerabilities at AI speed, our umbrella of AI-based automated remediation solutions has evolved into a significant adoption layer, a distinctive competitive advantage and opens new market opportunities for Qualys. Moving on to our business update. With customers spending $500,000 or more with us growing 5% from a year ago to 211, let me share a couple of recent wins, which illustrate why organizations ready to centralize the response to cyber risk are turning to Qualys to help unify their security tools, quantify and remediate risk in their environments and fortify their security operations. In Q3, one of my favorite wins was with a Global 700 customer that was previously only using Qualys for PCI scanning. This customer, like many organizations, were buried under fragmented telemetry manual spreadsheets and disconnected tools. With little automation, their teams were spending more time documenting than reducing risk and consequently were burdened by an onslaught of compliance audits. This customer chose Qualys to transform siloed risk signals, spanning code repositories, endpoints, identity, cloud container and network assets into a cohesive real-time risk management solution by consolidating Qualys and non-Qualys data. This included replacing their existing vulnerability management vendor and purchasing 3 additional Qualys modules, including ETM to begin operationalizing the risk operations center with ingested third-party data resulting in a mid-6-figure annual bookings upsell. By consolidating these data sources into the Qualys platform, we are delivering this customer a vendor-agnostic orchestration layer with full visibility of their attack and risk surface, centralized risk management, quantification, prioritization and remediation while unleashing the operational efficiencies of security stack consolidation aligned with acceptable -- within acceptable risk parameters for the business. With our innovative technology, unmatched platform effect and focus on reducing risk and friction, this will underscore Qualys' ability to eclipse legacy siloed solutions and advance our leadership in the industry. It's also an outstanding example of how we are working with our managed risk operation, mROC partners of choice to activate the ROC with new win business. For the next phase, this customer is evaluating our TotalCloud native CNAPP solution and TruRisk Eliminate solutions while also bringing additional third-party tools into Qualys platform, representing a significant upsell opportunity. Further leveraging our mROC partner ecosystem to drive new logos was a new 6-figure customer win with a major airline in the Middle East. This customer chose Qualys because of our unified detection and remediation capabilities with TruRisk Eliminate. Nearly 9 months after announcing GA with our ETM solution and over 28 POCs converting to commercial success already, we have gained valuable insights into ETM pricing and packaging. As a point of reference, we expect that for every $1 of VMDR, ETM can drive an uplift of up to 100% now that ETM will include Cybersecurity Asset Management as well as other ETM feature enhancements such as those mentioned earlier and third-party data ingestion. Given this, starting with our Q1 2026 earnings call, we will shift from reporting cybersecurity asset management LTM bookings to ETM customer penetration as we believe ETM will be evolving into a key pillar of growth for Qualys over the next several years. Turning to our federal business. We achieved a high 6-figure upsell with an existing large government agency. This customer had previously used multiple legacy and next-gen tools to manage a variety of risk management use cases across their security, IT and DevOps team. In addition to the complexity of using multiple point products, this government agency has become increasingly frustrated with increasing costs associated with legacy on-prem deployments, the efficiencies of operating siloed systems and elongated remediation efforts. With a distinct need to shift several monolithic workloads to micro application across its hybrid environment on a FedRAMP high solution, this customer accelerated the consolidation of its security stack over 17 Qualys modules, including VMDR, Cybersecurity Asset Management, TotalAppSec, TotalCloud, TruRisk Eliminate and TotalAI. Today, this customer is leveraging a unified dashboard that provides them with a greater insight and automation than any of the competitive products they evaluated while taking full advantage of the speed and scale of cloud-native platform. This, alongside a significant 7-figure state win are a testament to the strength we see in our federal state and local government business and the long-term growth potential of the market. Beyond these wins, we are also increasingly gaining leverage from our partner ecosystem. In Q3, partner-led deal registration increased, demonstrating the success of our partner-first sales motion. In addition, we have now certified nearly a dozen partners who are actively launching mROC services, leveraging ETM to deliver centralized automated pre-breach risk management. Momentum is building towards a global ROC alliance, and we expect to certify additional strategic partners in the coming months ahead who are committed to positioning Qualys as their mROC partner of choice. Further contributing to our platform growth is our flexible platform pricing model, which we are calling Q-Flex. We beta tested Q-Flex in Q3 to help customers accelerate and maximize the adoption of the Qualys Enterprise TruRisk platform. In less than a quarter after introducing this model, we're seeing notable customer interest and tremendous success. To give you an example, an existing Global 10 customer made a multiyear commitment under our Q-Flex program, increasing their annual bookings by over 50% while adding new modules to their subscription count with Qualys. This win reflects our growing capabilities in risk management, and we expect the contribution from Q-Flex to continue to grow. In summary, our continuous innovation, early ROC deployment, strategic wins with federal customer -- and state agencies, momentum in partner-led initiatives and the initial adoption of Q-Flex collectively underscore Qualys' strength in unifying risk management workflows, reducing operational complexity for customers and addressing today's toughest security challenges. We believe these achievements not only validate our ongoing investments, but also position Qualys as a trusted leader in pre-breach risk -- cyber risk management, setting the stage for durable growth and long-term success. With that, I will turn the call over to Joo Mi to further discuss our third quarter results and outlook for the fourth quarter and full year 2025. Joo Mi Kim: Thanks, Sumedh, and good afternoon. Before I start, I'd like to note that except for revenue, all financial figures are non-GAAP and growth rates are based on comparisons to the prior year period, unless stated otherwise. Turning to third quarter results. Revenues grew 10% to $169.9 million. The channel continued to increase its contribution, making up 50% of total revenues compared to 47% a year ago. Revenues from channel partners grew 17%, outpacing direct, which grew 5%. As a result of our strategic emphasis on leveraging our partner ecosystem to drive growth, we expect this trend to continue. By geo, 15% growth outside the U.S. was ahead of our domestic business, which grew 7%. U.S. and international revenue mix was 56% and 44%, respectively. In Q3, gross retention continued to improve. However, upsells remain challenging with our net dollar expansion rate of 104%, unchanged from last quarter. In terms of product contribution to bookings, Patch Management and Cybersecurity Asset Management combined made up 17% of total bookings and 28% of new bookings on an LTM basis. Our cloud security solutions, TotalCloud CNAPP made up 5% of LTM bookings. Reflecting our scalable and sustainable business model, adjusted EBITDA for the third quarter of 2025 was $82.6 million, representing a 49% margin compared to a 45% margin a year ago. Operating expenses in Q3 increased by 5% to $64.9 million, driven by investments in sales and marketing, which grew 9%. As we remain focused on driving growth, we are mindful of where to further increase investments while optimizing returns and others, which resulted in EBITDA margin exceeding our expectations in Q3. This demonstrates our ability to maintain high operating leverage, remain capital efficient while continuing to innovate and invest to support our long-term growth initiatives. With this strong performance, EPS for the third quarter of 2025 grew 19% to $1.86. Our quarterly free cash flow was $89.5 million, representing a 53% margin compared to 37% in the prior year. Year-to-date, free cash flow margin was 46% compared to 42% in the prior year. In Q3, we continued to invest the cash we generated from operations back into Qualys, including $901,000 on capital expenditures and $49.4 million to repurchase 366,000 of our outstanding shares. Since commencing our share repurchase program in February of 2018, we've repurchased 10.4 million shares and returned $1.2 billion in cash to shareholders. As of the end of the quarter, we had $205 million remaining in our share repurchase program. With that, let us turn to guidance, starting with revenues. For the full year 2025, we expect revenues to be in the range of $665.8 million to $667.8 million. which represents a growth rate of 10%. This compares to prior guidance of $656 million to $662 million. For the fourth quarter of 2025, we expect revenues to be in the range of $172 million to $174 million, representing a growth rate of 8% to 9%. While we believe our platform approach to cyber risk management provides some insulation in macro volatility, this guidance assumes continued budget scrutiny in a challenging environment for new business growth in Q4. Shifting to profitability guidance. We expect full year 2025 EBITDA margin in the mid- to high 40s, net free cash flow margin in the low 40s. We expect full year EPS to be in the range of $6.93 to $7, up from a prior range of $6.2 to $6.5. For the fourth quarter of 2025, we expect EPS to be in the range of $1.73 to $1.8. Our planned capital expenditures in 2025 are expected to be in the range of $5.5 million to $7 million and for the fourth quarter of 2025 in the range of $1.2 million to $2.7 million. With that, Sumedh, and I will be happy to answer any other questions. Operator: [Operator Instructions] Our first question comes from Roger Boyd of UBS. Roger Boyd: Awesome. Congrats on a nice quarter. Sumedh, can you just double-click on some of the pricing you mentioned around ETM earlier. I just wanted to be clear on that 100% upsell metric. Is that inclusive of what you have with cybersecurity asset management and patch? And just now with the kind of packaging sort of figured out on that product, just your confidence in kind of the ability to start driving better upsell moving forward. Sumedh Thakar: Yes, that's a great question. So from the way the pricing we're looking at it is the ETM pricing is going to include Cybersecurity Asset Management because as we talk to our customers, for building any Risk Operations Center, the foundation is asset inventory and without that, you cannot succeed. And so that was a big feedback that came about. So that's included. What we have added also is the Agentic AI capabilities for them to be able to augment their security team with AI agents so that they can really manage outcomes for cybersecurity within their spend and optimize because everybody has been asked about how they're optimizing their spend even in cyber. And the ability to have very focused threat intel that will allow them to validate exploits, so that's included. The upsell that we look forward to is then once they have used ETM to be able to get the inventory to be able to confirm that the exploit can work in their environment. Then they purchase TruRisk Eliminate, which includes patch as an example and mitigation so that they can get that particular thing actually remediated. Because at the end of the day, we can create all kinds of visibility, but given that attackers are exploiting vulnerabilities, if you saw the recent Mandiant report in minus 1 day on an average, which is even before patches are coming out, the key is going to be about being able to remediate things and mitigate things even if you don't have a patch available. So the pricing, to answer your question is 100% -- up to 100% is what we see with the addition of VMDR ability to bring in CSAM, Agentic AI, as well as ability to confirm exploitation. And then from there, the upsell will be they will -- they can upsell to eliminate so that they -- it allows them to do more in terms of actually getting an outcome. Operator: Our next question is from Patrick Colville of Scotiabank. Patrick Edwin Colville: I guess I want to ask 2 parts. One is on the Fed. I know the Fed is like a more nascent notion for Qualys, but what are you guys seeing in the Fed's, especially kind of in the first couple of weeks of 4Q given the shutdown. And then -- and the other question I'd like to ask is about the competitive environment. And the reason I ask this one is the one we get most from investors. And it's like is the competitive environment changing for Qualys, given noise from vendors like CrowdStrike and others who are claiming to be entering the space and winning share. So are you coming up against different companies now versus a year ago? And results speak for themselves, win rates seem high, but can you talk to that as well? Sumedh Thakar: Yes, that's a 2-part question. So let me stay focused to answer both of them. So first one is on the federal side, as you already know, we are at our very, very early innings, and we made the investment and the commitment to get FedRAMP high, which has really created very, very powerful conversations. I mean I have the pleasure of actually being out in D.C. and having some very critical meetings there to start to have the conversation around Risk Operations Center, how it can help the government and essentially bring efficiency. And so you kind of have the dose, which is, of course, that is driving people to think more of efficiency in terms of how they can consolidate different things, and that's where the Risk Operations Center as a way to eliminate, fixing things that don't really matter to the risk has really resonated well with our federal customers. Today, it's not just the spend of the tool. It is the amount of spend you put in remediating things that the tool is telling you, which is a waste of time and money if those things are not even exploitable. So for us, what we are seeing is -- it's a very exciting early conversations. We see lots of opportunities over the next few years. Of course, when you have the current scrutiny that is going on, sometimes people are taking a bit of a wait-and-watch opportunity. In other cases, we're actually seeing opportunities coming to us because of the focus on being able to be efficient in terms of the Risk Operations Center. So it's a mixed bag. But overall, from what we see right now is we don't have as much exposure revenue to that part. We do see that this is an area that we have committed to invest over the next few years and FedRAMP was our first step. And now with our focus on the conference we did in D.C., and we are going to continue to invest in the federal space moving forward. On the vulnerability management and competition side, I think if you -- I was really excited to see that Qualys got the leader position in GigaOm's Patch Management above many of the other vendors that have been out there. Because really with what we have been seeing and what I saw a few years ago and why we have been talking about how vulnerability management is evolving, less about detecting more and more CVEs. Most people are barely fixing 5% of the CVEs that are being discovered because it's creating so much noise. So while there are other players that talk about discovering more CVEs, the focus for Qualys and what we are doing with the Risk Operations Center has been about how we are helping customers really narrow down and we did that at our conference, ROCon Conference, where we show a nice little representation of how 62 million findings after applying the right agent in threat intelligence went down to 2 million findings that really mattered in terms of any risk. And then further after applying business context went down to only 300,000. And so our focus has been shifting towards how do we help the customer actually pinpoint exactly what matters from threat intel perspective, but then also how can we help them immediately fix it, because of attackers are attacking things in 4 hours, you don't have time to go and create Jira tickets and ServiceNow tickets and wait for other teams to use different patching solutions and different mitigation solutions to do that. And so what we're doing now, what we're seeing is really an evolution of that is customers really like our capabilities, accuracy of detection, et cetera, but we have also opened up the platform now with ROC to be able to ingest data from other areas like OT or other EDR tools that might be collecting CVEs. So that we can help customers actually narrow down that focus of what really matters and the key exciting thing is for them to be able to get things fixed with Qualys, which is something that -- and validating the exploit and then getting it fixed with Qualys is what is focus for most of our customers right now. So primarily, we see Tenable, Rapid7. Yes, occasionally, we see some of the other tools that are talking about giving more CVEs. But customers are focusing more on how do we get the key things remediated quicker rather than discovering more which they are not fixing anyway. Operator: Our next question is from Mike Cikos of Needham. Michael Cikos: I just wanted to double check and congrats on the quarter here. Was there any onetime benefits to revenue or CCP that we need to take into account on our side? And then secondly, as a follow-up, Joo Mi, great to see the results. Net dollar retention obviously remains here at [ 104 ] what needs to happen for that net dollar retention to actually start picking up from where we are today? Joo Mi Kim: Yes. With respect to CCP, nothing specific to call out, it was a solid quarter. As usual, you do get some benefit or negative impacts from out-of-cycle renewals, but nothing material that we think that's specific to this quarter. So it was really a solid growth quarter from an execution standpoint. Net dollar expansion rate, we'd love to get that up from [ 104 ] and upward, and this is part of the reason why Sumedh had commented on the fact that we've been really focused on making sure that we're delivering the message in terms of how ETM could be beneficial to our existing customers as well as new prospects. And so as we look to the cohort of customers that are up for renewal in each respective quarter, we're making sure that they understand the value that they could potentially see from whether they're looking to upsell from CSAM to ETM or cross-selling with adding ETM to their existing VMDR solution, and we think that, that could be a meaningful impact during the dollar expansion rate. Operator: Our next question is from Kingsley Crane of Canaccord Genuity. William Kingsley Crane: Congrats on a really great quarter. If we think about Agentic AI within the risk operations center, TotalAI within VM and then the CNAPP suite, they all require significant development resources to how are you prioritizing R&D spend across those initiatives? And just what metrics do you use to evaluate resource allocation? Sumedh Thakar: Yes, that's a great question. And I think it's really the focus for us on investment in R&D and sales and marketing right? And at the beginning of the year we started with the plan to hire a CRO from a sales perspective and put focus on hiring more engineers, et cetera, to be able to deliver on all the capabilities that we're talking about. And I think as we have -- I'm pretty happy with our focused execution with the level of investments that we have made and the way Shawn, who is our VP of Global Sales, has executed with the team to give us a solid quarter. And so the focus for us now is to really, from a sales and marketing perspective to focus on working with Shawn and team. So that we can get efficiencies from what we are seeing cross-functional between our sales team, our product management team, et cetera. And then on the R&D side, we have had really good success with leveraging AI internally within our own development efforts. And as an example, we pretty much stopped hiring anybody in QA anymore. We are seeing 20% to 25% efficiency gain with our best engineers. And ironically, it's actually the best engineers who are getting the most benefit of using AI. And so in a way, with all the things that we are doing with adding AI into the Risk Operations Center, AI is benefiting us in adding those without a significant increase in our R&D expense. And so I think at this point, the way we are looking at it is we're going to continue to leverage AI. And of course, we're going to invest back in our business. But no need really at this point for us to look at having CRO and the team is executing well focused with what our goals are. And then on the R&D side, again, we, of course, are -- if you see the innovations that are coming out, is a pretty rapid pace, we will, of course, continue to invest in R&D, but it's all going to be looked at from the lens of what kind of investment we will make in terms of people versus AI tools and how those tools are going to give us the required efficiency or I would say, unexpected efficiency in some cases. And so we're excited about what we're going to be able to do from both adding the Risk Operations Center, Agentic AI capabilities while internally also using Agentic AI across the board, not just in R&D, but also in sales and other areas as well. Joo Mi Kim: And just to add to that, we are extremely focused on making sure that we have the right team structured in the focus areas from a product development standpoint. We have different teams working on, whether it be a total AI or ETM. And because of that, we are continuing to increase the hiring, the R&D, the engineers. It's just that the geographic mix of incremental hires has shifted more to be in India, which has helped from an R&D expense standpoint, but we are making sure that we're working across it different orgs or different functional areas within the engineering team to make sure that we're prioritizing in the right manner. Operator: Our next question is from Shrenik Kothari of Baird. Shrenik Kothari: Echoing my congrats to the team. Sumedh, the TruConfirm announcement definitely sounds like a step function moving from, as we said, the risk scoring to automated exploit validation and at scale. Just curious like -- do you envision this also becoming sort of a pillar like ETM as monetizing it standalone? Or do you think of it as becoming an on-ramp to move customers into broader ETM. And then just with the with the POCs converting and all the large enterprise consolidations you talked about, like how should we think about the ETM trajectory ahead? And then I have a quick follow-up for Joo Mi. Sumedh Thakar: That's a great question. And look, I mean I think I would say that at the end of the day for risk management, you only manage your risk if you have eliminated the right risk, right? Just building dashboards and as I said, dashboard tourism is not helping with just visibility. And so at the end of the day, for that to happen, you need to have 3 things. You need to be able to collect data from multiple sources so you can get a broader picture of the view and your you're applying threat intelligence and you're seeing some of the traditional CTEM, which has been around for many years. Some of the CTEM solutions are just giving you, we consolidate the data and here it is. And so they are giving you a theoretical view of what might be exploitable in the environment. But with TruConfirm included as part of ETM, we are going a step further relative to the CTEM visibility-only platforms, giving them the ability to actually confirm and that's included as part of ETM. It is not an additional upsell, but that helps us differentiate from the CTEM only solutions, gives them the ability to confirm in that environment that the exploit actually works. And then the upsell from there is really and that's kind of how we look at the beachhead for converting our customers from the MDR to ETM is that, that conversion then will allow us to upsell them to the actual eliminate capability. Because again, like I said, if attackers are looking -- are starting to exploit vulnerabilities even before patches are being made available, it is really about speed. And so you need to be able to quickly detect the vulnerability, you need to be able to then confirm that it is exploitable in your environment rapidly. And then the next logical step has to be a automated AI-driven fix. So that you can get it fixed before the attackers get there. And if we -- and that's really where the Risk Operations Center is not just a CTEM solution, it really is more than a CTEM solution, which is just giving you dashboards. Shrenik Kothari: Got it. Super helpful. And Joo Mi, very quickly, Sumedh mentioned about the AI driver for automated remediation and orchestration scale into model mROC partner delivery again also reducing the heavy lifting internally. So just curious, as partners increasingly monetize these services, how should we think about incremental leverage and how we're thinking about that. Joo Mi Kim: Yes. I think that mROC will really help us to grow the top line because how we see the new product and value proposition in terms of the customers being able to really see how ETM could help them from a risk management standpoint, they will need assistance from the partner to really make sure that they are implementing the tool they're utilizing in the appropriate way and they're maximizing the ROI from their respective like customization that's required from the organizational standpoint. So with working hand-in-hand with the partner to help us accelerate the top line growth for us, we think that we will get some leverage from a margin perspective, but really the unit economics, we don't really see a material shift there. I think we're already seeing some kind of benefit as we continue to shift more of our business to the partner side and then layering on top that mROC, professional services or additional implementation help that customers might see will help to accelerate that revenue growth and the ETM penetration. Sumedh Thakar: And Shrenik, just to kind of add to what Joo Mi said, I called that out as an example in our earnings calls where an mROC partner, brought this new logo opportunity to Qualys in the Middle East, one of the largest airlines because they were excited about, not because of just a margin here or there, they were excited about the ability to provide high-value risk management services to their customer. If they brought that customer to Qualys versus just selling them some other VM scanner that would just give them more findings and they would have to do a lot of work to provide value on top of that. So that strategy around mROC partners are bringing not just ETM, but they're also bringing us other customers, other deals with the understanding that these engagements with Qualys will lead to services revenue for these companies. Operator: Our next question is from Junaid Siddiqui of Truist Securities. Junaid Siddiqui: Great. As you pivot more into a platform play, are you seeing any changes in sales cycles from customers? Sumedh Thakar: I mean, I think nothing notable to call out for. I think on the -- there's good and bad, right, at times for us to be able to show the value of the platform by ingesting data from tools that they already have. Can be a win instead of saying, you need to do a deployment of our agents and scanners everywhere to see the value that Qualys brings and then the pricing kind of allows them to think about maybe eliminating their existing solution over a period of time. And so I think today, I think so far, we are in the early days, but we're seeing, especially with the ROCon Conference that we had and the partner advisory -- I mean -- sorry, the product advisory board where we had a lot of the top banks out there. I think the feedback is a lot of excitement around the Risk Operations Center as a focus area rather than just kind of trying to do a like-to-like scanner to scanner replacement and the time and effort it takes. This is something that they feel like it's something that they can justify in terms of moving quickly now, of course, it is something that is new. Everybody is looking at it this year. So it is allowing them to figure out how they're going to budget. Some people have the budget now, some people are looking at it to budget for next year's purchases. And so -- but overall, the conversation has been pretty positive. And I think the goal for us is to not only existing customers not only bring the Qualys findings into ETM, but that value they get out of that is going to encourage them to bring a lot of other findings and other assets that are not currently in Qualys. And so we are seeing that with some of the early adopter customers. They started with bringing Qualys VMDR findings into ETM, but then quickly pivoted after seeing the value to bringing sometimes twice as many assets into Qualys as they had before from other tools, increasing the license count for ETM. So that's kind of how we're looking at it as we progress is that it's going to help us be much quicker in POCs and we don't have to walk away if a customer already has a competing VM scanner. We can actually just ingest the data, show them the value -- show them the business value and then grow from there rather than doing prolonged POCs that involve deployment of agents and scanners, which ultimately they see the value in that, but it is sometimes -- just takes a longer cycle. So I think net-net, I think will -- it's early days. We'll see how it develops. But so far in the initial engagements we have had, it's been pretty exciting and fairly quick moving. Operator: Our next question is from Joshua Tilton of Wolfe Research. Joshua Tilton: Congrats on a great quarter. I've been bouncing around a few calls, so I'm actually going to ask a pretty high-level question. And my question is, we have the privilege of covering 3 publicly traded vulnerability management vendors, and you guys are all kind of growing at different rates. And I guess my question to you is, are the deltas in your growth rate a function of things changing within the VM market and therefore, some of you are growing faster, taking share, growing slower within VM, or the delta in the growth rates because some of you have taken these broader platform plays and you have these non-VM products better separating the growth between these 3 players? And if it's the latter, I guess, can you just help us understand which of the product -- the non-VM products for you are really driving the separation and growth that we're seeing at Qualys versus some of the other players? Sumedh Thakar: I would just say that some of us have just have an awesome organic platform. That's why we are growing at a different pace. But having said that, look, I think, we've talked about this for a few years, VM has been changing and people are less focused on just scanning and more focused on prioritization remediation, and that's why we pivoted towards, if you recall, Patch Management a few years ago and we got GigaOM giving us that #1 spot in their analysis for Qualys, which was a great achievement for us just within 4 years, getting to #1 of our established players. We're also pivoting more with ETM towards the ability to not just -- not only collect data from multiple tools as well as our own tools, but also ability to prioritize with threat intel. We have award-winning threat intelligence, and we talked about that. And then the ability for us to actually confirm the vulnerabilities exploitable by exploiting it and then getting it fixed. And so what we are seeing, and we have been reporting on how Eliminate and Patch Management has been growing as a percentage of our LTM bookings. And then we've also talked about now that our focus on ETM and how starting at the earnings call for Q1, we're going to focus more on the penetration for ETM in our customer base, which is elevating from VMDR to ability to give them a broader Risk Operations Center and then the upsell from that is going to be the Eliminate capabilities to get things fixed. And so I -- with the engagement that we have with our customers, there is a big focus from customers on business alignment of cybersecurity spend, the ability to look at risk from a business perspective. And what we are doing now in the organically developed platform that we have that integrates so many different things together, I think, is helping customers get a very quick and simplified view of their actual risk and the ability to actually remediate before attackers get there versus competitors have multiple acquisitions with multiple separate tools that don't really work with each other. And they're not able to get that kind of -- in my belief, they're not able to get the kind of response that we are able to give very quickly whenever there is something going on, and that's the feedback that we have been getting from customers. Joshua Tilton: Sumedh, you had me at organic platform. But maybe just a follow-up for Joo Mi. If I missed it, I apologize, but any way to think about how we should expect billings growth to finish or current billings growth to finish this year? Joo Mi Kim: Yes. I think that Q4 because it was a very strong quarter, a tough compare for last year. We do expect current billings to be a few percentage points below the revenue growth rate ending the year. So maybe if you think about it from the like 2025 full year current billings growth at around 8%. Operator: Our next question is from Jonathan Ho of William Blair. Garrett Burkam: This is Garrett Burkam on for Jonathan. I was just wondering if you could walk us through how you're thinking about contribution from your new and continued product innovations like including AI and new modules around VMDR and mROC versus just continuing to upsell and cross-sell your existing installed base? And then also, can you just talk about how customer conversations are going with your mROC solution at this point? Just what traction you're getting there? Sumedh Thakar: Sorry, I didn't get the first part of the question again. So you're asking for contribution from... Garrett Burkam: Yes, like new modules and new customers versus upselling your existing base in your existing modules? Sumedh Thakar: Yes. Look, I think every customer is a different part of the journey. So we don't really break it out by individual modules. I think we have been giving color on the contribution of TotalCloud, which is our cloud native CNAPP solution. We're happy to see the progress it is making in early days, but it was 5% of the bookings for the quarter. And then you also have -- we called out Patch Management and Cybersecurity Asset Management, which has been the focus for us the last couple of years, and we're happy with the penetration there. But we're also now pivoting more towards the Risk Operations Center, ETM solution that we talked about and our goal is going to be just like we did from VM to VMDR a few years ago, really up level our customers from VMDR to ETM solutions. So which we have a very nice existing installed base of vulnerability management customers that we can work on upselling them and cross-selling them to ETM, which by the way, will include Cybersecurity Asset Management already. And then next step above that, we'll be upselling them to Eliminate solution to actually get things fixed. And so conversations have been super positive around Risk Operations Center, as I said in the earnings script, one of the big differentiators for us has been the CRQ and the business focus on risk management rather than just giving technical scores, and that was underscored at our ROCon Conference in Houston where we added a business track, separate business track for cybersecurity, which had sessions with CFOs and Board members and insurance companies. And actually, because of that, we had a 20% increase in attendance because people were really focused on making sense out of from a business perspective. So the conversations with customers are on Risk Operations Center, ETM solution from Qualys has been that they really like that we're not just a CTEM solution, giving them dashboards. We're actually natively fixing issues for them rapidly as well as we're giving them AI-based intelligence around the business and for their particular industry, what is the risk of ransomware? How much money could they lose, why should they fix this particular vulnerability versus not fix another vulnerability. So it's been very positive feedback, and we're excited about that. And so I think, as we get into the next year, we are really putting a focus on ETM and as part of that we have made some internal promotions to align well with our go-to-market strategy there with product management and Jonathan, our CISO, also really working on helping us as a GM for our risk operations solutions to really bring all of our teams to executing more towards ETM and getting the benefit out of upselling our customers to ETM. And that's what we see in the Q1 earnings call, we'll be starting to focus on the opportunity ahead of us. In addition, of course. One of the reasons is like there's a lot of CNAPP solutions out there. We see the resonation -- what is resonating with customers with our CNAPP solution. There's not so much individual features, but it is, again, the ability to bring the cloud risk as part of the holistic business risk. And so yes, other CNAPP solutions can tell you how many open buckets that you have after the public. But if you ask them, what does that mean, how in dollar value lost to your company, if one of them is compromised. There don't have answers to that. And so our cloud security solution is actually integrated from a risk perspective to give that business quantification, and that's what the feedback that we're getting from customers. And so as I look into next year, our focus is going to be on ETM as the big focus to cross-sell our customers. It's going to be continued investment for long term in the federal market. Focus on the continued innovation that we have with Eliminate capabilities. And then all of that is going to be underpinned by our work that we are doing with mROC partners which I think is going to contribute even more to scale our business in 2026. Operator: Our next question is from Joseph Gallo of Jefferies. Unknown Analyst: This is [ Anec Bevin ] on for Joe Gallo. Really strong quarter. Can you just share some color on where exposure management is in terms of budget prioritization in 2026? And can we expect billings to track in line with your noted 8% for 2025? Sumedh Thakar: I think I'll answer the first part is we're seeing definitely customers are looking to invest in proactive risk management solutions. And as I said, that the Risk Operations Center where exposure management is part of that in business quantification. With the feedback and response that we're getting from customers. This is definitely an area that they are focusing on in all the conversations that we had with this year. I think a lot of customers see the Risk Operations Center and the Security Operations Center, ROC and SOC kind of working closely with each other because there is a lot of fatigue currently on the SOC side because of too many alerts. And the feeling is that if they can focus on better prevention in the first place that can reduce the number of alerts and reduce the fatigue that they see in the SOC and people are looking to balance in the early conversations, while I don't have an exact percentage right now. we will see how it evolves in next year. People do talk about balancing their cybersecurity budgets between proactive risk management versus just reactive after the fact that somebody is in your network, and there's -- a lot of that has happened in the past. And it's ultimately you cannot do away with one or the other. You need both, so that you can proactively reduce risk while having the monitoring needed, if there is a compromise to block that. But there is definitely a focus on customers to prioritize the split between those because again, if they don't prioritize what they are fixing accurately, then they're asking and wasting their IT teams resources and fixing things that don't actually matter while at the end, getting more alerts in their SOC. So from that perspective, we are seeing conversations around the Risk Operations Center and exposure management is one part of that. We are definitely trending where customers are liking this ability to think about how much they spend into proactive risk management in terms of business risk and how much risk they would have, which is what I talked about in my keynote as well as ROCon is moving from a attack surface management to risk surface management. You can spend a lot in covering your attack surface, but the risk of loss was only $50,000 and you spent $500,000 to your attack surface. That's not a great business equation. So that's what we are hearing and we're seeing from our customers in terms of billings, Joo Mi? Joo Mi Kim: No, I think that 8% that we believe that we'll be able to achieve in 2025 for the full year is on track. Operator: Our next question is from Rudy Kessinger of D.A. Davidson. Rudy Kessinger: Just a clarification on that last question, Joo Mi. You said that 8% billings for this year is "on track." Is that to imply that you think you can do 8%-ish again next year? Or can you just clarify that, please? Joo Mi Kim: Yes. So right now, I mean, billing has the tendency to be very lumpy. So for this year, we think that we're going to end the full year at 8%, which implies a lower current billings growth rate for Q4 given the tough compare to 1 year ago. In terms of next year, it's a little bit too early to tell in terms of 2026, what we think that we'll be able to achieve. A lot of it will depend on what we'll be able to close the year at when it comes to the net dollar expansion rate. And we are monitoring very closely in terms of the newer product adoption to give us a better sense and clarity into what we think that we should be anticipating for 2026 growth rate. Rudy Kessinger: Got it. Okay. And then you guys had some pretty decent results in the last few quarters now. Growth has been stable at 10% the last 4 quarters, I believe, on revenue. You've got NRR stable at 104%. What -- I guess, what would you need to see to maybe give you guys confidence in maybe declaring that you can deliver a stable 10% plus growth over the next couple of years? Sumedh Thakar: Well, we're certainly working towards that. I think the key growth vectors we see right now are converting our VM customer base to -- VMDR customer base to ETM is an area of focus, creating upsell with Eliminate on that. We continue to see very -- a lot of interest for our cloud security solution. And I think with a long-term federal opportunity that we are focusing on, we have really good conversations with Risk Operations Center on the federal side as well. I think those are the areas that we continue for sort of short-term, medium-term and long-term growth, which is again underpinned by our focus on mROC partnerships. But we're really laser-focused next year on our VMDR to ETM conversion and the upsells will Eliminate. Operator: Our next question is from Yun Kim of Loop Capital Markets. Yun Suk Kim: Congrats on a solid quarter. Sumedh, on the Enterprise TruRisk Management, ETM, is that primarily a big deal sales motion? Or is it just a combination of a bunch of products that could be purchased and deployed in multiple phases and collectively that could lead to 100% uplift over time. Just want to get a better understanding of that 100% plus uplift commentary. Sumedh Thakar: Yes, I think we feel and with the early response from customers, we feel like we can hold up to, of course, 100% of the VMDR because we're adding them -- we are providing them AI capabilities, Agentic AI capabilities, marketplace built in, where they can essentially bring on an AI agent as part of their team for 4 weeks as they're focusing on an audit or for 3 weeks as they are triaging the ransomware related vulnerabilities. And so CSAM is also included in that. Ability to test exploits is also included in that. And so we feel like that's something that is going to be helpful for customers, primarily it is VMDR, CSAM plus all the new capabilities that I highlighted, or what is focused on that now. We also talked about Q-Flex and I think a lot of this is going to go hand-in-hand as we start seeing scale next year. A lot of these customers who are looking to buy ETM are also going to be interested in our Eliminate platform and also be interested in cloud. And so the Q-Flex is what sort of you talked about is from an ability to provide them a way to try and use different Qualys modules that make sense to them instead of having to go through multiple purchase cycles through the year and we are going to see a combination of the Q-Flex pricing with ETM cross-sells are the focus for us as we get into next year. Yun Suk Kim: Okay. Great. Looking forward to ETM adoption next year, given that it sounds like it's going to have big impact. Just -- Sumedh, you haven't done any acquisition in a while or anything sizable. If you can just give us an update on your view on acquisition strategy. Obviously, you guys are performing very well. The business overall is stable. You got this ETM kicking in starting next year. Obviously, you're very proud of your organically growing platform, but you must see a strategic opportunity to expand your offering to get to that place faster than organically, are you tempted at all given how dynamic the market is evolving? Sumedh Thakar: Look, we are always open to all kinds of different opportunities to look at organic small acquisition, some larger acquisition potential as well. That makes sense. We definitely come more from -- we want to give our customer an organic experience with the platform. Having said that, we have done tuck-in acquisition in the past where if there is a fit with our platform, we're not shy of looking at something larger. But currently, with the way we are executing, focusing -- and one of the things that happens with ETM now is that we are able to increase the asset count that the customer has with Qualys by actually bringing data from other tools and may not necessarily need them to essentially buy that particular capability from Qualys, as an example, right? Like now with ISPM identity solution, as an example, that we have as part of ETM, we can pull an identity from Okta and AD and others, and we don't necessarily have the customer to us -- to maybe acquire an AD security company. We can work with companies out there while that increases the asset count in Qualys. And so these dynamics keep changing, and we see efficiencies coming out of AI. We are seeing ability for us to look at various players in the market, how they are doing. And we continue to stay focused on our road map from an organic experience for our customers while also keeping an eye on the industry and looking at whether it's going to be a smaller or a larger acquisition, we're definitely continuing to be open to that. Operator: Thank you. This now concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Goodbye.
Operator: Good afternoon, and welcome to PROCEPT BioRobotics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn it over to Matt Bacso, Vice President, Investor Relations, for a few introductory comments. Matthew Bacso: Good afternoon, and thank you for joining PROCEPT BioRobotics third quarter 2025 earnings conference call. Presenting on today's call are Larry Wood, Chief Executive Officer; and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed on this conference call. These risks and uncertainties are disclosed in more detail in PROCEPT BioRobotics filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date, November 4, 2025. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances or unanticipated events that may arise. During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non-GAAP financial measures as well as reconciliations of these measures to their nearest GAAP equivalent are included in our earnings release. With that, I'd like to turn the call over to Larry. Larry Wood: Thanks, Matt. I'm excited to be on the call today to discuss our third quarter results and share some early insights from my first couple of months in the role. First, let's talk about the quarter. We demonstrated strong execution and results with total revenue for the third quarter of 2025 of $83.3 million. Strength in the quarter was driven primarily by U.S. capital systems shipped, which totaled 58 in the quarter. While we have begun to see some large hospital systems more carefully scrutinize capital spending in light of evolving macroeconomic conditions, we delivered a strong capital quarter. Capital pricing has remained stable. And importantly, we continue to maintain solid visibility into our pipeline and remain confident in our ability to finish 2025 on a strong note. On procedures, my handpiece sales were roughly in line with expectations. Procedure utilization is an area we are highly focused on improving moving forward and believe it's a key to unlocking long-term value. As part of this increased focus, we're implementing several organizational changes and launching multiple initiatives aimed at improving our commercial execution. One example is increasing focus on improving our speed of new account launches. While HYDROS launches consistently deliver strong procedure adoption post launch, the timing from sale to first procedure is highly variable. The situation presents 2 challenges. First, it delays the realization of utilization benefits from newly installed systems. And second, hospitals are holding excess HYDROS handpieces that were purchased at the time of the capital sale. To address this, we launched an initiative with clear goals and metrics aimed at achieving procedural targets in the shortest possible time after a sale. Early results have been highly encouraging, and we plan to expand this program in the fourth quarter and fully implement it in 2026. Reflecting on my first few months, I've had the opportunity to observe procedures and speak with a number of key opinion leaders across the field. What I've seen has only deepened my conviction in this opportunity and validated the reasons I chose to join PROCEPT. When I think about our long-term potential, it really starts with the fundamentals. BPH is massively undertreated. Many patients fear the side effects of drugs or surgery and avoid therapy altogether. What they don't realize is delaying therapy can significantly affect their quality of life and even lead to more serious health issues. At the same time, many patients are still unfamiliar with Aquablation therapy and the life-changing benefits it can offer. Our clinical value proposition is strong. The Aquablation procedure and the supporting clinical evidence are highly compelling, especially on the outcomes that matter most to patients. I think the team has done an excellent job driving early adoption and supporting clinical users. But if we want to expand our impact, we must do more foundational work to increase therapy awareness and drive patient activation, which is something I have a lot of experience from my time at Edwards. This will in part -- this will be a core part of our near and midterm commercial strategy. We are also sharpening our focus internationally. We see strong opportunities in markets that value transformational therapies and are willing to support access for patients. We will increase investment and organizational support in these regions accordingly. Additionally, to support our core initiatives, we've made a number of organizational changes. Pooja Sharma has joined us as Chief Marketing and Strategy Officer. She brings deep experience from Edwards Lifesciences, where she led marketing and strategy for the transcatheter heart valve business. Her background in driving category leadership and therapy development is exactly what we need at this stage. Also, Stephen McGill has been promoted to Senior Vice President, General Manager, International, and will now report directly to me. Stephen has done an outstanding job leading our international business. With added investment and focus, I'm excited to have him on the leadership team. This also enables our incoming commercial leader to focus exclusively on North America. By organizational change and influx of new talent can create some short-term disruption, my primary responsibility is to ensure that we have the right people and the right objectives to drive long-term success. Overall, procedure volumes have been solid year-to-date. However, given the size of the BPH market in the United States, we are still only scratching the surface and have tremendous opportunity to further accelerate procedure growth. Looking ahead, Aquablation is a highly differentiated solution for BPH patients. While our current evidence is already strong, we will continue to invest in building a robust clinical foundation and ensuring patients are aware of Aquablation therapy. We also see longer opportunities beyond BPH. Specifically, we believe Aquablation has the potential to be a compelling therapy for prostate cancer. This is an area we are actively studying in the WATER IV clinical trial. High-quality evidence generation will be a foundational part of our expansion strategy in this space. In closing, I'm energized by the opportunity ahead. The leadership team has been incredibly supportive, and we are committed to advancing this therapy for the patients that need it. We will build a world-class marketing organization to activate patients and accelerate utilization. We will invest meaningfully to expand market awareness. We will accelerate new account launches and drive international growth with a focused market-specific approach. With that, I'll hand it over to Kevin to walk through the financials for the quarter. Kevin? Kevin Waters: Thanks, Larry. Total revenue for the third quarter of 2025 was $83.3 million, representing growth of 43% compared to the third quarter of 2024. U.S. revenue for the third quarter was $73.9 million, representing growth of 42% compared to the prior year period. Turning to U.S. procedures. Handpiece and other consumable revenue for the third quarter of 2025 was $44.4 million, representing growth of 50% compared to the third quarter of 2024. We also recorded approximately $2.4 million of other consumable revenue in the third quarter of 2025. In the third quarter, we sold approximately 13,225 handpieces, reflecting 51% year-over-year unit growth. While we navigated a period of commercial leadership transition, our team continued to deliver solid performance and momentum. Turning to U.S. robot placements. We generated total U.S. system revenue of $24.7 million, representing system revenue growth of 26% compared to the third quarter of 2024. In the third quarter, we sold 57 new HYDROS systems. The pricing for our systems was at an average selling price of approximately $435,000. Additionally, we placed 1 HYDROS system under an operating lease model. As a result, we exited the third quarter of 2025 with a U.S. installed base of 653 systems, representing an increase of 47% compared to the prior year period. Lastly, international revenue in the third quarter of 2025 was $9.4 million, representing growth of 53% compared to the prior year period. Moving down the income statement. Gross margin for the third quarter of 2025 was 64.8%, representing an increase of 160 basis points year-over-year. The year-over-year margin expansion was driven primarily by greater organizational effectiveness. Total operating expenses for the third quarter of 2025 amounted to $77.2 million compared to $59.3 million during the same period in the prior year. Net loss was $21.4 million for the third quarter of 2025 compared to $21 million in the same period of the prior year. Adjusted EBITDA was a loss of $7.4 million compared to a loss of $12.4 million in the third quarter of 2024. Our cash, cash equivalents and restricted cash balances as of September 30 were approximately $297 million. Moving to our 2025 financial guidance. We continue to expect full year 2025 total revenue to be approximately $325.5 million, representing growth of approximately 45% compared to 2024. We now expect to sell approximately 213 new robotic systems in the United States in 2025. As a result, we anticipate system sales in the fourth quarter to total approximately 65 systems. Turning to U.S. handpieces. For the full year, we now expect sales of approximately 52,000 handpieces, representing a 61% increase in unit volume compared to 2024. The reduction in fourth quarter handpiece sales guidance reflects modest headwinds related to the optimization of field inventory resulting from the variable launch timing of recent HYDROS placements. We are maintaining handpiece average selling prices to be approximately $3,200 and other consumable revenue expectations to be approximately $9.5 million for the full year. Additionally, we expect U.S. service and other revenue to now be approximately $17.5 million for the full year. Lastly, on international revenue, given strong positive momentum, we now expect full year international revenue to be approximately $37.5 million, representing annual growth of 56%. Turning to gross margins. We now expect full year 2025 gross margin to be in the range of 64% to 64.5%. This would imply a fourth quarter gross margin of approximately 63%, which includes approximately $2 million of tariff expense. Turning to operating expenses. We continue to expect full year 2025 operating expenses to total $302 million, representing a 29% increase compared to 2024. After considering all relevant factors, we continue to expect a full year 2025 adjusted EBITDA loss of approximately $35 million. I would now like to pass it back to Larry for closing comments. Larry Wood: Thanks, Kevin. Before we open the line for questions, I'd like to take a moment to provide perspective on fiscal 2026 to give investors early visibility into how we are approaching the year ahead. For fiscal 2026, we are currently anticipating total revenue in the range of $410 million to $430 million. The outlook reflects our current momentum in capital sales even in an uncertain macro environment and incorporates our expectation of modest procedural headwinds in the first half of 2026 when we make targeted strategic investments to enhance our commercial capabilities and operational excellence. These initiatives are designed to drive sustained long-term utilization growth and position us for durable profitability. We will continue to invest in our strategic priorities to drive long-term growth and do not expect these investments to impede our progress toward achieving profitability. Lastly, in late February 2026, we plan to host a formal Analyst Day in New York City, where we will outline multiyear revenue guidance and provide updates on our marketing priorities, R&D initiatives, prostate cancer trial and profitability targets. We look forward to providing a more robust long-term view. With that, we are happy to take questions. Operator? Operator: [Operator Instructions] Our first question is from Matthew O'Brien from Piper Sandler. Matthew O'Brien: Great. And Larry, I hope things are going well here early in your tenure as CEO. Would love if either you or Kevin would talk about the capital environment because that number in the quarter was quite strong, clear acceleration. I know some people were worried coming out of Q2 about the capital environment. So can you just talk about the strength that you saw there, especially in an environment that you say is weakening a little bit? Is it really HYDROS that's starting to see an inflection or maybe build some of the backlog even further? Maybe just talk a little bit more about what you're seeing there. And then I do have a follow-up. Kevin Waters: Yes. Maybe I'll start, Matt. This is Kevin. I appreciate your question. So as you observed, we're really pleased with the capital team's performance in the third quarter. I think if you recall, in the second quarter, we said that we had some variability in timing, particularly with some of our IDN partners, and that still continues to be the case. So when we highlight perhaps some future weakness in capital, it's really more around timing and capital allocation with our customers as opposed to any worsening of the macro environment. And the team executed very well in the third quarter, and we feel good about that momentum heading into the fourth quarter where we're expecting somewhere in the kind of mid-60 range of systems, but feel good about the team, the capital environment and performance. Matthew O'Brien: And then, Larry, a question directly for you. 2 months on the job now, I would love to hear a little bit more about what you've seen in your seat, maybe low-hanging fruit, some longer-term things that you can focus on and forgive the long-winded question. But the near-term changes on the org side probably make people a little bit nervous, especially as you're guiding for next year. So why the confidence in even providing that 2026 revenue guidance, which basically brackets where the Street is at? Can you just talk a little bit about your confidence there? Larry Wood: Thanks for the question, Matthew. I will say my first 8 weeks have been really incredible here. I've thoroughly enjoyed getting involved with the management team and digging in and I've had the chance to spend some time in the field and talk to a number of our KOLs. And for those of you who know me from my time at Edwards, I spent 40 years at Edwards and probably thought I'd never leave. And -- but spending the time on the Board with PROCEPT, it just felt like such a spectacular opportunity to change medicine again. And my time here, everything is really just validated it, spending time with the KOLs, seeing procedures, seeing what we can deliver for patients. I think the challenges in front of us are -- I don't think we've necessarily told our story yet. I don't think we've told our story to clinicians, and I certainly don't think we've taken the story to patients. And I lived a lot of this journey when I was at Edwards. We had a lot of early success with transcatheter heart valves. But then we sort of hit a little bit of a wall once we got through the early adopters. And we had to do a lot more with therapy awareness and with patient activation and all of those things. And that was one of the big things that attracted Pooja to come here because we get an opportunity to sort of transform medicine again. But when you start with a procedure that I think is so highly differentiated, but isn't necessarily respected as such, I think it just creates this enormous opportunity that we can change the practice of medicine. And so I'm super energized by it. We wanted to provide guidance for next year. I know being a new CEO coming in, I'll just be real frank about it, there's a lot of people that just assume somebody is going to be overly conservative with the approach and that creates uncertainty for folks. And so we just wanted to give you a range. We feel great about our future. We feel incredibly optimistic about our future. We have a lot of initiatives that we've already started and some of the pilots that we've run, I feel very encouraged by. So I'm just really excited about the opportunity, and we look forward to sharing more with you in February. I'll have more time in the role. Pooja actually starts tomorrow. So she'll have a little bit of time in the chair to be able to lay out some of her plans. And we're excited to share them with you and give you more long-term view in February. Operator: [Operator Instructions] Our next question is from Brandon Vazquez from William Blair. Brandon Vazquez: First, I just wanted to focus a little bit on the quarter specifically and some of the updates and then maybe a follow-up on a broader question. But you talked about this dynamic in the quarter of HYDROS placement seeing a little bit of a slower ramp. It sounds like that probably impacted utilization. I have you on my initial update of the model here at low single digits increase in utilization. One, is that right? And then two, just talk about this dynamic. Is this something specific to HYDROS? And then what kind of changes did you guys make that are already showing improvements? And how do we think about that utilization number ticking back up to the normal kind of high single, low double-digit range that you've historically been seeing as you tackle this dynamic? Kevin Waters: Yes. Thanks, Brandon. Let me take the math part of that equation. And you're correct. So if you look at this pure year-over-year growth in utilization in the third quarter, it is in the low single digits, but frankly, kind of right around our expectations and what our guidance implied heading into the back half of the year. And then you do see utilization in the fourth quarter guide kind of really step back up to more in line with where we're at with Q2. And that dynamic of HYDROS -- first off, a significant number of HYDROS systems we've sold in the last 2 quarters, coupled with an elongated launch time line has contributed to kind of that low single-digit utilization. And that's really the initiatives that we're focused on as a company. Larry Wood: Yes. I'll just add to that. We -- just in our natural capital cycle, a lot of our instrument placements happen late in the quarter when we close those sales. And I think that's true of most capital organizations. And what that means is we don't really get benefit from the units that we sell in that quarter. That benefit comes later. But we see a lot of variability in newly placed systems between the sale and between when they come online and when they start delivering real utilization. And that's just a huge opportunity for us to really tighten up, and that's been an area of focus for us. But I'm committed to really focusing on utilization. I mean we have to deliver on the capital side of things for sure. But increasing utilization, I think, is our #1 priority, and I think that also fuels future capital. So I see these 2 things as going hand in hand. And again, I think there's tremendous work that we need to do to drive utilization. And again, we have early initiatives on this that we're encouraged by, and we've made organizational changes to try to drive it, and we're going to continue to do that over the next several months. But getting systems placed and getting them active and hitting our utilization targets sooner is going to be really important to us longer term. Brandon Vazquez: Okay. And maybe a higher-level picture as a follow-up. Larry, you had mentioned a little bit that your experience in building the TAVR market, I think you used the phrase of -- sorry, patient activation and some other learnings. And you were talking about moving kind of past the early adopters into the -- crossing the chasm here and going into the broad adoption. Talk a little bit about in TAVR, what did that take? And what isn't being done here in PROCEPT? What do you think within the PROCEPT story in your experience needs to be done? It feels like that's kind of the next step, as you had alluded to for PROCEPT is you've got a great technology, great clinical backing. How do you make this a technology for the masses? Larry Wood: Yes. No, it's a great question. I think one of the things that we saw in TAVR is if patients just were referred and they walked into a surgeon's office and they had aortic stenosis, the surgeon would just recommend surgery because that's the procedure that they can do. And frankly, it's a procedure that had a great contribution margin for the hospital, and they were happy to just keep doing that. And so when a patient walked in indifferent to the procedure that they're going to get, then the doctor might do what's easiest for them or what's most profitable for them and go down that road. I think bringing the patient's voice into that equation is really important. And I think also we generated a lot of evidence in the TAVR space to show why TAVR was a good procedure for these patients and in many cases, why it was a better procedure than surgery. And I think we need to spend more time focused on the evidence with the clinical community, so they understand these procedures aren't all created equal, and we can deliver differentiated results for patients. And at the same time, we need patients to be educated on what questions should they be asking their doctor to the degree that things like I only want to have one procedure, so I want the most complete outcome. There's just a lot of things that we need to do from an educational standpoint. But I think it's a complete game changer when a patient walks in and says, I've watched an Aquablation procedure and then the doctor has to try to change them to another procedure versus a patient just coming in and saying, what do you think I should have, whatever you recommend is what I'll go with. And there's just a lot of work there that we have to do, both with the medical community and patients. And then I think the other thing is we need to keep focusing on the evidence. We need to keep creating the evidence, and we need to keep amplifying that message so that people feel great about the procedure they're performing. They know they can deliver these great outcomes for patients. And I think that's really what our system can do in a very differentiated way. And right now, I think the doctors view a lot of these procedures as being very similar in terms of outcomes. And I don't think that's representative of what the data reflects, but that's on us to tell that story. Operator: Our next question is from Richard Newitter from Truist Securities. Richard Newitter: I wanted to start off with the '26 outlook. Thank you for providing a high-level revenue number. I was hoping you could provide maybe broad strokes on some level on the components. There's probably a lot of ways you can get to that number. So maybe whether it's commenting relative to where you see consensus, capital procedures, is there anything that needs to be kind of moved around? Or you kind of feel pretty good with the [ sum ] of the components as they are? And then also, if you could just talk about -- you mentioned the first half next year procedure, I think you had said procedures will be -- or utilization will be a little challenged. Is that -- why is that? Kevin Waters: Yes, Rich. So there's a lot of puts and takes to the model, so I appreciate the question. And I'll start by saying we plan to provide a lot of color, obviously, in February when we introduce guidance. And I don't think there was anything out there we see modeling that is grossly misrepresented at this time, and our guidance essentially brackets where consensus stands today. I think the one thing I will say to maybe help frame is just with the international business, [ you see ], that's somewhere in the $45 million to $50 million range, and then you can kind of work the model backwards from there. But at this time, we're not going to get into the different components. We want to finish the year. We're focused on driving procedures in the business in the fourth quarter, and we'll provide an update in February. Larry Wood: I'll just add. As we mentioned that there could be some headwinds in the first half, we're not -- we don't want to be blind to the fact that we've made a lot of organizational changes, but I'm really committed to putting the right long-term organization in place that's going to drive our long-term growth and our long-term future. And I appreciate that, that's a transitional period, and we may see a little bit of headwind from that. But I remain super confident in the team and everything that I've seen, everybody is on board, everybody is committed to making these changes and driving the business, and we all think we're going in the right direction. But we just want to be respectful of that it is a lot of change for a lot of people in a short period of time. But that's all reflected in our guidance. And we're very comfortable with the guidance that we provided. And obviously, we're going to try to drive the business as hard as we can. Richard Newitter: Okay. And then maybe if I can -- just on profitability. Look, it's 2 quarters in a row here where you guys are coming in above us or better than the Street's thinking. Kevin, can you talk a little bit about where you are on the trajectory to profitability? And then I guess, Larry, just -- should we expect anything in terms of reinvestment that's needed now that you've had some time to look at the business? And what should we be thinking about the profit trajectory and all the comments you provided before this leadership change, if any? Larry Wood: Yes. Maybe I'll start with it, and then I'll let Kevin pile on if there's -- if I miss anything. But there are going to be strategic investments that we make. But to some degree, I think it's going to be redirecting some of our spending to some of the new activities rather than just all incremental spending. But at the same time, I don't think anything is going to disrupt our path to profitability. But I will say this, just so it's clear to everyone. If there's an investment that I feel we need to make that's going to drive our long-term growth and that delayed profitability by a quarter, we would make that investment. I'm really -- I'm building a house to live in. I'm building a house that I plan on being here for a long time, and I'm really looking at how we build this to try to drive long-term growth and long-term value. And I don't want to become so obsessed with profitability that we miss out on critical investments even if those don't pay off for 2 or 3 quarters or for 4 quarters. So we're going to make those investments. But I don't think anything disrupts the path that we're on to profitability. And I think we're going to be responsible spenders of our money, but we're going to invest in the strategic priorities that are going to drive our long-term value. Operator: Our next question is from Patrick Wood of Morgan Stanley. Patrick Wood: Amazing. I'll keep it to one, but basically around the commercial activities and utilization side of things. I guess, correct me if I'm wrong, but there's basically 2 componentry here. There's a, as soon as the system is placed, getting faster off the blocks and getting some of that utilization right out the gate, but presumably, b, it's getting eventual total utilization higher. You mentioned you were putting some commercial activities in place. I'm just really curious, when you're addressing those 2 factors, can you give us some like specific flesh on the bones to sort of think about the changes that are being made? Is it just who's running what? Or is it incentive structure? Just any more details there would be amazing. Larry Wood: Yes. Thanks for your question. I think there's a few things there. I think, one, as I mentioned before, we want to see new systems, the metrics that we're building in is really from time of sale to hitting our utilization targets. And we want to minimize amount at a time [0:30:01.6], which is highly variable. And I just wouldn't say -- I would say, if I'm just real frank about it, that I think sometimes the handoff between our -- the capital sales team and the utilization team could be enhanced. And so that's become a big area of focus, and I think that will improve our utilization out of the gate. And that's not just the time to first procedures, but the time to doing a number of procedures that we would consider a system to be fully launched. I think the other thing is we've looked at our organization structure to say how do we best utilize our field resources. And I think there's a recognition that it's more than just being in cases. We have a lot of our field team that spends time in cases and they support physicians. And it's an important part of what we do because we want to make sure every patient has a spectacular outcome. But there's more to the role than that. And we need to be building the market and driving the cases and spending time in the office, spending time with referrers and doing all the other work to make sure people are up to date with the latest evidence and those sorts of things so that we're the preferred procedure for BPH. So it is asking our people to do a lot of things differently than what they've done historically. But I think that's what it's going to take if we're going to drive and improve our utilization over time. And again, it's -- I don't want to keep referring back to it. But this is very much the transition that we went through at Edwards. In the beginning, all we did was go and support cases, and it was sort of a, if you build it, they will come. Then you reach an inflection point where you have to start getting to the doctors that do multiple procedures or aren't those necessarily early adopters. And eventually, we're going to have to get to those entrenched physicians who are very comfortable doing what they're doing and maybe shy away from new technology. But each one of those tranches takes a different mindset and a different interaction with the customer. And I think we're just moving to the next phase of it. And again, I think the team has done a great job with early adopters, but we're just entering in the next phase, and it's just going to require us to do different things than what we've done historically. Operator: Our next question is from Ryan Zimmerman, BTIG. Ryan Zimmerman: Larry, the utilization talk is music to my ears. I appreciate you harping on that. One of the questions I have, though, is there are some new PFS rates that just came out, and you guys got a Category I code. It's down in line with kind of the other procedures, about 550, if I'm not mistaken, on the code. But my question is just in light of that, how do you think that impacts utilization? And what underpins your confidence on procedure adoption given those dynamics, especially for '26? Larry Wood: Yes. Thanks for your question, Ryan. Honestly, I think the fees came in about what we expected them to. I think everything is in line. But that's really the smaller part of the economics. I mean the procedural reimbursement is a much larger part of that, and we're still waiting to see where that falls, but we remain cautiously optimistic that, that's going to land in a solid place. But I think the other thing, too, is economics are important when technology is all viewed as homogeneous. I think when technology is highly differentiated, I don't know that people are going to take better economics over a better procedure. And for those of you who -- I know several of you followed Edwards, in the early days of TAVR, I remember there's a lot of discussions [ which ] the contribution margin from open heart surgery is probably more than double the contribution margin from doing a TAVR. And there was a lot of people who thought that was going to be a massive headwind, and we've seen how that played out. We had a highly differentiated technology, and it became less about the contribution margin and it became more about the procedure and the efficiency of the procedure and the outcomes that we were driving for patients. So I think we need to make sure that people understand how differentiated our procedure is. But I think the economics behind our procedure certainly support the improved utilization and increased utilization that we expect to drive. Ryan Zimmerman: Okay. I got a lot of other questions. I'm going to just stick with one more, and then I'll save it for the follow-up for you guys. But as you think about guidance, Larry, I mean, the company has had a philosophy around guidance. I think the beats have been fairly formulaic relative to maybe expectations or kind of what the guidance has been. Do you have a different view on this in terms of how you're approaching? You talked about, obviously, your thought process for the '26 guide. But I guess, more in the context of how you think about it relative to the expectations or how you perform or maybe what your internal guidance is, et cetera. Just curious if you want to speak to that. Larry Wood: Yes. I don't know that I'd give you a very satisfying answer to be frank about it. I think my approach to guidance is we need to create a range that we're going to achieve. And I think we need to be accurate about it. And I think we need to have upside potential, but we also need to reflect realities and not everything may go exactly like we want. But to the degree that there's expectations out there, I'm not probably a big believer in moving guidance around in relation to expectations. I'm more a believer in driving the execution of the company and putting out good guidance and achieving or exceeding our guidance through improved execution. So that's kind of where I'm going to land on things, and we'll go. But I think it'd be unrealistic to think that I know everything about the business. Obviously, Kevin and Matt have been here a long time, and I rely heavily on them. I'm in my eighth week, and I suspect when we get to February, we can probably have a lot more fulsome discussions around guidance and how we see the long term and maybe some of the models that we have. Operator: Our next question is from Chris Pasquale, Nephron Research. Christopher Pasquale: Larry, this is a market where you have a lot of patients on the sidelines deferring care. You talked about the need to educate those patients. You talked about the company not really having told its story yet. I put all that together, and it sounds like an argument for an investment in DTC advertising, which some other companies in the sector have spent a lot of money on in recent years. Is that something that you're contemplating? And maybe talk about how you balance that drive toward profitability with maybe some spending priorities or some areas where the company may not have been investing enough historically. Larry Wood: Thanks, Chris. Well, I think there's a lot of different channels that you can use. And obviously, if we want to do a Super Bowl commercial, that gets very expensive. But I don't think you have to do that to go deliver your message to patients. I think, there's social media. There's a lot of other things that we can do that are pretty cost-effective ways to do things, and we did a lot of these things at Edwards. So I think these are all things that we're going to be focused on, but we do have to take our message to the patients. And we do have to get that out there to them so that they understand. I think one of the other things, and I know you followed Edwards, Chris, that there were a lot of patients that just believed that aortic stenosis was just all about symptoms tolerance. And there was not an understanding of the damage that was being done while they sat in that symptomatic phase until it became intolerable. I think the same is true of BPH. I think a lot of patients are sitting on the sidelines and they're just saying, well, it's just about whether I can tolerate these symptoms or not, but there's not a good understanding of the damage that they're doing to the bladder and the long-term complications that can lead to that point to a need for earlier therapy. And so again, I don't think any work has been done in that area to really tell that story or make that clear to patients. I think it's all just been focused purely on this procedure versus that procedure and a lot of early data. So when I say we got to tell our story, it's not just to the patient, some of it's to the clinicians, but there is going to be a direct-to-patient element of this that we will be investing in. But again, I don't think it fundamentally changes our path to profitability. I think that remains intact. And we'll just have to make responsible investments along the way. Christopher Pasquale: That's helpful. And then I just -- I wanted to double-click on the comment about hospitals scrutinizing purchases more closely. You guys had a strong quarter for capital. Most of the other companies that get asked about this topic routinely have also said, look, things remain pretty healthy. So is there something new that you're seeing that you wanted to call out and really flag here because it could impact things going forward? Or are you just alluding to the fact that, look, it's been a tough year from a macro perspective in general, and you're continuing to execute despite that? Larry Wood: Yes. Thanks. I don't think it fundamentally changes our projections for capital. I think what we've seen is the purchasing process is taking longer. I think there were systems that we expected to close, for example, in Q2 that just got pushed into Q3 just because it just seemed like a lot of systems have put additional steps in place or they've expressed just some macro concerns and it's just caused things to be delayed. I think we generally expect -- and we saw that this quarter, the systems ended up showing up and they ended up coming through, and we continue to expect that to happen. It just seems like there's a few more steps being added to the process and things have just been moving a little slower. I think we just wanted to be transparent about that. Operator: The next question is from Suraj Kalia from Oppenheimer & Company. Suraj Kalia: Larry, congrats on your new role. It's a pleasure to be working with you again. Hopefully, you can hear me all right. Larry Wood: I can. Suraj Kalia: Perfect. So Larry, I totally get your point about TAVR, the parallels there. If I could just expand on Chris' earlier question, Larry. So TAVR was a convincing solution for a high acuity condition, and we saw rapid share shifts, right, from SAVR. Specifically, as you look at BPH, do you think -- and as you lay out the long-term plan, the focus is specifically going to be on pulling in de novo patients, whether through DTC or otherwise? Or you envision this more in terms of share gains from TURP, nucleation, what have you? Larry Wood: Yes. Thanks for your question, and it's good to hear from you. It's nice to hear friendly voices. The -- I think the biggest opportunity we have is getting people off the sidelines. And I think even when I worked back in cardiac surgery, there were a lot of patients that viewed the cure is worse than the disease. And so people would avoid having open heart surgery even though they had a life-threatening condition that was damaging their quality of life. And I think we see that in the BPH space as well. You have people who -- they're so worried about the surgery and its impact on potentially leading to incontinence or potentially leading to sexual dysfunction. So they'd rather live with their symptoms than having cured. And I think what we need to be able to show people through our evidence is our incontinence rates are incredibly low, almost 0. And our sexual dysfunction rates are also incredibly low. And so you can correct your problem and actually markedly improve your quality of life. So the people suffering on the sidelines are by far and away the biggest opportunity. As we grow the market, we want to absolutely make sure we're getting our fair share. But to the degree that we can expand the market and that we can grow the market, that's more valuable to me than trying to move a share point from TURP over to Aquablation. Suraj Kalia: And for my follow-up, Larry, obviously, BPH is a lot more fragmented, right, versus severe symptomatic AS. How should we think about -- or what is your view in terms of the price elasticity of demand, i.e., should we think about the same approach where with the SAPIEN and SAPIEN 3 Ultra, you'll adopt it in terms of premium pricing versus rest of the market for Aquablation also? Or you'll think there would be a more flexible approach given the changing price elasticity of demand in BPH and a fragmented market? Congrats again. Larry Wood: Well, to the degree that you want to draw parallels with SAPIEN, I think I waited 15 years before I did a price increase. So I don't think price increases were a huge part of our development strategy. And I don't know that price increases are going to be a huge part of our strategy here either. It's funny when people say the aortic stenosis market was not very fragmented. I think that's a view today. That was not a view 15, 18, 20 years ago when we started working on it. I think it was highly fragmented, and you looked at high-risk people and intermediate risk people and low-risk people, and now we talked about asymptomatic. So again, it's not a perfect analogy by any means, but I do believe that there are a lot of parallels. And I do think the journey is going to be similar. Now to your point, we're going to continue to develop our platform. We're going to continue to innovate, and we're going to continue to make sure that we have the best therapy and the best technology, and it's also backed by the best evidence. And I think those are things that are just going to be hallmarks of what we do. But it's really going to be about getting patients off the sideline and improving our utilization rates. Operator: [Operator Instructions] Our next question is from Nathan Treybeck from Wells Fargo. Nathan Treybeck: Kevin, I think you disclosed one system placement under an operating lease. Can you talk about why this was done? And do you expect operating leases to become a bigger part of your system placements going forward and then just modeling considerations there? Kevin Waters: Yes. Look, this was not an indicative or a shift in our business practice, but we did feel we owed an explanation given our installed base went up by 58 and we sold 57. So this robot is -- I would characterize it more as a one-off where we aren't able to recognize revenue. It's going to be paid for over time. But there is no near-term plan to have a significant shift in our business model. But as we've said in the past, the #1 priority is to get robots installed and to generate procedures and to treat patients, and we'll continue to evaluate various alternatives as they make sense for the business. Nathan Treybeck: Okay. And just for my follow-up. So just based on my forecast, I guess, over 70% of your installed base next year will be with accounts that have been doing Aquablation procedures for over a year. So it seems to me that new accounts should be less of a drag on utilization growth. I guess how does this play out for your utilization outlook next year? Kevin Waters: Yes. Look, I think a drag is a bit harsh, but I think our focus on launching accounts in a more timely and robust manner and the focus there should allow those new accounts to come up the curve faster and start contributing more meaningful to utilization sooner in 2026. So that's point one. And then point two, the other area of focus is driving utilization in our existing accounts. And as you pointed out now with the age of our installed base, that's a huge opportunity for us to drive procedure volumes and procedure revenue is focusing not only on new accounts, but on existing accounts doing more procedures as well. And we also are working on numerous initiatives to help that metric as well. So it's twofold. Operator: [Operator Instructions] Our next question is from Mason Carrico from Stephens Inc. Mason Carrico: On the variability in timing from system sales to first surgery beyond that initial delay, is there any meaningful difference in utilization once fully ramped in the accounts where there was a longer delay prior to the first surgery versus accounts that made the transition quickly? And then second, for the accounts that did have a longer delay, are there any commonalities between those accounts fundamentally? I mean, does that tend to be concentrated in low-volume hospitals, high-volume hospitals, academic centers, community hospitals, I guess, any additional detail you can give there? Larry Wood: Yes. Thanks for the question. I think every account is a little bit of a snowflake. And so I don't want to speak in gross generalities. I will say I don't think we've had the focus organizationally and what happens the day after the system sale. And I think now what we've done in our launch pilots is we have everybody focused on what happens day 1 and also a plan, not just to get the first case done, but to get the first 15 cases done, to get the first 20 cases done and really get people in a cadence of doing the cases and the routineness of it. And so I think it's just a bunch of renewed focus on that and putting the energy behind it so that we drive that. I do have a belief that if we get -- and this is a belief that's -- I can't necessarily back it with data, but it's just intuitive to me that if we get a system placed and they immediately start with a high cadence of cases, then we're just going to see better utilization out of that system over time than we will if we just sort of let the game come to us. So it really is just about us driving the system and driving the adoption of the procedure much more aggressively than maybe what we've done historically, where we just kind of let the doctors use the system as they see fit rather than having a real strategic plan for how we launch each system. Operator: Our next question is from Joshua Jennings, TD Cowen. Joshua Jennings: Nice to be on the earnings call with you again, Larry. I wanted to -- and the rest of the team. I wanted to just ask about the concomitant BPH and localized prostate cancer scenario. And I mean it is a meaningful, I think, case volume opportunity. We've had some docs over the last 12, 18 months talk about using Aquablation for those patients. Has that started to factor into utilization levels at some centers or more than some centers? And is there any opportunity to capture real-world data from those cases if they're being done at a high enough clip? Larry Wood: Yes. Thanks, Josh, and it's good to hear a familiar voice. I will say that we're really focused on the BPH opportunity. BPH is undertreated, and I don't want to get people too distracted with cancer. Now that being said, I think cancer is just a natural adjacency for us. And I've had time with a number of our KOLs, and there's a lot of excitement about how this could transform prostate cancer, but we need to complete the trial. WATER IV is running. I think we're going to provide a full update on that in February of next year at the Analyst Day, and we can provide more insights on that, and it's a natural adjacency. But I look at something -- I look at that as blocks that build on top of our BPH story, not like the whole story. And so I think everything that is in front of us right now to grow this business and drive it is going to be built around BPH with prostate cancer being an add-on. Operator: Our next question is from Mike Kratky from Leerink Partners. Brett Gasaway: This is Brett on for Mike. Congrats on the quarter. I just want to go back to ASP, primarily on the consumable side, just where -- how should we be thinking about the mix of HYDROS factoring into that $3,200 that we've been seeing in the last few quarters, particularly in '26? Is there any point where there's an inflection where the mix actually gets to a point where you can start to see some growth there? Kevin Waters: Yes. So if you look at our installed base today and when we launched HYDROS, essentially every system sold since Q3 of '24 has been the HYDROS system. And we said HYDROS does carry the consumable component higher ASP than AquaBeam, I think somewhere in the low single digits. And our guide in '26, perhaps for your model, I'd be relatively conservative on price. We will get some upside as the mix shifts more heavily to HYDROS, but we're also not reliant on price increases to get to the guide that is in the model. But naturally, over time, you should see low single-digit price increases as the mix becomes more towards HYDROS. Operator: Our next question is from Michael Sarcone from Jefferies. Michael Sarcone: Maybe one for Kevin. You talked about 4Q gross margin guide of around 63%. And I think you did call out $2 million from tariffs, but just wanted to know if there were any other factors that you would call out in terms of what's impacting gross margin for 4Q? Kevin Waters: No. You said it. Our guide does incorporate about $2 million in tariff-related expense. That's about 200 basis points alone for Q4. So outside of tariffs, you'd be looking at somewhere in the mid-60s. And I'll just say our margins at this point, they'll continue to trend upwards. But at this stage of the company, even at 65% margins, this isn't a headwind or a hindrance to the company being profitable. And we feel that even at these levels with outsized revenue growth and manageable OpEx, that path to profitability still remains clear, and we're not dependent on margin expansion at this point to get there, but we're continuing to work at it obviously. Operator: This will be our last question. And this question is from Travis Steed from BoA (sic) [ BofA ] Securities. Stephanie Piazzola: This is Stephanie Piazzola on for Travis. Just wanted to ask about the Q4 implied guidance. You beat Q3, but maintained the full year 2025 guide. And you talked about some of the recent trends and changes, but I just wanted to follow up on the Q4 guide and the key drivers of that lowered outlook in Q4. Kevin Waters: Yes. So if you look at what our [ Q ] guide entails compared to previous guidance, we essentially have lowered the overall handpieces sold number by about 1,000 systems. And really, we mentioned destocking. We mentioned inventory optimization and a focus on launching accounts. And it's really that dynamic flushing through via handpieces sold in the fourth quarter. And we do look forward to giving our investors an update on the procedure side of the business in February '26. And we believe when you look at that metric, you'll find that there's not really a slowdown in the business, but we felt we needed to call out the handpiece dynamic that both Larry and I referred to in our script. Larry Wood: Yes. Just to add to what Kevin said, and I think this is just a little bit of a business maturity issue as we get larger is we haven't really been managing customer inventory by establishing par levels for each customer. So we have some customers that are probably not carrying enough inventory, and we certainly never want a customer to not be able to do a case because they don't have adequate inventory. But at the same time, we have other customers that are probably carrying too much inventory. And our initial look at this probably says there's probably more inventory in the field than what's needed. And so as we optimize those par levels, we may see a little bit of destocking. But we're focused on procedure growth, and that's what's going to drive the long-term health of the business. And I'm expecting that we're going to have a good procedure quarter in Q4, and that's going to be our focus on a go-forward basis. Operator: Thank you. This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good afternoon. Welcome to Aviat Networks First Quarter Fiscal 2026 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Andrew Fredrickson, Interim Chief Financial Officer. Thank you. You may begin. Andrew Fredrickson: Thank you, and welcome to Aviat Networks First Quarter Fiscal 2026 Results Conference Call and Webcast. You can find our press release and updated investor presentation in the IR section of our website at www.aviatnetworks.com, along with a replay of today's call. With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal quarter, followed by myself to review the financial results for the quarter. Pete will then provide closing remarks on Aviat's strategy and outlook, followed by Q&A. As a reminder, during today's call and webcast, management may make forward-looking statements regarding Aviat's business, including, but not limited to, statements relating to fiscal guidance, financial projections, business drivers, new products and expansions and economic activity in different regions. These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. Additional information on factors that could cause actual results to differ materially from the statements expressed or implied on this call can be found in our most annual report on Form 10-K filed with the SEC. The company undertakes no obligation to revise or make public any revision of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release, which is available in the IR section of our website at www.aviatnetworks.com and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I would now like to turn the call over to Aviat's President and CEO, Pete Smith. Pete? Peter Smith: Thanks, Andrew, and good afternoon. Let's review the highlights from the first quarter. Total revenues of $107.3 million, up 21.4% versus the year ago period. Non-GAAP gross margin of 33.8%, adjusted EBITDA of $9.1 million, non-GAAP EPS of $0.43. These quarterly results represent a good start for Aviat in achieving our goals for fiscal 2026 and are a good return to performance versus our year ago Q1. I'd like to thank all of Aviat's employees, partners and customers for playing a part in this quarter. Let's discuss our end markets and key developments. Private networks remain a core area of focus for Aviat Networks. In the first quarter, we secured a number of meaningful project bookings across public safety and utility networks. The strong state and local government budgets continue to set the stage for a good fiscal 2026 environment for our private network opportunities. In the utility vertical, we continue to grow our funnel by pursuing the cross-selling opportunities from the 4RF Aprisa acquisition. These efforts and our end-to-end portfolio and turnkey solutions have resulted in a number of meaningful bookings with utilities, including one large multistate and multiphase network modernization project worth approximately $8 million. We expect to have more large wins in this segment, thanks to our unique product offering, which includes our access and router solutions, our backhaul radios such as our IRU 600 ultra-high power microwave radio and our ProVision Plus and frequency and health assurance software, all combined to offer utilities and other private network operators leading performance and lowest total cost of ownership. I am also pleased to announce the launch of our Aprisa LTE 5G router solution for police, fire and emergency vehicles. Public safety has long been our leading segment within private networks, and this is a major step in expanding our solutions offering for these customers. This solution addresses a critical segment of this market that is entirely new to Aviat. The global cellular router and gateway market is expected to grow at a 12% annual rate and reach $2.8 billion in annual revenues by 2028. This growth is driven by the increasing demand in applications like real-time data sharing and video streaming and GPS tracking across a wide range of connected devices, including mobile data terminals, body-worn cameras, sensors and surveillance systems and vehicles of all kinds. This solution is made in the U.S.A., is available now and supports all major frequency bands, including FirstNet and is certified by all the major carriers in the U.S. and many international carriers. Please reference Slide 9 in our investor deck for more information on this opportunity for Aviat. As part of this product rollout, we have also enabled our ProVision Plus software to help simplify the complexity inherent with 5G networking for public safety mobility applications that also provide carrier coverage visibility and vehicle tracking to increase productivity, reduce downtime and minimize security risks, all while lowering operating costs. The introduction of this offering is also significant as it builds on the technology acquired in the 4RF acquisition and validates our ability to not only identify and acquire the right technology, but to successfully integrate it, build upon it and leverage it to create new high-value solutions for our target markets. We're excited to see where this offering goes. Before moving on to our mobile service provider business, let's briefly address the U.S. federal government shutdown and its impact on Aviat. Roughly 5% of our business is with the federal government. So from that perspective, we do not anticipate a large impact. We saw some small opportunities where the timing was accelerated to beat the shutdown in Q1, and we also anticipate that some opportunities will be pushed out until after the shutdown is over. Most likely, this will mean some revenues are pushed out of our fiscal second quarter, but that they will come back in the third quarter. If the shutdown extends a significant amount of time, its impact to our business will become harder to predict. At this time, though, we do not believe that the shutdown will have a significant impact on Aviat's FY '26 business. In regards to our mobile service provider market, we continue to gain traction both in North America and globally. The operating environment continues to strengthen for Aviat versus a year ago, and we remain positive on the setup for fiscal 2026. In North America, we continue to make good strides with our Tier 1s. In regards to BEAD, we continue to see fixed wireless access and other wireless solutions as growing beneficiaries of the program. We believe wireless makes the most sense for the performance per dollar and the speed to deploy. We still anticipate that Aviat will not see any benefit from BEAD until calendar 2026, likely in the back half of the year. I would now like to turn the call over to Andrew to review the financial results of the quarter before coming back for closing remarks. Andrew Fredrickson: Thanks, Pete. I'll review some of the key fiscal 2026 first quarter results. Please note that our detailed financials can be found in our press release and all comparisons discussed are between the first quarter of fiscal year 2026 and the first quarter of fiscal year 2025, unless otherwise noted. For the first quarter, we reported total revenues of $107.3 million as compared with $88.4 million for the same period last year, an increase of $18.9 million or 21.4% year-over-year. North America, which comprised 49.1% of our total revenues for the quarter was $52.6 million, an increase of $10.4 million or 24.7% from the same period last year due to growth both in private networks and mobile network operators. International revenues were $54.7 million for the quarter, an increase of $8.5 million or 18.3% from the same period last year. This was driven by increased mobile network operator business versus a year ago and growing private network demand. Gross margins in the first quarter were 33.2% on a GAAP basis and 33.8% on a non-GAAP basis. This compares to 22.4% GAAP and 23.2% non-GAAP in the prior year. The change in gross margin is primarily due to regional and product mix in the quarter in addition to higher volumes in this quarter as compared to a year ago. First quarter GAAP operating expenses were $30.5 million, down versus $35.4 million in the year ago period. Non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation and deal costs were $28.4 million, a decrease of $1.7 million versus the prior year. This decrease is due to disciplined cost management and increased efficiencies at Aviat. First quarter operating income was $5.2 million on a GAAP basis and $7.9 million on a non-GAAP basis. This compares to a $15.6 million GAAP loss and a $9.5 million non-GAAP loss in the year ago period. The first quarter tax provision was $2.3 million. As a reminder, the company has over $450 million of net operating losses or NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. First quarter GAAP net income was $0.2 million and non-GAAP net income, which excludes restructuring charges, share-based compensation, M&A-related and other nonrecurring expenses and the noncash tax provision was $5.5 million. First quarter non-GAAP EPS came in at $0.43 on a fully diluted basis, up by $1.30 versus the year ago period. Adjusted EBITDA for the first quarter was $9.1 million or 8.5% of revenues, an increase of $16.8 million versus last year. Moving on to the balance sheet. Our cash and marketable securities at the end of the first quarter were $64.8 million. Our outstanding debt was $106.5 million, bringing our net debt position to $41.7 million. With that, I'll turn it back to Pete for some final comments. Pete? Peter Smith: Thanks, Andrew. We are pleased with the start of fiscal 2026 and look forward to continuing to execute our strategy to capture additional share of wallet in private networks and win more share of demand within mobile networks. We are maintaining our annual fiscal 2026 guidance unchanged at full year revenues to be in the range of $440 million to $460 million, full year adjusted EBITDA to be in the range of $45 million to $55 million. With that, operator, let's open up for questions. Operator: [Operator Instructions]. Our first question comes from the line of Scott Searle from ROTH Capital Partners. Scott Searle: Nice job on the quarter, Pete, Andrew. Just real quickly, I know you're not updating or expanding guidance in terms of the fiscal year given the current macro environment, and we're only in the first fiscal quarter. But I'm wondering if you can comment on the sequential outlook as we're going into December. I would assume there's some seasonal uptick there. And along those lines, where are you expecting the strength to come from? Is it from Tier 1 North American providers? Is it private networks? Or are you seeing something going on from an international standpoint? Andrew Fredrickson: Yes. I think U.S. public safety is perhaps the strongest, and that's going to give us a quarter-over-quarter lift. So we feel -- Scott, we feel good about that. We also want to be cautious that it is early in the year and the government shutdown, while it's a small part of our business, we just want to be conservative, and that's why in our remarks, we feel increasingly confident about FY '26. We just don't want to get over our skis on the December quarter. That's -- I mean, so we could start the dialogue about Pete and Andrew are conservative. We will take that criticism. But we see significant strength right now in U.S. private networks, principally driven by public safety. Scott Searle: Okay. Fair enough. And then just in terms of some of the specific growth categories, 4RF is something you guys have started to talk about more recently have seen some strength there. You've identified public safety. I'm wondering how big this opportunity could be as you start to think about where we could be if you look out several quarters from a 4RF standpoint. And I'm not sure if I heard any update on MDUs in your opening remarks. I'm wondering if you could give us some updated thoughts in terms of what you're seeing there and if that opportunity is expanding beyond the Tier 1 that you were dealing with. Andrew Fredrickson: You're asking all the questions, Scott. So with respect to the MDU, we've demonstrated all that you could ask with respect to our 28 gigahertz and 39 gigahertz performance. We've demonstrated carrier-grade serviceability. We've demonstrated the MU MIMO. We've had customer links going for almost 2 years, right? We are focused on Tier 1s with this. We're not prepared to give an update on news. But with respect to -- we're not ready to kind of go the next step on the news, but we are making great progress with our customer base, and we feel very confident about our prospects for the future. So that's what I would say about the MDU. I would -- this wasn't a question, but I would also say that in learning about the MDU market, it's aligned with fixed wireless access, which is the fastest-growing segment in all of wireless. And we've started to unlock additional technology sets that will serve us for a couple of years as we explore opportunities outside of our core microwave business into adjacencies. So there's learning that has occurred that will benefit us say it's not in a model, but a couple of years from now, we think that this is a good development for the medium- to long-term future. And then you started to ask about 4RF. And we see good traction in -- I'll go back a couple -- I mean, maybe a year ago. When we looked at their small customer base versus our customer base, -- we're both strong in utilities. And then there was only 11% overlap between their customer base and our customer base. So in terms of an acquisition, the customer or channel synergy is tremendous, and we've owned it for a year and 5 months, and we're starting to see the traction in selling microwave to the historical 4RF customers and vice versa, the 4RF solution into the Aviat utility base, which I would say, if you think about Aviat, our best customers are public safety, our second best customers and channel strength is in utilities. So we're excited about that. Operator: Our next question comes from the line of Jaeson Schmidt from Lake Street. Jaeson Schmidt: Just curious if you could discuss what you're seeing in India and sort of what you're baking in from that region into this kind of fiscal '26 outlook? Andrew Fredrickson: Sure, Jaeson. So I'll take a first answer on that one. So this quarter, we did have a good mix of revenue from India in the quarter, and the margins were relatively favorable there as well. So from that standpoint, this quarter, it was a good mix and result for us. I'd say in terms of the overall fiscal year, last year, India was, call it, a mid-single-digit contributor as a country overall on a percentage basis to our revenues. I would expect them to be relatively the same this year. That being said, we have good customer diversification, both from a geographic and individual customer standpoint. And so we're not thinking about India as being kind of a single driver within our overall business. Peter Smith: And Jaeson, I would add that I think that there is an upgrade cycle to come in India. I don't think it will be this in our -- the Aviat fiscal year, but I think it could be a growth driver for -- from July through June and our fiscal year '27. So I agree 100% with what Andrew said. And if you want to look out further, I could see India being -- the India upgrade or replacement cycle having an impact, say, a year from now and beyond. Jaeson Schmidt: Okay. That's really helpful. And then just as a follow-up, when we look at gross margin for fiscal '26, is it fair to expect you guys to be able to kind of grow gross margin sequentially throughout the year? Andrew Fredrickson: Yes. So this quarter, gross margins were up, especially versus the year ago period, mainly due to overall volumes globally. In terms of looking out for all of fiscal '26, I would say there's some opportunity to grow margins by a percentage point or 2, I'd say, is the most likely outcome. I don't know that it would be kind of sequential. But by the end of the year, I think you could expect us to be kind of at that mid-30s percent. Operator: Our next question comes from the line of Rustam Kanga from Citizens. Rustam Kanga: Nice print here. Just one question on the Aprisa Router. Could you just kind of speak to the opportunity there from a competitive displacement standpoint versus your #1 competitor and some of the smaller players there and kind of how you're thinking about that opportunity? Andrew Fredrickson: Yes. So just to go back to the -- what we call the mobile cellular router opportunity, it's a $2.8 billion market growing at 12%. And we would say the incumbent is principally what Ericsson owns via their Cradlepoint acquisition. Telefonica can be there. You can also think about Semtech. Out of that $2.8 billion, we think we're ready to engage $800 million of that opportunity. We have $0 today. And why -- so why are we talking about this when we haven't done $1 of revenue? It's because this offering is the combination of 4RF, our Aviat's kind of hardware and software platform and our #1 market channel in public safety. And we basically engaged approximately 10 state police or large municipal government police departments. There's no friction. There's a lot of interest in our solution. It will take probably another 6 months, but we think that this is going to be a big growth driver towards the end of this fiscal year going into next fiscal year. And we think we're super excited about it. Rustam Kanga: Awesome. Great to hear. And then just wanted to touch on federal. I appreciate the 5% of the business metric there. Just curious if you could just help us quantify or maybe ring-fence the magnitude of sort of the accelerated pull-ins and then how much is sort of baked into the guide for Q2 that you said might push into Q3, just how to sort of think of that as a relative mix perspective? Andrew Fredrickson: I mean worst case for this quarter, maybe 1% pull in. It's really hard to judge. Worst-case push out, and I don't think it will be this bad would be 4% to 5%. And look, I don't want to get trapped in this guidance because if the government opens tomorrow, then we'll have a mad dash to get stuff out because the customer base is going to really want this done. So to be conservative, let's say, the government shutdown doesn't get restored until January, then we have to be a little more conservative. If it opens up tomorrow, then it's not as bad. I know that, that doesn't -- this is one of the reasons we guide on an annual basis. And I know when you put your forecast out, this doesn't help, but I want to be -- say where we're at. Sorry, I couldn't be more definitive. Operator: Our next question comes from the line of Theodore O'Neill from Litchfield Hills Research. Theodore O'Neill: Congratulations on the good quarter. Pete, on the Slide 9 here about the cellular routing solution for public safety. I'm just wondering what's the driver here? Do they -- do these vehicles not have routers? Or do they need some -- an updated router? I'm wondering if you could just fill me in on that. Peter Smith: All right. So a lot of the vehicles, actually, I think most, if not all, the vehicles have routers in them. And what has transpired is there's some dissatisfaction with the incumbents on their price point and their OpEx business model. And then further, we have deep customer intimacy from our public safety microwave networks. We're a trusted provider. We hypothesized that this was going to be interesting for Aviat's growth. And based on the -- our 10 chosen customers' engagement, we see dissatisfaction with some of the functionality, some of the business model with the incumbent, and we have the hardware, the software and perhaps most importantly, the channel and the customer relationships. So that's what I would say. Theodore O'Neill: That makes sense. So you're already the incumbent provider for other parts of the network. So it just -- it makes it an easy sell. Peter Smith: Yes. And to be kind of maybe overly specific, the procurement person for the microwave public safety network typically is a couple of doors down from the person that's responsible for the technology that goes into the emergency vehicle or the... Theodore O'Neill: Yes. Okay. And my other question is about the multi-dwelling unit fixed wireless broadband. So Verizon acquired Starry Group Holdings, so they could go after that market. And I was wondering what that acquisition means for Aviat, if anything? Peter Smith: Two, I think, first, it validates our effort in the multi-dwelling unit space. If a company like Verizon is going to spend on what we believe to be channel access, we think that, that bodes well for the growth of hardware and software in the MDU space. Also, we did look at the Starry assets. We didn't look at it from a channel perspective, but we looked at it from a hardware perspective. And what I could say is we're a couple of generations ahead of where Starry left off. Operator: Our next question comes from the line of Egor Tolmachev from Freedom Bank Broker. Egor Tolmachev: Could you please share a quick update on BEAD program progress you see among your clients and maybe how it will impact your business? Peter Smith: BEAD. Okay. So on BEAD, we've been super conservative all along with respect to BEAD. And last earnings call, I was a bit more bullish. And the reason we are bullish is now our customers are talking to us specifically about BEAD funding and BEAD deployments. So we are getting significantly more encouraged about BEAD. We see some specifics that there's growing non-fiber support. So Utah and Arizona have quantified the maximum they're willing to pay for a fiber connection, which means that -- so their number in Utah and Arizona, they limited to, I think, less than 15,000. That could swing 40% of the connections to be non-fiber-based. New Mexico is proposing 40% for fixed wireless, which will drive microwave backhaul. Washington is at 39%. And Kansas proposed 50% of locations to be served by hybrid and fixed wireless access. So we think all of these developments and our customer engagement bode well for us capturing some of the BEAD and BEAD funding. And the question we have is, will that be in the March, June or the September quarter? We don't know. But as we get nearer to landing some of those -- or our customers get nearer to deploying some of the BEAD money, we will circle back and update you on our progress and what it might mean for revenue growth going forward. Egor Tolmachev: And maybe a quick follow-up on your Intercom telecom partnership. Can you maybe provide some quantitative estimates or timing of -- for this partnership? Peter Smith: The partnership is ongoing. So it's established and it's working. And yes, I think that's about all I could say about the partnership. So thank you. Operator: This concludes the question-and-answer session. I would now like to turn it back to Pete for closing remarks. Peter Smith: Thanks, everyone, for joining. I have a few things to point out. We basically lapped the year ago poor performance. Now our adjusted EBITDA is at a level of $54 million. Independent of the cellular router opportunity, we see the public safety market remaining attractive. In the Q&A session, we poked at the MDU, which we see as an emerging market and gets Aviat firmly into fixed wireless access, which would be good. The mobile cellular router is an attractive segment. We see BEAD incrementally moving forward. So with all that, thanks for calling in, and we look forward to updating you on progress in 90 days. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good day, and welcome to the Key Tronic First Quarter Fiscal Year '26 Investor Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Tony Voorhees. Please go ahead. Anthony Voorhees: Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here in our Corinth, Mississippi facility is Brett Larsen, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events or the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K and quarterly 10-Qs. Please note, on this call, we will discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast, and the link can be found on our Investor Relations website. In addition, the slides, together with a recorded version of this call will be available on the Investor Relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website. For the first quarter of fiscal 2026, we reported total revenue of $98.8 million compared to $131.6 million in the same period of fiscal year 2025. Revenue for the first quarter of fiscal year 2026 was adversely impacted by reductions in demand from one long-standing customer and delays in new program launches as our customers face continued uncertainties in the global economy. In addition, the consigned materials program that was announced last quarter has begun to ramp. As this large program grows, reported revenue is expected to be lower compared to traditional turnkey programs, while our gross margin is projected to improve. Our gross margin was 8.4% in the first quarter of fiscal year 2026 compared to 6.2% in the previous quarter and 10.1% in the same period of fiscal year 2025. The sequential quarterly increase in gross margin was primarily related to operational efficiencies gained from the reductions in workforce. The year-over-year decreases in gross margin in the first quarter of fiscal 2026 largely reflects reduced revenue as well as inventory and accounts receivable reserves of approximately $1.6 million due to a customer bankruptcy. Our operating margin for the first quarter of fiscal year 2026 was a negative 0.6%, down from 3.4% for the same period of fiscal year 2025. As top line growth returns, we expect margins to be strengthened by improvements in our operating efficiencies and the positive impact of our strategic cost savings initiatives. We also believe the recent cost savings initiatives have made us more competitive when quoting new program opportunities. As production volumes increase and our operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity and a more streamlined supply chain, all contributing to stronger financial performance. Our net loss was $2.3 million or $0.21 per share for the first quarter of fiscal year 2026 compared to net income of $1.1 million or $0.10 per share for the same period of fiscal year 2025. As mentioned previously, the change in earnings was largely due to the reduction in revenue when compared to last year's results. Our adjusted net loss was $1.1 million or $0.10 per share for the first quarter of fiscal year 2026 compared to adjusted net income of $2.8 million or $0.26 per share for the same period of fiscal year 2025. See non-GAAP financial measures in the earnings release for additional information about adjusted net loss and adjusted net loss per share. Turning to the balance sheet. Our inventory for the first quarter of fiscal 2026 remained largely unchanged from the same time a year ago. Our recent strategic initiatives were designed to better align our inventory with our current revenue. While many of our customers have revamped their forecasting methodologies, we have made significant enhancements to our materials resource planning algorithms. As a result, we are now more prepared to address potential future disruptions in the supply chain and more able to respond effectively to evolving tariff implications as we continue to manage inventory more cost effectively. For the first quarter of fiscal 2026, we reduced our total liabilities by a combined amount of $21.8 million or 9% from a year ago. Our current ratio was 2.4:1 compared to 2.6:1 from a year ago. At the same time, accounts receivable DSOs were at 81 days compared to 92 days a year ago, reflecting stronger collection on receivables. Total cash flow provided by operations for the first quarter of fiscal year 2026 was approximately $7.6 million as compared to $9.9 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce our debt year-over-year by approximately $12 million. Total capital expenditures in the first quarter of fiscal 2026 are about $3.2 million, and we expect CapEx for the full year to be around $8 million, largely spent on new innovative production equipment and automation. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment and plastic molding capabilities, utilize leasing facilities as well as make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal year 2026, we are pleased to continue to see our new programs gradually ramping and our cost and efficiency improvements from our recent overhead reductions are paying off. We expect to see growth in our U.S. and Vietnam production, have a strong pipeline of potential new business and remain focused on improving our profitability. Over the longer term, we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new products ramping, we are not providing forward-looking guidance in the second quarter of fiscal year 2026. That's it for me. Brett? Brett Larsen: Thanks, Tony. Moving into fiscal 2026, the uncertainty surrounding global tariffs and the macroeconomic outlook continued to delay new program ramps for many of our customers. To provide our customers with options to manage these uncertainties and to remain cost competitive, we have continued to build up new production capacity in the U.S. and Vietnam and have rightsized our Mexico facility. Demand from certain long-standing customers has reduced total revenues when compared to last year's first quarter results. Moreover, the continued market uncertainty and shifts of tariffs have unfortunately impacted new program launches across all of our facilities. We're doing our best to work with suppliers and with our customers on options for manufacturing their products from different locations in mitigating the impact of tariffs. Our changes made to our manufacturing footprint and cost reductions enable us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. We're moving full speed ahead with adding capacity in key regions. During the first quarter of fiscal 2026, we opened our new technology and research and development location in Arkansas. We're delighted to be enhancing our operations in a region where we have maintained a long-standing presence and a strong team and can benefit from a business-friendly environment. Our U.S.-based production provides customers with outstanding flexibility, engineering support and ease of communications. We expect double-digit growth in our facility in Arkansas during the latter half of this fiscal year. In Vietnam, we have doubled our manufacturing capacity in Vietnam and now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the U.S. and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and to mitigate the impact and uncertainty surrounding tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect both the long-standing customer trends to nearshore as well as derisk the potential adverse impact of tariff increases and geopolitical tensions. Our Mexico facility offers a unique solution for tariff mitigation under the existing USMCA tariff agreement. Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies and invested in automation in order to be more cost competitive in the market. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. During the first quarter of fiscal 2026, we won new programs in medical technology and industrial equipment. In addition, we got underway with the recently announced manufacturing services contract with a data processing OEM that will consign its materials to our Corinth, Mississippi manufacturing facility. As we discussed, the consigned materials model is new for us at this scale, and if successful, will considerably improve our profitability in coming quarters. It has the potential to ramp significantly during fiscal year 2026 and is estimated to grow to over $20 million in annual revenue. Despite the many uncertainties and disruptions in our global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and the dual source of contract manufacturing. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsourcing strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart long-term strategy. We believe our manufacturing footprint and cost competitiveness will allow us to take advantage of these opportunities. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. Many of our new manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of the program specific design challenges makes that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection [indiscernible] assist, multi-shot as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly and the design, construction and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariff and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well to our expanding Vietnam facilities. We are expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico and Vietnam. We move forward with a strong pipeline of potential new business, and we're seeing significant improvements in our operating efficiencies. Over the long term, we remain very encouraged by our cost reductions made over the past 2 years to become more market competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint and the innovations from our design engineering. All of these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions. Operator: [Operator Instructions] And we will take our first question from Bill Dezellem with Tieton Capital. William Dezellem: Let's just start with the 2 wins this quarter. What was the size of each of those, please? Brett Larsen: Sure, Bill. Just to clarify, there was actually 1 medical and 2 industrial. The medical was roughly about $5 million in size. And the 2 industrial combined is probably around $6 million. William Dezellem: All right. And you referenced in your opening remarks the medical capabilities, medical production capabilities in Vietnam. Does this particular product belong in Vietnam? Or will it be produced somewhere else? Brett Larsen: So our intent is that later this fiscal year to be actually up in production for some medical device over in Vietnam. We've recently received certification to do that, and our customer actually visited the site just last week and has given us the go ahead. William Dezellem: And this specific customer or one another medical customer? Brett Larsen: This specific customer. And I think with the introduction of one, our anticipation is that, that facility will continue to show well, and we're expecting continued interest from others. William Dezellem: Right. Okay. That's helpful. And you referenced the manufacturing services contract. As you -- I guess, let's start with the level of revenues that you experienced this quarter. You said it was the first quarter where you had some revenue there. Brett Larsen: Yes. It had just started. So I'm assuming you're talking about the -- the consigned program that we referenced. William Dezellem: That's right. Brett Larsen: Yes. The consigned program down here in Corinth, and Tony and I are actually down in Corinth today visiting and checking in on that program and seeing it launch and ramp. And in our first quarter, there was roughly just over $1 million of actual revenue. That will grow sequentially over the next few quarters and our expectation it could exceed $20 million on an annual basis. William Dezellem: Great. That's helpful. And then as you referenced in your opening remarks, if it's successful, the $20 million or more, what are the swing factors that will make that contract more successful or less successful? Brett Larsen: I think from our perspective, Bill, a consigned program, it takes a special customer that has its own supply chain capabilities and has the ability to provide the components on a timely basis and has the capital to do so. In this specific instance, all of those are true. And I think with the consigned model, the amount of margin will increase because you're not including the cost of the materials. So on 2 fronts, both our reported margin percent is expected to go up. And then also the amount of working capital required for that revenue is minimal other than local ancillary supplies and, of course, labor. William Dezellem: Great. So essentially, you are really billing for use of the facility, labor and your profit and not for the inventory component, which historically is a very large portion of your revenue? Brett Larsen: It is. It is. William Dezellem: Okay. That's helpful. And so ultimately, this model's success or failure is a function of your customers' ability to manage the inventory. It's really on their shoulders rather than anything tied to Key Tronic and your activities other than what would be normal for any other manufacturing contract? Brett Larsen: Yes. This one is a bit different in that respect. And of course, there's communication and correspondence between us and them of specific components that are required, but ultimate delivery of that will be dependent on their supply chain rather than our own group going out and buying from specific suppliers. William Dezellem: Right. Okay. And thinking out loud, do I remember correctly that 80% of the bill of materials ends up being inventory as opposed to labor or overhead expense? Brett Larsen: That's a bit high. I would say it's closer to about 60% to 70%, Bill, is material on a typical turnkey program. William Dezellem: Okay. Appreciate that. And then over the last several quarters, you all have talked about a utility product program. It's not for a utility, but your customer would be selling to a utility. What's the update on that product's success with their customer -- and customers and your ramp of that business? Brett Larsen: Sure. That's a good question, Bill. In our first quarter, we had anticipated to have some production revenue from that particular customer. It was delayed by about 1.5 months, but fortunately, we're seeing that ramp nicely in our second quarter. William Dezellem: And then you have also talked about a consumer product that I think that the -- your customer had some challenges. It was -- could have been a very large program had they been able to be successful with the retailers that they were going into. What's the update on that? Or is there an update? Brett Larsen: No update at this point. We are seeing some softness in some of our long-standing customers, in particular, consumer products. I can't recall the specific one you're mentioning, but we are seeing some reductions in demand from some consumer products that we are building today. William Dezellem: So the one I'm specifically referring to, I believe you all announced -- made an announcement about it. It could have been that large. Brett Larsen: Okay. William Dezellem: That's not resonating what that one might be. Brett Larsen: No, I'm sorry, Bill. William Dezellem: Okay. No problem. And then relative to one additional question here, and then I'll turn it over. Relative to Mexico, you have been rightsizing that for some period of time. Where are you at in that process? Brett Larsen: We will continue to monitor that. We have excess capacity in Mexico, but we also have a very strong sales pipeline that we're expecting to drop in, in the latter half of this fiscal year into Mexico. If that doesn't transpire, we'll need to make some additional cost reductions, but I don't anticipate in our second quarter to make any big severance or headcount reductions in Mexico. We do have capacity. I feel like we are now market competitive in our cost structure, and we're seeing the benefits from that in an increased amount of activity and interest down in that site. William Dezellem: So basically, you -- the excess capacity that you have, you believe you will be able to fill or start to utilize in a meaningful way in the second half of this fiscal year. If that does not happen, then you'll have to take another bite at the apple. Brett Larsen: Absolutely. Yes, well said. William Dezellem: And if it does happen and you are able to use that capacity, then would I be mistaken to think that, that will have a meaningfully favorable benefit to net income and should be something that we shareholders are quite enthusiastic about? Brett Larsen: Yes. If that comes to fruition, as we've discussed before, there's an earnings multiple once your fixed costs are covered. And yes, that would be a meaningful improvement in the overall profitability. Operator: And we will take our next question from Sheldon Grodsky with Grodsky Associates. Sheldon Grodsky: [Audio Gap] quarter after quarter here, but let me ask a couple of questions here. First of all, is your facility in Vietnam primarily to serve the North American market or to serve the Asian market? Brett Larsen: It's both. Sheldon Grodsky: Any sense as to how much is going to Asia and how much to the U.S.? Brett Larsen: Broad brush, I would say 2/3 Asia, 1/3 North America at this point. Sheldon Grodsky: Okay. And what kind of tariffs are you facing on your Vietnam imports? Brett Larsen: It's -- what is it, Tony? 20% or 30%. Anthony Voorhees: Yes. Brett Larsen: And that -- Sheldon, that's actually covered by our customers would be paying that to import that into the U.S. We'd be selling that to them in Vietnam. Sheldon Grodsky: Okay. And what sort of tariffs -- but what is the actual tariff situation in Mexico? I know there have been a lot of moving targets, and I've come to the conclusion that I know nothing on the subject of tariffs and where the tariffs, and I have a feeling we're getting a lot of misinformation on the subject. But are most of your products exempt under NAFTA too? Or are you being heavily tariffed there? Or what's that story? Brett Larsen: Yes. I think you bring up a good topic Sheldon, is our Juarez, Mexico facility does provide a level of tariff mitigation. So if there is enough product change, if there's a tariff shift, oftentimes, you can take advantage of the USMCA and be able to provide manufactured product without incurring a tariff. Of course, there's nuances in that depending on if it has metal from a foreign source. And I don't even -- I'm not even going to pretend to know that I know all the details. But for the most part, yes, we are able to mitigate most tariffs by production of an assembly down in Mexico. Sheldon Grodsky: Okay. So I've been trying to figure out where it's bad and where it [ isn't ], but your customers seem to be put off completely anyway. It seems like we're going into a manufacturing depression with the tariffs that was supposed to give us a manufacturing new beginning here. So. Brett Larsen: What we're finding is there's a lot of paralysis. There's a lot of intent, a lot of verbal discussion of transfers of manufacturing, but I think the unknown and the fluidity of duties and tariffs, I think, have put many of those on a -- let's wait and see. Sheldon Grodsky: Okay. You mentioned also in the presentation that you had a customer bankruptcy that cost you some money. Is this a big customer, long-standing customer? Or someone who came briefly and managed to go belly up? Brett Larsen: It was about a 3- or 4-year customer relationship. We did get stuck with some inventory and receivables, unfortunate. But yes, that was not a significant customer by any means, but it did stay in writing off the $1.6 million this quarter. Operator: And we will take our next question from George Melas with MKH Management. George Melas: A follow-up on the last question. You had gross margins of $8.4 million this quarter. And in dollar terms, it was $8.3 million. If we add back the $1.6 million, which was the reserve that you took, you also had some severance of $1.2 million in the quarter. How did those flow through the P&L? Brett Larsen: Yes. So the severance definitely goes through COGS. So that would have an impact to your gross margin. The $1.6 million write-off for the bankruptcy was segregated into 2 amounts. $600,000 of that went through cost of goods to write off the inventory and roughly $1 million went through SG&A as writing off the receivable. George Melas: Got it. Okay. So let me just quickly adjust this in my model. So I would say your adjusted gross margin was roughly 10.2%. It goes from 8.4% to 10.2% if you add back the [indiscernible] and the $600,000 for the inventory write-off. Brett Larsen: Yes. George Melas: So trying to find some good things in the release, that's a pretty good gross margin for you guys, especially at that revenue level and especially given that the consignment material model hasn't really sort of contributed much. As you said, it was just roughly $1 million in revenue. So help us understand why that margin is as robust as it is. Brett Larsen: I think there's 2 things there, George. One is, of course, the continued reduction in our overall costs. I think that is -- that's -- we're demonstrating that. And even if you look at the gross margin sequentially from Q4 to Q1, it's improved. One item to talk about in Q1 is there was quite a bit of NRE revenue, which is essentially revenue we charge our customer upfront for tooling, for line set up, for engineering services, that was fairly high. And I think that helped bring up the gross margin in the first quarter. So can we continue to replicate a 10% gross margin? It would take more revenue going forward. George Melas: Okay. Because the tooling revenue, the line set up, the engineering -- I can see how engineering services, you would charge more than a normal average gross margin. But we do the same for tooling and line set up then. Brett Larsen: We do. We do. It just so happens with a couple of large programs we're ramping, we were able to book the profits associated with that during our first quarter. George Melas: Okay. Can you give us roughly in the order of magnitude of how much that was? Brett Larsen: An estimate, I think, between $1 million and $1.5 million. George Melas: Of revenue? Brett Larsen: Of profit. George Melas: Of gross profit. Okay. So it was meaningful. The consignment materials program, if it ramps up to $20 million and with the math that you gave, Bill, it's sort of equivalent to a $60 million program for one of your regular programs, right? Brett Larsen: That is correct. George Melas: Okay. So that would make it probably your largest customer or one of your top 3 customers? Brett Larsen: Yes, it would. George Melas: Okay. And what is your assessment so far of how the program is ramping up? Brett Larsen: We are actually down in Corinth real time and watching that ramp and excited to see where it's headed. We are definitely not on a $20 million run rate yet, but that's our goal to get there by the end of the fiscal year, and we are busily trying to add some additional capacity down here in order to achieve that. George Melas: Okay. So as you see the program ramp as you expected, the entire program production would be in Mississippi? Brett Larsen: At this point, yes, there is some possibility of some dual sharing of that program across a couple of sites. But at this point, we're expecting that to be in our Mississippi. George Melas: Okay. Great. And then I was quite -- a quick question on SG&A. SG&A was sort of flattish year-over-year despite a meaningful revenue drop. And is that how one should model SG&A going forward? Or is there something I'm missing maybe? Brett Larsen: I don't expect any big changes in SG&A with additional revenue. I do know that we had the $1 million of write-off associated with the bankruptcy that went through there in Q1. But I think we'll largely be close to that dollar amount moving forward. George Melas: And so that dollar amount includes the $1 million write-off or. Brett Larsen: With some -- there will be some increases. As we return to profitability, I think there will be some -- our intent is to have some bonuses and different things that go into that G&A going forward, which there's not now. So I would expect it to be roughly about what it was in Q1. George Melas: Okay. Great. And then you mentioned sort of you have -- you expect to return to profitability by the end of this fiscal year. So it's just a few quarters away. And what needs to happen in order to achieve that? And maybe what kind of revenue do you need to achieve and of course, you have the different kinds of revenue. You have the regular revenue, the consigned material program revenue. But can you give us some color on what needs to happen? Brett Larsen: Yes. I think we were able to demonstrate -- if you take Q4 to Q1, even on less revenue, we were able to generate some additional profitability and actually some improvement. Our expectation to get back to profitability is that we'll need to continue to ramp this consigned program. We'll also need to continue down the ramp of the utility provided metering system that is ramping nicely this quarter. And we'll need to add some additional revenue down in Mexico. If we're able to do those 3 things, we'll be able to achieve those goals. George Melas: Okay. Can you give us roughly a revenue target that you need to achieve to. Brett Larsen: I don't think we can at this point, particularly with the complexity of now a fairly large consigned program. George Melas: Right, right. So if you have those 3 major factors that you need to achieve, the consignment program has started and it's ramping. The utility program is ramping. So it's really about executing on that, but also having some additional sales in order to fill up the Mexico plant. Brett Larsen: Correct. George Melas: Okay. Great. And just one quick question on the balance sheet. The AR seems to have been -- came down drastic meaningfully and the inventory was roughly flattish. So I was really happy about one and disappointed in the other. Can you talk a little bit about the reduction in AR and also about whether -- where you see inventory going? Anthony Voorhees: You bet. So definitely a reduction of $16 million in AR sequentially. Some of that is obviously driven by reduction in revenue quarter-over-quarter, but a lot of that is largely due to favorable collections by our AR group. So we've seen some significant improvements there. In addition to that, like Brett mentioned, we did write off some AR. So that's primarily the result of the reduction in trade receivables there. The inventory, like Brett mentioned, we have 2 one which is consigned, but we have another large program that is material heavy. So the reason we didn't see inventory continue to go down quarter-over-quarter is largely due to us bringing in inventory to support a couple of other programs that we're currently ramping. George Melas: Okay. And one of those programs you're ramping, Tony, is the one that you referred to as the utility program. Anthony Voorhees: That is correct, yes. Operator: And we will take our next question from Bill Dezellem with Tieton Capital. William Dezellem: I have a couple of follow-ups. First of all, you all haven't talked a lot about the Mississippi facility in the past. Why is it that this customer chose this facility and the advantages that it brings for them? Brett Larsen: Yes, that's a good point, Bill. I think in the past, there's been some fairly flat revenue in Mississippi, some long-standing customers of many years. I think there's a lot of history here down in Mississippi. This particular consigned program, I think, for us strategically was best suited down here, one, because of the labor that's available locally. And then two, I think we are looking to transfer some of those existing programs that have been in Mississippi up into Arkansas into that new Springdale facility we discussed because it's a better fit from a technological standpoint. That leaves the capacity and the labor available for this consigned program down here in [ Corinth ]. It will take some additional capital, but I think we're well on the way proving that this is the right location for that. William Dezellem: Great. And then I understand that you're not providing official guidance. But when you look out at the variables, directionally, are you thinking that revs will be up or down in Q2 versus Q1? Brett Larsen: I think in Q2, there won't be any meaningful change. William Dezellem: That's helpful. Okay. And one additional question relative to the -- this general delays that you referenced with new programs. I think it was in the press release. Is it your sense that, that is nearly 100% tied to tariffs and the uncertainty with that? Or is it a broader uncertainty in the overall market or a broader cautiousness? What's your view there? Brett Larsen: Yes, [indiscernible] would be my view, Bill, is I think it's both. I think not only are they concerned about the uncertainty of specific tariffs, but I think there also is some uncertainty of consumer demand and how good -- how healthy is the economy. And I think everybody is extra cautious right now, I think, in making any big changes. Operator: And we will take our next question from Sheldon Grodsky with Grodsky Associates. Sheldon Grodsky: This is a tricky question to ask, but if I remember correctly, you guys got a new bank relationship sometime in the last year. And as far as I can remember there haven't been too many good things happening since you signed on with them. How is your relationship with your bank lender? Brett Larsen: I would state that actually our relationship with our bank is extremely solid and healthy. We meet with them on a quarterly basis, while our income or our actual net income has not met what we had hoped, we are generating cash, and we're actually paying down debt. And there's actually more available on our revolver now than there was a year ago. Operator: [Operator Instructions] And at this time, we have no further questions. I'd now like to turn the call back to Mr. Larsen for any additional or closing remarks. Brett Larsen: We'd like to thank you for attending or listening today's conference. Tony and I look forward to talking with you in next quarter. Operator: Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Matson Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Justin Schoenberg, Director of Investor Relations and Corporate Development at Matson. Please go ahead. Justin Schoenberg: Thank you. Joining me on the call today are Matt Cox, Chairman and Chief Executive Officer; and Joel Wine, Executive Vice President and Chief Financial Officer. Slides from this presentation are available for download at our website, www.matson.com, under the Investors tab. Before we begin, I would like to remind you that, during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws regarding expectations, predictions, projections or future events. We believe that our expectations and assumptions are reasonable. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release, the presentation slides and this conference call. These risk factors are described in our press release and presentation and are more fully detailed under the caption Risk Factors on Pages 24 to 35 of our Form 10-Q filed on May 6, 2025, and in our subsequent filings with the SEC. Please also note that the date of this conference call is November 4, 2025, and any forward-looking statements that we make today are based on assumptions as of this date. We undertake no obligation to update these forward-looking statements. I will now turn the call over to Matt. Matthew Cox: Thanks, Justin, and thanks to those on the call. I'll start on Slide 3. In the third quarter, our business segments performed well in a difficult environment marked by continued uncertainty and volatility arising from tariffs and global trade. In Ocean Transportation, operating income was lower year-over-year, primarily due to lower year-over-year freight rates and container volume in our China service. In our domestic tradelanes, we saw higher year-over-year volume in Hawaii and Alaska, and lower year-over-year volume in Guam. In Logistics, our operating income was lower year-over-year, primarily due to lower contributions from freight forwarding, transportation brokerage and supply chain management. For the fourth quarter 2025, we expect consolidated operating income to be approximately 30% lower year-over-year. We're also optimistic and expect a more stable trading environment for our customers starting in the fourth quarter as a result of the reduction in uncertainty regarding tariffs, port entry fees, global trade and other geopolitical factors due to the trade and economic deal between the U.S. and China announced on October 30. Joel will go into more detail on our updated forecast and outlook later in the presentation. I will now go through the third quarter performance of our trade lanes, SSAT and Logistics. So please turn to the next slide. Container volume in our Hawaii service increased 0.3% in the third quarter year-over-year. For the full year 2025, we expect volume to be comparable to the level achieved in 2024, reflecting modest economic growth in Hawaii and stable market share. Please turn to Slide 5. According to UHERO's September Economic report, the Hawaii economy is softening as slowing tourism and high inflation and interest rates weigh against stronger construction activity. Construction is a bright spot in the Hawaii economy, supported by public sector projects and the Maui rebuilding effort. Hawaii tourism softened considerably over the summer as tourist arrivals and spending declined year-over-year in part due to tariff uncertainties impacting international tourism. Moving to our China service on Slide 6. Container volume in the third quarter of 2025 decreased 12.8% year-over-year, primarily due to the difficult environment marked by continued uncertainty and volatility arising from tariffs and global trade. Freight rates in the quarter were lower year-over-year. Please turn to Slide 7. The Transpacific tradelane in the third quarter experienced a muted peak season compared to the elevated demand levels last year, due to businesses advancing cargo in the late second quarter and early third quarter ahead of U.S. tariff deadlines, which led to slower third quarter demand for our expedited services. The muted demand we experienced in the third quarter persisted through October as customers continue to navigate tariff uncertainty. As such, for the fourth quarter 2025, we expect lower year-over-year freight rates and volume in our China service as we expect many of our China service customers to be cautious on inventory levels and work through previously purchased inventory. However, we expect a more stable trading environment for our customers in the fourth quarter of 2025 as a result of the reduction in uncertainty regarding tariffs, port entry fees, global trade and other geopolitical factors due to the trade and economic deal between the U.S. and China announced on October 30. Please turn to Slide 8. When port entry fee collection commenced in the U.S. and China on October 14, we did not let these fees impact our China service. We advised our customers that our CLX and MAX services from China would not change and that port entry fees would not be passed on to them. At that time, based on our initial assessment of our anticipated fleet schedule, vessel charters and expected dry dockings, we expected to pay approximately $20 million in port entry fees in the fourth quarter 2025 and approximately $80 million annually in port entry fees in 2026 and 2027. Then on October 30, the U.S. and China reached a trade and economic deal. The deal includes a 1-year suspension of port entry fees and a cumulative reduction by 10% for tariffs on Chinese imports to curb fentanyl flows for 1 year, each starting on November 10. We expect the USTR and the China Ministry of Transport to publish specific instructions regarding port entry fees shortly. This was a welcome development, and we are optimistic that this is a positive step towards a longer-lasting agreement between the 2 countries. Quarter-to-date, we have paid $6.4 million in port entry fees. Again, we have not passed these port entry fees on to our customers. Our philosophy in the tradelane is to charge rates based on the value we provide with our expedited services given the underlying supply and demand conditions. In our nearly 20 years of operating our China service, we have not passed on surcharges or temporary fees to our customers, and we did not and do not intend to do so with these port entry fees. I want to underscore that we are business as usual with the CLX and MAX services operating without interruption. We remain committed to the Transpacific tradelane and are highly confident in our positioning with the 2 fastest and most reliable Transpacific services and we will continue providing our CLX and MAX customers with world-class service. Moving to the next slide. In Guam, Matson's container volume in the third quarter of 2025 decreased 4.2% year-over-year due to lower general demand. In the near term, we expect Guam's economy to moderate, reflecting a challenging tourism environment. As such, for the full year 2025, we expect volume to be modestly lower than the level achieved last year. Please turn to Slide 10. In Alaska, Matson's container volume for the third quarter of 2025 increased 4.1% year-over-year. The increase was primarily due to one additional northbound sailing compared to the year ago period and higher AAX volume. In the near term, we expect continued economic growth in Alaska, supported by a low unemployment rate, job growth and continued in oil and gas exploration and production activity. As such, for the full year 2025, we expect container volume to be modestly higher than the level achieved last year. Please turn to Slide 11. In the third quarter, our SSAT terminal joint venture contributed $9.3 million, representing a year-over-year increase of $2.4 million. The increase was primarily due to higher lift revenue. For full year 2025, we expect the contribution from SSAT to be higher than the $17.4 million achieved last year without taking into account the $18.4 million impairment charge recorded by SSAT during the fourth quarter of 2024. Turning now to Logistics on Slide 12. Operating income in the third quarter came in at $13.6 million or $1.8 million lower than the result in the year ago period. The decrease was primarily due to lower contributions from freight forwarding, transportation brokerage and supply chain management. In the fourth quarter of 2025, we expect Logistics operating income to be modestly lower than the level achieved last year. And with that, I will now turn the call over to my partner, Joel, for a review of our financial performance. Joel? Joel M. Wine: Okay. Thanks, Matt. Please turn to Slide 13 for a review of our third quarter results. For the third quarter, consolidated operating income decreased $81.3 million year-over-year to $161 million with lower contributions from Ocean Transportation and Logistics of $79.5 million and $1.8 million, respectively. The decrease in Ocean Transportation operating income in the third quarter was primarily due to lower freight rates and volume in China. As Matt noted, the decrease in logistics operating income was primarily due to lower contributions from freight forwarding, transportation brokerage and supply chain management. We had interest income of $7.6 million in the quarter compared to $10.4 million in the same period last year. Interest expense in the quarter was unchanged year-over-year. Net income decreased 32.3% year-over-year to $134.7 million and diluted earnings per share decreased 28% year-over-year to $4.24 per share. Lastly, diluted weighted average shares outstanding decreased 5.9% year-over-year. Please turn to Slide 14. We continue to generate strong cash flows. For the trailing 12 months, we generated cash flow from operations of $544.9 million. We returned capital in the form of dividends and share repurchases of $302.5 million, and we had maintenance CapEx of $186.6 million. Our cash flow from operations exceeded the aggregate spend on maintenance CapEx, dividends and share repurchases by $55.8 million. Please turn to Slide 15 for a summary of our share repurchase program and balance sheet. During the third quarter, we repurchased approximately 0.6 million shares for a total cost of $66.4 million, including taxes. Year-to-date, we repurchased approximately 2 million shares for a total cost of $229.3 million, including taxes. Since we initiated our share repurchase program in August of 2021 through September of this year, we have repurchased approximately 13.1 million shares or 30.2% of our stock for a total cost of approximately $1.2 billion. As we have said before, we are committed to returning excess capital to shareholders and plan to continue to do so in the absence of any large organic or inorganic growth investment opportunities. Turning to our debt levels. Our total debt at the end of the third quarter was $370.9 million, a reduction of $10.1 million from the end of the second quarter. Please turn to Slide 16, where I will walk through our outlook. Based on the outlook trends Matt mentioned earlier, we expect Ocean Transportation operating income to be lower than the $137.4 million achieved in the fourth quarter of 2024. For Logistics, we expect operating income in the fourth quarter of 2025 to be modestly lower than the level achieved last year. In total, we expect consolidated operating income in the fourth quarter to be approximately 30% lower than the prior year. In addition, we expect the following for the full year 2025. Depreciation and amortization to approximate $196 million, inclusive of $28 million for dry dock amortization. Interest income to be approximately $32 million and interest expense to be approximately $7 million, other income to be approximately $9 million, an effective tax rate of approximately 22.0% and dry-docking payments of approximately $45 million. Lastly, I'd like to discuss our CapEx projections for the full year 2025. Compared to what we previously provided on our second quarter earnings call, our expectation for maintenance and other capital expenditures this year has increased to approximately $130 million due to some CapEx now expected to occur before the end of 2025 versus previously expected to occur in early 2026. Overall, we are confident our annual maintenance CapEx will remain in the $100 million to $120 million range going forward. Our estimate for expected new vessel construction milestone payments in 2025 is now approximately $248 million. This is lower than our prior estimate as a milestone payment has been pushed back to the first half of 2026. Please note that, the total cost of our new vessel program remains the same at approximately $1 billion. Please turn to Slide 17. I wanted to spend a moment on our current CCF funding of the new vessel build program. As of September 30, the $628 million in cash deposits and treasury securities in our capital construction fund covers approximately 92% of the remaining milestone payment obligations, which excludes future interest income or accretion earned on cash deposits and treasury securities. Assuming the interest income rate on our CCF money market funds remains at our current rate of 4%, we expect only approximately $28 million of additional CCF cash deposits to be required for the final milestone payments in late fourth quarter 2027. In addition to the current CCF balance, we also had $93 million in cash and cash equivalents as of September 30. These 2 balances combined exceed our remaining milestone payments, so we are in a great funding position on the new build program. This year, in the fourth quarter, we expect to make approximately $101 million in milestone payments from the CCF, of which we already made approximately $36 million in milestone payments in October. Lastly, the targeted build schedule also remains unchanged. We recently received an update from Hanwha Philly Shipyard, and there has been no change to the schedule we previously communicated. We continue to expect our 3 vessels to be delivered in the first quarter of 2027, the third quarter of 2027 and the second quarter of 2028. With that, I'll turn the call back over to Matt. Matthew Cox: Okay. Thanks, Joel. In closing, as we continue to navigate through this period of market uncertainty and volatility, Matson remains well positioned and diversified across its tradelanes and in logistics. We will continue to focus on what we can control. Across all our business lines, we continue to work closely with our customers to manage their transportation needs in an evolving marketplace. We are also steadfast in maintaining the highest levels of service reliability and delivery delivering superior customer service. Decades of experience have proven to us that Matson's future success and growth is a function of how well we deliver for our customers during unsettled times. We believe that the trade and economic deal announced on October 30 is an important positive step forward towards a more stable economic trading environment. And with that, I will turn the call back to the operator and ask for your questions. Thanks. Operator: Certainly, and our first question for today comes from the line of Jacob Lacks from Wolfe Research. Jacob Lacks: So pricing has clearly held in well, just given everything going on, on the Transpacific lane right now. We've seen a lot of pressure on more traditional spot rates over the past few months. Do you view the current pricing levels as sustainable? Or do you think there could be some further pressure from here just with weakness in the more traditional ocean market? Matthew Cox: Yes. Thanks for the question. So, I think we did make a conscious choice to hold our prices as we saw the SCFI and the spot rate fall pretty dramatically in the last quarter or so. And that was really based on a belief in our sense that we would see a little bit less expedited volumes for reasons that we talked about earlier. And we're very pleased with our pricing. As we've said many times, we are -- we have a different pricing algorithm coming out of the pandemic, and we really are trading at multiples, some of the highest spreads over the market rates that we've ever seen in absolute dollars. So, I guess the way I would describe that now, where we typically go is that we do typically see a period of market adjustments as we get through traditional peak and once all the merchandise is delivered, and that usually happens sometime in October for a few months until we get ramping up for Lunar New Year. So, I would say our absolute freight rates are likely to come down, but in a very orderly way and very consistent with our previous seasonal patterns. So really nothing surprising or no major significant changes to the way we've thought about the market. Jacob Lacks: That's helpful. And then it's -- I think you touched on this a little bit, but the utilization headwinds in the quarter, is that just your actions on pricing? Do you think there's sourcing changes out of China that are impacting it? It would be great to get your perspective. Matthew Cox: Yes. My perspective on this was there was certainly additional capacity in the Transpacific market, but our utilization little bit lower levels was really borne out of an insight that because of the dramatic premium in our pricing relative to the market pricing that we couldn't lower our prices enough to create additional demand that which needed to move in an expedited fashion was going to pay the Matson premium for getting its cargo to the market in a very reliable and fast way. So, our sense was that ours had a little bit more to do with the front-loading of inventory. And if you're front-loading hundreds of thousands of SKUs, you're likely to have a little bit less need for expedited product, if you're moving it all into a warehouse. And it was really more that function that, I think drove our utilization rather than supply and demand in the broader market. Jacob Lacks: Makes sense. And maybe just one quick clarification. Are the $6.4 million in port fees, are those included in the operating profit down 30% in 4Q? Or are those excluded? Matthew Cox: Yes, they are. They're included. Operator: And our next question comes from the line of Omar Nokta from Jefferies. Omar Nokta: I actually have a few questions that pretty much follow up on everything that Jacob was asking you guys were talking about. And maybe just on this first one, I know it's not a lot, but in terms of that $6.4 million in port fees, is there a mechanism for you to get that refunded back or some kind of rebate? Is there any kind of discussion on that front? Matthew Cox: So, Omar, we mentioned in our prepared comments just a moment ago that we were awaiting final -- the USTR and the China Ministry of Transport final regulations that we expect those to be issued shortly in the next week or 2. And we will be able to determine whether that was an element or not. Omar Nokta: Okay. So just making sure, the $6.4 million that was incurred accounting-wise? Or was it actually like a cash outflow? Matthew Cox: It was a cash outflow. Those are due upon arrival or prior to departure each week. So those are paid each week. Omar Nokta: Okay. Okay. And then obviously, clearly, Matson, you're performing very strongly despite all the headwinds we've been seeing, especially kind of in light of the muted peak season you had talked about, and sort of been expecting. Just in terms of what we've been seeing here recently in the spot market, obviously, your earnings aren't going up and down or swinging as dramatically as say, the spot market does. But I wanted to get a sense of what you're sort of seeing develop today. Spot rates on the Transpacific fell to lows back in early October, but they've had a nice sort of sharp rebound off the bottom. Just from your vantage point, are you seeing that kind of in your business? Is it increased activity that's driving some of these gains? Or is it -- are these index rates maybe moving up for some other reason? Matthew Cox: Yes. I mean, I can -- let me answer it directly first and then indirectly, if I can. The actions that are happening on pricing now are really having 0 impact on Matson's pricing. We really are pricing on a totally different threshold, which is customer that -- customers who have cargo that need to move fast to meet whether it's a late production or whether it's unforecasted demand that -- where they need to replenish cargo. So, we're quite disconnected from those market mechanisms. But more broadly, I see this as an effort by the international ocean carriers to get freight rates up from a level that I believe they see are really not profit making and doing their best to try to get rates up to a more stabilized level, especially as we get past the peak season for cargo in the markets. And whether they're those will be achieved will be subject to other ocean carriers handicapping that. But it really is having no impact on us. Omar Nokta: Okay. I appreciate that color. And maybe just a final one. Joel, we had spoken, I think, back in maybe early September and sort of discussing the load factors and how -- I think you mentioned this in your remarks earlier, perhaps you were running in the 90s in terms of load factor earlier in the year, you were willing to take that down into the 70s and maintain rate. How has that evolved since? Are you still kind of operating in that 70s region? Joel M. Wine: Yes. So, I mean, it's different for the CLX and the MAX. And the key observation, Omar, was that for the last 20 years, we've been basically full for 20 years. So, this period going back to April, when the first big round of tariff escalation occurred where we were -- our volumes were down significantly, that was the first time we experienced that. So then as we moved into May and June and then the traditional peak season, there was a number of dynamics happening in the market that led us to maintain our pricing, as Matt's talked about, but we didn't necessarily get all the way back to full. So even now to today, since April, we haven't been full at all during that entire period of time. So, it's really been a function of maintaining our rates and then working with our customers as they have continued to build inventory and ship, but not -- but -- and then based upon that, the utilization factors have leveled out where they were. And you just -- you can kind of see and estimate what that is based upon the volumes we just reported for the quarter relative to the year prior when we were full of the whole year. So that's kind of the dynamic that's played out and continue to play out here as we post the news on October 30. Operator: [Operator Instructions] Our next question comes from the line of Reed Seay from Stephens Inc. Reed Seay: I wanted to ask about your customer conversations at this point. It's been a pretty crazy year for Transpacific ocean cargo. Are they potentially getting a little weary of sourcing from China? Or at this point, do they seem pretty steadfast and sticking it out through these trade discussions and all the deals? Matthew Cox: Yes. This is Matt. Let me take a crack at that. I think what we're seeing is an expansion of trends over these last few years. So, it was a China-centric a few years ago, manufacturing strategy. They were the world's factory floor. And then I think as a result of some political turmoil, we saw many of our customers evolve into a China Plus One strategy, which took all of the eggs out of one basket given the volatility and what had happened through the pandemic and other things. So, I think over time, you saw our customers, large retailers diversify their sourcing. I think you see with the -- more recently, with some of the discussions and issues between the U.S. and Chinese governments, we see a continuing long-term trend of our customers looking to identify multiple sourcing for their products. I think that's a long-term trend that's going to continue. I think it's also true, however, that China will continue to be a very important source of manufacturing into the foreseeable future. So, I think both are true. We're continuing to see customers look to diversify whether it's in Southeast Asia or other Mexico or other locations. We're also seeing the continued strengths of the ability to source out of China. So, I think both are going on at the same time. Reed Seay: Got it. And then kind of on a similar vein, you've talked about the catchment basin in the past couple of quarters. Can you talk about maybe where you're seeing a lot of this volume from the CLX and MAX maybe as a share of -- from Vietnam or from other sources just as we see it in the third quarter? Matthew Cox: Yes, sure. I can touch on that as well. So, I think we -- you can use 20%, which is what we reported last quarter as a good indicator of the amount of cargo that is on the CLX and MAX services that come from other than China origin. And those are North and South Vietnam, where we started in 2023 and then earlier this year, separate services from North Vietnam and South Vietnam. We also see cargo moving from Cambodia over the border to catch up with our Ho Chi Minh service in the South. We're also seeing cargo come out of Thailand, of Malaysia, of the Philippines. But I would say, as of now, the largest chunks of our cargo are really coming out of Vietnam at this point. But we do expect, for example, Thailand and other origins to continue to grow as we transition into 2026 and beyond. Reed Seay: Got it. And lastly, if you could just talk about maybe the pricing within your domestic lanes, Alaska and Hawaii now are a little more stable. I guess, China is more stable now, too. But can you just talk about how those are progressing and whether or not you've had some gains there? Matthew Cox: Yes. I mean on our domestic trades, our approach has been and continues to be -- we tend to do annual rate increases that mirror increases in our underlying costs, whether that be for labor or other inputs. We have a floating -- as you may know, we have a fuel surcharge that adjust based on our actual cost of fuel in each of the tradelanes and based on the fuel that we're consuming in those markets. And so, our approach there is really around recovering increases in costs, whether those were port terminal fees or pass-through. So, I would say our -- we've seen a relatively steady pricing environment. We've been relatively successful in continuing to see real year-over-year increases in line with our costs. And those are really the highlights of our pricing dynamics that have been and continue to be those that drive our current performance. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Matt Cox for any further remarks. Matthew Cox: Okay. Well, thanks, everybody. We appreciate your dialing in today. And again, to repeat myself, I think we really are encouraged and optimistic by this October 30 deal date, 30th date between U.S. and China. And I think it will really reduce some of the planning uncertainty for our customers who've been trying to live through this period of relative instability. So, we're encouraged by that, and I will look forward to catching up with everyone on our year-end call. Thanks. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: " Nathan Elwell: " Mark Van Genderen: " Sarah Lauber: " Gregory Burns: " Sidoti & Company, LLC Timothy Wojs: " Robert W. Baird & Co. Incorporated, Research Division Operator: Good day, and welcome to the Douglas Dynamics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Nathan Elwell, Vice President of Investor Relations. Please go ahead. Nathan Elwell: Thank you. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I would like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in yesterday's press release and in our filings with the SEC. Please note, in addition to our earnings release, we issued another press release yesterday afternoon regarding the acquisition of Venco Venturo. We also published a one-page fact sheet on our IR website that summarizes our results for the quarter. Joining me on the call today is Mark Van Genderen, President and CEO; and Sarah Lauber, Executive Vice President and CFO. Mark will first discuss the acquisition of Venco Venturo before providing an overview of our performance for the quarter. Then Sarah will review our financial results and guidance. After that, we'll open the call for questions. With that, I'll hand the call over to Mark. Please go ahead. Mark Van Genderen: Thanks, Nathan, and welcome, everyone. We had another solid quarter, which Sarah and I will discuss shortly. But I'd like to start by thanking the employees of Douglas Dynamics for their continued focus and resolve. This team truly cares about keeping people safe and communities thriving, especially important as we head into winter. I'd also like to take a moment to highlight 2 changes we recently announced regarding our Board of Directors. After 13 years of dedicated service, Margaret Dano decided to retire. We wish her the very best and want to thank her for her many meaningful contributions to Douglas Dynamics over the years. Always collaborative and thoughtful, her guidance will have a lasting positive impact on Douglas Dynamics for many years to come. Second, we are pleased to welcome Jennifer Ansberry and Brad Nelson as new independent directors. Jennifer is the Executive Vice President and General Counsel of Lincoln Electric. Her extensive legal and M&A experience and deep understanding of the industrial sector will be invaluable as we advance our strategic priorities. Brad possesses a strong track record and significant leadership experience in manufacturing from companies such as Oshkosh Corporation to his current role as CEO of MasterCraft Bolt Company. Both Jennifer and Brad bring valuable experience and fresh perspectives that will be essential to support our future progress. As a result of these changes, our Board has now expanded from 7 to 8 members, 6 of whom are independent. Turning to the business and our announcement we made last night. Over the past several months, we've shared with our employees and with you, our shareholders, the Optimize, Expand, and Activate strategic pillars. On our last quarterly call, I focused mostly on Optimize and Expand. So as you may have guessed, today, I'll talk to Activate, which refers to the restart of our M&A efforts as we look to build our portfolio of attachments over the long term. Today, I'm pleased to confirm that Venco Venturo has officially joined the Douglas Dynamics family. Adding this well-established and highly respected provider of truck-mounted cranes and dump hoists is a meaningful first step as we look to diversify and balance our portfolio over the long term. Sarah and I returned from Cincinnati last night after an energizing visit with a 70-person team at Venco Venturo. Brett Collins, Mike Stridholt, and the entire group in Ohio have built an exceptional business, and we're extremely proud to become the new stewards of the Venco Venturo brand. We're thrilled to welcome Venco Venturo's employees to our team and look forward to learning from their expertise, collaborating closely, and growing this great business with them. With access to Douglas Dynamics' operational capabilities and continuous improvement processes, we believe there's a strong opportunity to build on Venco Venturo's success, driving profitable growth. Now that the deal is complete, the real work begins to fulfill that goal. Our integration team has been working diligently to lay out a clear plan to ensure a smooth transition and to start realizing the benefits of this partnership. This marks our first acquisition in more than 9 years, and I want to emphasize that our approach to M&A remains disciplined and strategic. Over time, we're committed to building a diversified portfolio of complex attachments that require professional upfitting to work vehicles. This acquisition represents an excellent first step and a great example of the types of high-quality brands and businesses that align with our long-term vision. We're excited about the opportunities and look forward to partnering with the Venco Venturo team and to all that we will accomplish together in the years ahead. A heartfelt thank you to everyone involved in making this deal happen, including Sarah, Jon Sisulak, and the finance team for leading the charge with the financial analysis and legal review, plus Shannon Zleger, Chris Burnuer, the Work Truck Attachments team, and the Venco Venturo leadership team for making this a straightforward transition. Stepping back, I'm pleased to report that 8 months into my tenure as CEO, our team is working collaboratively and effectively. This has been clear to me over the past few months as we pursue the Venco Venturo acquisition and with success of our established divisions. Speaking of, let's turn to our current operations. Needless to say, we are pleased with our results. The improvements this quarter were primarily driven by the excellent performance of Work Truck Solutions, which delivered growth of over 30% and record third-quarter results again. And Attachments preseason shipments were in line with expectations. In fact, let's review the segment results, starting with Work Truck Attachments. Results improved this quarter, mainly due to the timing of preseason orders and ongoing cost control measures. The ratio of preseason shipments was a more typical 60-40% between the second and third quarters this year versus the 65-35% split in 2024. Remember that 2024 was unusual, as higher finished goods inventory at the end of Q1 last year drove a stronger shipment mix in Q2. That wasn't the case this year as the Attachments team significantly decreased its inventory, with it currently down $11 million on a year-over-year basis. Additionally, based on our recent channel checks, dealer inventories are now back below the 5-year average after being elevated for quite some time. This is healthy news, and when coupled with positive dealer sentiment and financial health means we are ready for winter. Our operations are on the front foot, and we are primed and ready to respond to demand shifts, snowfall, and ice event trends as they occur. We're proud of the way our team has adapted and prevailed over the weather-driven challenges over the past few years. Assuming we receive a somewhat typical amount of snow and ice events in our core markets this winter, we are well aligned and well positioned for the season to come. Turning to Work Truck Solutions. The teams exceeded expectations and produced record third-quarter results yet again. With both net sales and adjusted EBITDA up over 30%, it's clear the strong demand and higher volumes are also being met with improved efficiencies. Our teams at HENDERSON and DEJANA are really knocking it out of the park. This is even more impressive now that the comps are much tougher and we're being compared to a record third quarter last year. Our municipal business continues to grow, thanks to the team's continuous improvement work in the recent years, which is now paying off as we'd hoped. When combined with the strong competitive position in a dynamic market, we are in a formidable position today. In our commercial business, after seeing softer order patterns in the local dealer markets in recent quarters, an overall reduction in economic and tariff concerns led to a stronger-than-expected performance in the third quarter. We hope these trends continue, but also understand that dealers still have inventory on the ground. And despite interest rates starting to come down, smaller customers are more price-conscious and slower to make decisions. The commercial fleet business remains generally positive. Fleet buyers are less influenced by near-term issues, instead managing their business more for the medium term. So really a fantastic performance in the Solutions segment. Overall, we're still seeing strong demand from municipal customers and solid demand from commercial customers. Our teams are receiving the chassis and components they need, allowing them to flex their DDMS muscles, driving greater efficiency and deliver improved profitability. From an operational standpoint, we are executing effectively across the segment. And when you add in our solid backlog, Solutions is set to have another fantastic year. In summary, this was an excellent quarter for Douglas Dynamics, characterized by important wins and strong execution. Work Truck Solutions continues to experience encouraging fleet business and substantial demand and backlog from municipal customers. Attachments preseason came in as expected, and the team is primed and ready for winter. We have launched our strategic pillars internally, and the teams are building the specific divisional plans aligned with the Optimize, Expand, and Activate strategic pillars. We are confident in both the direction we are taking and our ability to execute and deliver sustained impact in the years to come. With that, I'd like to pass the call to Sarah. Sarah Lauber: Thanks, Mark. Before I begin, unless stated otherwise, all the comparisons I'll make today are between the third quarter of 2025 and the third quarter of 2024. Also, please remember the third quarter of 2024 included a one-time gain of $42.3 million from the sale-leaseback transaction. I want to start by congratulating everyone on their performance this quarter, with all teams either meeting or exceeding our expectations. This strong work has allowed us to increase our guidance ranges again, which I will get to. But first, let's look at the third quarter. Overall, results were very encouraging. Solutions produced another record quarter with top and bottom line growth of over 30% and preseason shipments were in line with expectations at Attachments. On a consolidated basis, net sales increased 25% to $162.1 million, and gross profit grew 23% to $38.1 million, primarily driven by higher demand plus improved throughput at Solutions and the timing of preseason shipments at Attachments. SG&A expenses were $22.5 million. The change this quarter, excluding the 2024 sale-leaseback transaction costs, was driven by higher stock and incentive-based compensation on higher earnings, somewhat offset by lower CEO transition costs. Interest expense decreased 16% to $3.8 million for the quarter due to lower interest on the term loan and revolver from lower borrowings and a lower interest rate, which was partially offset by floor plan interest on higher chassis inventory. Adjusted net income and adjusted earnings per share both increased more than 60% for the third quarter to $9.5 million and $0.40, respectively. Adjusted EBITDA increased 31% to $20.1 million, and margins increased 60 basis points to 12.4%. Okay. Let's look at the results for the 2 segments. Attachments, our preseason orders ended in line with our forecast. Net sales increased 13% to $68.1 million, and adjusted EBITDA increased 29% to $10.5 million based on the timing of preseason shipments and ongoing cost control measures. Importantly, the ratio of preseason shipments was a more typical 60-40 split between second and third quarter this year versus the more unusual 65-35 split we saw last year. As Mark already noted, as we look towards winter, the team is primed and ready to respond to a variety of weather conditions, and our operations are as efficient and effective as they've ever been. Turning to Solutions, and I don't mind sounding repetitive when I say that combined, our municipal and commercial teams produced record third quarter results again, despite facing tough comparisons to a record-setting quarter last year. Net sales increased 36% to $94 million, which includes approximately $8 million of incremental chassis sales. Adjusted EBITDA increased 34% to $9.6 million, which produced margins of 10.2%, higher than our initial expectations. The strength of the performance stems from strong demand, higher throughput volumes, and improved efficiencies following a solid performance across all locations. With our overall backlog still well above historical norms, the full-year outlook remains positive. As the timing of deliveries and business mix shift from quarter to quarter, our overall results will continue to fluctuate, but we do expect to show annual improvement in solutions for the fourth year in a row. With the results for the quarter covered, let's look at our balance sheet and liquidity. Total liquidity at quarter end was $70.1 million and was comprised of $10.6 million in cash and $59.5 million of borrowing capacity on the revolver, which is more than ample for our needs this year. On a year-to-date basis, net cash used in operating activities decreased 36% due to improved earnings, which were partially offset by an increase in accounts receivable. Year-to-date, free cash flow improved 21% to negative $29.3 million. Inventory fell approximately 5% to $138.7 million compared to the same quarter last year. Attachments has done a great job reducing its inventory over the past year, which was partially offset by a planned increase in chassis and components in the Solutions segment, which are needed to address the robust backlog. As expected, capital expenditures increased to $8.1 million year-to-date. We now expect total 2025 CapEx to be at the lower end of our traditional range of 2% to 3% of net sales. We are happy with our current debt levels, and the leverage ratio at the end of the quarter was a very manageable 1.9x. At this point, we expect to stay close to 2x through the end of the year, which is well within our goal range of 1.5 to 3x. And finally, we paid our quarterly dividend of $0.295 per share at the end of the quarter. Finally, let's review our improved outlook. In short, our year-to-date performance has outperformed our expectations. The combination of exceptional results at Solutions and Attachments preseason shipments in line with our forecast means we have been able to raise our guidance ranges again. We now expect net sales to range from $635 million to $660 million, from the previous range of $630 million to $660 million. Adjusted EBITDA is now predicted to range from $87 million to $102 million versus the previous range of $82 million to $97 million. And adjusted earnings per share are expected to be in the range of $1.85 per share to $2.25 per share, up from the previous range of $1.65 to $2.15. Finally, the effective tax rate is still expected to be approximately 24% to 25%. The outlook assumes relatively stable economic and supply chain conditions and that core markets will experience average snowfall in the fourth quarter. We are being prudent in our assumptions given the weather we've seen in recent winters and the elongated replacement cycle, which is reflected in our guidance. We believe our inventory and cost control efforts mean we are ready for whatever weather conditions we see later this year, and we are monitoring reorder patterns closely as winter weather begins. We executed effectively across the company this quarter and are very pleased with our year-to-date results. We feel well prepared as winter weather approaches and look to support solutions as they push to close out another excellent year. Finally, I'll just mention a couple of points related to the Venco Venturo acquisition. The deal is expected to be modestly accretive to earnings and free cash flow in 2026, with a minimal impact on the fourth quarter of 2025. We funded the acquisition through our revolver, and we do not expect it to materially change our leverage ratio. We look forward to working with the Venco Venturo team longer term on operational synergies and profitable growth initiatives. With that, we'd like to open the call for questions. Operator? Operator: [Operator Instructions] The first question comes from Greg Burns from Sidoti & Company. Gregory Burns: Would you be able to share maybe a little bit more detail about the acquisition? Maybe how much revenue Venco was generating, what type of margins, and maybe what multiple you paid for the business? Mark Van Genderen: Yes, Greg, I'll start and then turn it over to Sarah. Maybe I'll start qualitatively, and she can get into more of the quantitative questions. But this is a business that we've been talking to and looking at for the last several years. The owner of the business, Brett Collins and I have developed a relationship during my time at Douglas, and we realized it was just a great fit for us. And with a lot of the discussions that Sarah and I have had over the last several months with our shareholders and the investment community, and as we kind of thought about our strategic pillars, an area of focus was, hey, it's great that you're looking at additional M&A opportunities. But it's been a while since you've done one, look to find something maybe a little bit on the smaller side, something that fits in really well strategically with the company. And the list of kind of the boxes that we wanted to check went on and on, and Venco Venturo really hit every one of those. So Brent and I started talking in earnest, probably 6 months ago. And again, he's been fantastic to work with and his team have, and we couldn't be more excited about it. Again, the grand scheme for us may be on the small end of the scale of what we've done historically, but certainly, as we've kind of said, small but mighty small and strong internally as we look to the future and really get excited about the opportunities there and the synergies that can be built between our attachments team and between -- maybe I'll turn it over to Sarah to add a little more color on the quantitative. Sarah Lauber: Yes. So Greg, we can't get into the specifics on the terms of the deal. I guess what I can say is we've been talking -- since we've been turning on this Activate pillar, we have been talking about focusing on small- to medium-sized deals, which for us would be $25 million to $75 million, call it. I would say this one is on the very low end of that scale. For 2026, we talk about it being modestly accretive to earnings per share and free cash flow. I would estimate that their sales are in the $30 million to $40 million range. And currently, pre-synergies, their margins are closer to our solutions business margins, with plenty of opportunity for us to get in there with our DDMS and our sourcing and our operational synergies to work on margin improvement longer term. Gregory Burns: And then just one more on Venco. Is DEJANA currently -- are they a supplier to DEJANA? Is DEJANA using them in their upfits? And what kind of opportunities are there for you to leverage the solutions business to maybe increase the demand or the growth for Venco? Sarah Lauber: Yes, you hit it spot on. This is why it kind of hit all of the boxes that Mark was describing, because it is a complex attachment that we do upfit. DEJANA is a purchaser of Venco Venturo cranes and hoists. It's certainly an opportunity for us to grow that also in future for the future upfit of DEJANA. Mark Van Genderen: Yes. As we started the integration work in earnest, it's been good to see our sales team down there working with the sales organization at Venco Venturo and really looking to see, hey, where could this take us in the future. And again, in upcoming quarters, as we really settle in, I'm sure we'll have plenty of updates on how that's going. Operator: [Operator Instructions] The next question comes from Tim Wojs from Baird. Timothy Wojs: Maybe just the first question I had, Sarah, I guess, if you could kind of maybe kind of outline maybe what you're expecting in each segment in the fourth quarter? And I guess, most specifically in attachments, just given we haven't really seen like, I guess, a normal snowfall in the fourth quarter for a long time. So just kind of curious if you could delve deeper into kind of what you're expecting in the fourth quarter in both segments. Sarah Lauber: Certainly. When you look at our new guidance and you focus in on the midpoint, I would say for attachments, that would be back to the '23 levels in volumes, which is, like I said on the call, it's still a conservative approach for us. We are focused on average snowfall, but we are not pinpointing average volumes at this time. From a margin perspective on attachments, I would say right now, our expectation at that volume level would be that that would be flattish margins to last year and where we landed last year. Timothy Wojs: And then I guess on the Solutions side, really good growth there. I guess, kind of how did the muni business perform kind of relative to the kind of commercial DEJANA businesses, in terms of maybe the pace of revenue growth between the 2 businesses? And then I guess, just given the growth, I thought there might be a little bit more leverage from a margin perspective. So if you just walk through kind of the margin expectations and kind of what you saw there in the third and fourth quarter? Sarah Lauber: Yes, absolutely. From the perspective of commercial and municipal, both of them had record top-line quarters. So we really did see good growth across both. It wasn't one versus the other. From a margin perspective, both performed very well, which led us to outperforming our expectation in the third quarter. The leverage when we look at that quarter-to-quarter can be a little bit choppy for solutions, just the way the Truck flow is. So when you think about incremental margins for solutions, you really need to look over a couple of quarters and/or a year period. I do expect for the year that solutions will be close to 25% incremental margins, which is pretty much where I've had them. Operator: [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mark Van Genderen, President and CEO. Mark Van Genderen: Thank you. We appreciate your continued interest in Douglas Dynamics, and we look forward to seeing some of you at the Baird conference in Chicago next week. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and thank you for joining us for Rivian's Third Quarter 2025 Earnings Call. Today, I'm joined by RJ Scaringe, our CEO and Founder; Claire McDonough, our Chief Financial Officer; and Javier Varela, our Chief Operations Officer. Before we begin, matters discussed on this call, including comments and responses to questions reflect management's views as of today. We will also be making statements related to our business, operations and financial performance, that may be considered forward-looking statements under federal securities law. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and the shareholder letter we have filed with the SEC. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of historical non-GAAP to GAAP financial measures is provided in our shareholder letter. Just before the earnings call, we published and filed our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we will cover on today's call. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of keeping the call to 1 hour, we would ask these analysts to limit any follow-on questions to one. With that, I'll turn the call over to RJ. Robert Scaringe: Thanks, Chip. Good afternoon, everyone, and thanks for joining us for today's call. We continue to make progress against our key strategic priorities, including preparation for the launch of R2 and development of our technology road map, including autonomy and our vertically integrated hardware and software. As we've stated before, over the long term, we expect the industry to be fully electric, autonomous and software-defined. I've never been more confident in the opportunity ahead for Rivian than I am today. I firmly believe Rivian's technology, along with our direct-to-consumer ownership experience, position our company to build a category-defining brand with a strong product portfolio for the U.S. and European markets. One of the key drivers for attracting customers to electric vehicles and to Rivian's products more specifically is consumer choice and price point. The average new vehicle purchase price in the United States is now just over $50,000, and the most popular configuration is a 5-seat SUV or crossover. Given the attractiveness of this addressable market, I believe R2 is addressing the largest market opportunity with the right product. We leveraged the performance, utility and personality of R1 and refactored into a smaller SUV at a lower cost. From an R&D perspective, our teams are executing well to ensure the development of R2 remains on track with our plans. We continue to increase the quality and maturity of our design validation builds, positioning us to begin manufacturing validation builds at year-end following the full commissioning of production equipment. We recently completed the construction of our 1.1 million square foot R2 Body Shop and General Assembly Building and our 1.2 million square foot Supplier Park and Logistics Center. All shops have started equipment bring up, and we are in the process of commissioning the robots in the R2 body shop. In addition, we have completed updates to our paint shop that will allow us to increase our total annual plant capacity to 215,000 units. I've been driving an R2 for a while now, and it is incredible. From a performance perspective, it delivers on the adventurous spirit customers expect from Rivian, while also being a great daily driver that will fit so many different use cases for our customers. Looking longer term, we expect to add an additional 400,000 annual units of capacity for R2, R3 and associated variants with our next U.S. manufacturing facility in Georgia. In September, we are honored to be joined by state and local officials for groundbreaking ceremony. Our significant investment in the state of Georgia is expected to create 7,500 jobs as well as billions of dollars of economic benefits to the local community as we expand our U.S. manufacturing and technology footprint. In parallel to the progress we've made in developing R2, we've also continued to invest in our technology, including our hardware, our software and our autonomy platform. I'm excited to share the progress we're making at our upcoming Autonomy and AI Day on December 11. Over the longer term, we believe what will differentiate Rivian's autonomous capabilities will be our end-to-end AI-centric approach. With the launch of R2, our growing fleet of customer vehicles will collect real-world driving data, which will complement the data already collected by our second-generation R1 vehicles. That data can be used to train our large driving model which we believe will allow a rapid rollout of updating driving inference models with growing capabilities. In closing, as we look towards 2026, I'm excited about the opportunity ahead for Rivian, I believe our technology and our products will position Rivian as a market share leader over the long term. I want to thank our employees, customers, partners, suppliers, communities and shareholders for their continued support. With that, I'll pass the call over to Claire. Claire McDonough: Thanks, RJ, and good afternoon, everyone. As RJ mentioned, we continue to make progress on our priorities, and I want to thank our team for their continued focus as we drive execution throughout the business. While we face near-term uncertainty from trade, tariff and regulatory policy, we remain focused on long-term growth and value creation. It's great to see the continued progress in R2 validation and testing. We're also excited to share more about our hardware and software road map and vision in December at our Autonomy and AI Day. Turning to the results for the third quarter. Our consolidated revenues were approximately $1.6 billion, and consolidated gross profit was $24 million. Gross profit included $125 million of depreciation and $24 million of stock-based compensation expense. Adjusted EBITDA losses for the third quarter were $602 million. As expected, we saw a quarter-over-quarter step-up in overall operating expenses. This was driven by elevated R&D investments related to prototyping as we prepare for the launch of R2 and training costs for our autonomy platform. SG&A stepped up primarily related to the growth of our sales and service infrastructure and team as well as operating expenses, we don't anticipate will be part of our ongoing cost structure. Now looking at our Automotive segment. During the third quarter, we produced 10,720 vehicles and delivered 13,201 vehicles from our manufacturing facility. As we've said previously, we expect Q3 will be our highest delivery quarter for the year, which was the primary driver of the $1.1 billion of automotive revenue. Automotive gross profit in the third quarter was negative $130 million and was negatively impacted by low fixed cost absorption associated with planned shutdown to prepare the normal plant for R2. Despite this headwind, we saw strong progress in our unit economics with one of the best quarters ever in automotive cost of goods sold per unit delivered driven by improved material costs. Our Software and Services segment reported another strong quarter with $416 million of revenue and $154 million of gross profit. About half of the revenue within Software and Services was a result of the software and electrical hardware joint venture we created with Volkswagen Group. We also experienced strong growth in gross profit contribution from remarketing and vehicle repair and maintenance. Looking at our balance sheet, we ended the quarter with approximately $7.1 billion of cash, cash equivalents and short-term investments. We continue to see improvements in our working capital, primarily driven by our focus on reducing our raw material, work in progress and finished goods inventory levels. We continue to expect to receive additional capital of up to $2.5 billion associated with our Volkswagen Group joint venture transaction, $2 billion of which we expect to receive in 2026. Additionally, we continue to partner with the Department of Energy for an up to $6.6 billion loan at a favorable cost of capital. We will update the market as we progress on this important project for the company. Finally, for our guidance. We are reaffirming our 2025 delivery guidance range of 41,500 to 43,500 units. We are reaffirming our 2025 adjusted EBITDA loss guidance range of $2 billion to $2.25 billion and 2025 capital expenditures guidance of $1.8 billion to $1.9 billion. We continue to expect our gross profit for the full year of 2025 to be roughly breakeven. Thank you again to the team for delivering a great quarter. As we near the end of the year, we look forward to 2026 and remain steadfast in our belief that R2 and our technology road map will be truly transformative for our growth and profitability. I'd like to turn the call back over to the operator to open the line for Q&A. Operator: [Operator Instructions] Our first question comes from Emmanuel Rosner, Wolfe Research. Emmanuel Rosner: My first one is on -- curious if you could characterize the demand environment in the U.S. that you're experiencing on the back of the removal of the consumer tax credit. Obviously, a big portion of industry reports monthly sales and did so yesterday. And for those that are involved in the EV business, there were quite a bit of a drop September into October. So just curious what you've seen and then sort of like level of comfort around the demand levels on a go-forward basis. Robert Scaringe: Thanks, Emmanuel, for the question. We certainly expected to see a pull forward of demand from October into September with the end of the IRA program, and we saw that in September. And that pull forward, of course, results in somewhat of a softer demand environment as we look at October. And I think that's -- as you referenced. I think that's true just across the full space, across the industry and across multiple different manufacturers. I think it's important that we look out from a longer-term horizon point of view and recognize that ultimately, customers are going to be making decisions around what's the best product for them. And we spend a lot of time, I think, often overly focused on electric vehicle sales relative to others. And the way we think about this, in particular with regards to R2 is we need to build the best vehicles and give customers great choices. And so in the case of R1, we have the best-selling premium SUV sold in the United States, and that's for EVs, premium SUVs. And we're the best selling SUV, electric or nonelectric in the state of California. And with R2, we're really hoping to capture the magic of what is in R1 in terms of performance, features, capabilities in a much more cost-effective or affordable package that allows us to have this vehicle be cross-shopped with so many different types of vehicles, and it's hitting the most popular segment with midsized SUV, 5-passenger SUV with a price point that starts at $45,000, the average price of new vehicles sold in the United States is around $50,000. So we're really bullish, really confident on R2 and what that represents for us as a business. Emmanuel Rosner: Okay. Great. And then as a quick follow-up. What are you expecting in terms of demand for regulatory credits? I don't believe you're assuming any additional sales this year, but any directional view into 2026? Claire McDonough: Thanks, Emmanuel. We don't expect to have meaningful revenues from the sale of regulatory credits, and we've taken those out of our forecast. Just given some of the uncertainty on potential policy changes, we wanted to make sure that our forecast was conservative on this front. Operator: Our next question comes from Mark Delaney with Goldman Sachs. Mark Delaney: COGS per car meaningfully, I think it came down to about $96,000 per vehicle, even with the downtime the company did get the normal site ready for R2. I think, Claire, you mentioned material cost is one of the key drivers of that. But I was hoping you could speak a bit more on what you're seeing in terms of COGS per vehicle. I guess, ultimately, any change in where you think costs can get to, especially as you look out to R2. Claire McDonough: Thanks for the question, Mark. As you noted, we had about $96,300 of cost of goods sold per unit delivered in Q3. And that was despite the fact that we had several weeks of downtime. So there was an impact from fixed cost absorption included within these results. As we look forward, the big driver of performance improvement in terms of our cost of goods sold, in 2026, will be the volumes that we'll receive from R2's ramp and scaling efforts. So we'll see benefit not just with R2's path to positive gross profit and positive unit economics, which we expect to achieve by the end of 2026, but also the volume impacts that will benefit both R1 as well as our commercial vans as volumes scale throughout the normal facility as a whole. Mark Delaney: My other question was on Mind Robotics. You mentioned doing work with Mind Robotics, but also bringing in external financing. So maybe just talk a bit more about what Mind Robotics does and what kind of opportunity you see for the entity going forward. Robert Scaringe: Mark, this is an area we've spent a lot of time on as a company thinking around and thinking about, I should say, what does our manufacturing infrastructure and manufacturing platforms look like long term. And as we have thought through that, it led us to the view that we need to develop products and robotic solutions that can allow us to run and operate our manufacturing plants more efficiently. And the design of these robotic solutions, capturing the data that we have within our existing facilities to train the robotic platforms on manufacturing and to train on some of these high dexterity operations. And so we've ultimately raised $110 million in a seed round to launch this as an effort outside of Rivian, but obviously with Rivian still as a close partner and as a shareholder in this entity. But the applications will include Rivian applications but also much wider ranging. So thinking about essentially a wide spectrum of industrial applications where we see the benefit of AI-enabled robotics. Operator: Our next question comes from George Gianarikas with Canaccord. George Gianarikas: Maybe you could just update us a little bit on the Volkswagen relationship just because there are lots of headlines as to what's going on there internally. Any update there would be very much appreciated. Robert Scaringe: The Volkswagen relationship is coincidentally is coming up in terms of the joint venture on the 1-year anniversary. And it's -- a lot has happened in the last year. We continue to make great progress. We have an incredibly productive and strong relationship with Volkswagen Group. I was just in Munich a few months ago for a number of different product reveals, one of which was the Volkswagen ID.1, which is a roughly $22,000 EV that's being developed by Volkswagen and of course, leveraging our technology platform. And it's just an awesome vehicle. I'm really excited for that to be one of the launch vehicles that comes out of our collaboration and joint venture with Volkswagen. But it's the first of what will be many programs that come out of this joint effort. And so the relationship remains very strong, very positive, and there are lots of things to come in front of us in terms of products and other ways we can work together. George Gianarikas: And maybe as a follow-up. I don't mean to front run the Autonomy Day in December, but what role do you see Rivian playing in the robotaxi market? There are some of your peers also developing electric vehicles that have teamed up with some of the rideshare companies. Any sort of -- anything you could share on that front? Robert Scaringe: I mean, a lot of emphasis has gone on the robotaxi side. I think independent of whether the application is in a personally owned vehicle or in a robotaxi, I think really important is recognition that the technology is going to become really a key part of our automotive ecosystem. And so in our view, as we look towards the end of this decade, it will start to become really an important driver for consumer purchase decisions around whether or not a vehicle is capable of driving itself with both hands off the wheel and eyes off the road, but importantly, doing that across a very wide spectrum of roads. So essentially, any drivable road should be something that can be driven by a vehicle without a lot of involvement from the driver. And as it stands today, more than 95% of the miles driven in the United States are in personally owned vehicles, the remainder being a mix between taxi, rideshare and rental. We think that that's likely to stay mostly the same, maybe a rideshare grows by some percent. But we think in terms of large-scale adoption autonomy, it's going to be solving this for personally owned vehicles that's going to drive the biggest step change for us. Now saying that, the opportunity for us to participate in robotaxis, it's, of course, there. It's something that if we chose to partner with some of the big rideshare operators, there's lots of market opportunities there. But our focus today is really on the technology. And that's what we'll spend, as you said, George, we'll spend our Autonomy and AI Days really talking about the technology road map, how we've developed it. That's both the hardware, the software, our data flywheel. Of course, we'll demonstrate what all those different elements come together to enable in terms of what the vehicle can do. And I think through that event, you'll see there's lots of different ways this can be applied in terms of go-to-market, whether that's personally owned or whether that's through robotaxi partnerships as you stated. Operator: Our next question comes from Joseph Spak with UBS. Joseph Spak: RJ, the CEO of Scout Motors was recently reportedly said that 80% of their preorders are for their EREV variant. And you have BYD has both a BEV portfolio and EREV portfolio. And even if you look at China overall, in recent years, EREVs have been growing arguably faster. So there's clearly demand for that type of product. And I think there's probably some benefits to that type of powertrain for the vehicles you want to sell, meaning trucks. So maybe you disagree, I'd be curious to hear that. But I know you talked about this all-electric future you envisioned. But the question is, would you actually consider offering an EREV for the US market or globally? And if so, how easy is it to adjust the platform? Robert Scaringe: Thanks, Joe. We're not planning to offer an EREV or effectively a serious hybrid, which would involve putting an engine into the vehicle. So that's not in our product road map or something that we're at all contemplating. But I do think it's important to note that part of the journey of electrification is providing customers with choice, and so different manufacturers are going to make different decisions on this. Some will decide to take more of a hybrid approach or an EREV approach. Others are going to take a pure EV approach. And in the end, [indiscernible] this is all going to be driving towards in our view, as I said in my opening remarks, we believe everything will be electric, everything will be software defined and everything will have very high levels of autonomous capabilities. And so we're very focused on continuing to lead with electrification. We think particularly for the midsized segment SUV, which is going to make up the vast majority of our volume with the launch of R2 and then it's follow-on product with R3. That segment really works beautifully with an electric -- fully electric architecture, where we're able to deliver great performance, outstanding range and at a price point that's very comparable to ICE or hybrid alternatives. Joseph Spak: Okay. And as a second question, I know you spoke briefly on Mind. I guess I just want to -- one, there's no spend or has there been spend already going on for that? Two, how should we think about that spend going forward? Or is it all ring-fenced in the sort of external company of which you're just an owner. Maybe just if you could clarify that for us, that would be helpful. Robert Scaringe: Yes. So Mind Robotics is a separate company from Rivian. Rivian is a shareholder in this. The $110 million that I referenced before is the seed financing for its capital from outside of Rivian. And we're -- I mean, we're incredibly excited about it. I think the -- as much as we've seen AI shift how we operate and run our businesses through the wide-ranging applications for LLMs, the potential for AI to really shift how we think about operating in the physical world is, in some ways, unimaginably large. And so that influences how we think about designing logistics inside of a plant. It influences how we think about designing even plant layouts. And so the creation of this company is ultimately the culmination of us coming to the view that we wanted to have direct control and direct influence over the design and development of advanced AI robotics that would be very focused on industrial applications. And so these are robotic solutions, we will be creating through this entity through Mind Robotics that are designed and optimized around manufacturing and industrial environments. Operator: Our next question comes from Dan Levy with Barclays. Dan Levy: I would like to ask if you could possibly give us the latest update on tariffs within the results? I know you had stockpiled batteries. So I don't know if there's any impact there, but we have seen some changes in tariff policy. And then maybe just broadly on tariffs, given IRA is no longer really a consideration, how does that change the battery sourcing strategy for R2? Can you rely perhaps on some of the cheaper LFP batteries from overseas? Claire McDonough: Thanks for the question, Dan. As you mentioned, the administration announced the lengthening of the 3.75% MSRP offset for Section 232 automotive tariffs to 2030 last week. It also included the ability to designate parts in the 232 automotive classification that expands the pool of eligible parts, which is particularly important for a company like Rivian, which is heavily vertically integrated. So today, we source a lot of raw material inputs that we're building subassemblies of internally that aren't necessarily -- weren't previously necessarily designated under a Section 232 classification. And we're really appreciative of the administration for these new changes that were announced most recently. So as you think about the impacts on the quarter itself, based off of what we -- the product that we sold, we were just under the couple of thousand dollars per vehicle of impact in Q3. And on a go-forward basis, we expect the impact to be a few hundred dollars per unit for new builds once these policies are fully in place. We'll see a trend down in terms of the tariff exposure in Q4 since we'll certainly be selling some vehicles that may have higher levels of tariff sitting in inventory or parts that we're building towards in inventory today. But that's the general applied path and trajectory there. And then maybe I'll pass the second part of your question on the R2 battery cell sourcing back over to RJ. Robert Scaringe: Yes. So the R2 program, we've talked about this in the past, is launching with 4695 cylindrical cell, and that cell starting in the late 2026 time frame will be produced in the United States and Arizona. And so we, of course, sourced that quite some time ago and have been developing in close partnership with the supplier of that cell, which is LG for some time. As you point out, there are opportunities to look at other sources of battery cells, both in terms of chemistry, but also in terms of supplier, but as it relates to the production that's coming out of our normal facility, that's planned to be the LG cell produced in Arizona. Dan Levy: Okay. Great. Second question is somewhat related. And I know that the regulatory picture still has to sort of emerge a bit more. But it is a bit more clear now. And so -- can you tell us to what extent now that you have maybe a better sense on tariffs, you have a better sense on reg credits. Those have moved against maybe some of the initial assumptions you had when you were planning the R2 BOM and knowing that, that BOM is sticky, what mitigants do you have to ensure that you're going to get the appropriate unit economics? I know you've talked about plans to get the BOM cut in half versus R1 and exiting '26 with a positive gross margin. But how do you mitigate against some of these given the BOM is sticky? Robert Scaringe: Well, there's -- yes, there's a lot in that question, but to unpack it. I think first and foremost, the building materials is -- it's contractual. And so as we negotiated the building materials and also made decisions strategically as to where the content that ultimately makes up the building materials in the vehicle is coming from, we made decisions around prioritizing domestic or USMCA compliant sourcing. So having the parts come out of USMCA compliant locations. And that was because those decisions were made where we already had line of sight to the likely shift in some of the policies that we've seen recently. I think importantly, these contractual agreements that we have on the BOM itself help really give us confidence in us achieving the BOM and us ultimately getting to the exit rate positive unit economics on R2 -- R2 positive unit economics at the exit of 2026. I think another element that's changing is the expansion of the 232 framework and the allowance for that -- the 3.75 to carry out longer is very helpful for us. And we previously have guided to say the effective tariffs have been a couple of thousand dollars and what we would now guide to say is that it's a few hundred dollars of tariff cost per vehicle. So it's a pretty significant shift for us. Now I think above and beyond that, just in terms of the overall COGS framework, Javier, you and the team have been very focused on making sure we're already at the plant. Of course, your team is also responsible for the building materials and supplier sourcing. But just comment on the confidence we have in our cost structure. Javier Varela: Yes. When it comes to the BOM, RJ, you have explained it, and I want to insist that we have sourced on a landed basis. So by contract, we have 100% of the car sourced. We understand what is the cost that we are incurring and the tariff situation is much more favorable, as Claire explained. The rest of the content of the COGS, we are working, obviously, in the conversional cost, logistics and all the transformation costs in the plant. We have -- we are doing already in normal huge lean transformation, improving our performance in our daily operations, and all these learnings, we will translate them to R2 operations, ramp, the design of our process is more compact in R2, lesser space, less costs in terms of maintenance and overhead consumption. So we are really confident and we can see and confirm with our internal numbers that we are sticking to our target of reducing by half the cost. Operator: Our next question comes from Edison Yu with Deutsche Bank. Yan Dong: This is Winnie Dong for Edison. I wanted to ask about the OpEx trajectory on a going-forward basis. You mentioned in the shareholder letter that there is some inclusion of that for autonomy training. So on a go-forward basis, how should we think about that OpEx line for the purpose of autonomy? Claire McDonough: Sure. Our philosophy and approach has always been to drive efficiencies into the business to help self-fund strategic areas of differentiation, such as our autonomous driving training. And as we look at our future road map of investment, that remains intact from a philosophy and approach. We're always looking for and committed to finding efficiencies and opportunities to reduce spend within the organization so that we can also scale the business for the increased volume that we expect to come with the introduction of R2 next year as well. So as you think about the R&D spend, we'll see elevated levels of R&D spend in the lead up to the launch of R2 and that's primarily driven by a lot of the work that we do to build development prototypes. So today, design validation builds. We talked a little bit in our prepared remarks about starting to have manufacturing validation builds in our normal plant at the end of this year. And then you'll see some of that external spend, some drop down when we launched the R2 product. So you'll see over the course of '26 more normalizing levels despite the fact that we're going to be continuing to ramp up our autonomous training over the longer term as well. Yan Dong: Got it. That's very helpful. My second question is on the R2 launch for next year. I was wondering if you can comment maybe on the production cadence as you see order flow coming through? Like how should we anticipate that to sort of look like first half versus second half, et cetera, for next year? Claire McDonough: Sure. For R2, as we mentioned, we plan to start saleable builds and deliveries in the first half of '26, but we would steer folks to there being limited volumes in the first half of the year. And then the second half of the year will build up our ramp and see increasing production volumes throughout the second half of the year and then into 2027, where we'll first be in a position to have fully optimized the 215,000 sort of run rate units of capacity that we have established within the normal facility. Operator: Our next question comes from Federico Merendi from Bank of America. Federico Merendi: I wanted to touch upon the capacity that you're building up. In normal facility, you're going to have 215,000 units of production available in Georgia from what I understand, 400,000 additional. But given what you -- what Emmanuel said about the underlying demand and that you're not going to integrate your production with hybrid vehicles or range extended vehicles. How should we think about the saturation of those 2 plans that you are building up? Robert Scaringe: The normal facility, as you said, will have 215,000 units of capacity, and that will be split between R1, our commercial van and R2. And R2 of that will have 155,000 units of capacity. The Georgia facility built across 2 phases will ultimately have 400,000 units capacity, and that will support R2, R3 and variants of each of those products. And we -- again, I said this before, but I think it's a very important point to make that the understanding the demand profile from customers for electric vehicles, it requires us to look deeper than just EV sales in aggregate, but rather to look at the strength of a vehicle offering relative to what else is on offer. And ultimately, the way customers are going to be making decisions is the price of the vehicle, the value it provides, which is performance capability, features and so we're very, very bullish on what we're building with R2. The way we think about it as a team is we're building the best car you can buy in this category and in this price point. And we want that to be like abundantly clear and something that is so self-evident when you use the vehicle. We were just talking about how exciting it will be for people to compare the vehicle to other things in this price category. And so we're very bullish on R2. We've also seen that the rate of adoption of EVs really does tie heavily to the number of highly compelling offerings. And to date, at this mass market price points, so call it in the $45,000 to $50,000 range, there's really been a single dominant brand with really 2 products. It's, of course, Tesla with the Model 3 and the Model Y. And with them taking up roughly half the market, 50% market share, it's not a reflection of a healthy market. It's a reflection of a very underserved market in terms of choice and options. And so what we're building with R2 is very different than a Model Y. It's similar size, similar price but very, very different in terms of it's -- the way it's executed. And so it's going to attract we think a very wide range of customers that's including people that may be considering EV but also importantly, folks that are not necessarily considering EV, but just looking for a great vehicle for $45,000, $50,000. And so with all that said, what we've shown to date in terms of product sets, our product portfolio is the R2, the R3 and the R3X. Importantly, there's other variants which, of course, we haven't shown yet, but that will be built off the R2 and R3 platforms that will support the overall volume in Georgia as well. Federico Merendi: And I would assume that to basically ramp all the volume, you will export vehicles to other regions or countries. When should we assume that you will enter into other markets? Robert Scaringe: Yes, the R2 and R3 vehicles are absolutely architected from the very beginning and designed from the very beginning, contemplating Europe and planning for Europe. And we think they both fit the European market extremely well. We haven't announced European timing yet, but it is really a core part of the program and it was also a key element of the decision that we made to set up the plant in Georgia, given it's ease of export for vehicles going to Europe. Operator: Our next question comes from James Picariello from BNP Paribas. James Picariello: So just on free cash flow, how are you thinking about working capital in the fourth quarter relative to the strong source of cash contributions in the second and third quarters. And I know it was previously indicated that we should expect CapEx to run higher next year. Is there any dimensioning you can share regarding that increase? Claire McDonough: Sure. As we look at the fourth quarter as implied by our guidance, we do expect to see a step-up in our capital expenditures for Q4. And then as you rightfully called out, we've seen strong favorability in working capital trends throughout the first 3 quarters of this year. We'll see that reverse a little bit in the fourth quarter where we expect working capital to consume cash in the fourth quarter. And then as we look at the working capital outlook for 2026, as we build up inventory for R2, we expect working capital overall for 2026 to be a use of cash. And we'll see that normalize as we ramp and get to our run rate levels overall. And as Javier mentioned, very focused on making sure that we have very lean operations in normal as we look at the broad-based inventory outlook for the business in the longer term. We'll provide more details on the 2026 CapEx outlook on our Q4 earnings call. So we'll circle back with more details there. But as RJ mentioned, that would be additional capital to start vertical construction for the Georgia facility that would be reflected in our 2026 CapEx spend. James Picariello: Understood. That makes sense. So my follow-up, with respect to the next tranche of VW investment, the $1 billion in equity, this is tied to 2 scopes of successful winter testing, I believe. Do you expect the testing to take place this winter or late next year? Just curious on the timing there. Claire McDonough: We don't plan to comment on exact timing. But as you heard me talk about in my prepared remarks, we're confident in our ability to achieve the $1 billion of equity investment from Volkswagen Group in 2026. Operator: Our next question comes from Ben Kallo with Baird. Ben Kallo: So maybe 2 parts with R2 coming. I know, RJ, you've talked about $45,000. Can you just talk about your philosophy around pricing? Model Y and other Tesla models, they would release the highest trim if we want to call it that first and then kind of scale down from there as the market expands. But can you think about -- can you talk to us about pricing and how you set that versus cutting it in the future, considering the -- for now, at least at normal, it seems like supply could be limited. And then how that ties into the Georgia plant and R2 because it seems like you have a lot going on in pricing kind of differentiating the 2 in a short amount of time. Robert Scaringe: Yes. In the early part of next year, we're going to have an R2 event where we'll go through the full portfolio of R2 products, which would include the different pricing levels across trim and powertrain configuration. And so of course, as you called out, when we're starting a production line of a new vehicle, we're going to limit the number of variants that we're building and so we have a launch addition for the R2. And this is a classic challenge because there's -- of the thousands and thousands of people that are excited for R2, some will want the most base version, the lowest priced version. Others are going to want the highest end versions, some will want something in the middle. And so we spent a lot of time really thinking around what's the right version to launch with. And so we've -- well, I'm not going to provide the pricing, what that is here, I'll say that it's a dual motor variant, and that's well appointed, but it's not intended to be our most expensive version, but it is intended to be a very nicely set up vehicle, which we think will make the most people the most happy, which is really the goal we had in selecting our launch configuration. But as implied, following the initial ramp-up with that launch configuration will then add in the other trims and other configurations, which at that event, I referenced earlier, we'll go through that in the early part of 2026 and talk about when those different trims are going to be available. Ben Kallo: And my follow-up is along the same lines. Just in terms of marketing versus advertising, versus cutting price to figure out the market size. How do you guys think about where advertising fits in because a lot of the questions are focused about on other OEMs retrenching not going down the path of EVs or doing hybrid electrics. And so is there something that you guys can do through advertising or marketing to distinguish that not all EVs are built alike? Robert Scaringe: Yes. It's an awesome question. And so I mean, ultimately, the question is getting at this point of awareness, awareness of what R2 is and awareness of Rivian as a brand. And some of that will naturally come just from the presence of R2 on the roads and having more people have access to it, the brand becoming much more accessible because of a much lower price point and some of the same word of mouth that's benefited the brand to date with R1. But beyond just the existence of the product, the presence of it on the roads and the positive dynamics associated with word of mouth, we are putting a lot of thought into exactly how we'll launch different campaigns of the vehicle that's putting in unique places making sure that it's -- whether those are physical activations that are temporary in nature, physical activations that are through partnerships with other entities which -- is it going to show up at a ski resort? Is it going to show up at a restaurant, these types of decisions to the more digitally focused marketing spend that allows people to see and experience the vehicle. And we've historically not really relied heavily on paid marketing, and that's certainly -- it's been a decision, but it's also, I think there's an opportunity there for us to be thoughtful and highly measured but thoughtful in how we deploy dollars into driving awareness. So folks know about this really incredible product that we developed. Operator: Our next question comes from Philippe Houchois with Jefferies. Philippe Houchois: Yes. My question was on -- so it's clear on tariff and thanks for the clarification that it's a negative still, but lesser negative than you would have been 6 months ago. What has become a net positive, though, compared to the past is the fact the dollar is weaker and import duties into Europe are going to go from 10 to 0, and I'm just wondering to what extent it has kind of shifted your thinking on Europe. I know you talked about Europe and R2, R3 are well suited for the market, I would agree. And does it make sense to think about a faster rollout into Europe and potentially also a bigger scale? And if you think about the potential of the market, is it still appropriate to try to do a direct selling from the U.S. exports? Or does it make sense to try to use local distribution and dealers in Europe as a separate business model? Robert Scaringe: Yes, the impact of a 0% export tariff is certainly something we've been quite enthusiastic about, and we're pleased to see. And it has -- as you pointed out, it hasn't had as much attention as we think it deserves. And so while -- as I said before, we haven't announced the timing for when we're going to be exporting to Europe. It's certainly part of our own calculus on deciding when we add that layer of complexity to the business. recognizing that we have a lot of demand here in the United States, and we want to make sure we achieve critical mass for this large pool of demand that we have here in the U.S. But at the same time, as you said, without a tariff to now bring our vehicles from the United States to Europe, there is a real opportunity to get into Europe sooner. And so these are the types of things we're thinking about, but we haven't yet said exactly when we'll be in Europe. Philippe Houchois: Right. And if I can do a follow-up. I think you've been quite efficient in delivering the R2 development on time, and that's congratulations for that. Can you remind us what kind of time lag we might expect between R2 hitting the road and then R3? Is it 12, 18 months, 24 months? What's your time frame there? Robert Scaringe: We haven't announced R3 yet in terms of timing. But what we have said is that R3 will be produced only in our Georgia facility. We're not planning to produce that in our normal facility. And the Georgia facility, we have said is launching in late 2028. And so it would be no sooner than the launch of that facility in Georgia. Operator: Our next question comes from Andres Sheppard with Cantor Fitzgerald. Andres Sheppard-Slinger: Wonderful. Congrats on all the progress. R.J., I think most of my questions have been asked. I do want to maybe go back to a subject which I believe you're quite passionate about, which is autonomy. I guess with the rapid acceleration and deployment of self-driving vehicles, both in passenger vehicles and commercial vehicles, I'm curious if maybe you can give us perhaps a little bit more into your vision for Rivian's approach. And I realize we probably get a lot of these answers in the AI day coming up. But curious if you see a scenario where Rivian might pursue -- is more likely to pursue perhaps a robotaxi partnership with a vendor or perhaps pursue autonomy in commercial vehicles, maybe even with the EDVs? Any thoughts there? Robert Scaringe: Yes. Well, first, thanks for the plug for our Autonomy Day on December 11. We're incredibly excited about that. We're going to be going into a lot of detail there and talking about a number of things that we've not yet talked about publicly and unveiling a lot of the technology behind what we're building and what we've been focused on over the last several years to enable this. But I guess, first at the highest level, this is an area of the business, and this is a technology drive within our business that we think is going to be among the most important for transportation. And so it represents one of the largest investment areas for us as a company. It represents one of the most focused R&D efforts for us as a company. And as you already said, it captures a tremendous amount of excitement from us as a business and certainly for me. As I said earlier though, in terms of the applications for autonomy, it is very wide-ranging. We think it's going to become a very powerful driver of sales. And when you think about the products we're launching, particularly with R2 and R3, the form factor of those vehicles is so universally useful. So it's universally useful for a personally owned vehicle, it's universally useful for a vehicle that's going to -- that might participate in any form of ridesharing services. It's university applicable in the United States and in Europe. And so layering on top of that already very interesting vehicle in terms of form factor, package, pricing, very high levels of autonomy, where we start to look at well beyond hands-off wheel, eyes on the road, but into hands-off wheel, eyes off-road, point-to-point navigation, so address to address. We look at that as a really significant driver of demand and what will unlock a lot of folks that may not have even been considering Rivian or an EV, but to say, "Wow, I really like this car, but I also really like the fact that it can do -- it can give me my time back. It can drive places with me sitting in the car on my phone, getting my time back. And so that is our north star. It's not that we will be able to start immediately there. But what we'll talk about on December 11 will be what that road map looks like. First, expansion of the number of roads that we have hands-free on, then overlaying that with point-to-point address to address navigation and then following that, adding in for select specific environments, hands off and eyes off, which is an important one and then over time, growing the number of locations and broadening the operational design domain for where the vehicle can operate with eyes off. And so that's -- that is like the core focus for us as a business and doing that well will unlock up, as you already alluded to, many different types of businesses that will support what we already build on our commercial business, which we're quite excited about. It opens up opportunities for robotaxi, but importantly, by far and away, the largest revenue opportunity is consumer-owned vehicles or vehicles owned by household that represents well in excess of 95% of the miles driven in the United States. And that's largely true for Europe as well. And so that's our core focus to start. But to be very, very clear, the technology can be applied in many, many different places. Andres Sheppard-Slinger: Wonderful. That's super helpful. I really appreciate all that color. Maybe just as a quick follow-up, one for Claire, I don't believe this has been asked about yet. But just on the DOE loan. Can you maybe just remind us or refresh us kind of your expectations from -- for withdrawals for next year and beyond? Claire McDonough: Sure. The DOE loan, if you recall, it's a project-based finance loan, which means that we would need to be underway with vertical construction of our site in Georgia and have also met at that point in time for First Advance, a number of different conditions, precedents ahead of initial draw. As RJ alluded to, we plan to begin vertical construction in 2026 and see the first vehicles coming off of the line by the end of 2028. Operator: Our final question for today will come from Colin Langan with Wells Fargo. Colin Langan: Just wanted to ask if I look at the midpoint of guidance, it implies adjusted EBITDA is actually improving into Q4. But the midpoint of delivery guidance will be down. So what would drive better Q4 EBITDA and lower volumes? Claire McDonough: Sure, Colin. As you think about the trajectory for the fourth quarter overall, we anticipate seeing consistent level of EDV volume as a whole as you look to Q4 results. And the EDV has historically had a lower cost basis associated with it as well. So that's one factor. And then the other factor is, as we look ahead to the future, is we'll continue to earn increasing levels of background -- revenue associated with our background IP for the Volkswagen Group joint venture as we continue to show progress against key milestones in the JV. So similar to what you've seen throughout the course of Q3 relative to Q2, there could be incremental improvement in terms of the gross profit benefit from software and services as well. And then in my prepared remarks, I had mentioned on the SG&A side, we do expect to see a slight reduction in our SG&A spend in the fourth quarter. Colin Langan: Got it. You talked about regulatory credits. You don't expect any for the rest of the year. Are there any -- as we think about '26, is there any coming? I know sometimes the contracts are multiyear? Or should we kind of assume '26 also doesn't have regulatory credit help? Claire McDonough: Yes. As I mentioned before, we've taken regulatory credits out of our forecast, just given some of the uncertainty in the broader policy environment. Operator: This concludes the Q&A section of the call. I would now like to turn the call back to RJ for closing remarks. Robert Scaringe: Thanks, everyone, for joining today's call. Hopefully, you can hear in our voices, just the level of excitement that we have for R2. And importantly, the technology platforms that we're building certainly, our autonomy platform being chief among them. We've got a lot of work to do in front of us as we get ready for the launch of R2. But as I said, I've been spending a lot of time in our vehicles, and they are just absolutely incredible, both the vehicle, the technology, the autonomous capabilities of the vehicles. And so we're incredibly excited to spend more time in December 11, talking around our autonomy technology and overall AI within the business and within the vehicles. And then certainly in the early part of next year, starting to get folks in R2 products and that has -- that is what we're heads down on focus. We spent a lot of time talking about the vehicle itself. But the rest of the business is also being prepared. That's all of our go-to-market functions, our service functions. Of course, as you heard from Javier getting our plant and our operations seems ready. And so we are focused on that and feeling very excited for the launch of the vehicle and for the launch of all this technology that we've talked about today. Thank you, everyone, for joining today's call. Operator: This concludes today's call. Thank you for joining us. You may now disconnect.
Operator: Good day and thank you for standing by. Welcome to the InnovAge First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Kubota, Director of Investor Relations. Please go ahead. Ryan Kubota: Thank you, operator. Good afternoon and thank you all for joining the InnovAge 2026 fiscal first quarter earnings call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal first quarter results. You may access the release on the Investor Relations section of our company website, InnovAge.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, November 4, 2025, and have not been updated subsequent to this call. During our call we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment and redetermination processing delays, seasonality of cost trends, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick? Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I know it feels like we just held our fourth quarter results and full year earnings call, and we did. The first quarter reporting cycle always comes quickly due to SEC requirements and companies needing more time to complete and audit their year-end financial results. As a result, we're meeting about 6 weeks after our last call. So today, I'll spend less time on new headline numbers and more on the progress we're making against our strategic priorities, the continued strength of our model and the momentum that we expect to carry us through fiscal year 2026. This afternoon, we reported total revenue of $236.1 million, center-level contribution margin of $51.4 million and adjusted EBITDA of $17.6 million. Compared with the first quarter of fiscal 2025, total revenue increased 15% and adjusted EBITDA more than doubled. Census grew to an all-time high of 7,890 participants, up nearly 2% quarter-over-quarter. These results reflect continued strong medical cost management and better-than-expected census growth as the Medicaid redetermination cleanup is progressing well in the first 90 days. The quarter also reflects positive momentum in our new Florida centers, particularly in Tampa where our partnership with Tampa General is off to a strong start. The operating environment for many value-based care models remains challenging. Medicare Advantage and Medicaid managed long-term supports and services are experiencing lower or declining reimbursement levels, higher-than-expected medical service utilization and growing regulatory scrutiny around risk adjustment and quality measures. In contrast, InnovAge and the PACE model have remained resilient. While many plans are retreating from markets or reporting financial strain from escalating medical costs, PACE offers a fundamentally different approach, one built on direct accountability for every aspect of participant care. At InnovAge, our providers not only deliver care within our centers, but also oversee, approve and coordinate nearly all healthcare services that occur outside our walls. This closed-loop model gives us a high degree of visibility and control over cost trends, allowing us to manage participant needs more responsibly than reacting well after the fact. These differences are showing up in the numbers. While many managed care organizations are reporting higher-than-expected medical cost trends this calendar year, our total participant expense per month declined sequentially relative to the fourth quarter of fiscal 2025. What we see in our business is also supported by independent research. In its recent report to Congress, MACPAC identified PACE as the most fully integrated care model available to dual eligibles. The study found that PACE participants, though typically older, frailer and facing more comorbidities, are generally less likely to be hospitalized, less likely to visit the emergency department, less likely to require institutional care and without increased mortality rates. Simply put, PACE works. Our job is to continue educating policymakers and payers about its value so we can expand access and unlock the program's full potential. And within the PACE sector, InnovAge is the largest provider by census in the country, serving nearly 8,000 participants across 20 centers in 6 states. That scale not only gives us operating leverage, but also unique insight to what drives consistent outcomes for frail seniors. As I approach my fourth anniversary as CEO, I've been reflecting on how much has changed. Over the last 11 quarters, we've delivered steady revenue growth, more than doubled adjusted EBITDA over the last 2 fiscal years and achieved positive net income this quarter for the first time since 2021. These results stem from disciplined execution, executing a multipronged growth strategy across markets, including existing center growth, joint ventures, M&A and de novo centers; cleaned up the balance sheet through the divestiture of multiple noncore assets and investments; upgrading systems and processes to strengthen quality, compliance and financial performance; strategically in-sourcing key services such as pharmacy and hospice to tighten cost control and improve coordination; improving center-level staffing and reducing operating model variation, supported by the enterprise rollout of the Epic EMR, the Oracle financial platform and rigorously managing corporate overhead to improve efficiency and productivity. These efforts have reshaped both the culture and the economics of InnovAge, which I believe has positioned us for sustained success. Before turning to our outlook, I want to touch on recent leadership changes. Over the past several years, we've built a strong leadership bench capable of stepping up when changes occur. Leadership transitions, some planned, some unplanned, are inevitable in a multiyear transformation, but they have not disrupted our momentum. We've made several important additions and adjustments. Dr. Paul Taheri, a widely respected clinical leader, joined this week as our new Chief Medical Officer. Meredith Delk recently joined as Chief Administrative Officer, leading pharmacy, home care, behavioral health and government affairs. Matt Huray has expanded his role to include sales in addition to his strategy and corporate development responsibilities as our Chief Growth Officer. Additionally, last week, we announced that Michael Scarbrough, our President and COO, will be leaving at the end of the month for personal reasons. Michael has done an excellent job strengthening our operations and positioning InnovAge for long-term success. He leaves behind a capable team and a strong foundation. These moves underscore the depth of our leadership and the growing appeal of InnovAge as a destination for top talent in the industry. Leadership change creates opportunities for internal advancement and professional growth among our next generation of leaders. At the same time, we've taken proactive steps to strengthen how the organization operates. We recently completed a spans and layers review, a structured evaluation of the size and shape of our corporate organization. This initiative focused on our shared services teams, which support our centers but do not deliver care directly to participants. Through that process, we identified opportunities to reduce management layers and streamline support functions, resulting in a smaller, more focused shared services workforce. We expect these changes to improve decision-making speed, enhance accountability and more closely align our cost structure with best-in-class benchmarks. It's a tangible example of our cost discipline and the operational maturity we continue to build across the company. Taken together, we expect that these leadership and organizational changes strengthen rather than distract from our progress. They demonstrate that InnovAge has both the talent and the structure to execute consistently through change. At its core, InnovAge exists to help seniors live safely and independently at home for as long as possible. Our integrated model reduces the burden on state and federal partners, and brings peace of mind to families. Our recent participant satisfaction survey tells that story clearly. 90% overall satisfaction and 97% of participants said they would choose InnovAge over a nursing home. Before I close, I want to share a recent testimonial from one of our participant's daughters that reminds us of our mission at InnovAge, our value proposition to families and the integrated PACE model in action. For my mom, InnovAge has been such a reassurance. At her age, if she wakes up feeling not quite right, it used to spiral into worry and that worry could turn into something worse. Now everything she needs is right there in the center: her doctor, her physical therapist, her dentist, even her eye care. Her care team shares her chart in real-time, so there is no guessing, no repeating, no gaps in her care. It's all connected. That kind of coordination gives her confidence and gives me peace of mind. It's just amazing. Stories like this remind us why our work matters and why we're so focused on execution. Behind every number we report is a person whose life and family's life is better because of this model. So, in closing, we're off to a strong start to the fiscal year. Our Q1 results were ahead of expectations, but I want to caution against annualizing them. Due to the relatively small scale of our business, the timing of Medicaid redeterminations, and the inherent seasonality of certain cost trends, first quarter results should not be indicative of full-year performance. We'll continue to execute with discipline, invest in talent and technology, and build on the foundation we've created. Continuous improvement has become part of our DNA. We remain confident in our strategy, proud of our progress, and committed to delivering sustainable growth and superior outcomes for the seniors and families we serve. With that, I'll turn it over to Ben for more detail on the financials. Benjamin Adams: Thank you, Patrick. Today, I will provide some highlights from our first quarter fiscal year 2026 financial performance and insight into some of the trends we are seeing in the current quarter. Starting with census, we served approximately 7,890 participants across 20 centers as of September 30, 2025, which represents growth of 9.4% compared to the first quarter of fiscal year 2025 and sequential quarter growth of 1.9%. We reported 23,500 member months in the first quarter, an increase of approximately 9.9% compared to the first quarter of fiscal year 2025 and an increase of approximately 2.2% over the fourth quarter. Our first quarter census growth was modestly better than expected and was primarily driven by our ability to reinstate more participants that had lost Medicaid coverage than expected and timing delays associated with disenrolling participants that have lost coverage and have not been able to regain eligibility in a few markets. Total revenues of $236.1 million increased 15.1% compared to $205.1 million in the first quarter of fiscal year 2025, driven by an increase in member months and capitation rates. The increase in member months was primarily due to growth in our existing California, Florida and Colorado centers. The increase in capitation rates was primarily due to an annual increase in Medicaid and Medicare capitation rates, partially offset by revenue reserve. Compared to the fourth quarter of fiscal year 2025, total revenues increased 6.6% due to an increase in member months and capitation rates. The increase in capitation rates was driven by annual rate increases in Colorado, New Mexico and Virginia, and an annual Medicare rate increase, all effective July 1, 2025. We incurred $108.9 million of external provider costs during the first quarter of fiscal year 2026, an increase of 1.5% compared to the first quarter of fiscal year 2025. The increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility and short-stay skilled nursing facility utilization and a decrease in pharmacy expense associated with higher rebates and the transition to in-house pharmacy services. This decrease in cost per participant was partially offset by an increase in assisted living and permanent nursing facility unit costs. Compared to the fourth quarter, external provider costs increased 0.6%. The increase was primarily driven by the increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was due to lower short-stay utilization, partially offset by higher assisted living utilization and an increase in assisted living and nursing facility unit costs. Cost of care, excluding depreciation and amortization, was $75.9 million, an increase of 19.7% compared to the first quarter of fiscal year 2025. The increase was due to an increase in member months coupled with an increase in cost per participant. The increase in cost per participant was primarily driven by higher salaries, wages and benefits associated with increased headcount and higher wage rates, higher third-party fees and shipping costs associated with in-house pharmacy services, and fleet costs inclusive of contract transportation. Cost of care, excluding depreciation and amortization, increased 5.5% compared to the fourth quarter. The increase was due to an increase in cost per participant, coupled with an increase in member months. The increase in cost per participant was primarily driven by higher wage rates and fleet costs, including contract transportation. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs was $51.4 million for the quarter compared to $41.3 million for the fourth quarter of fiscal year 2025. As a percentage of revenue, center-level contribution margin of 21.8% increased by approximately 320 basis points in the quarter compared to 18.6% in the fourth quarter of fiscal year 2025. Sales and marketing expenses of approximately $7.6 million increased 17.1% compared to the first quarter of fiscal year 2025 due to an increased headcount and wage rates to support growth, coupled with increased marketing spend. Sales and marketing expenses increased by approximately 7.1% compared to the fourth quarter of 2025 due to an increase in headcount and wage rates and increased marketing spend. Corporate, general and administrative expenses of $30.3 million increased 9.9% compared to the first quarter of fiscal year 2025. The increase was primarily due to an increase in employee compensation and benefits as a result of greater headcount and an increase in wage rates to support compliance and bolster organizational capabilities, software license fees, and contract and professional services. These increases were partially offset by a decrease in legal fees. Corporate, general and administrative expenses increased 8.8% compared to the fourth quarter of 2025, primarily due to higher wage rates and an increase in contract and professional services. Net income was $7.7 million compared to net loss of $5.7 million in the first quarter of fiscal year 2025. We reported net income per share of $0.06, and our weighted average share count was approximately 136.8 million shares for the quarter on a fully diluted basis. Adjusted EBITDA was $17.6 million for the quarter compared to $6.5 million in the first quarter of fiscal year 2025 and $11.3 million in the fourth quarter of fiscal year 2025. Our adjusted EBITDA margin was 7.5% for the quarter compared to 3.2% in the first quarter of fiscal year 2025 and 5.1% in the fourth quarter of fiscal year 2025. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. For the first quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $4.1 million of de novo losses in the first quarter of fiscal year 2025 and $3.8 million of de novo losses in the fourth quarter of fiscal year 2025. Turning to our balance sheet. We ended the quarter with $67.1 million in cash and equivalents plus $42.3 million in short-term investments. We had $71.5 million in total debt on the balance sheet, representing debt under our senior secured term loan revolving credit facility and finance leases. For the first quarter, we recorded positive cash flow from operations of $3.9 million and had $4.1 million of capital expenditures. We are reaffirming our fiscal year 2026 guidance, which we laid out in September. Based on information as of today, we expect our ending census for the fiscal year 2026 to be between 7,900 and 8,100 participants, and member months to be in the range of 91,600 to 94,400. We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million, and we anticipate that de novo losses for fiscal year 2026 will be in the $13.4 million to $15.4 million range. In closing, we are pleased with our first quarter results and believe we are off to a strong start to fiscal 2026. We are closely monitoring our census in light of the eligibility and enrollment system redesign due to state Medicaid redetermination that we spoke about on the last earnings call, and we look forward to providing an update on our second quarter call in February. Operator, that concludes our prepared remarks. Please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Benjamin Rossi with JPMorgan. Benjamin Rossi: So you've previously mentioned that the calendar 3Q is typically one of your softer margin quarters as a result of open enrollment. I guess just under your reaffirmed guidance setup, how are you thinking about margin progression for the remainder of the year? And then just curious if you could walk us through some of your assumptions for the remainder of the year and how you're thinking about impact from things like the aforementioned Medicaid eligibility changes, your cost savings initiatives and then some of the broader shift into the MA V28 model. Benjamin Adams: Yes. Ben, it's Ben Adams, and I'm here with Patrick and the rest of the team. We don't give quarterly guidance. So what I would probably say is there are a couple of things that are causing a little bit of noise in the progression this year. And why don't I walk through a couple of them just so you understand what's going on. You may remember in the last call, we talked about the fact that we had a number of folks who were what we call [ LOMI ] status, people lost their Medicaid eligibility, and we were either working to reestablish it or to help them find a program that better fit their needs. That process has been ongoing. I think it probably went a little bit better in the first quarter of the year than we anticipated, but we also think it may drag on a little bit longer than we thought. So that's something that's influenced us a little bit in the first quarter. In the second quarter, there are kind of a couple of things that happened in the second quarter. We have the October Medicare fee schedule increases. We have some risk score decay, which incurs in the second quarter where the risk scores get reset on July 1. We will, again, have sort of a full quarter of our merit increases, which were implemented in the back half of Q1. And we'll probably have a little bit higher utilization as we roll into sort of cold and flu season. So we'll have those factors to deal with in Q2. And then in Q3 is really where we start to see usually a little flattening in what happens with our net enrollments because some of that is sort of a byproduct of going through the open enrollment period. And then we sort of return to kind of a more normalized Q4. So those are some of the factors that are going on. This year, because of what's happening with our population around Medicaid eligibility in the first quarter and working through some of the issues there, probably is going to make a little bit more lumpiness in the front half of the year than in the past. But we're still good where we are with guidance. So hopefully, that provides a little color on how to think about the quarters. Benjamin Rossi: Really, yes, I appreciate the color there. I guess just as a follow-up, just taking a step back as we're making our way through open enrollment and Medicare Advantage. There's just been some commentary from brokers regarding an uptick in Special Needs plans offerings as some of the traditional MA plans are generally pared back. I appreciate that PACE possesses unique eligibility and processing requirements relative to those SNFs. But just curious how you describe maybe the competitive dynamics of this cycle and whether you've maybe seen any spillover into how you're thinking about your risk pool going into this upcoming year. Patrick Blair: This is Patrick. I'll get to start and maybe hand off to Matt. I think what we're experiencing is a market that still remains pretty competitive. I certainly see some of the extraction of certain Medicare Advantage plans. But to your point, the Special Needs Plans still remain a strong presence. I think in terms of how we're responding to that, I think we got out there very early into the market, working with our referral channels and working with our participants just to make sure that people were aware of the strength of our offering, how our offer differentiates between a Medicare Advantage set of benefits, how much more comprehensive we are and integrated we are. And I think for the most part, I think we're feeling good about our position in the market. I think it's taken a few years, but people are, I think, gaining a better understanding of PACE as it relates and compares to any sort of Medicare Advantage plan, whether that be a Special Needs Plan or a traditional Medicare Advantage plan. And I think that distinction, we're getting better at articulating that value proposition in all of our markets. And so I think we're feeling pretty good about our relative positioning in the markets. I think it is still very competitive, but I think we're getting much better at telling the PACE story, and that's certainly helping. But Matt Huray is here with us today, and I'll ask him to add any of his thoughts. Matt Huray: Thanks Patrick. Patrick articulated it well. I would start with just the difference in the models themselves. PACE is a vertically integrated offering. It's a comprehensive set of services and there's 0 out of cost. And so we're focused on making sure that folks for whom either is an alternative. And you'll recall, within the dual eligible population, only a small subset would be PACE eligible based on clinical frailty. But when we find folks who that overlaps, we make sure to hit those differentiated points. And year-to-date, it's early days, but it's going well. Operator: Our next question comes from the line of Matthew Gillmor with KeyBanc. Matthew Gillmor: I wanted to ask about some of the cost trends that you reported. And I think we tend to look at sort of total cost PMPM because it normalizes for the in-sourcing you've done on pharmacy and hospice, but really impressive results again this quarter. I wanted to see if there was any lingering benefit as the acuity of the population has normalized or if that's fully behind you. And then just what would you attribute the lower SNF utilization to in terms of your clinical efforts in the market? Patrick Blair: This is Patrick. I'll start. Ben did have some thoughts he wants to share. On your last point about sort of post-acute, we put a lot of work into optimizing our discharges from the hospital into the appropriate level of care with skilled nursing and have put a lot of work into the contracts themselves to ensure that we're optimizing the unit cost side of things as well as the level of care and care coordination side. I think we've gotten a lot better in that area as well of doing sort of our version of prior authorization, just making sure that the individual does, in fact, need to go to a SNF versus go back home. Really one of PACE's strengths is our ability to build a support structure around the home through our resources and family members, et cetera, to help people get back home when in many other programs, they're going to go to a SNF. And so I think that's a big part of it. And then just trying to align incentives as well with our network partners, that's really helped us a great deal with our SNF. But overall, each year, we've got a portfolio of what we call clinical value initiatives and OVIs, our operating value initiatives. And so in addition to the work we've done in SNF, we've done a lot of work on inpatient hospitalizations as well, conversions of short-stay inpatient stays into observations. We're doing a really tight management of readmission of our patients; our doctors play a big role. We've put work into our audits of hospital claims and are working with top-tier organizations to make sure we're not paying any more than we should. Lots of work around the ER as well. Pharmacy is one. I think Ben has mentioned it in the past, we brought pharmacy in-house. But that's allowed us to work with a lot of different elements of the cost structure there, not only how we fulfill the care, but how we fulfill the drugs, how we distribute the drugs, how we package the drugs, the care management that we put around the prescribing patterns. There's just a lot of work in that sort of CDI bucket that touches on all these areas. And we sort of build a plan at the beginning of the year. Some of those are successful. Some of them maybe aren't as successful. Some of them we get to the value quicker. Some of them, it takes longer to get to the value. And I think that we've done a really nice job on executing on those. And I think the more we get into the why, you probably saw some of it in my opening remarks about just this unique model where we control -- our doctors really control so much of the care that gets delivered. And we're really leaning into that and delivering great high-quality care, care with very high satisfaction. But I think our risk portfolio more broadly, I think we've got modestly better in terms of our mix. And so if you think about our mix, we've talked about independent living, assisted living and then people that are in a permanent nursing home. Because we're now enrolling people post sanction, we're enrolling a lot of individuals that are independent and living in the community. And so that's helping a bit with our mix. And I think that overall, the team is just doing a really outstanding job. And Ben, anything you want to add? Benjamin Adams: Yes. I mean, I guess the only thing I'd add to that is if you're looking at trend in kind of a Q-over-Q fashion, one thing that's probably worth being aware is that with the in-housing of pharmacy, it's moved a few expenses around in terms of the geography of the income statement. And we don't break it out, although there's some discussion of it in the 10-Q itself. But let me just give you a little guidance to think about it. If you think about our external provider costs, they went up Q-over-Q by 1.5%. Obviously we had a 9.9%, almost a 10% increase in member months. And so we had an offsetting amount to get there. And some of it had to do with improved utilization. Some of it also had to do with slightly better rebates on the pharmacy side and also the benefits of what our in-house pharmacy does to our external provider cost trend. So think about that is there's a little bit of a model transition when you do the Q-over-Q comparison. Similarly, if you look at the cost of care line item for us, it looks like it went up 19.7%, which is huge in comparison to the increase in member month. But if you sort of get behind it, you'll see in some of the description, we talk about the fact that there's an increase in SWB that's pretty large. And there's also a $4.9 million increase in consulting fees and shipping costs related to the in-housing of our pharmacy. So if you were to sort of realign things back geographically, which you really don't have all the pieces to do, but it will become more apparent as we get further through the course of the year and things begin to annualize out, you'll see the cost trends sort of make more intuitive sense as opposed to what the real Q-over-Q numbers would suggest. Matthew Gillmor: Yes. No, I appreciate that. We tend to look at the external provider costs and the cost of care together right now just because of that geography. Let me ask kind of one follow-up. Patrick, I was curious as you're thinking about these clinical value initiatives just how far along the path do you think you are in terms of standardizing some of these processes like working with the discharge planners at the hospitals to try to get people home. How much runway is there to go? I assume it's a long runway, but just wanted to get your sense in terms of the degree of maturity for these programs as you roll them out across your markets. Patrick Blair: Thank you. It's a great question and one that we sort of think a lot about. And what I would say, if I had to sort of put it into percentage terms, I'd say we're about 50% there. And our 100%, I don't put on sort of the caliber of your best MA plans, for example. So just -- but what are we capable of? I'd say we're about 50% there. And you're right, as we go through, as I go through inpatient and I think about what we're doing there, when I go through emergency room services or PTOT, dermal medical equipment, labs, those are post-acute that we talked about. You think about for all of those, what we've done is tightened coordination, tighten communication, leveraged our new Epic EMR to the fullest, got under the cover on unit costs and renegotiated where we could on unit cost. What's left -- and this is where you kind of go from good to great. What's left is really ordering behavior. The point about we control so much of the healthcare dollar, it means we also are responsible for deciding what we're going to do and what we're not going to do. So where do I think there's more opportunity in that back half? It's things like very thoughtful technology-based clinical guidelines and utilization review guidelines. So what we find is across our 20 centers, you could find variations in ordering patterns and variations in decision-making on when does someone go to assisted living. When do we make the decision for someone to go into a nursing home? How much of the specialist care that's recommended is supported with clinical guidelines. So it's that sort of reducing variation of care across our system and using clinical guidelines to help direct us and help guide us there. And so this intersects with -- you saw -- I think it was yesterday, we announced Paul Taheri is joining us. And if you think about Paul's leadership, he brings tremendous experience with sort of systems thinking. He brings tremendous experience leading physicians through this sort of transformation, understanding the unique dynamics and culture of our providers and how they make decisions and how to address resistance, frankly, to change. And then he just has a great collaborative leadership style and he's just an all-around great guy. So he's here to help us address that next 50%. And we think there's value there. It takes time to get to. It doesn't happen in a quarter or 2 quarters. But over the next couple of years, we feel really good about our ability to deliver high-quality, cost-effective care. Operator: I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Comscore Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would like to hand over the conference call to our first speaker, Kevin Burns, Executive Vice President for Business Operations. Please go ahead. Kevin Burns: Thank you, operator. Before we begin our prepared remarks, I'd like to remind all of you that the following discussion contains forward-looking statements. These forward-looking statements include comments about our plans, expectations and prospects, and are based on our view as of today, November 4, 2025. Our actual results in future periods may differ materially from those currently expected because of a number of risks and uncertainties. These risks and uncertainties include those outlined in our 10-K, 10-Q and other filings with the SEC, which you can find on our website or at www.sec.gov. We disclaim any duty or obligation to update our forward-looking statements to reflect new information after today's call. We will be discussing non-GAAP measures during this call, for which we have provided reconciliations in today's press release and on our website. Please note that we will be referring to slides on this call, which are also available on our website, www.comscore.com, under Investor Relations, Events and Presentations. I'll now turn the call over to Comscore's Chief Executive Officer, Jon Carpenter. Jon? Jonathan Carpenter: Good evening, and thank you for joining us. For the third quarter, we generated just under $89 million in revenues, slightly up year-over-year and driven by continued solid double-digit growth in key strategic areas of our business. For starters, we delivered another strong print in local with double-digit growth that continues to highlight our product strength in measuring audiences at a hyperlocal level across platforms. Second, and despite a shift in strategy from a large retail media client, we delivered 20% year-over-year growth in cross-platform. Absent this shift, which we believe is unrelated to our product, but does have a second half impact on the revenue, our cross-platform business was up 35% in the quarter and demonstrates that clients across the media industry are turning to us for our suite of cross-platform audience, planning and measurement capabilities. These cross-platform capabilities are fueled by our unmatched data integrations across CTV, social, traditional TV and digital, which, when coupled with our intellectual property, enables us to deliver high-quality, differentiated cross-platform results for our clients. At our core, our goal is to enable cross-platform performance for our clients. We do that by giving them the measurement data, audience intelligence and privacy forward solutions they need to plan, target and execute effective ad campaigns that deliver the outcomes that their businesses demand. In other cases, our solutions help clients articulate the unique audiences that are engaging with specific pieces of content at the show and episode level and allow for more effective packaging, planning and monetization of content to advertisers. With our staggering data footprint, Comscore is measuring the audiences that matter most to help our clients get the performance and outcomes that matter to their businesses. And we do this with solutions like Comscore Content Measurement, which gives advertisers and media owners a unified view of audience behavior across screens in a way that they've never had before, letting them understand reach and engagement across content without duplication. We've built CCM in close collaboration with leading publishers, broadcasters and agencies to directly address the industry's biggest unmet needs in content measurement and planning, delivering the transparency and comparability that the market has been asking for. Comscore Content Measurement solves one of the industry's most persistent and long-standing problems, fragmented measurement and positions Comscore as the company that can finally bridge linear and digital truthfully and at scale. CCM launched earlier this year, and we've already seen a number of clients leaning in, signing long-term contracts, which is a strong endorsement of this innovative solution, which we continue to see accelerate. The next step with this offering is something that we just launched in beta, measuring deduplicated, exclusive and overlapping reach for specific programs and episodes. Program and episode level clarity takes the top-level view of audience behavior that CCM provided at launch down to a granular view of what audiences are actually engaging with. Clients can now see where attention spikes or fades across individual shows, seasons or movies, helping ground decisions for buyers and sellers with trusted independent data measuring real viewer behavior. For content owners, it provides the evidence base to greenlight new seasons, renew deals and better price and package content for advertisers, distributors and licensing partners, ultimately driving incremental revenue opportunities. And for advertisers and agencies, it informs smarter media planning by showing exactly which programs and episodes attract their target audiences. Comscore is uniquely positioned to deliver these granular insights, combining our unparalleled data assets, partner relationships and independence to bring a new level of precision and transparency to content measurement. The quick progress that our team has made in building out impactful features like this in our content measurement product is especially exciting because it's tangible evidence that the transformation we've been undertaking has been successful. Before I hand it over to Mary Margaret, and as we previously disclosed in September, we announced an agreement that the company had reached with its preferred shareholders that once voted on and approved by our shareholders, has a number of features that we believe are beneficial to our common stockholders. Among other benefits, the agreement includes the elimination of more than $18 million in annual preferred dividends, the cancellation of a $47 million special dividend obligation, the reduction in our overall Board size and in the number of preferred designees on our Board and the exchange of more than $80 million in preferred stock for common stock at a significant premium to the 90-day trading price as of our signing in September. These benefits, along with other changes outlined in our proxy filing, bring us a lot closer to a united stockholder base with better alignment of interest between preferred and common stockholders. In addition, this arrangement, if approved, gives us greater financial flexibility to invest in our products and technology to help drive growth. We encourage our shareholders to vote in favor of this transaction and look forward to updating you all on our 2026 outlook when we get back together in the early part of next year. With that, why don't I hand it to Mary Margaret for further details on Q3 and our end of year outlook. Mary Curry: Thank you, Jon. Total revenue for the third quarter was $88.9 million, up 0.5% from $88.5 million the same quarter a year ago. Content and ad measurement revenue of $75.5 million was up 0.3% from the prior year quarter, driven by growth in our cross-platform and local TV offerings. Cross-platform revenue of $12.3 million was up 20.2% compared to the prior year, driven by higher usage of our Proximic and Comscore Campaign Ratings solutions as well as the continued adoption of Comscore Content Measurement, which launched earlier this year. As Jon mentioned, cross-platform growth in the third quarter was impacted by a strategy shift of one of our large retail media clients, which we expect will impact the fourth quarter as well. Syndicated audience revenue of $63.2 million was down 2.8% compared to the prior year quarter, driven by declines in our national TV and syndicated digital products, partially offset by growth from our other syndicated offerings, including double-digit growth in local TV from higher renewals and new business. Our movies business also remained strong, generating $9.5 million of revenue in the third quarter, up 1.9% from the prior year. Research and Insights Solutions revenue of $13.4 million was up 1.4% from Q3 of '24, primarily due to new business in the quarter, including revenue from the launch of a new AI measurement solution, which was partially offset by lower renewals and the timing of certain deliveries. Adjusted EBITDA for the third quarter was $11 million, down 11.1% from the prior year quarter, resulting in an adjusted EBITDA margin of 12.4%. While we remain disciplined in our cost execution, our core operating expenses increased in the third quarter, primarily driven by higher employee incentive compensation accruals this year, which are based on expected full year performance. We also continue to transform how we operate and invest in new products and capabilities, which have an impact on our financial results. These investments include enhancements to existing products, upgrades to our tech stack, providing faster data delivery and increasing interoperability as we continue to roll out key integrations. Based on current trends and expectations, we are revising our full year revenue guidance to be roughly flat with the prior year. Our previous guidance was based on the expectation that growth from our cross-platform solutions would exceed the declines we anticipated from our syndicated digital and national TV products. As I mentioned, our cross-platform revenue in the third quarter was impacted by the strategy shift of one of our customers. We expect this shift to also have an impact on revenue in the fourth quarter. And while we still expect to see solid double-digit growth in cross-platform revenue, we have tempered our expectations for the quarter and the full year. We remain encouraged by the growth we're seeing in our cross-platform and local TV offerings and believe that momentum from continued adoption will provide additional growth opportunities as we head into 2026. We are maintaining our adjusted EBITDA guidance for the full year with an anticipated margin of 12% to 15%. With that, let's open it up for any questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Jason Kreyer from Craig-Hallum Capital Group. Cal Bartyzal: This is Cal on for Jason. So maybe just to start, can you just provide some additional color on the large retail media advertiser that shifted away from Proximic and what kind of went into that decision? Jonathan Carpenter: Cal, it's Jon. This impacted the Proximic business primarily in one of our largest programmatic platforms. And yes, it was a large retail media client who has access to a tremendous amount of first-party data and access to a platform outside of one of the major platforms that we're operating in and has taken advantage of that shift. And it's something that was a headwind down the stretch in the third quarter, and we anticipate seeing it again in the fourth quarter. We anticipate it being short term in nature. But given the timing of the year, we had to make a call on the full year number. Cal Bartyzal: Got you. And then just curious what you're seeing in the pipeline there that gives confidence that the cross-platform growth opportunities can more than replace this lost revenue as we look to 2022? Jonathan Carpenter: Yes. I mean I think the combination of our suite of offerings here between Proximic's capabilities, coupled with the cross-platform ad measurement half of a product like CCR that throughout this year continued to perform incredibly well. Those 2 things alone complement each other incredibly well. And now we've layered on our content measurement capability with CCM. And as we talked about on the -- in the prepared remarks, CCM has really taken off. We launched it in January. It wasn't fully featured out, and we immediately saw really strong engagement. We've signed, as I mentioned in my notes, a number of new long-term deals with major partners and the pipeline for that product is incredibly encouraging. And so I think the combination of our full suite of cross-platform capabilities is really unmatched compared to the rest of the measurement marketplace, and we're going to continue to lean into the investment that we put forward on some of those, and we fully anticipate it to continue to pay off. Cal Bartyzal: Perfect. That makes sense. Maybe next for me, there's been some reports that one of your large competitors will no longer measure local TV stations that are not subscribers. So just curious how this can benefit adoption given your leading capabilities in local and if you've seen any benefit materialize in the market to date? Jonathan Carpenter: Yes. Thanks. Look, our prowess in local measurement across channels is certainly one of this company's great strengths. And I think you see that in the result quarter after quarter here with double-digit growth in our local offering. We continue to invest in that capability to support not just our local broadcast partners, but to support our cross-platform capability. And we're highly confident in the quality of that product and the stability that clients get when they engage with our offering, particularly on the traditional, call it, TV currency side of things. And so I fully expect us to continue to benefit from the strength of that product. Cal Bartyzal: Great. And then maybe last for me. Should it ultimately be approved, can you just kind of discuss how the recapitalization improves your EBITDA to free cash flow conversion? And what some of the points of emphasis might be for investments given the additional resources? Jonathan Carpenter: Yes. I think we're excited about what this agreement does for common shareholders. I outlined some of the benefits of this for our common shareholder base. I encourage people to go to our proxy filing for additional details on that and as we get into the '26 discussion. And again, like I said, we're encouraging people to approve this. And once approved, I'd be happy to share more detail on the benefit beyond what I articulated on the call today. Operator: I'm showing no further questions at this time. This concludes our Q&A. I would like to turn it back to Jon Carpenter, CEO of Comscore. Jonathan Carpenter: Great. Thanks. I'd just like to recognize and thank our employees for their continued hard work here at Comscore and what they do to deliver every day for our clients. Further, I'd like to thank our investors and our clients for their continued trust and partnership. Thanks, everyone, for joining us this evening, and we'll be talking soon. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the CareDx Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I'd now like to turn the conference over to Tina Jacobsen, Vice President of Investor Relations. Please go ahead. Tina Jacobsen: Thank you, operator. Good afternoon. Thank you for joining us today. Earlier today, CareDx released financial results for the third quarter 2025 ending September 30, 2025. The result is currently available on the company's website at www.caredx.com. Joining me on today's call are John Hanna, President and Chief Executive Officer; and Nathan Smith, Chief Financial Officer. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. Information concerning the risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are included in our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, November 4, 2025. We disclaim any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events or otherwise. This call will also include a discussion of certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute or in isolation from GAAP measures. Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures may be found in today's earnings release, which is posted to our website. I will now turn the call over to John. John Hanna: Thank you, Tina, and welcome to everyone joining today's call. We had a strong third quarter on many fronts, including record volume and record revenue in testing services, patient and digital solutions and our lab products businesses. Our strategy of solution selling is working. At CareDx, our mission is clear: to create life-changing solutions that enable transplant patients to thrive. We are uniquely positioned as the only company serving transplant patients from end to end, delivering innovative diagnostics, digital tools and patient support that span the entire transplant journey. Our strategy is rooted in putting patients and their care teams at the center of everything we do, and you'll see this reflected in our product innovations, operational excellence and the way we partner with transplant centers worldwide. At the core of this strategy lies an exceptional team. The true driving force behind our success. To further strengthen the outstanding group here at CareDx and advance our mission, I was delighted to announce in October the appointment of Suresh Gunasekaran, President and CEO of UCSF Health to our Board of Directors. With over 2 decades of experience leading major academic medical centers, including some of the largest solid organ and bone marrow transplant programs in the United States, Suresh brings to the organization the voice of our customers, offering invaluable perspectives as we advance our strategy to become the solutions provider to transplant centers. In addition, I was also pleased to welcome last month Dr. Jeff Teuteberg, our new Chief Medical Officer. Jeff is one of the most forward-thinking clinicians in transplantation. He is internationally recognized for his track record of clinical innovation, research and patient advocacy and is joining us from Stanford University where he was section chief of heart failure, cardiac transplant and mechanical circulatory support since 2017. Jeff has held prominent roles in the American Society of Transplantation and as the President of ISHLT or the International Society of Heart and Lung Transplant. His deep experience will be instrumental as we strive to establish noninvasive molecular testing as the standard of care in solid organ transplantation and launch our next generation of precision medicine assays in stem cell transplant. The expertise and vision of these leaders reinforce our commitment to innovation in both new products and how we go to market and engage our customers. Now on to the third quarter results. Total revenue of $100.1 million grew 21% year-over-year. Adjusted EBITDA was $15.3 million, more than double Q3 last year. We repurchased an additional 2 million shares during the quarter at an average price of $12.87. Year-to-date, we have repurchased approximately 9% of shares outstanding. Today, we are raising 2025 revenue guidance to $372 million to $376 million, a reflection of our strong performance in the third quarter. We are also raising adjusted EBITDA guidance to $35 million to $39 million. Nathan will provide additional details on the guide in his prepared remarks. In Testing Services, revenue was $72.2 million for the third quarter, an increase of 19% year-over-year. We delivered approximately 50,300 tests in the third quarter, up 13% year-over-year, with growth across all 3 organs: heart, kidney and lung. I personally visited 20 transplant centers in the third quarter. I spoke with the clinicians and transplant program administrators to understand how our existing and future solutions can help improve the care of their patients. Their feedback was clear. Our team is highly engaged, consistently puts patients first and is executing on the right priorities. I also spent time with our local commercial teams, gaining valuable insights into where our solution selling strategy is working and where we can further improve. These conversations reinforce my confidence in our strategy and our people and left me inspired and optimistic about the significant growth opportunities ahead. This week at the American Society of Nephrology meeting, or ASN, we are launching HistoMap Kidney, a breakthrough tissue-based molecular test that exemplifies our commitment to end-to-end transplant care. By integrating advanced histopathology with molecular insights, we're empowering clinicians to make more precise and timely decisions for their patients. This is just one example of how CareDx is bridging the gap between diagnostics and patient outcomes, reinforcing our leadership in delivering comprehensive solutions across the transplant continuum. HistoMap Kidney is built on the Banff human organ transplant gene set, a research tool adopted by transplant researchers globally and leverages gene expression profiling for deeper insights into immune activity and rejection phenotypes to inform clinical decision-making. We built HistoMap Kidney to address a critical unmet need in transplant care. If a patient's kidney function declines after transplant, clinicians need clarity on the type of rejection. With HistoMap Kidney, doctors can use the original biopsy tissue to obtain a precise molecular readout, confirming the subtyping rejection from an FFPE sample. By providing objective actionable data, HistoMap Kidney helps reduce uncertainty in biopsy interpretation, gives clinicians and patients greater confidence in their diagnosis and next steps. It will be available starting in early '26 in a clinical study and then for commercial use later in the year. Also at ASN Kidney Week, CareDx Technologies will be showcased in 5 abstracts covering AlloSure and our AI-derived integrated risk assessment algorithm, AlloSure Plus. The abstracts will present new insights, including biomarker interpretation in the early post-transplant period, including in the setting of delayed graft function and new evidence supporting the use of AlloSure in combination with clinical data to predict antibody-mediated rejection. Further, AlloSure Kidney will be featured in new analyses from the KOAR registry, demonstrating its ability to predict long-term outcomes and in research demonstrating the use of AlloSure Kidney to facilitate the transition to immune suppression monotherapy in kidney transplant patients. Belatacept monotherapy is preferred by clinicians because of its demonstrated improved clinical efficacy and tolerability as compared to traditional regimens. This emerging evidence suggests AlloSure can be utilized to optimize immune suppression strategies and improve long-term outcomes for transplant recipients. In addition, an ASN abstract from Henry Ford Hospital in Detroit addresses whether donor kidney volume impacts AlloSure levels or 1-year graft function. This is particularly relevant in pediatric transplantation where size mismatch between donor and recipient has been a concern. The study found that kidney size did not significantly affect AlloSure levels or graft function at 1 year, reinforcing the reliability of our noninvasive monitoring tools across a broad range of donor and recipient characteristics. These new data reflect our commitment to advanced transplant care through rigorous science and innovation. We are proud to see our technologies validated across diverse clinical settings in patient populations and look forward to continuing to deliver meaningful solutions that improve transplant outcomes. Keeping with our commitment to evidence generation, I want to highlight a major milestone in heart transplantation. Just 2 weeks ago, the second study from the SHORE registry was published in the Journal of the American College of Cardiology Heart Failure. This is the largest prospective analysis of antibody-mediated rejection, or AMR, in heart transplantation ever published. The SHORE study evaluated over 2,200 heart transplant patients across 59 U.S. centers, analyzing nearly 25,000 biopsies and almost 9,000 paired AlloSure heart samples. This is truly a landmark data set. What's most exciting is that SHORE validates HeartCare, which brings together AlloMap and AlloSure Heart as a noninvasive, clinically proven approach to heart transplant surveillance and context-driven decision-making. The data show that AlloSure Heart results are highly specific for diagnosing AMR. Elevated AlloSure Heart levels were strongly associated with biopsy-proven AMR and higher values correlated with more severe rejection. And when AlloSure is modestly elevated, a positive AlloMap can help identify those at risk for acute cellular rejection. These findings demonstrate that HeartCare can optimize biopsy utilization and clinical decision-making in heart transplant care. Lastly, on the topic of evidence generation, I'm particularly proud of our leadership in response to the draft LCD policy for molecular testing for solid organ allograft rejection that was published in July. Our team delivered a comprehensive evidence-based comment letter that champions patient access to personalized care. We submitted the letter to policymakers ahead of the public comment period closed on August 31, and it remains accessible at caredx.com/lcdcommentletter. We consider the draft policy to be a significant step forward in affirming coverage for surveillance testing without a tie to protocol biopsy. However, we noted that limits placed on surveillance testing conflict with clinical guidelines and restrict clinician decision-making in scenarios where patients have elevated risk of rejection. Specialty societies, key opinion leaders, advocacy groups, policymakers and patient stakeholders also submitted comment letters emphasizing concerns with the proposed limits. We urge policymakers to maintain coverage for combination molecular tests such as AlloMap Heart and AlloSure Heart. Our comments provided the latest evidence in clinical data, which demonstrates the testing with AlloMap Heart and AlloSure Heart, identifies rejection with greater accuracy than gene expression testing or donor-derived cell-free DNA testing alone, resulting in improved patient outcomes. We continue to anticipate that the draft policy will be finalized in early 2026. On our earnings call last quarter, we commented on the likelihood of potential outcomes and the associated financial impacts and those expectations are unchanged today. We plan to provide an update on our long-range planned financial assumptions once the policy has been finalized. We remain committed to supporting the transplant community and have not and do not anticipate to observe any business impact as the draft policy comments are being evaluated and the policy is being finalized. Moving on to our initiatives to drive operational excellence. Placing our customer at the center of everything we do has driven us to improve our enterprise infrastructure and business processes to operate more efficiently. We continue to push forward with the launch of our EPIC instance to make it easier for healthcare providers to order CareDx testing and receive test results. We have 8 EPIC Aura transplant center connection projects in process now and are officially live at Boston Children's, the U.S.'s leading pediatric heart transplant program. Feedback from that pilot implementation has been exceptional. Because our EPIC order set is tailored to transplant centers, it makes the center's workflow simple and fast. Since going live at Boston Children's, AlloSure Plus results are now available directly through EPIC Aura. Medical records are received automatically with each order and the center has seen a 20% reduction in order turnaround time and a 60% reduction in specimen holds. This is a great example of how we're making the clinician and patient experience better, not just faster. We continue to expect roughly 10% of our total volume will be serviced through EPIC Aura integrations by year-end, and roughly 50% of total volume will be serviced through EPIC Aura integrations by year-end 2026. This quarter, we also made remarkable progress on revenue cycle management. Building on last year's foundational updates to the team and workflows, we've now begun automating key RCM processes with AI, streamlining claims submission, accelerating appeals and reducing manual intervention across the board. The investments are already delivering measurable results. This isn't just operational fine-tuning. This is a strategic move to unlock operational efficiency to drive margin expansion and support scalable growth as our testing volumes increase. In the third quarter, we achieved improvements across all of our RCM KPIs compared to our benchmark periods, including an over 200% improvement in total appeals volume, a 60% improvement in claims submission time, a 600 basis point improvement in overall 0 pays, and a 1,300 basis point reduction in claims rejection rate. We believe these wins are key leading indicators for the growth and predictability of average revenue per test and are beginning to emerge in our financial statements. Cash collections in the third quarter were exceptional with collections accelerating to 124% of testing services revenue. Nathan will provide additional color on our expectations for revenue per test in his prepared remarks. I'll now turn to Patient and Digital Solutions, which includes our transplant pharmacy, software tools and remote patient monitoring services. In the third quarter, we reported revenue of approximately $15.4 million, representing 30% growth compared to last year. Our solution selling strategy is driving strong results. By delivering integrated Patient and Digital Solutions, we're unlocking new growth opportunities for testing services, deepening customer loyalty and strengthening our brand equity. For example, at the largest kidney program and Pediatric Institute in Georgia, we have become the pharmacy of choice for the kidney transplant program to help more efficiently and effectively manage their post-transplant patients as they ramped up their kidney transplant volume and initiated an AlloSure Kidney surveillance protocol. Next, in lab products, which includes PCR kits for rapid disease donor HLA typing, NGS kits for transplant recipient HLA typing globally, and IVD monitoring assays for solid organ and stem cell transplant recipients outside the U.S., revenue of $12.5 million was up 22% year-over-year. We just returned from ASHI, the American Society of Histocompatibility and Immunogenetics Annual Conference, where we showcased CareDx's continued investment in creating life-changing solutions. This year at ASHI, we launched AlloSeq Tx11, our next-generation HLA typing solution with enhanced Class II coverage and expanded non-HLA markers to support broader transplant organ profiling. AlloSeq Tx11 is designed for flexibility working with low-quality samples preventing allele dropouts and reducing the need for retesting. We also introduced Score 7.0, our modernized analysis software for QType, built for scalability and regulatory alignment and supporting future ABO typing and IVDR compliance. In addition, we announced that AlloSeq TX and QType have received IVDR certification in the European Union, underscoring our commitment to delivering high-quality regulatory compliance solutions for transplant centers worldwide. Our well-attended user group meeting entitled ABO Histocompatibility in transplantation, current status, unmet needs and future directions, featured leading experts from the Brigham and Women's Hospital, LifeLink Foundation and the University of Alberta. The session addressed the clinical relevance of ABO antibodies in transplant rejection, genotype versus phenotype discrepancies and the importance of advancing ABO blood typing for improved patient outcomes. Additionally, we announced our validation of a rapid ABO genotyping assay, which demonstrated 100% concordance with established methods and enables faster, more accurate blood group determination by integrating ABO and HLA genotyping into a single workflow we're helping transplant centers expand donor eligibility and streamline organ allocation, delivering real-world impact for patients and providers. This is the degree of innovation that defines CareDx and supports our confidence in continued strong lab products growth. Before I hand it over to Nathan, I want to reflect on our recent progress. Each achievement this quarter is a direct result of our strategy in action and underscores the importance of keeping patient needs at the center of every decision. Our progress isn't just measured in numbers, but in real-world impact we're having on transplant patients, their families and the clinicians who care for them. The growth we're seeing is not just the result of isolated initiatives, but of a cohesive approach where each decision and investment is anchored in delivering meaningful value for patients and their care teams. These growth drivers clearly demonstrate how our investments in innovation, optimizing our go-to-market approach, building and amplifying evidence generation and enhancing operational excellence through RCM progress and EPIC Aura integration are translating into meaningful impacts for patients, providers and the broader transplant community. They serve as proof points that our strategy is working and that we are building lasting value for all stakeholders, including our shareholders. Our leadership team has a proven track record of disciplined capital allocation and operational execution. We are confident that these strategic investments will yield a strong return, fueling high-quality, durable growth for years to come. There is no shortage of work left to be done, but I'm proud of our execution so far this year and anticipate continued progress. Now I will turn the call over to Nathan to discuss our detailed financial results and guidance. This is Nathan's first call as our CFO of CareDx. I'm thrilled to have him on the team and look forward to his leadership as we execute on our strategic and financial goals. Nathan? Nathan Smith: Thank you, John, and good afternoon, everyone. It's an honor to be here, and I'm grateful for the opportunity to contribute to the value creation that's ahead for CareDx. Starting with financial highlights and key performance indicators for the third quarter compared to the prior year quarter, total revenue of $100.1 million increased 21% with all 3 business segments generating record quarterly revenue. Testing Services revenue of $72.2 million increased 19% on reported test volume of approximately 50,300, an increase of 13%. Revenue per test of 1,436 increased 5%. Revenue per test includes $5.9 million in revenue recognized from cash collections in excess of receivables on historical claims. This positive benefit was driven by the success of our revenue cycle management function that improved our cash collections on those historical claims. We will be using the revenue per test metric that minimizes the back and forth of adjustments and better reflects the fundamentals of our business. Continuing on Patient and Digital Solutions revenue of $15.4 million, increased 30% due to further adoption of the CareDx pharmacy as the pharmacy of choice for transplant patients. Lab product revenue of $12.5 million increased 22% driven by our distributed NGS transplant test kits and our PCR-based rapid HLA typing kits. Gross profit of $70.9 million reached a high watermark, increasing 190 basis points to 70.9%. This improvement was driven principally by top line performance and input cost discipline. Our non-GAAP operating expenses of $57.9 million declined to 58% of revenue, down from 63% of revenue. Adjusted EBITDA of $15.3 million increased significantly driven by revenue growth and operating leverage. Now turning to cash. We collected $119 million this quarter. Our RCM team achieved record collections of approximately $90 million from testing services. Those record collections drove $19 million in sequential reduction in our accounts receivable and a significant 38% improvement in DSOs, which improved from 71 to 44 days. That performance underscores the transformative impact of our investments to accelerate claim collection in RCM. We closed the third quarter with $194.2 million in cash and cash equivalents, following a $25.6 million share repurchase during the period. We exited the quarter with 51.4 million shares outstanding and no debt. I'll turn next to guidance. With the strong performance in the third quarter, we now expect full year 2025 revenue of $372 million to $376 million. We also expect full year non-GAAP gross margins to be approximately 70%. Turning to adjusted EBITDA. We are raising full year guidance range to $35 million to $39 million compared to the previous range of $29 million to $33 million to reflect the strong operating results in the third quarter. Updated full year guidance implies fourth quarter revenue of $101 million to $105 million. That assumes fourth quarter testing volume will range between 52,000 to 54,000 tests. The strong momentum of RCM wins and cash collections are driving greater predictability and increasing our confidence in continued average revenue per test improvement. In October, we had the highest cash collections for testing services in the company's history. In Q4 2025, we expect to recognize revenue per test of $1,400 to $1,420, inclusive of $4 million to $6 million of collections in excess of receivables. We are taking a prudent approach to guidance on this metric to allow for potential variations in payer mix, coverage and contracts. Now turning to the other revenue lines. We expect Patient and Digital revenue of $15 million to $16 million, and lab products revenue of $12 million to $12.5 million. We expect fourth quarter non-GAAP gross margins of approximately 70%. And finally, we anticipate fourth quarter adjusted EBITDA to range between $10 million to $14 million. To conclude my remarks, the momentum of the business at CareDx is robust. We are delivering a unique combination of top line expansion, margin improvement and OpEx management. Results in Q3 are a testament to the execution and our ability to scale efficiently while controlling costs. I'll now turn the time back over to John. John Hanna: Thanks, Nathan. In closing, everything we've discussed today from our strategic execution to our operational progress reflects our unwavering commitment to putting patients first as the only transplant company offering end-to-end care. The growth we're delivering is a direct result of strategies shaped by that North Star, and the impact is evident in the lives we touch, the partnerships we build and the innovations we bring to the transplant community. We remain focused on advancing the standard of care, deepening our relationships with clinicians and centers and driving sustainable value for all our stakeholders. With the right strategy, the right team and a clear sense of purpose, we are well positioned to lead the field and realize the full potential of CareDx. And with that, I'd like to open the call for questions. Operator: [Operator Instructions] Our first question will come from the line of Andrew Brackmann with William Blair. Margarate Boeye: This is Maggie Boeye on for Andrew. You highlighted some of the wins on the revenue cycle management side of things and then some of the impact that has already shown up here both for the third and fourth quarter thus far. How should we be thinking about the durability of those impacts on ASPs moving forward? And then as you sort of think about additional products which might exist, how do we think about the runway for further ASP lift from revenue cycle management initiatives moving forward? John Hanna: Yes, I'll take the first part of that and the durability of ASPs. Yes, as I mentioned in my prepared remarks, third quarter was a record quarter for us in terms of cash collections, and we saw that same momentum going into fourth quarter in October. Just over the last 6 months, we have seen an overall increase in our base revenue per test increased by 5%. So what gives me confidence in the durability of that ASP is the strong cash collections on the historical claims that will ultimately increase that base ASP that we'll be recognizing on future claims. These RCM victories increase the predictability of our revenues per test over time, we see that momentum continuing through the fourth quarter and into 2026. Margarate Boeye: Great. And then maybe just one on the EPIC Aura integration. I appreciate the comments so far on how it's been trending with your first pilot in Boston. But just -- how do we think about the rollout of the integration for the other accounts you have planned, both for 2025 and 2026? We've seen a lot of labs thus far have the major tailwind from these integrations. So anything you can talk about there about what you're expecting? John Hanna: Yes. Thanks for the question, Maggie. I'm going to ask Keith to fill that one. Keith Kennedy: Thanks, Maggie. We have about 150 active discussions going on with hospitals and transplant centers across the country right now, and we anticipate going live at about 40 centers in '26. We agree there's typically a 10% uplift in volume once you go live, and we are tracking 3 major KPIs on each integration as we go, and we expect to sort of report and show that next year as we do these. But right now, we don't have enough implementations to give you real world evidence as to what that uplift is, but we were really excited to see that we had a 20% reduction in order turnaround time, which is really important to the centers. We're the leading transplant solid organ testing company in the United States and really globally with the fastest turnaround time. So I was glad to see that we could further improve that. And then we had a 60% reduction in specimen holds, which contributes to the turnaround time and the improvement in that. So all really, really good things for our relationships and what we think it will impact volumes going forward. Operator: Our next question will come from the line of Mark Massaro with BTIG. Vidyun Bais: This is Vidyun on for Mark. Congrats on the nice quarter here. I just have a quick one. Were there any prior period collections in the quarter? Apologies if I missed it. John Hanna: Yes. And Vidyun, thanks for joining us today. Yes, there were, as I mentioned in my prepared remarks, we had approximately $5.9 million in cash collections that exceeded our historical claims. It was a positive benefit. Vidyun Bais: Okay. Understood. And then just one follow-up on the ASP. I heard you on the Q4 ASP guide. Just should we be thinking about that kind of $1,400 level of the new floor moving forward? And just in terms of the remaining upside in ASP, what kind of framework we should be using to think about it? I think your denial rate is about 40% right now. So just where do you think this can go at peak? John Hanna: Yes. Again, thank you, Vidyun, great questions there. So as I mentioned previously, the range that we guided to for fourth quarter is between $1,400 and $1,420 for our ASP, which you should be using in your models. Then as we think about the framework to be using, as we described, we're looking at this framework as a revenue per test. And so we're taking total revenue divided by total reported test, and that's the way we're looking at it because it removes the variability that we see in these out-of-period adjustments. Operator: Our next question comes from the line of William Bonello with Craig-Hallum. William Bonello: A couple of questions. I'm just going to take another crack at that because I just want to make sure. So I think what you're saying is what we calculate as the ASP or the revenue per test is the revenue per test going forward. That's how we should think about it. But then you use the language of cash collections exceeding historical claims. Historically, I think you talked about prior period collections, sort of beyond what you would normally expect. I'm just trying to understand you're calling out is consistent with what you've called out in the past. Or if you're looking at that call out in a slightly different way. And if you're sort of saying, look, going forward, we're not going to be giving that call out. Apologize, I'm just a little confused by it. John Hanna: Yes. Thanks, Bill. It's John. Appreciate the question and the clarity. We're certainly going to call it out because we're going to be transparent. You can see it on the books. So we did have the $5.9 million in prior period revenue that we collected, but we -- as you know, when RCM function really starts cranking like we've got it going, we're going to collect this cash, which we view to be indicative of future period ASP. And so this quarter, we had cash collection that was 124% of our revenue that we booked in the quarter. And as those claims age into the accrual window, we're going to continue to see that ASP propped up. So we're pointing toward revenue per test as the metric to look at because it's more indicative of what you're going to see in future quarters from the company. William Bonello: Yes. Okay. I think that makes sense. And I mean there's evidence on prior period adjustments, good guys and bad guys, right? So okay. So nothing unusual is the bottom line about the [ $500 million ] in this period. John Hanna: That's correct. William Bonello: Okay. That's helpful. And then just a different topic. I'm just curious, John or anybody if you have any sort of on the macro environment, if you have any thoughts on the overall trends we're seeing in transplant volume. Obviously, your volume growth is staying pretty strong, but the overall transplant volume seems to have really been low for a while now. And I know we don't see an immediate correlation to your volumes, but you would think at some point, if we don't see a recovery in transplant volume, that might influence the overall testing volumes. I'm just curious if you have thoughts on what's going on with the overall transplant demand or volume? And then just how you think about that in terms of your growth going forward? John Hanna: Thanks, Bill. I appreciate the question. I'll first address our volumes, and then I'll talk about the macro. So as you know, this market is really just at the early innings of penetration. So we anticipate that our growth rates will continue to outpace the growth of the market overall for the foreseeable future. And when we think that that's not the case, we'll update you. But for right now, for as far as I can see, that's going to continue to be the scenario. In general, in the macro environment, we've seen transplant volumes across all three solid organs remain relatively flat year-over-year, maybe like 1% up or down depending on the organ. We had anticipated that we would see some acceleration here in the back half of the year, particularly in kidney transplant volumes that has not yet materialized. And we speculate that some of that is a function of the media that has been attracted to this space and questioning the practices of some of the various entities that participate in the transplant market, and that has dampened the acceleration in kidney transplant volume that we would have expected from the IOTA program. Now remember, that program is a 6-year program. And so we've got a lot of runway to go on the impact of that policy given that we're only 1 quarter into a 6-year program. So I still have confidence that we're going to see growth in the kidney transplant numbers over the course of this next 2 to 3 years as this comes to play. But you're right, it has not materialized as we had anticipated it would starting here in the third quarter of '25. Operator: Our next question will come from the line of Tycho Peterson with Jefferies. Tycho Peterson: Couple on the models. So on the guidance, you obviously narrowed guidance last quarter, now you're raising. Can you maybe just talk on for the fourth quarter, how much of that is price collections, volume, just some of the nuances behind the guidance raise? And then any preliminary thoughts on '26 you can share? John Hanna: Yes, thanks, Tycho, and appreciate the question. Yes, let me clarify a little bit on that. As we guided to, let's talk about volume. We guided to fourth quarter volume of 52,000 to 54,000 with the midpoint being at 53,000. That would represent the midpoint approximately almost 17% increase year-over-year. On the price element, we guided a price of $1,400 to $1,420. That price is inclusive of $4 million to $6 million in the cash collection benefit that we anticipate to receive, and that's based upon our early read of collections in our record month in October. And then for the other line items, we guided towards both on product, pharmacy and digital. It leads us to our overall revenue of $100 million to $105 million with $103 million being the midpoint. Tycho Peterson: And on '26, any comments? John Hanna: In terms of '26, we're going to defer any discussion on 2026 until after the clarity on the LCD. Tycho Peterson: Okay. And then on net price collections, any color on modality? How much traction is it for Kidney versus HeartCare versus Lung? John Hanna: HeartCare is our mature product, and we get a higher reimbursement rate on HeartCare. But with our kidney product, that's our fastest-growing product now where we don't get as well reimbursed there. But we are seeing wins with our rev cycle management teams and improving those collection rates with kidney. So I would say that the mix -- the product reimbursement mix doesn't have a significant impact, maybe 1 or 2 to 3 percentage points on the total price. Tycho Peterson: Okay. And then I appreciate the comments earlier on IOTA. I guess, so how are you thinking about when that really does start to become more of a meaningful tailwind? I mean I know it's kind of over 5 years, but when do you think that really kicks in? John Hanna: I mean our expectation was that it was going to kick in beginning this quarter. There has been, as I described, some media turmoil around transplantation, particularly as regards this concept of like jumping the wait list, right? So going down the wait list to find a better match for an organ. And the centers, I think, slowed down some of their aggressiveness in transplantation in that regard because of the media attention to the issue. I believe that we've seen the government clarify their policy on that topic with the transplant centers and the OPOs that should lighten up the conservatism and allow them to get back to driving kidney transplantation more aggressively like we anticipate as a result of the IOTA program getting started. So I think here, as we go into the fourth quarter, we'll see a pickup and then into '26 more materially. Tycho Peterson: Okay. Last one is just if the LCD goes through, is the $15 million surveillance headwind only for Medicare? Or is that all patients? And if it's just for Medicare, and that will require a protocol change for surveillance at the testing centers, I guess, what prevents all centers from adjusting to the new protocol? John Hanna: Yes, that's a great question. Thanks for that one, Tycho. So we have not seen any impact on utilization of the testing as a result of the LCD and we did not model a change in clinician behavior and ordering. So the $15 million that we provided in the scenario that we described last quarter is really just a reimbursement headwind. We don't anticipate and we are not going to message to clinicians that they change their behavior around utilization of the product because as you can see in the LCD, there is room to change that policy. So if the evidence emerges that suggests that patients should get 7 tests in the first year in specific scenarios or in general because it improves patient outcomes, then that policy may be modified. At that point in time, we wouldn't want to have to go back and reconvince clinicians that they should do 7 tests instead of 4. So we continue to promote the utilization of the product as it was validated under the ARTS protocol, which is 7 tests in the first year and 4 in every subsequent year. Operator: Our next question will come from the line of Mason Carrico with Stephens. Harrison Parsons: This is Harrison on for Mason. I wanted to start, if you could provide some insight into the delta in patient testing frequency at centers with protocols in place versus those without protocols. And for some of the centers that were early in readopting protocols has testing frequency trended consistently higher towards your established testing protocols. John Hanna: Harrison, thanks for the question. Certainly, since we reinitiated promotion of kidney surveillance protocols and protocols testing in August of '24, we've seen growth in surveillance testing. And we commented last quarter that the growth in kidney surveillance or the growth in kidney volume in general was nearly 20% year-over-year and that's a function of the readoption of those surveillance protocols and utilization of the testing. There are many, many centers more beyond just the 60 that have adopted formal protocols that utilize surveillance testing at their centers from CareDx, you have centers where perhaps there's 5 clinicians and 3 of them do kidney surveillance and 2 of them don't, right, and only order for cause. So there's heterogeneity in the use of the product even within some centers. And so we have seen significant growth in the use of AlloSure Kidney across the market, and we believe that the bulk of that growth is a result today of readoption and reinitiation of those 60 surveillance protocols that we called out last quarter. Harrison Parsons: Got it. And then I know we've done IOTA a couple of times on this call, but have you seen any notable shifts in center behaviors now that, that model is rolled out anything such as increase in compromised organs? Have you seen early signs of these centers leaning more into blood-based monitoring? John Hanna: I think we saw in the first half of the year and second half of last year, increasing adoption of blood-based monitoring for surveillance in anticipation of the start of the IOTA program. But in the third quarter, we have not seen growth in transplant volume in kidney transplant as a result of IOTA program. And to your comment around or your question around compromised organs, this gets to the point I made on the earlier question about these volumes. The criticism that has been made in the media is around going down the wait list and providing compromised organs to patients that are down list rather than giving it to the patient at the top of the list because it's not a great match, right? Or that patient is 35 years old and rather giving them a compromised organ that's only going to last 10 years, wait for a better organ that's going to last then 30 or 40 years, right? So the media on this topic, I think, has somewhat sensationalized an issue that is not really an issue because as you know, when you have these compromised organs, they often go to patients that otherwise would not get an organ. And that's where we anticipate the IOTA program is going to drive growth in transplantation and the need for more intensive surveillance monitoring of those compromised organs. We have not seen that come to fruition as of yet, albeit we're only three months into the initiation of this program. Operator: Our next question will come from the line of Brandon Couillard with Wells Fargo. Brandon Couillard: Dave (sic) [ John ], I just want to clarify one more time the prior period impact. So if I think about this right, the $6 million in the third quarter and then the other $4 million to $6 million in the fourth quarter, that's incremental relative to the prior guidance, right, which you increased $4 million at the midpoint, but then you've got kind of $12 million of good guys that will be incremental versus the prior guide, correct? John Hanna: Thanks, Brandon, for the question. We're including the prior period revenue in the guide. And so we raised the guide as a function of the collection of those -- that prior period revenue. Brandon Couillard: Okay. And John, we've talked about kind of the weaker market to liver transplant procedure volumes. Perhaps that's why you've sort of come in towards the lower end of your sequential volume growth expectations in 3Q and kind of the implied 4Q guidance. I just want to make sure it's more of a softer market as opposed to a competitive dynamic. Could you speak to that element? John Hanna: Yes, absolutely. I don't think it's a competitive dynamic or a softer market. I think it was just a function of the seasonality in the business. Like we had a really exceptional July, and then we saw things just soften in August and September, and we expected a pickup and it didn't occur. And therefore, we're maybe like 0.5 point off of where we expected to end the quarter, 1 point or 0.5 point off from where we expected to end the quarter based on what we did in July from a volume perspective. But it's not a function of a competitive dynamic. If anything, we're gaining accounts and really gaining accounts that as I described previously, went away from surveillance testing to for cause testing and now have turned back on surveillance, which is driving our growth in the kidney business line, in particular, where we saw another quarter of nearly 20% growth year-over-year in our kidney business. Brandon Couillard: And then just one on the pipeline, the HistoMap Kidney launch next year. Do you expect that to be a revenue driver? Or what do you need to generate in terms of data to reimbursement for that product? John Hanna: I do think it will -- thanks for the question, Andrew (sic) [ Brandon ]. I do think it will generate revenue for the company, albeit nowhere near AlloSure sized revenue because this is a test that will only be utilized in the setting of a patient having an elevated AlloSure, they get a biopsy and then they order the gene expression testing off of the biopsy. And so we think this is a really valuable product, particularly as we see new -- potentially new CD38, anti-CD38 therapies coming to market for antibody-mediated rejection and clinicians will want to know the subtype of rejection genomically of that patient from the tissue prior to treating the patient therapeutically. So we see a really interesting scenario there, kind of akin to comprehensive genomic profiling in the oncology market. So we're excited about HistoMap Kidney coming into play. We certainly will be striving to have that product reimbursed. And in the current LCD, there is a pathway for that, particularly in the language where it says in the setting of an inconclusive biopsy. And so that's our thinking today related to the product. But we'll provide guidance around 2026 revenues in our Q4 call likely. Operator: Our next question will come from the line of Yi Chen with H.C. Wainwright. Unknown Analyst: This is Katie on for Yi. Could you quantify the impact the SHORE study had on test adoption or volume growth? And do you think that's a lasting impact on adoption trends? Or was that more of a short-term burn boost following that publication? John Hanna: Thanks, Katie, for the question. The SHORE data has had a significant impact on the adoption of HeartCare in heart transplantation, dating back to April of 2024 at the ISHLT meeting where some of the initial data was first presented and we saw significant strength in our heart transplant business throughout the year 2024, and then coming into 2025. And so what you're seeing now is the product of multiple analyses of that data set in different contexts of use. The first publication was focused on the utilization of biopsy and biopsy reduction. The second SHORE paper that was just published was focused on antibody-mediated rejection. And then the third SHORE paper, which has yet to be published, but the manuscript has been submitted is focused on long-term outcomes and graft survival and the prognosis of graft survival utilizing HeartCare. And we're very excited to see that publication in press hopefully before the end of the year. Operator: And that will conclude our question-and-answer session and today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the Longeveron 2025 Q3 Financial Results and Business Update Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Derek Cole, Investor Relations. Thank you. You may begin. Derek Cole: Thank you, operator. Good afternoon, everyone, and thank you for joining us today to review Longeveron's 2025 Third Quarter Financial Results and Business Update. After the U.S. markets closed today, we issued a press release with financial results for Q3 2025, which can be found under the Investors section of the Longeveron website. On the call today with me are Than Powell, Interim Chief Executive Officer; Dr. Joshua Hare, Co-Founder, Chief Science Officer and Executive Chairman of the Board; Dr. Nataliya Agafonova, Chief Medical Officer; Lisa Locklear, Chief Financial Officer; and Devin Blass, Chief Technology Officer. As a reminder, during this call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our press releases and risk factors discussed in the company's filings with the Securities and Exchange Commission, which we encourage you to review. Following the company's prepared remarks, we will open the call to questions from our covering analysts. With that, let me hand the call over to Than Powell, Interim Chief Executive Officer. Than? Than Powell: Thank you, Derek, and thank you all for joining us today. I'm excited to be here with our leadership team to provide an update on our progress over the previous quarter and to share some thoughts about what is ahead. This is an incredibly important period for Longeveron and our stem cell therapy, laromestrocel and most importantly, for the patients that we hope to treat. I am honored to step in to lead the company and feel a deep sense of responsibility to our patients and their families to continue the progress on our medicines through clinical development and ultimately to approval. Through the first month in this role with the leadership team, the company and I, we have focused on disciplined execution, making decisions to further bolster our cash runway and still deliver on our corporate priorities and to bring the needs and expectations of our patients into everything that we do. Our time this afternoon will provide critical updates in these areas. But first, a brief comment on why I joined Longeveron this summer and why I'm committed to ensuring our success. Longeveron is focused on indications with significant unmet medical need and ones that have directly impacted my family. I know firsthand the need for new treatment modalities, and I am personally invested in advancing the company's development programs with a high degree of rigor and clinical relevance to prove their worth. That scientific rigor and groundbreaking innovation at the heart of Longeveron's stem cell research was critical in my decision to join this company. In our area of research, establishing safety and efficacy through FDA-supported clinical studies is table stakes for building the belief in the potential life-saving qualities of these therapies. And I've had the good fortune to work in the pharmaceutical and biotech industry for over 25 years, ranging from leadership positions with large organizations like GSK and Eli Lilly to being Co-Founder and CEO at a venture-backed start-up. And in every company, large or small, establishing the foundation of high-quality and clinical data has been at the heart of long-term success, and I'm excited about the opportunity to continue to deliver that here with Longeveron. Maybe most importantly, for my reason to join this company are all of the individuals that make up this great team. The leadership team is loaded with experts in their fields who are committed to delivering success for our patients and their families and who happen to be good people as well. Their expertise, their industry experience and their day in, day out effort to make a difference is inspiring, and I'm looking forward to continue to work with them. But enough about me, on to why we're here today. Longeveron has made significant progress advancing 3 programs, building on positive initial results across 5 clinical trials. We have a robust pipeline addressing rare pediatric cardiovascular indications of hypoplastic left heart syndrome and pediatric dilated cardiomyopathy as well as chronic age-related indications, Alzheimer's disease and aging-related frailty. The progress made so far by a small organization is remarkable, in my opinion. In the near-term, we will have unwavering focus on 3 things: first, delivering clinical trial results from ELPIS II, our pivotal Phase IIb study in HLHS. We completed enrollment of the clinical trial in June and remain on track for reporting results in the third quarter of next year. HLHS is a key strategic priority for us. We believe the HLHS clinical trial program developed in conjunction with the National Heart, Lung and Blood Institute represents the largest placebo-controlled study to date in this critical rare disease patient population. Pending the clinical trial results in Q3 of next year, based on discussions with the FDA, we have a clear path to potential regulatory approval and to future commercialization. Our second unwavering focus is on securing necessary financial resources. Now stem cell therapy development, seeking regulatory approval and preparing for potential commercialization all require a significant amount of capital. We've been successful throughout the history of this company in obtaining the capital we need and believe we'll be able to continue to do so, given what we see as a very attractive return on investment with our pipeline and near-term milestones. We recognize that future financing opportunities are not guaranteed and acknowledge there is risk in our current financial situation. Through the operational decisions we have made over the past month, we have extended our runway into late Q1, and we'll continue to stay focused on making cash-conscious decisions. While we do have an at-the-market financing facility in place that provides the potential to raise up to $10.7 million, if needed, we will continue to seek additional financing through capital raises and nondilutive funding options, including grants and strategic collaborations to advance our development programs. We firmly believe that with the intrinsic properties of laromestrocel, there is significant opportunity to attract partners for the continued development and potential commercialization of medicine. We will seek and are evaluating partnering opportunities across all indications, inclusive of HLHS. Our third unwavering focus will be on HLHS BLA preparedness. We remain focused on delivering key activity to support BLA readiness ahead of the ELPIS II data readout and beyond. We are also cognizant of our current financial situation and have now structured our spending to sequentially deliver critical CMC and manufacturing milestones to derisk our spend and appropriately optimize towards delivery of the ELPIS II study results. These actions have extended our cash runway, as I mentioned, though they will push our potential full BLA filing from late 2026 into 2027. The next 9 months are a transformational period for Longeveron with multiple critical milestones. It is an exciting time for laromestrocel, for Longeveron, for our shareholders and most importantly, for our patients. With that, I will turn the call over to Dr. Agafonova, our Chief Medical Officer, to provide an update on our clinical development programs. Nataliya? Nataliya Agafonova: Thank you, Than, and good afternoon, everyone. As Than mentioned, our HLHS program is a primary focus for us with a near-term pathway to potential approval in an area of clear unmet medical need. We are currently conducting the Phase IIb clinical trial ELPIS II, evaluating the potential of laromestrocel to improve right ventricular function and long-term clinical outcomes in infants with HLHS. We completed enrollment of the trial in June, enrolling 40 patients at 12 well-regarded infant and children's treatment institutions across the country. We remain solidly on track for top-line trial results in the third quarter of 2026 based on the 12-month follow-up period. The determination by the FDA at our meeting in August of last year that ELPIS II is pivotal significantly accelerates the potential regulatory path for laromestrocel. And if supported by data from clinical trial, this would allow us to initiate a BLA submission. This would be our first BLA submission, and it would be far an important indication with large unmet medical need and significant market opportunity. We can't overemphasize the unmet need our HLHS program is attempting to address. The current standard of care for HLHS involves a complicated 3-stage heart reconstruction surgery over the course of the first 4 to 5 years of patient's life. Despite this surgical reconstruction, only 50% of the affected children survived to age 15 without heart transplantation. Last month, we attended 2025 Single Ventricle Outcome Network Conference in Indianapolis. Hearing the stories of survival and their families was incredibly moving and a powerful motivator to continue advancing our stem cell therapy as a potential additional tool to help. Our laromestrocel program in HLHS is designed to boost or improve the heart function in these children with the goal of potentially enhancing their survival. In ELPIS I, our Phase I clinical study evaluating laromestrocel in infant with HLHS, we observed 100% transplant-free survival for 5 years in all patients following treatment. This contrasts with an approximately 20% death and heart transplant observed in historical control data over a 5-year period. As we mentioned on our last call, with the positive results from Phase IIa CLEAR MIND clinical trial in Alzheimer's disease, the publication of that data in Nature Medicine and the positive Type B meeting with FDA regarding pathway to BLA submission in Alzheimer's disease that yielded alignment on the proposed trial study design, population and endpoints for a single pivotal Phase II/III clinical trial that, if positive, could be acceptable for BLA submission for Alzheimer's disease, we believe we have a strong opportunity to forge collaborations and/or partnership for the advancement of laromestrocel in addressing of Alzheimer's disease. The need here is great as well and unfortunately growing. Between 2000 and 2021, death from Alzheimer's disease have increased 141%. 1 in 3 older adults dies with Alzheimer's or another dementia. We believe stem cells, particularly mesenchymal stem cells may have the potential to have a significant impact given their mechanism of action. I will hand the call over to Devin Blass, our Chief Technology Officer. Devin? Devin Blass: Thank you, Nataliya, and good afternoon, everyone. As we mentioned in our last call, a key area of focus this year is organizational readiness in chemistry, manufacturing and controls, or CMC, as we prepare for a potential BLA submission for HLHS in 2027. We are working diligently to ensure that our manufacturing infrastructure and operations are positioned to support both regulatory expectations and future commercial demand. After a disciplined evaluation, we made a strategic decision to pursue commercial manufacturing through a third-party CMO. This approach allows us to leverage the scale, experience and compliance infrastructure of a dedicated commercial manufacturer while maintaining flexibility and oversight. Under a limited statement of work, we have initiated technology transfer activities and successfully completed proof-of-concept manufacturing runs, demonstrating reproducibility of our process at an external site. We expect to finalize a master services agreement in the near-term, after which we plan to begin larger-scale manufacturing campaigns to confirm the process, analytics and prepare for commercial production. We anticipate announcing our selected commercial manufacturing partner later this quarter. Our goal is to continue to advance BLA readiness ahead of ELPIS II data readout so that we can move efficiently towards the BLA submission should data support it. Current priorities include technology transfer, planning and preparations for process and analytical method validation. Our Miami cGMP facility continues to support our early phase clinical manufacturing, process development and research activities. Additionally, with the existing capacity in our cGMP facility, we have the opportunity to provide selective contract manufacturing services for third parties. Our first contract manufacturing agreement has been mutually successful. While work under this initial contract is winding down, we believe there is opportunity for us to enter into new contract manufacturing and testing agreements that could generate additional revenue for Longeveron, helping offset our clinical development costs and reducing but not eliminating our additional capital need. I will hand the call over to Lisa Locklear, our Chief Financial Officer. Lisa? Lisa Locklear: Thank you, Devin, and good afternoon, everyone. This afternoon, we issued a press release and filed our quarterly report on Form 10-Q, both of which present our financial results in detail, so I will touch on some highlights. Revenues for the 9 months ended September 30, 2025 and 2024 were $0.8 million and $1.8 million, respectively. This represents a decrease of $1.0 million, or 53% in 2025 compared to 2024, driven primarily by a decreased participant demand for our Bahamas Registry Trial and reduced demand for contract manufacturing services from our third-party client. As Devin mentioned, we continue to explore opportunities to bring in new contract manufacturing services clients to utilize the excess capacity in our Miami cGMP facility. We also see the potential for increased demand in the Bahamas. Clinical trial revenue, which is derived from the Bahamas Registry Trial for the 9 months ended September 30, 2025 and 2024, was $0.7 million and $1.0 million, respectively. The $0.3 million or 36% decrease in clinical trial revenue when compared to the same period in 2024 was a result of decreased participant demand. Contract manufacturing revenue for the 9 months ended September 30, 2025, was $0.2 million from our manufacturing services contract, which is a decrease of $0.6 million or 76% when compared to the $0.8 million in contract manufacturing revenue for the 9 months ended September 30, 2024. This decrease was driven by reduced demand for contract manufacturing services from our third-party client. General and administrative expenses for the 9 months ended September 30, 2025, increased to approximately $9.1 million compared to $7.4 million for the same period in 2024. The increase of approximately $1.7 million or 22% was primarily related to an increase in personnel and related costs in 2025, including increased severance and equity-based compensation. Research and development expenses for the 9 months ended September 30, 2025, increased to approximately $9.3 million from approximately $6.1 million for the same period in 2024. The increase of $3.2 million or 52% was primarily driven by a $1.8 million increase in personnel and related costs, including equity-based compensation, a $1.2 million increase in supplies and costs associated with our technology transfer, including nonclinical manufacturing batches that advance our readiness for future commercial production as part of our BLA-enabling efforts; and finally, a $0.2 million increase in amortization expense related to patent costs. Our net loss increased to approximately $17.3 million for the 9 months ended September 30, 2025, from a net loss of $11.9 million for the same period in 2024. The increase in the net loss of $5.4 million or 45% was for the reasons outlined previously. Our cash and cash equivalents as of September 30, 2025, were $9.2 million. As a result of the recently completed financing in August of 2025 and a continued focus on disciplined and efficient capital allocation focused on first-to-market indications, the company currently anticipates its existing cash and cash equivalents will enable it to fund its operating expenses and capital expenditure requirements late into the first quarter of 2026 based on its current operating budget and cash flow forecast. As Than mentioned, the company also has access to an at-the-market ATM equity financing vehicle for the possible sale of up to $10.7 million aggregate market value of shares of the company's Class A stock. We are focused on managing our spend levels to optimize spend towards delivery of the ELPIS II study results. These actions have extended our cash runway into late Q1 2026 and will push our full BLA filing from late 2026 into 2027 if the current ELPIS II trial in HLHS is successful. The company intends to seek additional financing through capital raises, nondilutive funding options, including grants and strategic partnerships across all indications to continue to support our operations. There can be no assurance that the company will be able to obtain future financing at terms favorable to the company or at all. In the event the company is unable to attain the financing needed, we will need to materially revise our current operational plan. The relatively near-term potential for pivotal clinical data for HLHS and possibly our first BLA submission make this an extraordinarily exciting time for Longeveron. I will now hand the call over to Josh Hare, our Founder and Chief Science Officer. Josh? Joshua Hare: Thank you, Lisa. Good afternoon, everyone. As you've heard from the previous speakers, we're on the cusp of pivotal data in HLHS and hopefully our first BLA filing, which would be an important step in our mission to help patients and families through the application of stem cell research. This important milestone for Longeveron reflects not only our progress with laromestrocel, but the remarkable strides in stem cell research, application and commercialization. We've seen the solidification of cell therapy's role in regenerative medicine and its potential to treat a wide range of conditions, signaling an exciting future for both scientific innovation and patient care. Longeveron has been at the forefront of this evolution in medicine. Laromestrocel has delivered positive initial results across 5 clinical trials and 3 indications, and laromestrocel development programs have received 5 distinct and important U.S. FDA designations. For the HLHS program, Orphan Drug designation, Fast Track designation and Rare Pediatric Disease designation and for the Alzheimer's disease program, Regenerative Medicine Advanced Therapy designation and Fast Track designation. We believe stem cell therapy has the potential to become a mainstream treatment for many conditions with significant unmet medical needs. The outlook for future breakthroughs is promising, and we will continue to work towards our mission and hopefully support patients battling a range of diseases and conditions. As we do, we look forward to continuing to share advancements in our research, clinical programs and regulatory progress. I will now turn the call back to Than. Than Powell: Thank you, Josh. As you've heard, Longeveron has made tremendous progress advancing stem cell research for important development programs. We have 3 programs either currently in or with potential to start potentially pivotal clinical trials. HLHS, Alzheimer's disease and pediatric dilated cardiomyopathy. We are now approaching multiple potentially transformational milestones, including completion of a pivotal Phase IIb clinical trial in HLHS, our first potential BLA submission for HLHS and based on the strength of Phase IIa clinical data, potential partnering for the Alzheimer's disease program. We deeply appreciate the support of all of our stakeholders and look forward to continued collaboration and progress in the future. Operator, we would now like to open the call for questions from our covering analysts. Operator: [Operator Instructions] The first question we have is from Ram Selvaraju of H.C. Wainwright. Raghuram Selvaraju: Just 2 quick ones. Firstly, I was wondering if it would be possible for you to elaborate on the sort of business advisability of identifying potential partners for commercialization in rare, ultra-rare conditions like, for example, HLHS or PCM. And in particular, what format such partnerships might take and how these might differ in structure or nature from partnerships that might be applicable in more mass market indications. And in particular, if you could maybe just drill down on what might drive the decision to go that route via versus self-commercialization given how niche these indications are and the fact that they are not likely to require significant sales and marketing infrastructure to be penetrated efficiently? Than Powell: Excellent question, Ram, and I will take that one myself. I appreciate the question and appreciate you being here today. So yes, I do think in rare pediatric diseases, we've talked about before, our desire to seek partnerships outside of the U.S. And in today's announcements, we are talking about that having those conversations as well for partnerships in the U.S. I think our baseline expectation is that we will be prepared and can commercialize this product, as you mentioned, it is a relatively small footprint, and it is a customer base and surgeon base that we do know well from our clinical trials. That said, we do know there's incredible value here in being this close to a pivotal study readout for those companies that are engaged and involved in similar markets and with similar customers. And the value of that is something that we want to make sure we understand and explore both for ability to realize some cost savings from the commercial footprint build as well as being able to maximize and ramp-up revenue through existing forces that those commercial organizations may have at potential partners. It is an area that we're still exploring. This is certainly something that we will take under advisement based on our own expectations for how quickly we can grow ourselves, but wanted to ensure that we are looking at all options of value on the table. And again, it's based on the quality of the data we hope to see out of our ELPIS II study and knowing that being this close to a pivotal study is a rare and valuable asset, and we want to explore all ways to bring value into the company. I think that has been true in the market. You've seen other deals that have some of that structure in place. And there is a wide range of potential structures from straight commercial partnerships to potential future development, inclusive of PDCM and other indications that we may look at in the future, all would be on the table and be dependent on what's best for certainly getting this medicine to patients and certainly for the value we see as a company. Raghuram Selvaraju: That's very helpful. And I also wanted to ask if it would be possible perhaps to elaborate on dementia and in Lewy body dementia as a potential additional indication for laromestrocel? Than Powell: Yes. I appreciate that and appreciate the conversation on Lewy body dementia. Right now, those patients, our clinical trial was focused on mild cognitive disease and didn't have a Lewy body dementia component to it in our Phase II study. I do think the need and certainly some of the development we've seen in the Alzheimer's space for Lewy body dementia and understanding the mechanisms that may look at that or may be able to affect treatment there compared to Alzheimer's is interesting. I think right now, our focus is being able to continue the study and the results that we currently have in MCI in Alzheimer's disease and seek partnerships and development expertise from other companies that have had experience in the space. If there is reason to believe and if we have a scientific and development partner who also sees Lewy body dementia as a potential avenue to explore, we certainly know that the unmet need is significant there and would be happy to explore it based on good solid scientific rationale and any future conversations with the FDA on identifying those patient populations. Glad to see that there has been some more work in that space here from when we first started in Alzheimer's. Nataliya, any additional comments there? Nataliya Agafonova: No. Thank you so much, Than. I think you described it very well. Joshua Hare: Than, may I add a comment? Than Powell: Please, Josh. Joshua Hare: Yes. So terrific question. Thank you for that question. Just to reiterate what Than said, we have an RMAT designation and an aligned single adaptive design protocol with the FDA in place for our Phase II/III in Alzheimer's. So that clearly would be our next focus. However, Lewy body dementia, although distinct from Alzheimer's, does share a common pathophysiology of neuroinflammation. And we believe that, that is one of the key potential mechanisms by which laromestrocel is operative in Alzheimer's disease. From that mechanism of action standpoint, it certainly makes sense to think about Lewy body dementia, and other disorders associated with neuroinflammation in the future. But because of the progress -- because the progress we've already made is with Alzheimer's, it seems logical that, that should be the next step in the development of laromestrocel in the neurocognitive space. Operator: The next question we have is from Boobalan Pachaiyappan of ROTH Capital Partners. Boobalan Pachaiyappan: So congratulations, Than, for taking your new role. So 3 questions from us. So first, I wanted to discuss a little bit about the primary endpoint. So obviously, you wanted to show superiority in the composite endpoint, specifically on survival, heart transplantation and rehospitalization. So I understand the totality of the evidence is more important to secure approval. But I was wondering if you could provide some thoughts on -- or maybe if you have any expectations for the placebo and the treatment groups for all these 3 sub sort of endpoints, if you will, in order to consider ELPIS II a success? Nataliya Agafonova: I can take this, Than. Joshua Hare: Please go ahead, Nataliya. Nataliya Agafonova: Yes. Thank you so much. Boobalan, thank you so much. Great question. And we live this life right now to think about the best possible outcome, which is meaningful for parents, for patients and, of course, for the regulatory approval. And as you mentioned, we are thinking about the composite endpoint, which has some component of all cause mortality, transplant-free survival and overall hospitalization. And hospitalization currently is considered in this cardiovascular space is very, very clinically meaningful endpoint, not only how many of these patients stay in hospital, but how many patients stay out of hospital and alive. So we consider all this. And when we are thinking about this endpoint, definitely, we take into consideration our ELPIS I clinical trial. As you know, we have completed ELPIS I trial. It's open label, but we are trying to be creative here and using real-world evidence and compared to real-world evidence. So I can assure you that we consider all prior developed positive data and the current space to design the best, most clinically meaningful endpoint. Please let me know if I address your question or if you have more to ask. Boobalan Pachaiyappan: No, this is clear. So moving on to the next question. Obviously, in your press release as well as in your remarks, you mentioned that the BLA is now anticipated in 2027 rather than late 2026. And obviously, you've given reasons, operational decision to extend the runway. So I wanted some clarity on that. So my understanding is that you can submit your BLA on a rolling basis, which means potentially you could start the -- I don't know, the components one by one as early as whenever possible or whenever the FDA says okay or whenever the package is ready. So -- and also from now until late 2026, you have plenty of opportunities to strengthen your cash runway. So I'm curious why guidance is necessary at this juncture in terms of postponing the BLA? And also curious whether you'll be looking for fresh opportunities because you've got at least 4 or so quarters from now to strengthen your cash runway. So any additional thoughts would be helpful. Than Powell: Thank you, Boobalan. Really appreciate that question and certainly worth having a further discussion. And so I'll provide some initial comments and happy to have both Nataliya and Josh provide comments as well. I do think in our previous guidance and in our conversations, we have commented on having a full submission complete by the end of '26. And I think that's really the change that we're signaling here today is that, that full submission by the end of '26 as we've made decisions based on really making sure that we are optimizing the spend in CMC and the way and timing of when we're spending that, that it likely will just not be able to be fully submitted by 2026. Relative to a rolling submission and conversations on being able to start the conversations with the FDA earlier, certainly with the distinctions that we have for HLHS and our active conversations with the FDA, we do think conversations will be able to start earlier. The decision on rolling submissions and when that conversation takes place, we will have further conversations in Type C meetings to better understand that. But the primary component that we want to be able to communicate today was that a full submission based on the plans we have is likely not possible by the end of 2026. We do and will plan as we are able to find and secure additional funding to accelerate and bring forward as much as possible, both the stem and CMC and any opportunities that we have to get that full submission in and have those further conversations. So appreciate you making that distinction and giving us the chance to really further provide detail there. And as we have more information on when that timing could occur, we'll certainly look to provide that through these updates and any other updates that we have. Nataliya, Josh, any additional comments there? Nataliya Agafonova: Thank you, Than. I would just like to add that despite of these time line changes, we are full speed working toward BLA and the database lock every day. So nothing changed from the conduction of clinical trial and database lock, which we are planning next year sometimes end of July, August. Than Powell: Yes. Really good point, and I should have emphasized that. Yes, this is -- we are as confident as we ever have been on being able to complete the database lock. And this communication of this change has nothing to do with any findings certainly on any of the clinical trial results or anything on that's been produced on the CMC side. Devin and his team have done a fantastic job along with our conversations with the potential CDMO partners to really optimize spend there and all the results and examples or data that we have so far are on pace and on track to deliver. So we feel good about that side of it, too. Boobalan Pachaiyappan: All right. Great. Maybe one last question from us. So I'm taking a 30,000-foot view here and looking at the broader landscape of rare diseases, focusing particularly on the M&A aspect. Obviously, the space is getting heated up. And most recently, Novartis acquired Avidity, the company that we cover for $12 billion. And one of the key focus areas is rare pediatric disease and which is also your focus. So I would like to sort of get your broader thoughts on maybe the steps you can take from now, I don't know, in the next 4 quarters or so to sort of increase the M&A appeal of Longeveron. If you can comment on that, that would be good. Than Powell: Yes. Thank you. I appreciate that. And similar to the conversations on commercial structure for business development conversations, there are certainly M&A conversations that are possible in the rare disease space. And I do think for laromestrocel and both the opportunity it provides and the data that we have across the board, we would expect interested parties to want to have some of those conversations. For us, it will be critical that we are both seeing the value that we expect to see in any of those conversations. And to your point, that we are making sure that we're emphasizing the value that we see with HLHS as the lead indication, but the pipeline that also follows for the company and that in any conversations about partnerships or M&A, that the full value of the company is part of those conversations and part of the types of deals we want to structure. To your overarching 30,000-foot question, it's part of the reason I joined this company and part of the reason I am glad to be in this role. I do think the value proposition for our products and for the company are significant and to be able to have a top-line readout in rare pediatric cardiovascular indication with patients that have deep needs and additional treatments, plus a pipeline in a similar indication is a rare commodity to have in this space, and it is a great opportunity for us to make sure that, that value is both something that we're communicating and that we're having discussions about with potential partners. And we are glad that the market is coming back in the space. And I think as Dr. Hare mentioned in an interview he had recently done with NPR, we believe that congenital heart defects do deserve as much attention and focus as some of the genetic defects have been getting attention as well as the treatment modalities. So we think there's some additional communication we need to have about the patient need here with congenital heart defects and where we can play a role in that space. Josh, Lisa, anyone else? Lisa Locklear: No, I don't have anything to add, Than. Thank you. Joshua Hare: Yes, nothing from me, Than. Thank you. Operator: The next question we have is from Michael Okunewitch of Maxim Group. Michael Okunewitch: I'd like to start off, just given the seeming early success that we've seen from Mesoblast in their GvHD indication, it's another rare pediatric disease with quite high pricing that seems to be gaining traction with the physicians. So does this impact at all how you're thinking about the value of laromestrocel in HLHS in particular? Is there more of an appetite than you would have expected for high-priced cell therapies in these rare indications? Than Powell: Yes. Great question, Michael. Thank you. And I think we have always seen the HLHS program and with the conversation we've had on providing our SAP plan and thoughts on our primary endpoints. I mean we do see the value here of potential for survival, reduction in hospitalizations, transplant-free survival. The value proposition in HLHS is significant and does have value, most importantly, for patients and babies and their families. But certainly, as we think about the reality of those outcomes on the cost for treating those patients. So we do think there is significant value if and when this medicine is able to deliver as we hope it will in ELPIS II. And we do think that opens the door for conversations on making sure that, that value is recognized in the market. We are pleased that Mesoblast has had the success they've had in cell therapy and being able to have success in getting that product to market. Certainly, we see our value proposition in HLHS as its own entity, but being able to have other examples of cell therapies that have been successful and are delivering value is a good case study for us to examine. Michael Okunewitch: I would like to also touch on the -- how important you would consider the longer-term follow-up data from ELPIS I surrounding survival when you do end up going into those payer conversations. Do you think that will play a bigger role compared to with the FDA, where, obviously, the ELPIS II is the pivotal study. But I'd just like to see how important that 5-year long-term follow-up data you expect will be when you're justifying your reimbursement and payer conversations? Than Powell: Yes. Thank you for the question. And in my career, I've had the chance to work pretty closely with the payer community and specifically on some clinical trial design conversations. And I won't try and predict what they will likely say once a product is approved and how they're looking at reimbursement. I do think being able to have a both the survival endpoints that we talked about and potential composite endpoints, including hospitalizations and others are great value propositions that they will understand and the types of hard outcomes that they would like to see. And I think any data that speaks to its persistence and our ability to share that data. Obviously, ELPIS I is a Phase I study without a control arm, and we feel that data is incredibly important for the long-term success. And we do think payers and the FDA and patients will appreciate having that data. I just can't predict whether or not that will be an important piece of information for the payers or not, but certainly something that we will remind them of when we come to the reimbursement conversation. Michael Okunewitch: And then just one last for me before I hop back into the queue. I'd like to follow up around some of the discussion that you've had around rolling BLAs and other potential ways that you could expedite this process of regulatory review. And given the seeming supportive stance from FDA around both cell therapies and rare disease, have you looked into any other ways to potentially expedite your BLA pathway such as the newly announced Commissioner's National Priority Voucher program from a couple of weeks back? Than Powell: Yes, a good question. And I think the main thing I'll say on expediting our BLA path is we do have the designations across all of our programs that have allowed us to have very productive and open conversations with the FDA. I think ultimately, those conversations will be predicated on the data we get from ELPIS II and our ability to have those conversations both with our Type C meeting here going forward as well as the data from the trial, there will be lots of conversations that we will engage in about how to make sure if the trial is successful, we can get to patients as quickly as possible. I think for the new approval process that is part of the voucher program that Dr. McCarty put in place, we did certainly see that announcement and the focus of those types of approvals really looked a little bit different to us than where we see HLHS as a rare pediatric disease with some of the criteria they had in place. We will certainly continue to look at that. I think our position and our belief is that the continued focus on being able to extend the priority review voucher system as it currently exists is critical for recognizing the innovation that's happening in rare diseases. And we are hoping and are glad for our partners at BIO and other places who continue to press that issue with Congress and hope that, that will be able to be continued as that is a designation that we've had for HLHS. And we think it's critical for really recognizing the value and the amount of time and effort it takes to produce the innovation needed in these rare disease spaces. So the short version of the answer is we'll continue to look at any potential to bring our product to market as quickly as possible and just want to emphasize that extension of the priority review voucher is a critical priority for us in our conversations with Congress and anyone else who will listen. Operator: Hello? Than Powell: Operator, are there any other questions in the queue? Hearing none, I will seek to close this meeting. If anyone does have a question, please do feel free to follow up with us. We might have lost the operator here, but happy to follow up and do just want to say thank you for being part of the call today. Really excited about this team and what they've been able to deliver. Really excited about what our future looks like and look forward to these conversations with you in the future. I appreciate you all being here today, and we'll talk soon. Nataliya Agafonova: Thank you very much. Joshua Hare: Thank you. Lisa Locklear: Thank you. Nataliya Agafonova: Bye-bye.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I would like to welcome you to the NeuroPace Q3 earnings call. [Operator Instructions] I would now like to turn the call over to Scott Scaper, Head of Investor of NeuroPace. Please go ahead. Scott Scaper: Thank you, operator, and welcome to NeuroPace's Third Quarter 2025 Earnings Conference Call. Our agenda begins with Joel Becker, NeuroPace's Chief Executive Officer, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Patrick Williams, our Chief Financial Officer. Following our prepared remarks, we will open this call up for your questions. At that time we ask the analyst to limit themselves to one question and one follow-up question each, so we can provide an opportunity for everyone participating today. Let's quickly review our safe harbor statement. Some of the statements we will make on today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, and expectations about future events, strategies, products, regulatory, and operating plans and performance. All forward-looking statements included on this call are made as of the date hereof based on information currently available to NeuroPace are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in NeuroPace's annual report on Form 10-K, most recent quarterly report on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this call or to conform these forward-looking statements to actual results. And with that, I will now turn the call over to NeuroPace's Chief Executive Officer, Joel Becker. Joel? Joel Becker: Thanks, Scott, and good afternoon, everyone. I will start with an overview of our third quarter results and how the team is executing against our strategy. I will then provide updates on our key clinical and product development initiatives. After that, Patrick will walk through the financials and updated guidance before opening the line for Q&A. The third quarter was one of record results for NeuroPace and demonstration of the effectiveness of our strategy and its execution. Total revenue in the quarter was $27.4 million, delivering 30% year-over-year growth compared to $21.1 million in the prior year quarter. This record revenue was primarily driven by RNS initial implants, resulting in RNS revenue of $22.6 million and representing growth of 31% year-over-year. RNS growth in the quarter was broad-based across geographies, customers, and programs. All sales regions exceeded planned sales for the quarter with the number of prescribers, accounts, and utilization nationally reaching all-time highs. These results demonstrate the compounding effects of the recognition of the differentiated capabilities of the RNS System, enhanced commercial leadership and execution, and improved referral management, driving higher procedural volumes. The majority of our growth came from Level 4 centers with increased adoption and utilization. Project CARE also contributed meaningfully and again improved sequentially and year-on-year. We also saw increased contribution from our direct-to-consumer efforts as well. We remain confident in our long-term growth trajectory of growing a minimum of 20% in our core RNS business with our current adult focal epilepsy indication. Importantly, gross margin and operating leverage were also strong and continue to be highlights as we scaled growth in a disciplined manner. Additionally, during the quarter, NeuroPace generated positive adjusted EBITDA, a significant milestone for the company and the first time in our history. This important accomplishment reflects the scalability of our model and the progress we are making with disciplined expense management, consistent mix improvement, and increasing efficiency in both commercial and manufacturing operations. We are proud of this achievement. And while this metric may vary quarter-to-quarter, we remain committed to driving towards sustainable profitability and cash flow breakeven. Given the performance in the quarter, we are raising both our full year revenue and gross margin guidance ranges. For revenue, we now expect a range of $97 million to $98 million or 21% to 23% year-over-year growth, an increase from previous guidance of $94 million to $98 million. Let me now turn to our key clinical and product development initiatives, starting with NAUTILUS and our recent meeting with the FDA. As expected, we completed our pre-submission meeting with the FDA in September, which we believe was a productive and engaged discussion of the study. We reviewed the totality of the evidence, safety, the primary effectiveness endpoint and the prespecified secondary endpoints as well as additional analysis. We continue to believe the safety and effectiveness profile of the NAUTILUS data supports a favorable benefit risk assessment for this highly underserved population, and our PMA supplement will incorporate the discussion points from our meeting. We appreciate the opportunity to meet with FDA and the dialogue was consistent with our expectations. Development of our PMA supplement application is underway, and our timeline and plans remain on track to submit the PMA supplement for NAUTILUS before year-end. Moving on to our pediatric indication. We continue to work closely with the FDA and our collaboration partner, NEST, as we finalize the real-world evidence and protocol for our pediatric indication. We are working to ensure that the data set and protocol are both as strong as possible. As we continue this process, it has taken more time to align on that protocol and data set than we had initially built into our timeline. We remain confident about the approach of leveraging real-world evidence to gain this much-needed indication expansion in a pediatric patient population. As we finalize the real-world evidence and protocol timing for submission will extend beyond 2025. We are not providing a revised submission date today, but we will provide updates as milestones are met. We are appreciative of the quality of the interactions with FDA and NEST and the ongoing collaboration as we pursue this unique opportunity. We look forward to advancing this indication expansion pathway and remain committed to bringing RNS therapy to the pediatric population. I also want to highlight the growing recognition that RNS and our unique closed-loop stimulation is receiving across the field. The September issue of the Journal of Clinical Neurophysiology was entirely dedicated to the use of data and feedback for personalizing intracranial neuromodulation and several articles featured RNS at the center of that conversation. This journal is one of the most widely respected peer-reviewed publications in the field of epilepsy and brain modulation. It is the official journal of the American Clinical Neurophysiology Society and a key forum where leading researchers and clinicians publish data that shape standards of care. The editors described a critical shift underway in epilepsy therapy, away from one-size-fits-all stimulation and toward data-guided patient-specific neuromodulation. Driving that shift is the convergence of long-term intracranial EEG, advanced neuroimaging, and artificial intelligence, and the critical importance of developing individualized treatments in clinical settings. For years, the RNS System has generated data and outcomes that define what personalized closed-loop therapy could be. Now as AI and computational tools mature, the importance of the RNS System's unique ability to monitor and record data and then tailor individual therapies for specific patients through its differentiated closed-loop capabilities is coming further into focus. We believe the broader scientific community is recognizing that the RNS System platform is best positioned to capitalize on this new era of innovation that is beginning to shape the future of epilepsy neuromodulation and brain computer interface development. We are now seeing a number of factors we have been working on deliberately for years start to come together at the same time. The clinical maturity of closed-loop neuromodulation, the scale and quality of our long-term intracranial EEG data set, and the computational tools to act on that data in real time. And critically, we now have the tenured domain knowledge and execution muscle on the team to capture this opportunity. This convergence is creating an environment for the potential of accelerated adoption of closed-loop personalized neuromodulation. We believe the RNS System is uniquely positioned to capitalize on this new era of data-guided epilepsy care and longer term on the direction the field is heading in neuromodulation and brain computer interface or BCI. Now to an update on product development. Our RNS development pipeline is focused on extending the platform advantages just mentioned with greater on-device analytics capabilities, streamlined programming workflows, and enhanced connectivity to further improve both the quality and time to improved outcomes as well as enhance efficiency and ease of use to support wider adoption. We recently submitted to the FDA our seizure iEEG AI software tool, the first of a suite of planned NeuroPace AI applications, which utilizes our proprietary iEEG data and AI development efforts and is designed to improve clinical outcomes. With that, I'll turn it over to our Chief Financial Officer, Patrick Williams, to review the financials and our outlook. Patrick? Patrick Williams: Thank you, Joel. Before getting into our results, I wanted to take a moment to reflect on my first full quarter with the company. The strength of the product, the commitment of the team and the sheer scale of opportunity still ahead is now much clearer to me and makes me even more optimistic. The execution improvements being undertaken and feedback from physicians I have met with have reinforced that this is a company with a differentiated technology and with a long growth runway. In today's press release, we have provided a financial supplement, which breaks out our historical RNS, DIXI, and service revenue by quarter from Q1 2024 through today's Q3 2025 results. We believe this additional detail will allow investors and analysts to more easily reconcile our historical performance with our go-forward reporting structure as we move into 2026, where we will be substantially done with distributing any further DIXI product. Let me now walk you through our third quarter financial results. Our third quarter revenue growth was driven primarily by continued strength in our RNS system sales, totaling $22.6 million, representing growth of 31% compared to the prior year period, supported by higher procedural volumes, broad-based increased utilization within existing centers, and growing contributions from Level 3 and community centers as our investment and focus in these areas scale. Additionally, we generated approximately $770,000 of research service revenue in the quarter tied to our ongoing data collaborations. DIXI sales grew 8%, coming in at approximately $4 million in the quarter as the distribution agreement officially ended on September 30, and the entire company begins to focus more on RNS in line with our strategic rationale. As a reminder, the distribution agreement with DIXI provides for a 6-month wind-down period, which lasts until the end of Q1 2026. At the end of this wind-down period, the distribution agreement contractually allows NeuroPace to sell back any remaining inventory at prior paid costs back to DIXI. Thus, there is minimal to no inventory excess or obsolescence exposure related to this termination. Finally, although the distribution agreement allows for a wind-down period through Q1 2026, we currently believe we will be substantially done with DIXI sales by the end of 2025. We do not expect any material sales in Q1 2026 as our organization and notably, our commercial team strategically shifts its focus solely on our core RNS business and the potential upcoming FDA approval of expanded indications. We are raising our full year revenue guidance to a range of $97 million to $98 million, up from our previous guidance range of $94 million to $98 million. This updated guidance reflects an increase of approximately 21% to 23% over our reported total revenue for 2024. Our increased revenue guidance is primarily driven by our RNS System, which we expect to be in the range of $20 million to $21 million in the fourth quarter. At the midpoint of this range, RNS revenue growth for the second half of 2025 would be approximately 23%, an acceleration over our RNS first half revenue growth results of 21%. This revised total company guidance incorporates a lower contribution from DIXI products of approximately $3 million in the fourth quarter due to the aforementioned strategic shift and wind down of the DIXI product line. And with regard to service revenue, we expect approximately $750,000 in the fourth quarter, similar to our third quarter results and is based on our current projections of achieving certain milestone triggers outlined in these service contracts. Turning to gross margin. Total company gross margin for the third quarter 2025 was 77.4% compared to 73.2% in the prior year quarter and 77.1% in the second quarter 2025. RNS System gross margin remained very strong at above 80%, benefiting from improved manufacturing efficiency, favorable pricing, and continued leverage as we scale. This strength was partially offset by the lower-margin DIXI products, which carry gross margins slightly below 50% and were again impacted by incremental tariffs. Based on our strong year-to-date gross margins and increasing revenue contribution from our higher-margin RNS product, we are raising our full year gross margin guidance to a range of 76% to 77%, up from our previous guidance range of 75% to 76%. As we move into 2026 and substantially exit the DIXI product line, our revenue and gross margin will essentially only be the RNS system, which we believe will carry a gross margin greater than 80%. Total operating expenses were $23.8 million in the third quarter of 2025 compared with $19.7 million in the prior year quarter, in line with expectations with better-than-expected general and administrative expense and areas of research and development expense, offset by higher-than-anticipated selling expenses due to an overperformance in sales as well as higher variable compensation accruals across the organization. Operating expense growth of 21% in the quarter remained meaningfully below our revenue growth of 30%. Stock-based compensation in the quarter totaled $2.6 million. As Joel mentioned, we continue to demonstrate underlying operating leverage resulting from our focus on driving revenue growth while also effectively managing our operating expenses and gross margin. We plan to continue to focus on balancing these objectives as we drive towards cash flow breakeven. We now expect total operating expenses for 2025 to range between $94 million and $95 million, a slight increase at the lower end from our previous guidance range of $92 million to $95 million to reflect the increased expense in the third quarter related to sales overperformance and increasing variable compensation related to expenses we expect to incur by year-end. This range reflects 16% to 18% operating expense growth on a year-over-year basis and is well below our revenue growth rate. Included in our total full year expense is approximately $11 million in stock-based compensation, a non-cash expense. As we started last quarter and as part of an ongoing effort and commitment to provide increased transparency and support the ability to model our business, we will again break out and provide commentary on sales and marketing, research and development, and general and administrative components rather than referring to SG&A as a single line item. Sales and marketing expense was $12.6 million in the third quarter of 2025, up from $9.9 million in the prior year quarter and slightly up from $12 million in the second quarter of 2025. The year-over-year increase was largely due to personnel-related expenses associated with ongoing scaling of our commercial activities, investment in direct-to-consumer marketing and other sales-related expenses. The slight sequential increase was primarily due to higher variable incentive compensation related to sales over performance. We now expect sales and marketing expense to total between $47 million to $48 million for the full year 2025, slightly up from our previous guidance range, primarily driven by the aforementioned increase in variable compensation related to higher sales performance. R&D expense was $6.6 million in the third quarter of 2025, up from $5.8 million in the prior year quarter and slightly down compared to $6.8 million in the second quarter of 2025. The year-over-year increase was primarily driven by personnel-related expenses associated with the development of a next-generation platform, AI-enabled tools, and ongoing clinical trials. We now expect R&D expense to total approximately $28 million for the full year 2025 or at the higher end of the range of our prior guidance as investment in next-generation products continues, including final preparation of our IGE PMA supplement, which is still on track for submission by the end of this year. G&A expense was $4.6 million in the third quarter of 2025, an increase when compared to $4 million in the prior year quarter and down sequentially from $6.1 million in the second quarter of 2025. The year-over-year increase was primarily driven by personnel-related expenses. The larger sequential decrease was driven by nonrecurring costs associated with an executive transition in the second quarter. We now expect G&A expense to be at the lower end of our previously guided range and to come in at approximately $19 million for the full year 2025. Loss from operations was $2.6 million compared to a loss from operations of $4.2 million in the prior year and a loss of operations of $6.8 million in the second quarter of 2025. We recorded $1.6 million in interest expense compared to $2.2 million in the prior year quarter, reflecting the benefits of our debt refinancing earlier this year at more favorable terms. We continue to expect interest expense of approximately $8 million for the full year 2025. Regarding interest income, we expect approximately $2.5 million in income for the full year 2025. Net loss for the quarter was $3.5 million compared to a net loss of $5.5 million in the prior year period and a net loss of $8.7 million in the second quarter of 2025. Our free cash flow, defined as operating cash flow less capital expenditures, was negative $2 million in the third quarter of 2025 compared to negative $1.8 million in the third quarter of 2024. The year-over-year change primarily reflects higher revenue and gross margins, are partially offset by an increase in inventory as we place final orders for the DIXI product line. Lastly, as Joel mentioned previously, adjusted EBITDA, defined as EBITDA, excluding stock-based compensation, was a positive $0.1 million in the quarter compared to a negative $1.6 million in the third quarter of 2024 and negative $3.5 million in the second quarter of 2025. Finally, ending with our balance sheet, our cash and short-term investments balance as of September 30, 2025, was $60 million. We continue to believe this gives us sufficient capital to fund operations through cash flow breakeven. And with that, I would now like to turn the call back over to Joel for closing remarks. Joel Becker: Thank you, Patrick. The third quarter was a record quarter for NeuroPace and was driven by execution of our strategy and demonstrated strength across the business. We delivered record revenue, continued gross margin strength, and operating leverage, all of which demonstrate how our strategy and its execution are translating into results. At the same time, the broader field is recognizing what we've known for years, that responsive, data-driven neuromodulation represents the future of epilepsy care. We believe there is a growing view that the RNS system will serve as the foundation of the future standard in individualized brain neuromodulation. Multiple factors are beginning to converge that position RNS and NeuroPace to build on our current momentum. We have world-class opportunities, world-class technology, world-class data, and a world-class team to deliver on them. These foundational factors position us to establish RNS as the standard of care in epilepsy neuromodulation. Thank you for your time today and for your continued interest in NeuroPace. Operator, we'll now open the line for questions. Operator: [Operator Instructions] Your first question comes from Rohin Patel with JPMorgan. Rohin Patel: Congrats on a good quarter here and strong RNS revenue growth. My first question is just on 2026 and your outlook. Trends seem to be progressing well on all fronts as we close out the year. So just as we look ahead, can you help us understand the preliminary thoughts on the growth outlook and specifically how you're thinking about RNS growth given DIXI revenues will be coming off? And what are some of the key assumptions embedded in the outlook for new indication launches and some of these AI applications driving utilization and also Project CARE in the community setting? Joel Becker: Hello, Rohin, thank you for your comments, and thanks for the question. This is Joel. So as we look forward to 2026, I think we're guiding here for '25 and for the quarter of Q4. So I'm not guiding formally for '26, but we do think that a lot of the fundamental factors that are in place position us really well for the upcoming year. We've been clear when we think and talk about our longer-range planning, the core of our focal epilepsy indicated business, the RNS driver for that focal epilepsy indicated business is a business we're confident in growing at 20% plus. We're doing that, and that really serves as the foundation for the business. And then we see the things that we're talking about here with regard to the key development initiatives, both our clinical development initiatives with IGE as well as pediatrics and then the positive effects that the R&D pipeline as well with regard to ease of use and efficiency in generating improved clinical outcomes. A lot of those things are coming together to add on to the top of that core of the 20% plus growth in the currently indicated business. So we're really pleased with Q3. We think that we're really well positioned. We've got a lot of stuff converging and coming together here. And we'll talk more about '26 when we talk about '26, but we think that gives us a strong foundation to build on that 20% plus. Patrick, would you have anything you want to add there? Patrick Williams: Yes. I just wanted to add, and I really appreciate the question. And what we did was we did provide a financial supplement so that the analysts, the entire street will get very clear and transparent message in terms of what our historical revenue has been between DIXI and RNS. And I think what you're talking about is very key because we want to make sure that people understand that right now, there's still some DIXI revenue sitting in some people's 2026 numbers, and it's important that we really look at this on an RNS to RNS basis. So that was the basis of us giving that extra disclosure. And we would certainly expect that models will start reflecting that and show that likely 20% at a minimum growth for RNS. Joel Becker: Yes. So important point, Patrick, and I know you're up on it, Rohin. But with our prepared comments here, just emphasizing for folks that substantially all of the DIXI revenue will be complete here at the end of 2025. And so 2026 will be RNS and the RNS basis and the RNS growth should really be the focus of the model. Rohin Patel: And then I had a follow-up. I mean this is a bit of a longer-term development for you. But in your prepared remarks, you discussed the confluence of all your efforts to date in data, neuromodulation, and the hardware improvements that you've made or plan to make over time. And you have these partnerships in drug development, such as the Rapport collaboration, which leverage this extensive EEG database and some of the AI capabilities to support partners in drug development and biomarker identification. So I know it's early days, but is there any preliminary feedback you can provide from your partners on how you see the platform supporting drug discovery or personalized medicine in any way? And given this is starting to ramp, I know you called out about $700,000 in revenue, but early days, but starting to ramp. Is there any -- are there any milestones or proof points that investors should be watching for over the next year or so, either from more recurring revenue or other data points? Joel Becker: It's a great question, and thank you for emphasizing the topic. We do see that there are a number of things here that are really converging. And we are, we think, at a point of confluence here with regard to the data, the nature of some of the fields that are developing around us in terms of data science and then software as well as hardware development, as you mentioned. So I'll comment in a couple of different areas that you mentioned. One, from a partnerships perspective, I think you can go back and look at some of the public disclosures from Rapport that the ability to really provide that window into the brain and which we do both for our development partners within clinical study partnerships provide a tremendous amount of value as well as to clinicians every day in managing patients out there, which is why we're able to tailor and target therapy for individualized patients and demonstrate best-in-class results. That ability to uniquely monitor, record, analyze, and then tailor therapy is really at the foundation of both those partnerships as well as then what I was mentioning in terms of the journal focus where personalized, individualized targeted neuromodulation shows a tremendous amount of potential. And the ability to integrate that data and then tailor the delivered therapy is something that the RNS system is really uniquely well positioned to take advantage of. So we think both with regard to partnerships, more on the way there. I won't get into the specifics of it. But I think on the last call, we had mentioned UCB in addition to Rapport and we are working on others as well from a partnership perspective. And then, again, just that ability to use data, some of which is data analysis that humans just aren't able to see the patterns in our unique set of tools, algorithms and AI software is going to put us in a position to be able to leverage the unique nature of the RNS platform. So we're particularly encouraged about both the near-term results in the business as well as where the platform is positioned from a hardware, software, and data perspective as we see that confluence of factors. Operator: Your next question comes from Priya Sachdeva from UBS Financial. Priya Sachdeva: Congrats on a great quarter. I think first for me, would just love to parse out the implied growth for 4Q. The full year midpoint kind of implies a pretty steep step down despite pretty strong double-digit growth year-to-date and it seems to us like no slowing in momentum. So would just love to understand what you're seeing on the ground to help us give some context around that implied growth for 4Q? And then just a follow-up after. Joel Becker: Thank you. Priya, good to hear from you, and thanks for the question. I'll maybe start with where you ended there. What are we seeing on the ground? And I mentioned it in our prepared comments, but we really saw good execution and performance in a broad-based fashion across the business. So the core of the growth came out of the adoption and utilization in our Level 4 centers, which is great to see. It's where the vast majority of our business is built today. And we -- so we increased -- just to break that down a little bit. We increased prescribers again to an all-time high. We increased accounts again to an all-time high. And we increased utilization to an all-time high at the same time. And it's probably obvious, but those 3 things are difficult to do together. And especially when you get new customers starting, new clinicians and accounts starting, many times, they'll start a little bit slower than your customers who are more of a rhythm. And so we really appreciate the utilization -- the adoption utilization and number of prescribers and accounts all headed the right direction up and to the right at the same time. One. Two, we saw really good execution across our commercial organization. Again, I mentioned it in my comments, but all of our sales regions executed above their planned sales level. And so the consistency of execution across that team, which is an enhanced team. We've made some changes and some investments there over the recent time, and it's really great to see that execution across the business. And then care and DTC both contributed nicely as well. So when we think about what are we seeing on the ground today, that's where I'd start. Seeing really strong execution. When you think about Q4 then, just to get to your question, I think -- so there's a couple of components here. One is RNS, and we'll talk about RNS here in a minute. But DIXI in particular, is one that I would point out. DIXI is forecast to be down. And we expect some of that just given the wind down of the business. And that's the biggest net impact versus our previous expectations and why we're kind of seeing some of the Q4 dynamics that we're expecting. But I'd tell you, RNS here, as we look at RNS for Q4, I'm not guiding outside of what we've guided, but I will offer that the RNS business in Q4 in October and in the quarter is off to a solid start, both with regard to execution as well as to our patient pipeline. And so we feel real good about all that with some uncertainty and some downside offsetting that a little bit with DIXI. And I'll maybe ask Patrick to comment a little bit more on some of the levers. Patrick Williams: Yes. Thanks, Joel. And I think Joel hit the nail on the head there. Look, we had a very strong quarter, and we really do try to look at this business in 6-month increments, and Joel has been very consistent prior to me coming here. And if you look at even at the midpoint, as I said in my prepared comments, once again, DIXI is the reason why the overall number didn't go up as much as it did, and we talked about why that is. Let's focus on RNS. RNS in the first half of the year grew 21%. And at the midpoint of our implied guidance of Q4 for RNS of $20 million to $21 million, we're going to grow 23% in the second half of the year at that midpoint. And so we feel very comfortable with the durability of this business and where we're moving as we go forward, and Joel already hit it. We're off to a good start in Q4 with October, but that's really the components of it. So a strong quarter overall. Priya Sachdeva: I mean just a follow-up, great to hear the news on the PMA submission. And now that we have some increased clarity on the potential expansion, could you just remind us on the plan of attack into potential approval and how quickly we could see some incremental growth contribution? Congrats on a great quarter. Patrick Williams: Thank you. So our plan is -- in here, in particular, I'm referencing NAUTILUS in the idiopathic generalized epilepsy population. The plan is for submittal of the PMA supplement here before year-end 2025 and thinking about a 180-day clock there on a normal basis for a PMA supplement that would put us in mid-2026. And so that's what we've talked about. We're on track for that. Of course, they can each take on their personality and the time will take -- the time that it takes, but we're on track for submittal here in -- before the end of the year and getting the clock started for midyear '26. Operator: Your next question comes from the line of Mike Kratky with Leerink Partners. Michael Kratky: Congrats on a great quarter. To start, let me just say I'm immensely grateful for all the additional disclosures you're providing moving forward. So massively appreciate that. Really impressive RNS growth this quarter. I guess to follow-up on a prior question, it looks like the implied 4Q guidance for gross margin might also be implying a bit of a step down. So especially if DIXI might be a little bit lighter than anticipated, how should we reconcile some of your commentary just on the RNS strength with the implied step down in gross margin? I would have probably thought that would have been a little bit higher as RNS ticks up as a percent of revenue. Patrick Williams: Yes. This is Patrick here. Fair question, Mike, and good to have you back on the call. Look, I would say that, as we said in our prepared comments, we continue to believe that RNS will be north of 80%. 80% is a minimum bar for us. And I would just chalk it up as us not wanting to get ahead of ourselves. There is some movement in DIXI. We did say approximately $3 million. Is there a chance we sell more than $3 million as we're exiting the business? Potentially, and that could obviously have a drag on the overall gross margin. So I would really just view it as more of a mix issue related to DIXI as opposed to anything else. I will be very clear again, as I said in my prepared comments, as we move into 2026 and we are an RNS business, you should be modeling a gross margin that's 80% at a minimum, and we'll provide additional color when we officially guide 2026. And then we had a good question on service revenue, so I might as well hit that real quick. Look, service revenue has very good margins for us. And I think the key there for everyone is we will come back to you when we see additional potential service revenue streams that we have. But rest assured, we will be looking to optimize and maximize as best we can the monetization of our really good data and how we can support some of these pharma collaborations. Michael Kratky: And maybe just one follow-up. I really appreciate the color on Seizure ID. Can you just talk about how that fits into your broader portfolio? And is that something that you expect to generate revenue or will be more of a support tool moving forward? Joel Becker: Thanks for that, Mike. Yes, we're excited about Seizure ID. And as I mentioned, it's the first in what we expect to be a suite of tools that we'll be leveraging our proprietary EEG data and then AI-based algorithms that we've developed internally as well. So what we expect from Seizure ID is to make it more efficient and easy for clinicians to be able to identify episodes that are long episodes and the areas that they want to look at most closely for therapy and for changes in therapy to continue to improve outcomes. So the reason that matters is that for some patients, these cycles of particularly important EEG information are complex enough or occur over a long enough period of time that regardless, and we have tremendously talented and dedicated customers, a human can't pick them out if those cycles are coming over sometimes weeks or months of a period of time. And so when they look at that information and when Seizure ID looks at that information, it can very efficiently and effectively pick out those hallmark EEG patterns and make it easier for them to identify the areas of interest and then tailor therapy along with that. And so again, efficiency and ease of use leading to improved clinical outcomes is the focus of that particular tool. And the way we see that adding value in the business is through increased numbers of patients having access to an improved therapy causing us to both be able to compete with other treatment approaches as well as make RNS more easily accessible for people to have more RNS patients in their practice. So it's really all about making RNS more accessible and the improvements associated with it more accessible. And that's how everybody will see value from Seizure ID. Operator: Your next question comes from the line of Vik Chopra with Wells Fargo. Unknown Analyst: This is Simran on for Vik. Maybe just to start off on the margin commentary, very helpful color. I guess I just want to clarify, should we be thinking about 80% gross margin as a baseline for 2026? And are there any additional like puts and takes that we should consider on the margin line going forward? Joel Becker: Eighty percent is a fair number to model. RNS has been running ahead of that. The only caveat I would put is if there's some trickling DIXI revenue that happens in Q1. But again, as I said, the wind-down period does officially end Q1 of 2026, but we plan to be substantially done with sales. But again, I think modeling an 80% would be very fair from that standpoint going forward. Unknown Analyst: And then maybe just on NAUTILUS. I appreciate your reiteration of the timelines there. But when can we expect to see the full data set from NAUTILUS publicly? Joel Becker: So there are a couple of different opportunities for us to get the data out with NAUTILUS. We do expect to have a poster abstract presented at AES, and we are also planning on submitting for a presentation at AAN next spring as well. So a couple of different opportunities there, and we're looking forward to talking to people about the updated data. Operator: Your next question comes from the line of Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: Congrats on a great quarter. I was curious if we could maybe talk a little bit more about the NAUTILUS data and your sense of industry awareness around that data. And I know it's something you can't market for and you won't talk directly to, but I think the concept of off-label use is something we've discovered in our conversations with physicians. Just curious if that had maybe contributed some in the quarter in the practice -- in accordance with the practice of medicine, if doctors are using that a little bit more off-label and that they have some clinical data to support that. Joel Becker: So I think in the past, Frank, we have talked about that investigators are really the only people who are aware of the detail around the data outside of what's been presented publicly. And the business performance in the quarter, it doesn't come to mind for me that any -- there's nothing unusual in the quarter and nothing with regard to the practice of medicine variation that would have been impacted by the NAUTILUS results or any of the IGE data. I think as had been mentioned previously, we saw positive reactions from the investigator discussions with regard to the safety data as well as regard to the prespecified secondary endpoints. And so we were pleased to hear that from the investigator community, but nothing unusual in the quarter otherwise. Patrick Williams: Yes. I would echo that. And remember, we have a little bit of a long, let's call it, "clinical sales cycle" here, right? It takes a little bit of time for a patient once they get into a Level 4 and then that journey that they go through, right? So I think the most exciting thing that we're looking forward to is that when we submit and potentially get that IGE approval, the ability to put the entire organization behind that and be able to speak openly to doctors, obviously, and talk through that and being able to do both focal and IGE in the adult population is going to be a huge win for us. And some people would say 1 plus 1 may equal more than 2 when this is all done. So I think that awareness and our ability to support it is going to be a key tailwind as we move through 2026 and beyond. Frank Takkinen: And then maybe just a big picture question. Clearly, you've been outpacing, I think, where some of your competitors have been growing. If you were to speculate, do you think more of your growth is coming from market expansion or market share taking? Joel Becker: I think that it's really a combination, Frank. And I think if we go back to the drivers here, we're seeing an expanded adoption of RNS and we're seeing expanded utilization as well. So people are expanding the use of RNS within their practices, and we think RNS is a unique technology that allows them to treat patients uniquely and differently than they can with other therapies. And so I think whether it's specific focal patients or corticothalamic stimulation with a network stimulation approach or the things they can do from a hybrid perspective in addition to resection and surgical candidates, RNS opens up populations of people that can be treated according to the unique capabilities of RNS. And then I do think as well, with the data, in particular, the post-approval study data that has come out, we're winning more than our fair share of the device appropriate patients because of the data and because of the technology. So as I mentioned in a couple of different places in my prepared comments, I think there's a number of different factors that are converging here. The data, the unique capability of the technology, the future potential that people see with the technology and whether that's for future indications or for the future ability kind of future-proof your patient. Here's how we can access today a unique platform that is positioned well for tomorrow and the way things are shaping up, I think we're advancing on both fronts. Operator: Your next question comes from the line of Ross Osborn with Cantor Fitzgerald. Ross Osborn: Congrats on the strong quarter. Starting off, is there any color you can provide on where you think the label will shake out for IGE based upon your most recent interactions? Joel Becker: Well, I think as we've discussed previously, we have -- we plan to submit for the entire study population in NAUTILUS. And so I think you can get a pretty good idea for where the label will shake out based on the study patient population. Ross Osborn: Okay. Great. And then sticking with expanded indications, what level or type of data generation do you think you'll need to develop for the pediatric space to support approval? Joel Becker: Well, I think with the pediatric space, it's not so much data that would need to be developed. And that's really our approach here is the use of real-world evidence to support a retrospective submission for this indication. And I feel like we've made a lot of really good progress with the agency, with NEST, with the clinical providers of the data. And so we think the data is there. It's a matter of aligning the fit-for-purpose protocol and indices and endpoints with the real-world data that exists and what the agency is looking for. And so that's really where our focus is. So I don't think that we need to generate additional data. It's a matter of really matching up a high-quality data set with a trial design that is going to meet those needs. And I'm really -- I'm pleased with the level of engagement and the work that's been done there. But as you might expect, when you're doing a real-world evidence study, a lot of the work goes on, on the front end versus a prospective study where a lot of the work goes in on the back end. And so we're spending the time to make sure we've got that well aligned now. And again, we were very confident in the strategy, and that's what we're working on. Patrick Williams: I think that's the key point that Joel just hit at the end there, which is because of the uniqueness of this pathway that we're looking at and the retrospective of using real-world data, there potentially is opportunity to make up time on the back end as opposed to your more classical like a NAUTILUS clinical trial that we're doing. And so we'll give everyone updates, obviously, on this as we move through it, but that would be a bit of the silver lining I would have people understand. Operator: Your next question comes from Yi Chen with H.C. Wainwright. Unknown Analyst: This is Eduardo on for Yi. Congrats on the great quarter. Just I guess, a question regarding Project CARE. There were some question earlier about it and how you're seeing growth in Level 4 centers versus in kind of these other practitioners and especially in light of the potential IGE expansion, do you see Level 4 centers still being the primary places of growth? Or do you think having this different patient population involved could change the way you go about your sales tactics? Joel Becker: The short answer is yes. And I'm not trying to be cheeky, Eduardo. We see the Level 4 centers being a key and primary source and focus of growth for us. That's where we've built our business today. That's where the growth is coming from today, and we see a significant runway to access and treat patients in the Level 4 centers. We see the care centers and indication expansion as complementary to that. It allows us to reach out for patients that either couldn't have or wouldn't have been referred into Level 4 centers that can be appropriately treated out in the community, and we see that. And then it also positions us for indication expansion into the IGE population potentially, where if patients don't need to be referred into a Level 4 center for an SEEG study, it can allow them to be treated closer to home. So we really view the 2 approaches as complementary. And I think we saw that complementary effect here in Q3. The vast majority of our growth came out of the Level 4 centers, but we also saw sequential as well as year-on-year growth within the care centers. And so I think it's a both and rather than an either/or, and that's where we're focused. Unknown Analyst: Thank you so much for the detail and the extra color there. I also wanted to follow-up if there's any update. You guys had mentioned other investigator-initiated trials surrounding a variety of other indications: Depression, eating disorders, PTSD, and cognitive dysfunction. I'm curious any update there? Anything that we should be looking forward to or exciting developments in that space? Joel Becker: I think it's an exciting development, and we did talk about it at the Investor Day. So thank you for bringing that back up. I think one of the exciting developments is the things that we've talked about here in terms of tailored therapy, individualized and personalized therapy and what data and data science is doing to develop around us lend themselves very much toward alternative disease applications similarly to the way that they do with epilepsy. So I'm not going to get out too far ahead of that. But I would say that we think that a lot of the things that we're excited about converging here converge in a way that allow us to level -- my gosh, leverage the platform and that's true in epilepsy. It's also true in alternative disease applications. And so we think that further points to how well the RNS system is positioned both for today as well as for tomorrow. And more to come on some of that when we do more formal investor updates, but I think you're cluing in on something that we think is important and one that can be leveraged with RNS down the road even further. Operator: And with our last question, the question comes from Paige Chamberlain with Wolfe Research. Paige Chamberlain: I'm hoping to get some quantification around your market expansion efforts through Project CARE. I see a couple of goals you guys have laid out around this initiative. I want to ask you guys on 2. So first, I see the target of expanding your reach to an additional 1,800 epileptologists. I'm just wondering, benchmark how many of those have you reached so far and maybe just a general timeline and vision for that. The second one I see is to more than double the number of implants and referrals coming from CARE accounts in 2025. Curious the starting point for that going into 2025 and perhaps now sitting in November, are you on track to double? Joel Becker: So thanks for the question -- the questions. With regard to doubling in 2025, it's really using 2024 as our baseline, and we're really pleased with the progress that we're making here in 2025. And our plans for CARE for this year are very much on track to answer your question. With regard to the 1,800 epileptologists that are out there, that's absolutely the right number. And there are a number of different ways that we can look to reach that group of epileptologists starting with the first one is a very targeted approach. So we've identified centers, both Level 3 centers as well as community centers that have what I'll call the complementary assets in place, which are the functional neurosurgeon capability, the patient population, the internal assets from an equipment and software perspective as well as administrative support and patient populations that we think make up good targets for us. And that's the group that we're looking to penetrate first. And we're still in the early days of the penetration of that group. We're pleased with what we're seeing, but we've got a long way to run in terms of that total group of 1,800 as well as a good forward-looking trajectory even in our initial targets. So again, early days with CARE, but we like both the sequential as well as year-on-year progress that we're seeing and plans for '25 are on track, and we think that CARE can be an important strategy for us longer term, both for the current patient populations as well as, as we expand into IGE. And we track all those metrics internally. We haven't discussed them quite on a quarterly basis externally, but we'll certainly take that into consideration. But I think the key quantitative/qualitative is that we saw increase in prescribers in the quarter as well as an increase in utilization at that prescriber level. And so we're very, very happy with the penetration that's happening. CARE is clearly a part of that. And again, as we think going forward to kind of wrap this up with some of the other questions, as we get that additional indication, we think that we'll hugely benefit from that. But with that said, we've got a huge runway with our adult focal epilepsy, which is why we've been very consistent on saying we believe we can grow at a minimum of 20% on the RNS platform for the foreseeable future. Paige Chamberlain: I'll sneak in one more, if I may. I echo the appreciation for the additional disclosure around DIXI and service revenue lines. I guess I'll test my luck to see if we can get the same incremental detail around replacement. I know you guys obviously don't break that out. But the trough sort of for this revenue line has been described as this year, earlier this year, we're all doing our best to stab at this number. I'm just wondering if, directionally, you can nudge me should we be thinking about replacement revenue going north from here? Joel Becker: Yes. Directionally, what we try to focus on is clearly our initial implants. At some point, it'll start seeing a larger contribution from replacement as some of the competitive neuromodulation devices have a huge majority of their revenue is based on replacements. Ours is a very, very small percentage at the end of the day. So we call it less than 10%. And depending on the quarter, it's kind of in that even mid-single digits. So more to come on that. We are -- obviously have models that say when do we think replacements will come, but we're still a little bit aways from having a significant cycle, especially with meaningful units being placed over the last, call it, 2 or 3 years. So we look forward to that time. But for now, I think modeling initial implants is probably fair, and we'll provide more color as it becomes larger. Operator: Thank you. And with no further questions in queue, I'd like to turn the conference back over to Joel Becker for any closing remarks. Joel Becker: Thank you very much. We're pleased with the performance in the quarter and the direction and trajectory of the business. And as I mentioned in my prepared comments, we believe that there are multiple factors that are beginning to converge here, both with the results that we see as well as the way RNS is positioned and NeuroPace is positioned to build on that momentum. We have world-class opportunities, world-class technology, world-class data, and we've got a world-class team in place to deliver on them. And these foundational factors are exciting for us and position RNS and NeuroPace in a position to really establish ourselves as the standard of care in epilepsy neuromodulation. I'd like to thank all of the members of the NeuroPace team for their ongoing tireless efforts to advance our mission. And thank you all for your time today and for your continued interest in NeuroPace. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Veracyte Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Shayla Gorman. Shayla Gorman: Good afternoon, everyone, and thank you for joining us today for our discussion of our third quarter 2025 financial results. With me today are Marc Stapley, Veracyte's Chief Executive Officer; and Rebecca Chambers, our Chief Financial Officer. Dr. John Leite, our Chief Commercial Officer; and Dr. Phil Febbo, our Chief Medical and Scientific Officer, will join us for Q&A. Veracyte issued a press release earlier this afternoon detailing our third quarter 2025 financial results. This release and a copy of the presentation we will review during the call today are available in the Investors section of our website at veracyte.com. Before we begin, I'd like to remind you that statements we make during this call will include forward-looking statements as defined under applicable securities laws. Forward-looking statements are subject to risks and uncertainties, and the company can give no assurance they will prove to be correct. Additionally, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Veracyte files with the Securities and Exchange Commission, including the most recent Forms 10-Q and 10-K. In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today's earnings release accessible from the Investors section of Veracyte's website. I will now turn the call over to Marc Stapley, Veracyte's CEO. Marc Stapley: Thank you, Shayla, and thank you to everyone for joining us today. I'm pleased to share details of our third quarter performance as well as provide updates on our key growth drivers. We delivered another outstanding quarter. Our core testing business achieved 18% revenue growth year-over-year after adjusting for Envisia, driven by volume growth of 26% in Decipher and 13% in Afirma. This strong performance resulted in total revenue growing 14% year-over-year to approximately $132 million, even after the expected dilutive impact of removing the biopharma and other revenue tied to SAS. In addition to our robust revenue performance, our adjusted EBITDA margin reached a record 30%, representing a 650 basis point improvement from the prior year and far exceeding our expectations. As you know, we had set a goal of consistently achieving a 25% adjusted EBITDA margin on an annual basis, and it now appears that we will reach that milestone this year, more than a year ahead of our internal plans. This best-in-class profitability profile is a significant accomplishment, which we attribute to our disciplined portfolio focus. It enables us to continue to invest in our robust pipeline to serve as many patients as possible. The foundation we have built at Veracyte will enable sustained near- and long-term growth through a focused set of strategic drivers. I'm excited to share progress across several of these initiatives today. Starting with Decipher. We delivered approximately 26,700 tests in Q3, marking the 14th consecutive quarter of over 25% year-over-year volume growth. With the highest number of quarterly ordering providers and the highest number of orders per physician, Decipher's clinical utility is increasingly recognized by physicians for patients across all risk categories. This year, we have especially highlighted the clinical evidence for advanced disease, including high-risk localized and metastatic patients, where Decipher's predictive power has been shown to improve outcomes. With Decipher now available for metastatic patients, physicians can better assess the benefit of intensifying treatment with androgen receptor pathway inhibitors or chemotherapy. For example, recent analysis from the STAMPEDE trial published in Cell showed a high Decipher score predicts docetaxel benefit in metastatic patients and abiraterone efficacy for those with metastatic and high-risk localized disease. During the quarter, our volume of tests in this high-risk localized group grew more than 30%, demonstrating new traction in this category. We believe there remains significant opportunity to expand Decipher's use in this segment. Consistent with our established formula for evidence generation as the key to broad adoption, we continue to support extensive research in prostate cancer. For example, at ASTRO in September, research collaborators presented the first validation data from the BALANCE trial, demonstrating the PAM50 molecular signature predicts hormone therapy benefit in men with recurrent prostate cancer using data from our research use only Decipher GRID. This signature, well known in the breast cancer oncologist community and the backbone of our Prosigna test has now been shown to be able to stratify prostate cancer patients based on subtype, providing confidence in hormone therapy benefit for those with the Luminal B subtype. In addition to demonstrating the power of GRID and driving new important research in prostate cancer, this trial also builds on research presented earlier this year from the SSPORT trial, which showed the biochemical recurrence or BCR post-surgery patients with a high Decipher score received greater benefit from the addition of pelvic node radiotherapy and short-term ADT. These BCR patients represent a potential incremental opportunity for Decipher as we believe the majority never received a Decipher test when they were initially diagnosed with prostate cancer and would now be appropriate candidates for testing post-surgery. The complex treatment decisions faced by physicians and their patients dealing with advanced disease requires robust actionable information. As research empowered by GRID establishes clinical utility for new signatures, we are working to add such additional molecular features to the Decipher report to enhance clinical insights. Signatures like PORTOS and PTEN will be available in the optional Molecular Features Report when it launches next year. PORTOS predicts which patients with prostate cancer are likely to benefit from differing dosages of salvage and definitive radiation therapy. PTEN used alongside the Decipher score showed promise in determining whether metastatic patients would benefit from chemotherapy in the STAMPEDE study. These additions will further extend Decipher's application across indications, treatment decisions and various health care specialists. These studies represent only a selection of the extensive ongoing research related to Decipher. This quarter, we saw 23 new abstracts and publications on Decipher Prostate and GRID, bringing the total to 240 publications. Notably, at ASTRO 2025, of the 9 Decipher-focused abstracts, 2 compared the results of the Decipher test to the on-market DPAI solution and found marginal correlation. Investigators concluded that the 2 tests are measuring different biological processes, something we have asserted for a while based on prior studies. Further, there was meaningful discordance between the 2 tests across risk categories with a bias to low and therefore, potential undertreatment from DPAI. These findings support our view that digital pathology may complement molecular analysis by providing additional data points based on a more comprehensive analysis of tumor histology, but further research is needed to determine optimal use and to protect patients. To support this, we made our digital pathology services and associated AI models available to research collaborators earlier this year and have now implemented slide scanning as a standard production workflow. We've made tremendous progress in the third quarter and have now scanned over 115,000 slides from over 80,000 de-identified patients with outcomes data and expect this database to grow meaningfully as we continue building our digital image repository. Looking forward, the expanding clinical evidence supporting Decipher gives us confidence in its long-term growth prospects. With data consistently demonstrating its clinical utility and impact on patient management, Decipher is increasingly becoming the standard of care in prostate cancer. We see a long runway ahead, further bolstered by ongoing prospective studies to drive broader physician adoption, resulting in durable double-digit growth for years to come. Turning to Afirma. We were incredibly pleased with the 13% volume growth in Q3. This outstanding performance was driven by a steady pipeline of new account wins and yet another quarter of increased utilization per account. We also had a strong showing at the 2025 American Thyroid Association meeting, where we supported the presentation of 12 Afirma-related abstracts, including 4 independent studies utilizing data from Afirma GRID. Our operational efficiency program for Afirma is progressing nicely as we have transitioned over 1/3 of samples onto our new v2 transcriptome in the lab and having received New York State approval are on track to complete the transition of all incoming Afirma samples to the new workflow by year-end. While the data is early, we are pleased to see a side benefit in that the lower RNA input required by the new workflow has enabled even more patients to get a test result. Moving to our commitment to serve more of the patient journey through MRD and recurrence testing, we are excited about the opportunity for our whole genome-based MRD platform. Multiple studies are already completed in muscle invasive bladder cancer or MIBC, colorectal cancer or CRC, lung and other cancers with a robust pipeline, including 10 studies in testing and/or analysis, 13 in contracting and 10 in the active planning stage. This includes additional studies in MIBC as well as in breast, lung, CRC, kidney, immune therapy treatment response and others. The enthusiastic engagement by collaborators at leading institutions, along with the early results we are seeing reinforce our bullish expectations of our ability to capture a meaningful share of the pan-cancer market with our differentiated approach, which we have branded as TrueMRD. We are now receiving samples for the first phase of the NEO-BLAST trial. With growing enthusiasm over the efficacy of combination therapies like enfortumab vedotin and pembrolizumab or EV Pembro, there is keen interest in moving towards therapy de-intensification. The NEO-BLAST trial has the potential to help inform which patients can be de-intensified following standard of care neoadjuvant therapy. MIBC patients are being tested with standard staging MRI and TrueMRD. If they achieve a complete clinical response and are undetectable by MRD, they will be randomized to definitive local therapy or bladder-sparing active surveillance. We are excited to advance this trial and further the understanding of when a physician can safely de-intensify treatment for these patients. Our commercial success in MRD will begin with our proof of concept in MIBC in the first half of 2026, which we plan to launch with reimbursement. We expect to leverage our Decipher channel, which we believe reaches approximately 70% of MIBC patients who are seen in the urology and radiation oncology setting. Beyond MIBC, we plan to deliver indication expansion annually in order to serve more patients across more indications. Moving now to Prosigna. We are on track to launch Prosigna as an LDT for the U.S. breast cancer market in the middle of 2026, given the tremendous opportunity we see ahead. The clinical outcomes data from the 10-year OPTIMA PRELIM study presented in May suggested Prosigna had higher prognostic accuracy in high-risk patients compared to the test initially used to assign patients to treatment groups. We're excited to see the readout of the full OPTIMA trial, which is the first prospective study to specifically address Prosigna's ability to identify clinically high-risk patients who do not benefit from chemotherapy and can safely avoid the toxicities associated with treatment. New studies also continue to highlight the use of Prosigna for guiding preoperative therapy. An IMPACT study led by Dana-Farber Cancer Institute investigators and recently published in ESMO Open demonstrated a change in therapy in 35% of patients based on Prosigna results. At ESMO last month, investigators reported preliminary results of the RIBOLARIS study in which patients with clinically high-risk ER-positive breast cancer were treated with preoperative endocrine therapy plus Ribociclib, a CDK4/6 inhibitor. Prosigna was used to identify patients who achieved a low-risk molecular profile post therapy, allowing a mission of adjuvant chemotherapy. Additional follow-up is required for definitive results, but this study and other preoperative studies underway demonstrate how Prosigna enables precision medicine. As you can see, we have continued to advance our robust pipeline, having launched Decipher Metastatic in June, completed our NIGHTINGALE lung cancer trial enrollment of 2,400 patients in August and deployed our v2 transcriptome assay. We are making good progress on our MRD, Prosigna and IVD products. With so many new products and capabilities in these 2 years alone, I couldn't be prouder of the Veracyte team who are working tirelessly on behalf of our patients. Looking ahead, we will be accelerating our investments into our critical projects while maintaining the best-in-class financial profile we've consistently achieved. The strong momentum we have seen this year, together with the impact we expect to make with our upcoming product launches gives us confidence that we will continue to deliver comfortably durable long-term double-digit growth as we relentlessly pursue our mission of improving cancer care for patients all over the world. With that, I will now turn to Rebecca to review our financial results for the third quarter as well as our updated outlook for 2025. Rebecca Chambers: Thanks, Marc. Q3 was another exceptional quarter with $131.9 million in revenue, an increase of 14% over the prior year period. We grew total volume to approximately 45,900 tests, an 18% increase over the same period in 2024. Testing revenue during the quarter was $127.8 million, an increase of 17% year-over-year, driven by Decipher and Afirma revenue growth of 26% and 7%, respectively. Total testing volume was approximately 43,700 tests, an increase of 19% over the prior year period and included 17,000 Afirma tests. Testing ASP was $2,925, a decrease of 2% compared to the prior year, primarily driven by the impact of higher prior period collections in Q3 2024 as well as the Afirma Laboratory Benefit Manager impact previously discussed. Adjusting for the impact of approximately $2.5 million of prior period collections in the quarter, testing ASP would have been approximately $2,875, flat to the prior year period. Third quarter product volume was approximately 2,200 tests and product revenue was $3.3 million, up 4% year-over-year. Biopharmaceutical and other revenue was $800,000, a decrease compared to the $3.1 million in the third quarter of 2024, given the Veracyte SAS restructuring and liquidation proceedings. Moving to gross margin and operating expenses, I will discuss our non-GAAP results. Non-GAAP gross margin was 73%, up approximately 150 basis points compared to the prior year period. Testing gross margin of 74% exceeded our expectations, driven by improved lab efficiencies and was roughly flat to the prior year. Product margin was approximately 800 basis points higher than the prior year at 52%. We still expect product gross margin to decline in Q4 with our transition to a contract manufacturing model. Biopharmaceutical and other gross margin of negative 36% was down year-over-year due to the restructuring proceedings of Veracyte SAS. Non-GAAP operating expenses were up 2% year-over-year to $58.6 million. Compared to the prior year, research and development expenses decreased by $2 million to $14 million, driven primarily by the deconsolidation of Veracyte SAS. Sales and marketing expenses increased by $1.5 million to $22.4 million, given higher personnel costs supporting Decipher and Afirma. G&A expenses were up $1.5 million to $22.3 million, primarily due to project-related expenses within our support functions. Moving to profitability and cash metrics. We recorded GAAP net income of $19.1 million, including a $6.7 million loss upon deconsolidation of Veracyte SAS. This is onetime in nature and puts the France accounting impact behind us. Adjusted EBITDA was $39.7 million or 30.1% of revenue, well above our expectations given the benefit of prior period collections, lab efficiencies and the timing of some project investments, which are now forecasted to occur in the fourth quarter and into 2026. We generated $44.8 million of cash from operations and ended the quarter with $366 million of cash and cash equivalents. Turning now to our 2025 outlook. We are raising our 2025 total revenue guidance to $506 million to $510 million from our prior guidance of $496 million to $504 million. Due to our strong year-to-date performance, we are raising testing revenue guidance to $484 million to $487 million from our prior guidance of $477 million to $483 million. This reflects a raised Decipher outlook and continued Afirma volume strength. As a result, testing revenue growth is now estimated to be 16% as compared to the prior guidance of 14% to 15%. We are also raising adjusted EBITDA margin guidance for the year to exceed 25% from our previous guidance of 23.5%, which was already meaningfully higher than our original 21.6% 2025 guide. This reflects our year-to-date profitability outperformance and expectations for accelerated investment in the fourth quarter in support of our strategic growth drivers. We expect adjusted EBITDA margin to be approximately 25% in the fourth quarter and in future years, barring any specific incremental investments we decide to make, which we would, of course, communicate as appropriate. In closing, I am thrilled with our progress over the course of 2025. As Marc shared, we delivered on our product goals this year, including the launch of Decipher for metastatic patients and the transition of Afirma to the v2 transcriptome. With strong momentum heading into year-end, I'm excited to close out a successful 2025 and have confidence in our trajectory for '26 and beyond. We'll now go into the Q&A portion of the call. Operator, please open the line. Operator: [Operator Instructions] Our first question comes from Doug Schenkel at Wolfe Research. Douglas Schenkel: So I want to ask, I think -- I guess, 2 for Marc, and then I guess if I can take the liberty to ask a financial question of Rebecca. So on Marc, digital pathology, there were several presentations as you talked about in your prepared remarks at the ASTRO Annual Meeting showing weak correlation between multimodal AI scores and Decipher. As you talked about, it suggests these assays are complementary. Just on that topic, I'm curious, how do clinicians manage discordant results? Do you see this as being a concern for Decipher? Or is this something that you think actually leads folks to maybe kind of prioritize Decipher over some of the emerging competitors? And then maybe while we're on the topic, could you just talk a little bit about your own internal digital pathology efforts and kind of what the time lines are there? Marc Stapley: Yes. Happy to, Doug, and then we can get to your financial questions. And actually, I'll answer these questions, and then I'll turn a little bit to John on the commercial aspects and Phil on the DPAI internal digital program. But I think the way to think about this is if you think about new technologies, including genomics of 10 or a dozen years ago, there's a lot of excitement and new tests come out. And I think what's really important is to go at an appropriate pace, develop the clinical evidence and make sure that evidence supports the utility and most importantly, the patients aren't getting harmed by the wrong decisions and the physicians aren't getting confused. This is kind of the formula we took with Decipher and letting the research community help drive the research behind Decipher, which is what we believe has resulted in it being so popular. I think we're at that stage now with DPAI-based models, right? It's exciting technology. It's new, but enough evidence hasn't been generated yet. And then -- and so you do get discordant results. And there isn't anything to tell the physician what to do in that case. And so what they do is pretty logical. They focus on the gold standard, which, frankly, is Decipher. So if you've got a Decipher high and you have a DPAI-based low result, you certainly wouldn't want to undertreat that patient. And so you would focus on the Decipher result, treat accordingly, but the DPAI, the new technology loses credibility. And I think that's a bad thing for the industry as a whole. So our approach of making sure that we are really focused on developing the evidence and letting the research community do that is what we think will ultimately drive success for a technology that should have its place if done the right way. Let me turn over to John on the commercial side, what we're hearing from physicians. John Leite: Yes. Thanks, Marc, and thanks, Doug. It's a good question. It's difficult for us to firmly lean into this concept of complementarity while we are seeing significant rates of discordance. And while it leads to physicians ultimately then being confused as to how to interpret the results and how to proceed with the patient. And so on the commercial side, we're spending a lot of time or revisiting the wealth of evidence substantiating the clinical validation and utility of Decipher versus that of emerging technologies. And ultimately, physicians and based on the results of a survey that we've run, they heavily lean on the evidence that's currently substantiating Decipher and they see it as the current standard of care. Moving forward, we would hope that complementarity becomes more defined around how are insights to be developed in the best platform that ultimately associates a result with a clinical outcome and that will inform the right patient management decision. To do that, as Marc mentioned, we're working very closely with our current network of collaborators, key opinion leaders. Ultimately, we will curate and develop new signatures that will land on GRID. Ultimately, those will make their way into an equivalent of Molecular Features Report, such as we're doing now with the current GRID. And that's what true complementary in my mind, looks like. It's the rounding of clinical decisions aggregated and curated by an actionable report. Marc Stapley: And then maybe, Phil, anything to add standpoint of the internal development program? Phillip Febbo: Yes. Happy to, Doug, and thanks for the question. So being a custodian of over 200,000 transcriptomes and incorporating pathology scanning of whole slide images into our research program, we are in a very -- we have probably the best and most comprehensive data set where we can dig into that interface that John was talking about and figure out how to take the best of both the transcriptome, which is represented the Decipher commercially and the emerging excitement around DPAI. That is in full steam. We're digging in with collaborators as we've done with transcriptomes through the GRID. We're working with external -- some of the top investigators to drive that research forward and as well as both developing a model under -- as a DPAI model as well as understanding the interface and the biology that's measured there. We also have looked at that and see that it can help some of the prognostic, but we're also really understanding that through the GRID work we've done, we see a lot of opportunity, as Marc mentioned, on the molecular features that are coming out of the GRID and the different signatures. And we're excited about the LUM-B, non-LUM-B distinction that we saw presented at ASTRO. We're excited about the P10 activity, that's STAMPEDE activities. And we're seeing a number of the signatures that are predictive for therapeutic benefit. And so we are in an excellent place to look at the interface between the 2. Right now, we're driving forward with the molecular features because they're predictive, and we're in the best position of anybody to bring digital pathology into the clinic in a complementary and in a rigorous way. Marc Stapley: Thanks, Phil. Okay. And Doug, you had a -- sorry, hopefully, we answered that question and you had a question on financial. Douglas Schenkel: Yes. No, that was fantastic, and I appreciate all the detail. And in an effort to be respectful to my sell-side peers, I'm going to try to make the follow-up a much quicker one. I think for Rebecca, you're a year ahead of plan on margin targets, which is fantastic. There are areas you've talked about planning to invest in next year, like I think building up the breast channel is one example. How are you contemplating balancing the margin trajectory and the upside that you're generating with maybe the opportunity to opportunistically maybe pull forward some investment in a period of strength to drive future growth? Would be curious to just get your thinking and obviously, that helps us as we're contemplating the model updates. Rebecca Chambers: Yes, absolutely. Thanks, Doug, for the question. And you're right, we're in a very privileged position that we've gotten to based on really solid portfolio management and planning and quite regimented project prioritization. And I don't expect that to change. We have also a number of different initiatives that we're undertaking. As we did our strategic plan this year, we actually thought that the number of opportunities we had to invest in was almost embarrassing. It was a wealth of riches. And we remain in an incredibly fortunate position in terms of being able to help patients across the cancer care continuum with those investments. And so we are accelerating them to your point. This Q4 guide implies we hire a number of heads that we're working on hiring. We spend some money on clinical trials that we're hoping to spend and also, we start to scour the landscape for the best breast sales leader. And so all of those things will happen in 2025 are implied in the approximately 25% Q4. As we have talked about previously, looking ahead, we really do plan on managing to that approximate 25% adjusted EBITDA target going forward. We have a number of tailwinds on the gross margin side next year that we will benefit from, including the full year of the v2 transcriptome. And we have obviously the benefit of no longer having the burn of the French entity. Those will be -- those kind of good guys will be offset by incremental spend on the breast channel, incremental spend on MRD and incremental spend on the Prosigna launch in general and the development to get there. So I think -- think about that 25% is our goal in any given year. And we're going to do our best to manage the P&L to that, and we will be bringing forward spend into 2025 to accomplish this. Operator: Our next question comes from Puneet Souda at Leerink Partners. Puneet Souda: I'll try to wrap both of my questions in one, hopefully not too long. On the prostate side, you're well above 25% volume growth for Decipher. My question is, given the penetration that you have today, how should we think about the 2026 growth? Can you still grow more than 20% in volumes here for Decipher in '26? And then on the MRD side, I would love a perspective from Phil and the folks in the room as well. I appreciate you're getting closer to the launch here on MRD. But we have seen data so far from competitors where we have moved from observational trial to not prospective data sets that are getting published in NEJM. We saw the [ Tece ] data with the IMvigor011 MIBC trial. And there are other data sets that are coming from CRC, lung, other competitors entering the market. So how should we think about Veracyte's MRD position? And more importantly, what's the market strategy here? How do you differentiate? And how do you go to an oncologist and say, here is a test that you ought to employ in your practice, just given the competitive landscape? Marc Stapley: Yes. Thanks, Puneet. On the first question, let me take that real quick. And I'll actually cover this as a company as a whole, including Afirma and Decipher. You kind of -- this question of durable long-term growth has been a question that we've dealt with for quite a while, understandably. And if you actually take a look back and look at Afirma has grown year-over-year for the last 13 quarters. Decipher has grown over 25% in volume for 14 quarters in a row. And if you think about where they both were coming into the year when we looked at the market numbers, Afirma was about -- we had about 1/3 of the TAM and Decipher, we had about 25% of the TAM. So in both cases, there's significant growth opportunity ahead, which is why we've said we feel that the market penetration and market share opportunity and the tailwinds we have and frankly, the lack of headwinds given everything we've done around evidence and NCCN guidelines and so on is what's going to help us get -- comfortably get double-digit growth durably for the foreseeable future, and that includes 2026. So that isn't a concern of mine. When you actually take those 2 core ones alone and you get double-digit -- comfortable double-digit growth and you add to that MRD and Prosigna in the nearer term and international and nasal swab in the longer term, you can see we've got a pretty well mapped out. Since you brought up MRD on that one, I mean, we've had data published for our MRD test, including in bladder for quite a while. And as I mentioned today, we've got a lot of publications that are in the works. We've talked about UMBRELLA before. We've talked about NEO-BLAST today. I'll let Phil talk about his excitement around some of the clinical studies very, very briefly. But essentially, we are very much doing our bit to make sure that we're part of the evidence generation journey. Phillip Febbo: Yes, Puneet, thanks for the question. And I really feel quite confident that between the performance of our test, the strength of our clinical evidence portfolio and our commercial channel, we're going to be a leading competitor in muscle invasive bladder cancer with our MRD test. It's incredibly exciting to see the prospective trials come out like IMvigor011. It was incredible to see the NIAGARA trial to talk about in the neoadjuvant setting. These are foundational trials that are really demonstrating that MRD status is a new disease state and a state that we can take full advantage of the medical oncologist. I'm extremely excited to be able to manage patients more precisely and earlier with a compendium of therapies that are more effective. We will have to demonstrate with confidence the performance of our tests and I have confidence in our portfolio. What I've seen already, as Marc said, we've already published. We're already in prospective trials. And to cross back to a question that Rebecca had, our clinical trial portfolio will -- we do have opportunities to use some of that margin on our clinical trial portfolio, and we are doing so. Veracyte, I came to Veracyte because of the consistent history of investing in evidence, and this is no exception. Rebecca Chambers: And just one last thing to add to Marc's response on 2026, Puneet, just to sum it all up, we are -- as we're sitting here in our budget planning season, our early look at 2026 revenue is above the Street just to be blunt about it. So we're obviously not guiding today. We'll guide either early in the first quarter at a competitor's conference or shortly thereafter on our Q4 call. But given the trends we're seeing year-to-date, quarter-to-date in Q4, we're extremely excited about 2026 and beyond. And that even is taking into account the around $10 million headwind from biopharma and other revenue that we won't have next year. So I think as we're sitting here, we're -- the playbook is working, right? What we've invested in is demonstrating the evidence, which is demonstrating the utility, which is demonstrating the guidelines and coverage and growth and penetration. Marc Stapley: Thanks, Rebecca, thanks Puneet, for the question. Operator: Our next question comes from Kyle Mikson at Canaccord. Kyle Mikson: Congrats on the awesome quarter. Maybe, Rebecca, on your point there, when you look at the Street estimates for '26, I mean, when you look at like what Decipher is expected to do, what we think Afirma can do, where are people underappreciating Afirma, for example? Just curious what you think about that. And then maybe for John or for Phil, the molecular features for Decipher, just could you talk about how much of the unmet need those signatures are and if there's a pipeline beyond PORTOS and PTEN? Rebecca Chambers: Yes, I'll take the first one. Effectively, the range is pretty wide on each, Kyle. So I don't want to make a statement that's general in nature and have it be expounded or extrapolated into something that is wide in nature. So I would say, in general, we're above the average, but I don't want to go beyond that given I don't have the ranges in my mind for each. So I think the statement can just be applied to the average for both. Marc Stapley: And then we'll let John talk about the commercial opportunity for molecular features and why it's important. John Leite: Yes. So molecular features are a response to the evidence that's emerging as these collaborative groups use Decipher more and more as a selection enrichment randomization tool. And the evidence from STAMPEDE, from PORTOS, from BALANCE were designed to meet a need in the market, which necessarily is treatment of and management of high-risk and metastatic patients is becoming more and more heterogeneous. There are clearly differences in response to a variety of these therapeutics. And so the need for a biomarker is exceptionally high. You can look at the results of those studies to see the benefit of using Decipher in those studies, and we're meeting that need by providing these signatures now in a consolidated report with these predictive biomarkers. Marc Stapley: And Kyle, think of this as a repeatable formula. It's enabled by GRID and whole transcriptome approach. And you'll see us at these signatures when the clinical utility evidence is there and there's an unmet need in our customer base. Operator: Our next question comes from Lu Li at UBS. Lu Li: Congrats on the quarter. First question, I wanted to dig into a little bit on the 2025 guide. It does seem like the Q4 would seem to be roughly flat as of Q3. Any days impact or maybe just like holiday season? Please correct me if I'm wrong on this one. Rebecca Chambers: No, it's a great question. So recall, we had $2.5 million of prior period collections in the quarter in Q3, and that isn't necessarily implied in the guide. So that would be one thing. The other thing is the way the holidays do fall is a little bit more challenging than prior years, but those are the 2 things I would take into consideration. The third thing I would say is we did have a little bit of French revenue in Q3 that won't repeat in Q4. Lu Li: Got it. Appreciate that. And then I wanted to dig into the breast investment in 2026. Possible that you can size like how big of the channel that you're planning to build? And then also the kind of like the spend related to the Prosigna launch? And then second, also related to kind of the margin question. On Afirma v2, I think it's not fully transitioned yet. I wonder how much of the cost benefit that we've already seen in the quarter? And then how much left that we can potentially see the margin benefit in 2026? Marc Stapley: Thank you for the question. I'll ask John to talk about the commercial scale-up strategy. John Leite: Yes. Thanks for the question. I mean we're excited about Prosigna. We're excited about in anticipation of the release of the OPTIMA trial results at ASCO 2026 and we're excited about the potential launch. To do that, we will have to build a sales channel specifically focused on breast cancer oncologists. We will do that in a very measured way. It's always been our approach to not get over our skis from a spend standpoint and to build the sales team as we see the demand emerging. The plan here is fairly prescriptive. All you got to do is look at how we launched and have led the field in Decipher with prostate cancer to understand how we will approach the market in breast cancer. We will lean into the GRID. We will lean into collaborations with key opinion leaders. We will lean in with buy-in from market leaders on the HCP side and drive the demand from the top down and build the sales team accordingly. Rebecca Chambers: Yes. And in terms of the gross margin in the quarter and the v2 transcriptome, so think about the gross margin dynamic on testing as a quarter -- I'm sorry, a month of goodness from the V2 transcriptome for 1/3 of the Afirma volume. Obviously, as we transition throughout Q4, that will -- by the end of Q4, that will go to 100%, but I would really think about that only being at 100% for '26. We also had the benefit of $2.5 million of prior period collections in the quarter. And then we did have a decently sized write-off associated with v1 transcriptome reagents. And so those all kind of netted out with regard to the testing gross margin trends on a sequential basis, if that helps. We're not going to quantify the v2 transcriptome benefit because effectively, it's one of our levers for fueling the investments across the rest of the portfolio and don't want folks to get ahead of themselves on profitability. We will be managing our P&L to that 25% in '26 and beyond, and that gives us ample room given the programs we have in hand to invest for continued revenue growth while also delivering a best-in-class financial profile. Operator: Our next question comes from Subha Nambi at Guggenheim. Subhalaxmi Nambi: There have been a lot of updates throughout the year when it comes to competitive landscape for Decipher. In your view, in what ways have things played out as you expected? And what has surprised you the most? Marc Stapley: Yes, great question, Subha. Thanks for that. There have been a lot -- and there will continue to be competitive updates, I think. And I think similar to what we talked about for MRD, there's a rising tide here, and we were able to benefit from drafting on others to pave the way for molecular diagnostics in prostate cancer. And through evidence development and having a strong test and ultimately NCCN guidelines, we've been able to benefit from that. It's played out maybe better than we thought, frankly. I think Decipher has taken more share than I would have guessed it would coming into the year. And the NCCN guidelines are kind of an unknown quantity. It's hard to quantify the benefit you're going to get from those. And then obviously, there's been a fair bit of noise around DPAI, and we addressed that question extensively at the beginning, and that's turned out to be a lot of noise and not a lot of substance in terms of the market share and the growth rate that we're seeing in Decipher. Subhalaxmi Nambi: And then do you still expect to have a commercial Prosigna LDT midway through 2026? And if yes, could you provide some color on the time leading up to then? Like what should we expect to see LDT performance data and so on and so forth, I think the [ OPTIMAS ] data? Marc Stapley: Yes, we do expect to have a commercial Prosigna LDT halfway through 2026. You're not going to see a ton of data from us there because we're -- obviously, you've seen the OPTIMA PRELIM data. We're waiting for the final OPTIMA data. That's the key evidence behind that test. And then actually generating that test in our lab is a pretty straightforward process for us with a tech assessment, validation, bridging, New York State approval, all those things, which are fairly normal processes for us to follow. Operator: Our next question comes from Mason Carrico at Stephens. Benjamin Mee: This is Ben on for Mason here. On MRD, would you be able to provide some color on the overlap of urologists that are treating prostate cancer and our Decipher targets and are also those treating muscle invasive bladder cancer that are going to be targets for your MRD assay. What's the overlap here? And really just what does that Venn diagram look like of those 2 urologists? John Leite: I mean it's an exceptionally high overlap. Thanks for the question. We expect to be able to serve upwards of 70% of the TAM based on the channels that we currently control. These are primarily going to be a combination of urologists and oncologists. We feel confident we can serve the market. Benjamin Mee: Okay. Great. And then I appreciate the color that you gave on Decipher's growth in high-risk patients this quarter. Are you able to go a little deeper there and maybe comment on how ordering patterns have trended in localized patients after urologists have adopted the metastatic offering? Is this a fairly immediate impact to orders that you're seeing? Marc Stapley: Maybe I'll take that just in terms of stratifying the Decipher market that we're going after. Obviously, we added 30,000 patients when we launched metastatic and now we have the full TAM addressable by Decipher. We also mentioned BCR-based patients, which could be part of the prevalent population, hard to size it, but that's a potential upside. Of course, you've got incidence growth as well. When you kind of subdivide the localized disease population, we've said over 20% in low. So that's actually quite a high penetration for us. We said that the high risk is actually one of our highest growers this quarter, and that's driven a lot by the metastatic data that's come out as well. And so while intermediate has always been the highest penetrated and maybe even the highest growing area in the past, it's clear that we are making great traction in every single risk category of prostate cancer patients and metastatic really helped that. And GRID and everything else, NCCN guidelines help that as well. Operator: Our next question comes from Andrew Brackmann at William Blair. Andrew Brackmann: Maybe just on TrueMRD here. I appreciate all the color on the studies in the pipeline there. But can you maybe just sort of talk about some of the considerations that you have when you sort of think about choosing which indications to expand sort of each year as we sort of look at it, some of those indications are a bit crowded and there's others where Veracyte has a great channel. And so how do you sort of think about building out that annual road map of additional indications? Marc Stapley: Yes, it's a great question. And Andrew, thanks for referencing our brand, TrueMRD. We're excited about that product. Obviously, we fix muscle invasive bladder cancer for the reasons John just highlighted in terms of the Venn diagram and the overlap there with our existing customer base. You can imagine us really potentially going after any market with TrueMRD because it is a pan-cancer platform. But we will go after markets where we have an inherent advantage, for example, where we have an existing channel or building a channel. It's really great for us to build out the entire care continuum. I think it will really help in MRD to be a company that is able to support that patient and that physician right at the upfront in their diagnostic journey with a prognostic test or a diagnostic test or a predictive test as they're being treated and then an MRD test post treatment. And so obviously, covering that whole spectrum there will be an important advantage for us. And then beyond that, it will be subject to things like cohort availability, existing published data that we've already got. We won't shy away from competitive markets. We believe our whole genome-based approach is a differentiator. And so that will certainly -- some markets will be harder to go after than others, especially where they're already well penetrated. And let's face it, most MRD markets are not well penetrated today. So plenty of opportunity. But we won't shy away from it. We'll just be thoughtful about how we do that and the timing. Andrew Brackmann: Okay. That's perfect. And then somewhat related to that, another great quarter of cash generation here. So how should we sort of be thinking about your appetite for maybe expanding the portfolio through some acquisitions to maybe round out that care offering? Marc Stapley: Yes. I mean, absolutely. We've -- I'm very pleased with the performance of the business, especially the cash generation as well this quarter. And as Rebecca said, we're going to -- first and foremost, we look at investing in our business, clinical trials, product development, some of the stuff in infrastructure. We're really building an incredibly efficient engine here at Veracyte, and we have the opportunity to be able to do that. M&A, of course, is on the list. And if there's something that makes sense, then we would go after it. But our narrative on this hasn't changed one bit. The funnel isn't huge. We look at everything. We kick the tires, and we're very diligent, and we're not -- this cash doesn't burn a hole in our pockets, far from it. It doesn't change the VC approach that we take. And then beyond that, other capital allocation opportunities, none of which are top of mind for us right now. Anything you want to add, Rebecca. Rebecca Chambers: No, you covered it quite well. Operator: Our next question comes from Andrew Cooper at Raymond James. Andrew Cooper: Maybe first, just one on some of the numbers. I think in the script, you called out a little bit of timing of spend on the 30% EBITDA margin this quarter, but you do have EBITDA up, I think, around $10 million or so at the midpoint. So when you think about those prior plans versus where we are now, what was timing? What was operational performance? And then maybe in the guide, is there any incremental spend that you're pulling in that wasn't expected in '25 in the first place? And how do we think about sort of the jumping off point as we head into next year from an OpEx perspective? Rebecca Chambers: Yes, fair question, Andrew. So effectively, what was good news was the revenue outperformance versus our commentary plus prior period collections, which obviously flowed on 100%. I would say there was a little bit of v2 Afirma goodness in there, a little bit further ahead of kind of the transition than we would maybe have expected, though that's a rounding error. With regard to the 2025 spend, I would say there -- I wouldn't call it anything specifically material that would fold in. I would say maybe a couple of heads here and there, but we just try to derisk it as much as possible. And the jumping off point for next year, I think you've effectively quantified it decently well. You can effectively back into whatever you think the revenue number is with getting to that 25% adjusted EBITDA for 2026. Andrew Cooper: Okay. Helpful. And then already asked, maybe just a little bit more on the Molecular Features Reports. Help us frame how that fits in from a competitive perspective and what you think that can do? Is there any opportunity to kind of go out and monetize that a little bit more directly? How does it compare to something like Promoter Score that you've added on Afirma and what that's helped kind of enable with that platform? John Leite: Yes. Great question. No, there isn't a way to monetize it directly. But I believe it's yet another way that we continue to improve self-disrupt, add evidence, prove to each one of our HCP customers that they are using the best tool to make the most informed clinical management decision on behalf of their prostate cancer patients. This is just one more thing that we will continue to do. Phillip Febbo: Just to add from a medical perspective, adding these features to our report underscores the value of the biology. And so the treatment of men in that high-risk group and that biochemical occurrence in the metastatic group where we're seeing some very good growth because of our coverage -- recent coverage in metastatic and increased interest in the high risk is getting more complex. We have hormonal therapy. We have chemotherapy. We have radiation therapy. We have a whole slew of therapeutics, adding predictive signatures to complement the best-in-class prognostic signature will really help clinicians, urologists as well as some of the radiation therapists and medical oncologists in that space. And so it's part of the Decipher report, but it really helps drive a lot of and inform some of the increasingly complex decisions managing those higher-risk patients. Operator: This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: " Jeffrey Korn: " Jon Brinton: " Ron Vincent: " Doug Gaylor: " Unknown Executive: " Joshua Reilly: " Needham & Company, LLC, Research Division Mike Latimore: " Northland Capital Markets, Research Division George Sutton: " Craig-Hallum Capital Group LLC, Research Division Eric Martinuzzi: " Lake Street Capital Markets, LLC, Research Division Matthew Maus: " B. Riley Securities, Inc., Research Division Operator: Greetings. Welcome to Crexendo's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jeff Korn, Chairman and CEO at Crexendo. You may begin. Jeffrey Korn: Thank you, Paul, and good afternoon, everyone. Welcome to the Crexendo Q3 2025 Conference Call. I'm Jeff Korn, Chairman of the Board and CEO. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jon Britton, our CRO. In a moment, Jon will read the safe harbor statement. After that, I will give some brief comments on our performance and strategy. Ron will then provide more details on the numbers before handing the call over to Doug to provide a business and sales update. After that, we'll open up the call to questions. Jon, would you please read the safe harbor statement? Jon Brinton: Thank you, Jeff. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. All statements made in this conference call other than statements of historical fact are forward-looking statements. Forward-looking statements include, but are not limited to, words like believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2024, and the Forms 10-Q as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I'd now like to turn the call back to Jeff. Jeff? Jeffrey Korn: Thank you, Jon. I am incredibly pleased and proud of our entire team. who work tirelessly every day to make sure we have the best products, services and support in the industry. The exceptional results we announced today show that their efforts are paying off. Crexendo delivered another blockbuster quarter, highlighted by 12% year-over-year revenue growth, $1.5 million in GAAP net income and $3 million in non-GAAP net income. Our 28% growth in software solution underscores the strength of our platform and the increasing value we provide to customers and partners. I'm also very encouraged by our 8% increase in service revenue, which I have great confidence will continue to grow. With expanding margins, robust cash generation and continued innovation, we are executing exceptionally well on our profitable growth strategy. We are just getting started. Our investments in AI-driven capabilities, Oracle Cloud infrastructure and next-generation collaboration and contact center solutions are creating powerful momentum across our ecosystem. We see a long runway for organic growth, enhanced by strategic M&A opportunities, and we are fully committed to delivering sustained value for our shareholders. We are delivering profitable growth today while building an even stronger, smarter and more innovative Crexendo for tomorrow. One of our large investors recently suggested to me that I take a few minutes today to tell our story, explain where we came from and why I'm so confident in the future. Our DNA is telecom. We started our telecom journey roughly 15 years ago with our own homegrown switch and deep commitment to customer support. Growth was steady, but then about 4 years ago, the opportunity to acquire NetSapiens became available. We recognized immediately that their software was superior, their engineers were exceptionable and their potential profit was strong, but they needed a sales and marketing strategy and a plan for growth that was a perfect fit for Crexendo to provide. The combination of our marketing and retail expertise with their engineering excellence was a perfect match. Together, we have built a company that understands both sides of the business, platform engineers who think about scale and reliability, working alongside customer-facing engineers who understand what end users truly need. The synergy has made us better, faster and more innovative than any competitor in the market. This past month, that success was on full display at our annual user group meeting, UGM in Miami. It was our most successful UGM in our history with record attendance, over 550 registered participants and 65 sponsors and an energy unlike anything we have seen before. We gave demonstrations on innovations we are making, continued improvements in our look and feel on the platform and a significant discussion on our AI applications. The entire community was excited about our innovations and improvements. The highlight for me personally was being able to announce that we surpassed 7 million end users on our platform. That is an incredible milestone for our company and a clear validation of the strength and scalability of our technology. The excitement in the room was electric. The management team even got a champagne to shower, and I might add, somebody spilled an entire bottle of champagne over my head and got into my eyes. I still don't know who did it, but I'm still trying to figure out. But the closing Gayla was a tremendous opportunity for us to interact with our licensees who are every bit as excited about our milestone as we were and excited about our future as we were. It was a moment that perfectly captured the enthusiasm, pride and sense of community we share with our licensees and partners. Our licensees are energized and growing faster than ever, driving new adoption and innovation across the platform. Their success is our success. And together, we are redefining what is possible in cloud communications. We continue to invest in every area of the business that fuels our growth and differentiation. In engineering, we are strengthening our core platform and accelerating the rollout of AI-driven tools that improve both productivity and user experience. Through our EVP program, which is the ecosystem vendor partner program, we are expanding the applications and integrations available to our customers and licensees, creating new revenue streams and even greater value. We are also enhancing customer service and security, ensuring we maintain our industry's leading reputation for reliability and responsiveness. We have the secret sauce in retail, and that is our customer service. G2, an independent review company that speaks only to verified customers, ranks Crexendo #1 in 18 different customer satisfaction categories. No one else in the industry comes close, and that is because our culture is built around white glove service. Especially in the SMB market, that is essential, where many of our customers do not have large IT departments. Our responsiveness and personal attention truly sets us apart and creates value for our customers. On the wholesale side, our NetSapiens platform continues to be the fastest-growing platform in North America. Our session-based billing model remains a clear differentiator. Our partners only pay for what they use, unlike the outdated per seat model still used by many competitors. Combined with our open APIs, our partners can fully customize solution for their customers. Our new marketplace, which was introduced at the UGM, where we and our licensees can sell applications is already generating excitement and revenue. I am confident that it will continue to grow. Our partnership with Oracle Cloud Infrastructure continues to open global opportunities. We can now deploy new instances in days rather than months. And we have expanded internationally, including onboarding our first customer in Africa. While international revenue still represents less than 10% of our total revenue, it is growing rapidly, and I see enormous potential across EMEA and beyond the world. We remain active on the M&A front. We are currently reviewing several strategic acquisition opportunities and are optimistic we will close one by early next year. Combined with our strong organic growth, these initiatives will help us scale even faster and expand our capabilities in key growth areas. I was recently asked why I said last quarter that I'm more excited about our future than ever before. The answer is simple. It's because of the people around me in this room and the people in our entire organization. We have the best products and the best platform and the best opportunity. The enthusiasm and energy from our UGM made it clear, Crexendo's best days are ahead. We have a world-class team, the best partners in the industry and a technology stack that delivers proven results. I could not be prouder to lead this incredible group of people who pour their hearts and soul into building the best telecom software and customer experience in the market. Our future is bright, and we are just getting started. I continue to expect that we will have double-digit growth through next year. I remain very optimistic in our future, our people and our results. With that, I'll turn the call over to Ron for more details on the financials, and he will then turn the call over to Doug to discuss our sales and operations and give a deeper dive into our AI initiatives. Ron? Ron Vincent: Thank you, Jeff. Our financial results for the third quarter are as follows: Consolidated revenue for the quarter increased 12% to $17.5 million. Our service revenue for the quarter increased 8% to $8.6 million. Our software solutions revenue for the quarter increased 28% to $7.5 million. Our product revenue for the quarter decreased 25% to $1.4 million. However, I would not let the percentage change alarm you. Historically, using our 8-quarter look back, our average product revenue is $1.3 million per quarter. Therefore, for the quarter, product revenue is slightly higher than our historical average. Product revenue for the third quarter of 2024 was unusually high for the company. Our service revenue gross margins decreased 100 basis points to 57% year-over-year. Our software solutions revenue gross margins increased by 300 basis points year-over-year to 74%. Our product revenue gross margins decreased [indiscernible] basis points to 35% and our consolidated revenue gross margins increased by 200 basis points year-over-year to 63%. Our remaining performance obligations increased to $87.9 million as compared to $83.5 million at the end of June and $77.3 million at the end of September of '24. Our operating expenses for the quarter increased 5% to $16.2 million. The operating margin for the quarter was 7% compared to 1% for the same period of the prior year, a 600-basis point increase. Net income of $1.5 million for the quarter or $0.05 per basic and diluted common share as compared to net income of $100,000 or $0.01 per basic and $0.00 per diluted share for the third quarter of the prior year. Our non-GAAP net income was $3 million for the quarter. That's $0.10 per basic and diluted common share compared to non-GAAP net income of $1.7 million or $0.06 per basic and diluted common share for the third quarter of the prior year. EBITDA for the quarter was $2.1 million compared to $1 million for the third quarter of the prior year, and our adjusted EBITDA for the quarter was $2.9 million or 17% of total revenue. Cash, cash equivalents at September 30, 2025, was $28.6 million. That's compared to $18.2 million at December 31, 2024. Cash provided by operating activities for the 9-month period of $7 million. Cash provided by financing activities for the 9-month period was $3.4 million, primarily related to $4.1 million of net cash received from stock option exercises, offset by $300,000 in taxes paid on net settlement of stock options and RSUs and $400,000 in notes payable repayments and finance lease payments. I'll now turn it over to Doug Gaylor, our President and COO, for additional comments on sales and operations. Doug Gaylor: Thanks, Ron. We had a very strong quarter on both the top and bottom line, and we are excited about our momentum as we finish the year. This is our 9th consecutive quarter of GAAP profitability and 28th consecutive quarter of non-GAAP net income, and the results were a direct result of our focus on growing organically and profitably. Our GAAP profitability continues to be positively affected by managing our costs and driving synergies within the business. After successfully migrating our international data centers to OCI, Oracle Cloud Infrastructure in Q2, we have been focused on completing the remaining migrations of our U.S. data centers to OCI and anticipate additional cost savings from completing that migration beginning in early 2026. In addition, we are nearly complete with our classic to VIP migration, which will add additional cost savings beginning in Q1. We continue to see tremendous organic growth from our Software Solutions segment of the business, which grew 28% organically over Q3 of 2024 and has seen a 31% organic growth rate year-to-date. We had a very strong quarter with 12 upgrade orders from our existing licensees, combined with winning 6 new logos that chose Crexendo for their platform of choice moving forward. Of the 6 new logos, we won 1 new logo from Metaswitch, and we continue to see opportunities created by uncertainties created by our 2 largest software solutions competitors, Cisco's BroadSoft and Metaswitch. Our unique pricing and support model for our software solutions platform, combined with our robust feature set and open APIs that fuel AI applications and integrations allow us to differentiate ourselves from the rest of our competition at a much stronger price point than they might currently be paying. Our Telecom Services Retail segment grew at 2% organically for the quarter, and our telecom service revenue was up 8% organically, offset by a reduction in our product revenue to reach the blended 2% increase. As previously stated we proactively reduced selling some lower-margin product opportunities to maintain margins, thus [indiscernible] product revenue. We continue to see strong demand for our offerings from our channel partners and our master agent technology service distributors and expect retail segment revenue to continue to grow at a faster pace. The master agent technology service distributors saw a 28% increase in sales bookings year-over-year, and we expect that momentum to continue. We will continue to focus on profitably growing the segment of the business and will not be pursuing low margin or unprofitable retail opportunities as we've stated in the past. Our remaining performance obligation, also referred to as our backlog is now at $88 million, an increase of 14% from Q3 of 2024. Our remaining performance obligation number is the sum of the remaining contract values for all of our telecom services and software solutions customers that will be recognized on a sliding scale over the next 60 months, and that's a very strong indicator of our future revenue stream. Consolidated gross margin for Q3 was 63%, up from 61% in Q3 of 2024. We continue to see strong gross margins in our Software Solutions segment, where Q3 gross margins were 74% compared to 71% for the same quarter last year. For the 9 months of the year, our Software Solutions gross margins were 76%, highlighting the scalability and operating leverage we have on the software segment of the business. Our Telecom Services segment gross margin was 55%, which was flat with Q3 of 2024. And our telecom services gross margin are affected by our product gross margins, which declined year-over-year as a result of a decline in our product revenue as we concentrate on higher-margin UCaaS sales and less on low-margin product sales. We are confident that we will continue to see gross margin improvements in both segments of the business in the future as we start to recognize cost savings from our ongoing consolidation of our data centers to Oracle Cloud infrastructure as well as our plans to sunset our legacy classic offering. Crexendo's engineering team continues to enhance and improve our award-winning platform. We recently released version 45 on our platform as well as preannounced at our user group conference in Miami last week, the exciting enhancements planned for our version 46 release in 2026. The NetSapiens cloud-native platform is designed with open API integrations that allows us to enhance our offerings with both in-house and third-party developed solutions. Right now, the biggest game changer in our industry since the onset of the Internet will be artificial intelligence. And for Crexendo, AI is leading the charge in these developments with many new and planned releases that will make small and midsized businesses more efficient and productive. Crexendo's AI solutions are focused on helping businesses make more money as opposed to saving money. Our AI solutions are targeted at making small and midsized businesses more successful and more profitable. We currently have a variety of AI solutions already available for end users, including our Voice AI Studio, our AI call recording with sentiment analysis and our contact center AI powered by ChatGPT. In addition, in our most exciting release shared, we introduced Crexendo's AI receptionist orchestrator or code named Kairo at our UEM last week to rave reviews. This new application will be available later this month for new and existing customers to leverage the power of an AI receptionist to answer all incoming calls, answer frequently asked questions, schedule, reschedule or cancel appointments, access customer records and other applications. For the typical SMB customer, this technology will allow their business to be more effective, more productive for a minimal cost, while at the same time allowing Crexendo to significantly increase our average revenue per account. During the quarter, we announced multiple partnerships with our new vendors in our EVP program that Jeff mentioned earlier, which is our ecosystem vendor program, and we are now up to 41 official partners in that program. These partners provide products, software and solutions to our platform that allow Crexendo and our partners to benefit from selling solutions to end users that will make their businesses more efficient, more productive and more profitable. As this program continues to gain momentum, we will benefit from additional revenue streams. Crexendo's performance for the quarter and year-to-date has been very strong, and I couldn't be more excited about the future direction and opportunity for Crexendo. We continue to see strong double-digit organic growth combined with increasing GAAP profitability and strong positive cash flow. We are positioned perfectly with the combination of strong demand for our product offerings along with great solutions with a disruptive pricing model and the best and most talented workforce in the industry to continue our strong growth and success. We're excited about the additional opportunities to drive growth and innovation that AI will infuse into our business and are very optimistic that applications like our AI receptionist will drive demand and revenue. We are committed to delivering the best UCaaS, CCaaS, which is Contact Center as a Service and CPaaS, Communication Platform as a Service offerings in the sector to our customers and partners and best returns for our shareholders. As the fastest-growing platform solution in the country and now supporting over 7 million end users, we are laser-focused on growing our business, enhancing our solutions and improving our efficiencies and continuing to return strong results. With that, I'll turn it back to Jeff for any further comments. Jeffrey Korn: Thank you, Doug. I don't have any further comments at this time. So, Paul, I'll open the call up to questions. Operator: [Operator Instructions] And the first question today is coming from Joshua Reilly from Needham. Joshua Reilly: Nice job on the quarter here. Maybe just starting off in terms of the pipeline for new licensees. How should we be thinking about the setup for Q4 and maybe over the next few quarters? And are there any comp issues that we should be considering in terms of the number of licensees and users on the platform that you added last year in Q4 that we should be considering for the coming quarter here in Q4? Jeffrey Korn: I think, Josh, you can do -- going backwards from forwards, you can do the math and see what our growth is on a monthly basis from when we went from 6 to 7. While I expect that to accelerate somewhat, that's a good rule of thumb to look at how fast we'll be growing the amount of users on the platform. In regard to how many logos we expect -- new logos we expect or upgrades for Q4, still a little early for us to tell. As you know, Josh, we always have somewhere between 15 and 20 sandboxes out, and they take various times for people to continue testing and working and looking at the platform. So it would be hard for us to give you a number at this point. Joshua Reilly: Got it. And then on the new AI products that you've been launching and now have with Kairo, which is pretty compelling demo that we saw at the conference there. How are you going to be measuring the success of the broader launch of these products in terms of attach rates or any other metrics that investors should be considering? And how will the go-to-market work in terms of going back to your base of licensees and building awareness with them? I saw some of that at the conference recently, but just wanted to get your take on that. Jeffrey Korn: Yes. I think, obviously, we'll be monitoring that on a take basis from all of our customers out there. I mean if you think about that release, that release is going to really affect small and midsized customers to allow them to be more efficient and more productive, as I mentioned. So I think we're going to have a tremendous take rate on that, but we're going to have a very aggressive program for not only our existing base customers to easily be able to adopt that technology and add it into their infrastructure, but it will also be a key marketing point for us for all new customers when they're considering our solutions versus our competitors. So we'll be tracking that. We don't have obviously any measurements to compare it to at this moment, but I anticipate a strong uptake from our existing customers and new customers as well. Joshua Reilly: Got it. And then I think it would be helpful to discuss the progress that you've been making in migrating the customers to the OCI infrastructure that are hosted with you? And can you just remind us kind of the relative mixes of how many licensees are hosted with you versus in their own cloud and how that's kind of progressed over the last couple of years? Jeffrey Korn: I don't think we have off the top of our heads the record of how many host their own and how many are on OCI. But I can answer your question regarding the migration of our old cloud onto OCI. We expect that to be completed by the end of Q1 and be off our old legacy data centers. Operator: The next question will be from Mike Latimore from Northland Capital Markets. Mike Latimore: Congrats on 7 million users. That's a big number. In terms of the services growth getting to 8%, nice improvement there. I guess, can you talk a little bit about what drove that improvement? And then when you say you expect the growth to continue or even be faster, I guess, is your thought that, that 8% kind of moves up even in the fourth quarter? Jeffrey Korn: I'm going to let Jon answer that because he knows kind of the sales pipeline. Jon Brinton: Yes. So yes, it's a great question. And I would just say it's continued positive acceptance of the offers in the market and execution on our retail teams specifically, and we're seeing solid bookings growth and also, I would say, a slightly faster conversion to implementation and recurring revenue from the pipeline that we're bringing in. So, the team continues to drive the revenue there. We continue to see good success. We're focused on profitable growth, but they continue executing, and we're looking forward to continuing to see the growth there. Mike Latimore: Great. And then the suggestion that the growth continues, does that mean it sort of moves up from this 8% level over time? Jeffrey Korn: That would be my expectation, Mike. As you know, UCaaS is highly commoditized. And as I discussed in my comments, we make a concerted effort to have the absolute best service in the industry, and that's a strong competitive advantage for us aside from the fact that I think our offerings are amongst the best, if not the best in the industry. So that -- the better offerings together with the top customer service by far is a strong competitive advantage for us, and I expect that to accelerate our growth. Mike Latimore: Got it. And then in terms of the software pipeline, how would you characterize it as you look to the next couple of quarters here? Is there any shifting going on more to new versus installed or into larger deals versus higher numbers of deals? Like how would you characterize the software pipeline? Jeffrey Korn: Well, Mike, as you understand, larger deals tend to take longer because the analysis by the customer takes some time. So, we've had people play with our sandbox for 4 years before making a decision. People play with the sandbox for 2 months before making a decision. So it's fairly difficult for us to tell you on a Q-to-Q basis how many new logos we're going to get. But as I said before, we have a number of sandboxes out. People are very excited. Engineers are working with them. So we expect the growth to continue. I don't know if Doug or Jon have a little more color they want to add. Doug Gaylor: Yes. I don't see a lot of slowdown. There's a tremendous amount of pipeline of opportunities out there, and we're more optimistic now than we've been in a long time with the opportunities that are out there. So as Jeff said, a lot of these decisions take a lot of time and evaluation on the end users' part, but we know that we're the best solution for them. So the fact that we've got a number of opportunities out there in the queue, we know they're all going to come through enduring places and times, but we're confident we're going to win the high majority of those. Jeffrey Korn: Yes. To be clear, not all are going to come through, but a great majority of them will. Mike Latimore: Sounds good. Last one, just on the receptionist, AI receptionist. Can you talk a little bit about the opportunity there? Do you think like every one of your customers would have interest in that? Or is this geared more towards larger customers? Just how do you think about that opportunity a little bit? Jeffrey Korn: Yes. I think it's really an opportunity for every customer to take a look at it and find out if it's good for their business. So I think that we feel that the high majority of small and midsized customers will be very open to an AI receptionist type solution just to help make their business more efficient. If you think about our average sized customer out there being in the range of 18 or 20 stations, they can much easily deploy resources internally to help grow their business while they've got an AI receptionist that's answering frequently asked questions and doing a lot of the repetitive type functions within their business. So it allows them to redeploy assets within their organization to help them grow their business. So we think that our take rate is going to be extremely high, and we think that's going to increase our average revenue per account upwards by 40% or 50%. So will it be the right solution for every business? Probably not, but will it be a high take rate from the majority of our customers? We're feeling pretty optimistic that we're going to get a lot of customers that are going to fall in love with this technology and be able to grow their business with it. Operator: The next question will be from George Sutton from Craig-Hallum. George Sutton: Congrats on the results. So I wondered if we can go a little bit more into version 46. And it sounded like it's a complete rethinking of the platform. And I'm just curious, I certainly heard good feedback from the licensees. But I'm curious as you begin to go to market with that, when can you start going to new potential customers with this newer version of the platform actively? Jeffrey Korn: We're thinking Q1, George, obviously, I'm dealing with engineers, so I forgot to ask which year, but I'm assuming they meant Q1 of 2026. Jon Brinton: Yes. So I'll fill in some more color on that, George. This is Jon here. And it's actually -- we called that Project Horizon at our Expand Your Horizons partner event. So it's obviously a key theme for us. More than a rethinking of the platform, it's a rethinking of the interface in the way people interact with the platform. I think if you step back and think about it a little bit, we've talked about one application in this call, which is the Kairo, the Crexendo AI reception as an orchestrator. But at our code fest that we had at UGM, we had 10 different AI applications demonstrated, many of which the partners built on top of our platform. And what version 46 does is it really allows them to have a modern way to express how customers can view that, interact with it and deal with it. And we did give Q1 as a time frame for, I would say, previews and first looks and things of that nature. The actual GA date will probably be a little later than that. So, we don't want to front end the expectations too much. But just think of it as same underlying technology. I mean, with many of these AI applications, our platform underneath them is the engine that's powering all the communications behind them. So it's how customers want to look at it, interact with it, how it can be put into other vertical applications and extrapolate it externally in a way that people are more likely to use and naturally interact with the platform. So, think of it the underlying engine plumbing and all that will be the core NetSapiens platform, which has just been a great winning hand for us. This is just a better way for people to consume it. Jeffrey Korn: George, we had invested most of our money up to this point in making sure that the platform was bulletproof, and we are providing the best software telecom platform in the industry. If there was one thing we weren't doing as well as the basic engineering, it would have been the look and feel. And this improves the look and feel and puts us at a complete competitive advantage to any of our competitors. I think it's now going to be the best look and feel in the industry masked with the best engineering in the industry, and that makes a hell of a combination. George Sutton: So, on the other side of innovation, the Metaswitch/Alianza group meeting did not sound like it moved anything forward. It was a marketing layer message but really maintaining all their platforms. At what point does that lack of movement start to really accelerate your opportunities with those licensees? Jeffrey Korn: George, I don't believe in trashing the competition. I think our best way of selling is by showing that we have the absolute best products, people and performance in the industry. Allianz is a smart company. They're going to figure out what they have to do. We're not worrying about them. We're worrying about staying competitively ahead and rolling out the best products in the industry and the best price point in the industry. All in all, I think it gives us a superior advantage to anybody. Jon Brinton: But I will add, there is a nuance there... Jeffrey Korn: Not everybody agrees with me. Jon Brinton: [indiscernible] There is a nuance there that at our event, we focused on things that people either could walk out of the event, add to their offer and sell today or before the end of 2025. So, things that will be released here before the end of the year primarily with one exception that was the preview of the Horizon interface project. Everything else people can take and monetize in the near-term future. So, there's no architecture here where we're talking about what's going to happen way down the road. This was real exciting products that people can take and add to their platform today and grow their revenue tomorrow. Jeffrey Korn: George, I pointed out at the last UGM, which I think you're at too as well as this one, I'm there to listen, not to talk. And a lot of the feedback I got last year was incorporated in the release we had this year. A lot of the feedback I got this year will be incorporated in the releases we do next year. We listen carefully to our licensees. We understand what they need, and we make sure we provide it. Operator: [Operator Instructions] The next question is coming from Eric Martinuzzi from Lake Street. Eric Martinuzzi: My congratulations on the quarter as well. I wanted to ask you just along the lines of M&A, there was an acquisition yesterday by a competitor of yours, Ooma, and they went kind of outside their own technology architecture to pick up FluentStream. I just wanted to know your thoughts on -- is that something that you all might pursue if you could find something for the right price, a product running outside of the NetSapiens architecture. Jeffrey Korn: Well, Eric, as you've heard Doug talk about our stock fishing pond. We have over 220 licensees on our platform who are already on our technology. That would be our preference to start with. While we're excited to see any movement in the industry, we think that's a good thing. Our preference would be to pick up our own technology in an acquisition. Nonetheless, if something compelling came wrong at the right price, will we look at it, of course. But we've got a lot right in front of us where there's no migration required because they're already on our platform, and that makes the most sense to us. Eric Martinuzzi: Okay. And then I think historically, you've talked about acquisitions at revenue run rates in the neighborhood of $5 million to $10 million. The opportunity that you outlined in your prepared remarks Jeff, the early next year -- hoping to close one by early next year. Does that fit into that bucket? Jeffrey Korn: One of them fits in that bucket. One of them is a little larger. We're going to have to narrow down on one, but I'm quite confident we will do it. As you know, Eric, we're a small integration team here. So, if we're doing something in the $20 million range, that would probably be the only acquisition for the year. If we did something in the $5 million to $10 million range, we'd probably look for a second one. Operator: And the next question is coming from Josh Nichols from B. Riley. Matthew Maus: This is Matthew on for Josh. I guess to start off, it looks like the Oracle Cloud migration seems to be unlocking some good opportunity internationally with the ability to deploy in days versus weeks like you mentioned earlier. So, my question is, how quickly do you expect that international revenue mix to inflect from current levels? And what's kind of gating that pace of expansion here? Jeffrey Korn: Our growth internationally [indiscernible] is larger than our growth domestically, but it's a small part of our business. So, at this point, it's still a rounding error. I had spent part of the summer at our office in London meeting with customers and potential customers, and they're all very excited. Jon does it on a regular basis. Others do it on a regular basis. I expect international to continue to grow at a faster clip than domestically. But considering world issues, it's hard for me to give a number or specific guidance on it. Matthew Maus: Got it. And I guess switching over to, I guess, AI-related question. You're building out a comprehensive stack with Power launch this month and [indiscernible] for Agentic AI and so on. But I'm wondering what else can you layer into the platform from here? And are there additional capabilities you're evaluating or planning to roll out? Jeffrey Korn: There's always additional capabilities we're analyzing, but I'll let Doug answer the AI stack question. Doug Gaylor: Yes. As I mentioned, we've got 41 vendors in our EVP program now. As Jon mentioned, 10 of those in our code fest. We're showing AI solutions. The best part about our platform today is it's an open API platform. And so that means that anybody that is writing code out there, anybody that has a technology stack that they want to bring to our platform, it's easily integrated. So when we look at the opportunity for selling AI solutions, we highlighted 3 or 4 that we currently have, but we've got a number that are being in development as we speak. We've got applications that as we saw at our UGM last week with 65 sponsors, applications that range anywhere from texting to messaging to faxing, you name it. We've got those solutions that are developed and available for any and all of our licensees to sell to their end user customers. So there's a tremendous amount of monetization still to be had with third-party development applications. Matthew Maus: Got it. That was helpful. And I guess just one last quick question. So regarding the product gross margin, it dipped to the high 30s in Q3, which is softer than the low to mid-40s of historical average. I'm just wondering what drove that? And how should we expect that to change going into Q4 and 2026? Doug Gaylor: Can you repeat that one more time, Matt? We're having a little bit of hard time, a little echo there. Matthew Maus: Yes. So regarding the product gross margin, it dipped to the high 30s in Q3, which is softer than the low to mid-40s historical average. I'm wondering what's driving that and how we should expect that to change in Q4 and 2026? Unknown Executive: Yes, we would expect that to improve and go back into the low 40s range. We had some lower margin sales in that -- in the quarter that drove down the overall gross margin that we had in the quarter. Operator: And that does conclude today's Q&A session. I will now hand the call back to Jeff Korn for closing remarks. Jeffrey Korn: Well, I want to thank everybody for their attention. I want to thank everybody in the room here with me and everybody who is listening to the call, who works with Crexendo. It was an amazing quarter, an amazing team effort, and I'm very, very excited for our future and for the next time we get to talk. So until then, thank you, and thank you for your attention. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, and welcome to Ouster's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] The call today is being recorded, and a replay of the call will be available on the Ouster Investor Relations website an hour after the completion of this call. And with that, I'd now like to turn the conference over to Chen Geng, Senior Vice President of Strategic Finance and Treasurer. Chen, please go ahead. Chen Geng: Thank you, operator, and good afternoon, everyone. Thank you for joining our third quarter 2025 financial results call. Today on the call, we have Chief Executive Officer Angus Pacala; and Chief Financial Officer Ken Gianella. As a reminder, after the market closed today, Ouster issued its financial news release, which was also furnished on a Form 8-K and is posted in the Investor Relations section of the Ouster website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. I want to remind everyone that on this call, we will make certain forward-looking statements. These include all statements about our competitive position, anticipated industry trends, our business and strategic priorities, the development and expansion of our products and our revenue guidance for the fourth quarter of 2025. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially from those contained in or implied by these forward-looking statements are set forth in the third quarter 2025 financial results release and in the quarterly and annual reports we file with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today, and other than as may be required by law, Ouster assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. In today's conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures discussed today is included in the financial results release that was issued today. I would now like to turn the call over to Angus. Charles Pacala: Hello, everyone, and thank you for joining us today. I'll start with a brief recap of the quarter and review our strategic priorities. Ken will cover our financial results in more detail before I close with some final thoughts. Our third quarter results reflect the continued growth we are seeing across our business with revenue of $39.5 million, representing our 11th straight quarter of revenue growth. We set a new quarterly record with over 7,200 sensors shipped, bringing physical AI to life across multiple applications, including yard logistics and traffic intersections. Gross margin remained strong at 42%, and we ended the third quarter with $247 million of cash and equivalents and no debt. This performance further demonstrates our ability to convert pilot programs into large volume orders as we deepen our relationships across our diverse customer base. In our Smart Infrastructure vertical, we expanded deployments of Ouster Gemini and REV7 at logistics yards around the country, helping our customer improve throughput, efficiency and safety. We continue to progress with testing new Gemini AI algorithms at key customer sites during the quarter with the potential to expand use cases and more than quadruple the number of sensors per logistics yard. We also won new deals to bring Ouster BlueCity to additional intersections across Utah to enhance traffic flow, safety and operational efficiency. In our industrial vertical, we shipped a significant number of REV7 sensors to a leading global technology company as it continued to expand the use of autonomous mobile robots across its warehouse floors. Ouster's sensors are mounted on a variety of warehouse equipment, including AMRs, forklifts and tuggers, enabling our customers to detect and avoid nearby objects and helping heavy machinery to work safely in unstructured environments. We also secured a substantial order to supply REV7 to a large European industrial equipment manufacturer, which is upgrading the sensor stack on its next-generation electric mining trucks. These trucks are part of an autonomous haulage solution that increases safety, productivity and efficiency while producing 0 greenhouse gas emissions during operation. During the quarter, we delivered REV7 sensors to support the continued expansion of Serve Robotics last-mile delivery fleet across the United States. Last month, Serve announced its 1,000th robot deployment compared to an average of 57 active daily robots in the fourth quarter of last year and expects to reach 2,000 robots in service by the end of this year. Serve is a prime example of Ouster's engagement with companies that are rapidly accelerating from initial testing to commercial deployment. Turning to our 2025 strategic priorities. We progressed across all 3 key focus areas: one, scaling the software attached business; two, transforming the product portfolio; and three, executing towards profitability. Our software attached business gained traction during the quarter. Yard logistics was a key driver of demand, and we also won a deal to deploy Gemini for crowd management solutions at major tourist sites and large events in South Korea. More customers are recognizing the benefits of our Lidar solutions, and we won pilot deployments for intelligent perimeter security, spanning energy and industrial sites, Tarmac, data centers and defense facilities across the world. In September, we announced a strategic partnership with Constellis, which now offers a unified security solution enabled by Ouster Gemini and Ouster Digital Lidar. By investing in AI perception, Ouster has built a core platform to enable our customers to develop targeted market-specific applications. With Gemini, Constellis can provide real-time analytics, threat classification and automated response protocols to bring physical AI to advanced security operations. Constellis' operational expertise and global network positions us to rapidly advance Gemini for critical and large-scale security operations. In the ITS market, I'm excited by the continued growth of our Ouster BlueCity solution, where we won large deals in the U.S. and Canada. We continue to expand our distribution network and signed 7 new exclusive partnerships to bring BlueCity to additional states, including Illinois and Missouri. We are proving the value of AI-powered Lidar to state and local governments across the nation, and our Blue City partnership network now covers the majority of a nationwide market of over 300,000 signalized intersections. We also brought on a transportation integrator in Europe following a successful pilot deployment in Brussels. These partnerships in conjunction with expanding our BlueCity bundles to provide customers with more setup options are key actions to support the continued growth of our software solutions. Moving to the product portfolio. We continue to make major investments in retraining our AI algorithms on an ever-expanding corpus of field data. In the third quarter, these efforts delivered better detection accuracy at longer ranges and higher vehicle speeds to support use cases like tolling and highway monitoring. We also released real-time localization or RTLS, in our Ouster SDK. RTLS empowers our customers to understand the position of their assets with centimeter level accuracy, enabling features like geofencing, automatic speed limit enforcement and custom go/no-go zones. In addition, Lidar-powered RTLS significantly reduces the investment and infrastructure required by legacy sensors. Our team continued to progress with testing and validation of our next-generation L4 and Cronos custom silicon. These investments will unlock major performance, security and reliability improvements for our OS sensors and become the backbone of our solid-state digital flash line. The innovations from this next phase of our product roadmap are expected to more than double our current addressable market and are the most profound investment in our product roadmap to date. Finally, I am proud of our team's consistent execution towards profitability as we deliver record results in the third quarter as we remain on track to meet our long-term financial framework. I'll now turn it over to Ken to cover our financial results in more detail. Kenneth Gianella: Thank you, Angus, and good afternoon, everyone. I want to open my comments by noting that since joining the company in May, I have witnessed firsthand the incredible dedication and laser focus on execution towards our 2025 company goals that Angus discussed, and I'm excited about the opportunities in front of us. Now turning to third quarter financial performance. As Angus noted, our results reflect the underlying strength in our business. Revenue of $39.5 million was a record, representing growth of 41% year-over-year and 13% sequentially. We delivered more than 7,200 sensors, which also represented an all-time high. As a reminder, we do expect a level of fluctuation of volumes on a quarterly basis as it is largely dependent on meeting our customer delivery and timing needs. Smart Infrastructure was the largest contributor to the third quarter revenue, followed by roughly equal contributions from our robotics and industrial verticals. GAAP gross margin of 42% increased by 4 points compared with the third quarter last year and reflects the benefits of steadily increasing revenues and product mix, offset by continuing tariff headwinds. While our gross margin performance has been strong this year, we maintain that 35% to 40% is an appropriate long-term annual gross margin target for the business. Next, GAAP operating expenses were $41 million in the third quarter, up 7% over the prior year. The increase was primarily driven by investments in R&D to support the new product development cycle. As I mentioned last quarter, we remain focused on managing our operating expenses, but anticipate there will be variability on a quarterly basis, largely due to the timing of investments in our innovation and go-to-market expansion. Adjusted EBITDA was a loss of approximately $10 million, flat year-over-year and a decline of $4 million sequentially. The sequential decline is primarily due to a favorable employment tax refund we received in the prior quarter. We are pleased with our ability to drive growth and have the operational capacity to meet our customers' needs. Creating strategic and operational flexibility for the company to innovate and grow as we continue to execute towards profitability remains a top priority. Our balance sheet is one of the strongest in the industry, which is important for our customers as they depend not only on the long-term support of our products, but also our long-term financial security as a key supplier. We ended the quarter in a stronger position with cash, cash equivalents, restricted cash and short-term investments of $247 million. This includes approximately $35 million of net proceeds from our ATM. At September 30, we had approximately $4 million of authorization remaining on our ATM. Moving to guidance. For the fourth quarter, we expect to achieve revenue between $39.5 million and $42.5 million. Thank you for your continued interest in Ouster. I'll now turn the call back to Angus for his closing remarks. Charles Pacala: Thanks, Ken. Ouster has a strong financial foundation, a robust distribution and partner network and a diverse customer base of emerging and world-class companies. Ouster is at the forefront of technology that is reshaping how the world engages with the physical environment. Our physical AI solutions are helping deliver improvements in safety and efficiency across a wide range of industries. All of this, coupled with our cutting-edge product roadmap positions us well to further accelerate the adoption of physical AI. With that, I'd like to now open up the call for Q&A. Operator: [Operator Instructions] Our first question today comes from the line of Colin Rusch with Oppenheimer. Colin Rusch: Can you talk about where you're at in the testing process with the Rev8 and the Cronos offerings? Would love to get a sense of kind of how that testing is going. Any sort of concerns or kind of accelerations that you're thinking about with the platform given the potential growth and addressable market here? Charles Pacala: Colin, thanks for the question. So we really try not to talk ahead of the release of our next-generation products other than to make sure that it's clear that we remain incredibly committed to the investments we're making in the digital Lidar portfolio. So our L4 chip, the Chronos going into the DF platform, these are things we talk about each and every earnings call because they're still the biggest source of investment that we have at Ouster and because of all the promise, the importance of these products to the future expansion of Ouster's business. So the points that we've made in the past and we continue to make on this earnings call, a doubling of the overall TAM the most significant set of products -- hardware products in Ouster's roadmap in Ouster's history, all remain true. We're incredibly committed and focused to getting these products out as soon as humanly possible. But beyond that, I'm going to just leave it at that. Colin Rusch: Okay. Fair enough. And then as you work through the design cycle with your customers, and we know that there's an awful lot of customers you guys are working with. There's a lot of innovation happening in industrial hardware design. Can you talk a little bit about the cadence of those programs moving forward? We know that you have a number of wins and moving from kind of smaller volumes into more series production, particularly with some of the off-road vehicles. But what you're seeing in terms of just the cadence of design cycles, the adoption rates, any sort of win rate data that you can share? I would love to get a sense of how that's evolving here. Charles Pacala: Yes. I mean so we have over 1,000 end customers. And one of the points that we've made and one of the kind of bright spots about Ouster's promise of the future is that there's a small minority of all of the high-quality customers that we have that have actually reached full-scale production and commercial release of their products that are built with an Ouster Lidar inside. And so that means there's immense opportunity in our existing latent customer base for tranches of these customers to go from development all the way to commercial lease. And we mentioned on the call, Serve Robotics, a great example of a customer that shows how the volumes shift from a kind of development, small-scale pilot style production where they had 57 robots deployed with our technology, if you look back a year or so ago. Now they're on track to have 2,000 robots deployed with our technology in the next couple of months. So that kind of fundamental order of magnitude shift is a big part of our growth strategy for the foreseeable future. And a small fraction of our overall customer mix under 10% is actually in that full-scale production. So -- and -- but one of Ouster's core kind of muscles that we've built on the commercial side is our ability to support our customers developing these challenging new technologies and close gaps that maybe we have better expertise closing than our customers do, either on the hardware or the software that processes our Lidar technology so that we're getting customers to market faster and they're seeing that we're a valued partner in that process versus just a hardware supplier. So I think there's a lot of -- yes, there's a lot of kind of goodwill and deep partnerships that we've built along the way. And we're continuing to do that. It's something that our customers value at this point. Operator: And our next question comes from the line of Andres Sheppard with Cantor Fitzgerald. Anand Balaji: This is Anand on for Andres. Congrats on the quarter. With the rapid acceleration of self-driving vehicles, both passenger and commercial vehicles, do you guys expect to pursue this vertical a little bit more aggressively going forward? I know it wasn't as much of a focus this quarter. But are you looking for any major OEM agreements? And what would be an ideal candidate? Because it seems like most companies with the exception of Tesla are really reliant on Lidar for this. Charles Pacala: Yes. Thanks for the question, Anand. So I mean, it's -- first, it's great to see the renewed kind of resurgence and interest around self-driving vehicles. A lot of this is because of the advancements that Waymo has made in really providing commercial service to customers out here on the West Coast and in Texas and Arizona and then also some of the advancements from Tesla. So -- it's great to see this. Ouster already has some really strong partners in this area. We're talking about robotaxi specifically, Motional and May Mobility, both are strong Ouster partners. We've seen a lot of great partnerships that May Mobility has been inking with -- to build their customer base and actually expand their commercial robotaxi deployments. So Ouster already has some of these great customer relationships. When it comes to the OEMs and kind of direct OEM integration of this technology into a car you and I can buy, that's where I have tempered expectations in the past, just basically because of the long time horizon for OEMs directly integrating self-driving technology into the cars that you and I can buy. That's largely because of technology difficulties on the OEM side versus like the readiness of compute and sensor technologies that Ouster is responsible for. So -- but on that latter point, we're absolutely interested in this space. What I've always said is it's important to have the right products with the right -- at the right point in time for that adoption to happen. I think a lot of things are converging. We have put a lot of investment into the DF and the future products on that internally at Ouster so that, again, we have the right product at the right time for this massive opportunity in direct OEM integration. So definitely interesting to us in the future, something I've tempered in the past, but I think the stars are aligning in the next couple of years here. Anand Balaji: Got you. That's helpful. Just switching gears a little bit. I guess, for the past few months, the elephant in the room has been the Blue UAS certification. So I was wondering what are maybe some of the most recent updates related to that? And if you could potentially give us any granularity on sensor shipments? Or if not, do you continue to believe that you have a moat in this segment? Or are you seeing more competitors pursuing this now? Charles Pacala: Yes, specifically asking -- so for those listening on the call, the Blue UAS certification was really -- it was a certification for using Ouster's Lidars on defense DoD use cases and payloads, specifically for drones. So the common use case here is -- or the traditional use case for Lidar on drones is a surveying payload, surveying and surveillance payload. Ouster is a robust business as a surveying payload on drones already and the UAS announcement made us the first DoD Blue UAS certified company in the mix. And it's definitely a boost for our business. We're not splitting out specific sensor volumes, but we do see inbounds from customers that are interested in making sure they're operating certified payloads. And whether or not, sometimes it's because the end customer is a DoD customer. And sometimes the end customer isn't, but values the fact that we're using a certified American-made technology. So definitely a bunch of benefits there. I think we do have a moat. We're the first -- we're certainly the first mover in this space. And we have a great set of products that apply really well, small form factor, super high resolution, robust Lidars that don't weigh a lot. And all those things make sense if you want to put these on a small form factor drone like the Blue UAS certification is positioned for. So yes, not splitting out any specific numbers, but definitely a benefit to our business. Operator: [Operator Instructions] And our next question comes from the line of Madison de Paola with Rosenblatt Securities. Madison de Paola: This is Madison calling on behalf of Kevin Cassidy. I was just wondering with so many customers moving from prototype to production, what steps are you taking to mitigate potential supply chain constraints that could impact growth? And just as a follow-up, what's the long-term target for BlueCity's attach rate? Charles Pacala: Well, let me start with the latter first. Thank you, Madison. The bigger thing is we're not breaking that out and giving the long-term target. It is part of our overall robotics and industrial outlook that we have already. So if you just stick with those growth rates that we talk about, that's the majority of what would be covered there. Turning to your first part about capacity. One of the things we've done very well. And if you look at the growth just these last 2 quarters, we set 2 record quarters of shipments pretty much quarter-over-quarter, our sensors grew year-over-year for this quarter alone was 85% and quarter-over-quarter from last quarter to this quarter is a 31% growth. So having that capacity is very important to us as we continue our growth journey. So part of the capital investments we make aren't just strategic. It's also financial flexibility. What's important for us is meeting our customers' scheduled demands because while we pride ourselves on the continued growth, our customers are growing just as fast. And so, we have to have the capacity to deliver their needs so they can meet their customers' needs. So we will always be investing in capacity to ensure that we can meet the customer demands. Operator: And our next question comes from the line of Richard Shannon with Craig-Hallum Capital Group. Tyler Perry Anderson: This is Tyler Anderson on for Richard. So Amazon has been talking about adding a lot of robots in the future and including the humanoid robots, do you think there's going to be a benefit to you from this? I have seen some pictures of robots that look similar to yours. And how would they show up in bookings when that starts moving forward? Is this something that takes a long time that needs to be built out? Just any way to think about that would be helpful. Charles Pacala: Yes. It's a good question, Tyler, because this is a fast-evolving space. I'm amazed how many humanoid robotics companies have been announced in the last year. Overall, definitely a great thing for us. Humanoids need sensing technology like any other robot and Lidar is the best possible sensor you could put in the mix. And we already have some customers that are using our Lidars in their humanoid robotics platform. So definitely good news there. You would see -- the way that's going to impact our business is it would boost our robotics vertical, right? That's where this would fall into the financials or the financial performance of the company. I'd say it's still early days, like there aren't thousands of humanoid robotics -- humanoid robots that are deployed at end customer sites right now. It's a prototyping environment. So I don't expect it to be a big impact, positive impact on Ouster's business for the next year or so, foreseeable future. But this is all about laying the groundwork for a future tranche of customers to reach commercial deployment just like what we've seen with some of our other verticals happening all the time. So we love investing in new customer sets. I think the humanoid thing is interesting, but I think it's going to take a couple of years to play out. Tyler Perry Anderson: Great. And then you mentioned something about a majority of intersections, about 300,000 in the U.S. Is this the total addressable market that you're speaking to? Or is this something that you already have plans and that's moving forward with business in hand? Just want to get a look at that. And then also, is there any way that you could categorize the attach rate for your traffic data? Charles Pacala: Yes, absolutely. So what I said was that we had signed exclusive partnerships and distribution partnerships that covered regions for the majority of signalized intersections in North America. There are about 300,000 signalized intersections in North America. That's the total addressable market. But I think it's a market that we can largely go after aggressively today. BlueCity is a best-in-class intersection -- intelligent intersection product. It can cover a wide swath of the use cases today. We haven't quantified exactly how many of those 300,000 intersections exactly that BlueCity can go and capture, but it's a significant fraction. And a major impediment to going and addressing that market is just having regional partners that we can sell through that can support the end customers, not just in installing the technology upfront, but also supporting them for the long term. It's important that a municipality has support on their traffic infrastructure for many years to come. So we have a lot of inertia there. We announced 7 new exclusive partnerships. And so overall, we are -- we have partnerships that cover the majority of the North American market. When we're talking about attach rates, BlueCity is by default, a software-attached product. You cannot just buy sensors and you cannot just buy software. You have to buy the whole complete solution that goes turnkey onto your intersection. So I wouldn't -- every BlueCity cell has an attach rate of 100% for Lidars, has an attach rate of 100% for a software component. So it's more -- what we're seeing is that we're growing pretty fast in this market. Smart Infrastructure was our biggest vertical this quarter. And so my goal is instead of looking at attach rates per se for BlueCity, it's looking at the growth rate for BlueCity versus the rest of our business. I think there's some early signs that there's some really positive fast growth happening there. Operator: [Operator Instructions] Our next question comes from the line of Casey Ryan with WestPark Capital. Casey Ryan: Great quarter. We've talked a little bit about defense. I just wanted to get your perspective on that as a vertical because I think there's a lot of focus on drones. But as a company, do you guys define it as maybe being service-wide, meaning potentially all vehicles could sort of use automation? And as part of that, do you see sort of a retrofit opportunity as being potentially significant in addition to new weapons platforms and vehicle platforms? Charles Pacala: Thanks, Casey. It's a thoughtful question. So the defense market is incredibly diverse. I think that's the first thing to acknowledge. And there's legacy vehicles already deployed in the DoD. There are traditional defense contractors. And then there's this new tranche of kind of faster-moving start-ups in the space. Ouster is really focused, I would say, on the non-retrofit opportunities, working with the traditional defense industry or the new players. And yes, I think that the retrofit opportunity may be not something that we're tracking. But overall, like there's a big opportunity here, but with, I would say, an unclear timeline to the scale where this is deployed universally on these vehicle platforms. I do think that that's where it goes. Automation is good in this -- no matter what in this industry. But it's going to take quite a while, I think, to field this technology in a big way. But there's some promising first -- places where this is useful even today. So Blue UAS surveying platforms, great example. It's not automation, it's surveying. That use case ready today, being widely deployed and used, great for Ouster's business. Automated systems operating in the field in life or death situations, there's a very high bar for fielding that. And I think it's going to be a couple of years before that's a major impact on Ouster's business. But Ouster is as well positioned for this industry as anyone in the world. Casey Ryan: Okay. Terrific. That's a very thoughtful and helpful answer. Very quickly, there's the potential for DJI to be blocked, I guess, for U.S. shipments. Could you see that having an impact to your commercial opportunities because I think DJI obviously dominates market share in the U.S. for people who are using commercial drones for businesses and things like that. But I wonder if we should associate sort of a blocking as being positive somehow for Ouster in terms of serving domestic manufacturers. Charles Pacala: Yes. I think that maybe there could be a positive impact on just the general awareness on where customers are sourcing critical technology in their supply chain. So the scrutiny of DJI, it's an adjacent market to us. But I think more would be around the general kind of perspective on strategic supply chains and knowing who you're buying from and maybe there's some bleed over that benefits our business. So net-net, a little bit of benefit for Ouster. Operator: And our next question comes from the line of Tim Savageaux with Northland Capital Markets. Timothy Savageaux: Congrats on the results. I might have dropped off there for a second. So sorry about that. My first question is you called out Serve Robotics as a kind of an example of the deployment of technology and volume. I wonder, we've seen some work. You obviously just did a deal with DoorDash for Los Angeles. There are some estimates that L.A. by itself could take 10,000 robots. As you look at the scale of this opportunity, is that something that's significant in terms of potential growth drivers, whether it's last mile delivery in general or Serve in particular that you're focused on? Charles Pacala: Yes. Serve Robotics is -- I think they're having their Waymo moment, right? It's been many years of wondering, is this market -- is last mile delivery viable as a business, is it ready technologically for the prime time. And they've stuck to their game plan of making the technology and the commercial strategy work. And here we are with them now moving to orders of magnitude greater deployments. So kudos to them. I think that they're -- that's the best evidence that this is a real market with -- well, not just a real market with real demand, but that it's a viable market now. So it's easy to be skeptical and pessimistic and people were of Waymo and then they kind of scaled by orders of magnitude and now everyone is a true believer. I think that's what's happening with Serve, and I'm happy for it, both because they're a customer and because it also is like a harbinger of good things to come in the rest of the last-mile delivery market. Kenneth Gianella: I think I just want to add on there, too, Tim. It's a great proof point for our strategy of go-to-market, right? We across multiple verticals. It's just not a one vertical play. And Serve is just one of our thousands of customers who were in these early stages who scaled to success with their business plan and prevailed and gave us the opportunity to grow with them. So not just betting on one sector and riding that but having the foresight to go across multiple sectors and really work with these companies through their success, it's paying off for us now. Timothy Savageaux: Okay. And that's a good segue to my follow-up, which is, Angus, I think you mentioned sub 10% of your customer base having scaled into full production and I don't know how far sub-10%. But I guess if we look a little bit forward, I don't know whether it's a year or 2 and that number is 25% or 50%. What are the implications there for your overall revenue opportunity? Charles Pacala: Yes. I mean I'm pointing straight to our model of the 30% to 50% growth, right? When you look at how we're progressing with that and with that going into production, I mean, we've had some good tailwinds with margin lately, but I think that would keep our margins in that 35% to 40% on a GAAP basis we looked at. But we fully are looking at that ramp-up. That's where you can get towards the higher end of that 30% to 50% range. Kenneth Gianella: Yes. And I would say this is exactly the sub 10% in production is why we talk about Ouster being in the early innings or I think last quarter, we said we're still in the dugout. We're not even playing the game yet. So there's a long way to go and a lot of growth for Ouster to grow into our TAM numbers. We've put out TAM numbers. I think those are real in the long term. And -- but it just speaks to the confidence we have in hitting our 30% to 50% revenue growth for the foreseeable future. Operator: And I believe we have Tyler from Craig-Hallum with a follow-up question. Tyler Perry Anderson: Just a quick one. So thinking about your software business, are you -- or are customers able to use other sensors with your software? And essentially, could you be just overlaid in different use cases with your software for what people have already purchased? Charles Pacala: So short answer, no, you cannot use a different sensor with our software, and that's why it's a software attached business. We really always focus on the fact that we're selling systems BlueCity and Gemini combine our sensors with our software and in most cases, our compute as well. So software attached business. There are cases, though, where you can buy -- we have some customers, distributors that used to sell just Ouster Lidars, and now they're selling Gemini on top of those Lidars maybe after the fact to a certain set of customers. Maybe a customer thinks that they can write their own software for our sensors and realizes that after trying for a little while that Ouster has something more mature and they can sidestep a bunch of difficult technical issues by purchasing the Gemini software themselves. So we do have some cases there. But again, the end result is that the customer is running a software attached product solutions product from Ouster. Kenneth Gianella: Yes. And Tyler, I think the goal here for us is that software attach is buying the full system and perception and sensing fusion from us. The goal is that you would use an Ouster product set for your sensor and perception. And then once that software is integrated into your software stack, they can grow with us for generations because our -- we write this, so it's forward and backward compatible on the hardware elements that we sell. So regardless of the generation we're on, it gives us the flexibility. The other thing I would just add to that is if you start thinking about into the future, having that software attach rate, that makes us extremely sticky to our customer bases. So once you get in there, you want to provide not just quality service and quality products, but if you can provide a whole system and a platform that they can grow generation over generation, that's the ultimate goal of this play. Tyler Perry Anderson: Awesome. Just one more for me. So just thinking about the software and the model training, this is all traditional machine learning, correct? And is there any way -- or are there any customers that they're pulling for some kind of LLM or visual model capability that isn't traditional machine learning? Charles Pacala: I don't know if we've ever used the term traditional machine learning. I would definitely say that for this type of Lidar perception, we are using cutting-edge models, but they're not text models. So LLM is almost a misnomer for this industry. But we are using cutting-edge deep learning models in our products, trained on giant corpuses of annotated data that we've collected from the field. So true kind of cutting-edge fleet learning, true cutting-edge deep learning models used best-in-class in the perception space for Lidar. So yes, I think that there are ways we could augment our products with things like LLMs or maybe that the perception space will transition to transformers and LLMs. But the cutting edge is actually what we're using, and that's deep learning. Tyler Perry Anderson: Got it. And I meant traditional and non-transformer models coming from a data background. I was just trying to differentiate from that. Charles Pacala: Yes. Chen Geng: And with that, I would now like to say that Q&A is concluded. So I will hand it back to Angus for closing remarks. Angus? Charles Pacala: All right. Well, with that little discussion on LLMs, thank you all for joining the call, and have a great rest of your day. Cheers. Operator: And again, ladies and gentlemen, that concludes today's conference call. You may now disconnect. Have a great day, everyone.
Mark Flynn: Good morning, everyone, and welcome to Nova Eye's Investor Webinar for the September quarter. And thanks again for all of you joining, and some great interest in our recent results. Tom and I will cover the quarter's trading, the reimbursement update, the new 24-month clinical paper on the iTrack Advance, our guidance again for FY '26 and also an update on the drug delivery work stream. Very happy to take your questions. Please use the Q&A box. I have received some already from shareholders, and I will be asking those, but please submit the questions any time via the Zoom function. With that, we can kick off, and we'll get started and pleased to introduce Nova Eye's Managing Director, Tom Spurling. Over to you, Tom. Thomas Spurling: Thanks, Mark. Yes, over 50 people on the webinar. That's really pleasing that we always get good numbers. I want to, as I promised him, a particular shout out to Bilal Khan at New World Medical. He tells me that he listens intently to our story and reads everything we put up. I only wish that he was not a private company so that he could reciprocate the favor. So welcome, Bilal. Now just recapping our business, I'd like to remind everybody -- just to remind what we do have. So iTrack Advance is a leading minimally invasive glaucoma surgical device. We have FDA approval, we have CE approval, and we're nearly through our MDR process. And we're excited to announce this quarter NMPA, the Chinese government approval. And we've got strong reimbursement in the U.S. and in other major markets. There is 170,000 patients that have been treated with iTrack Advance. That is a lot -- I mean, you can say that's not that many, but that is -- there's longevity associated with our treatment, that means that it's safe and there's long-term safety data now. We are a participant in a large established global market that's growing. Now we only have 3.5% as we assess of the U.S.A. market. And -- but -- which means -- imagine if it became 7%. That's an exciting concept to me. We have a direct sales force in the U.S. and Germany. I know there's some questions about that. We have a large distribution partner in China. But in the U.S., we choose and very importantly, it's a major asset that we've got a strong footprint in the United States, dealing direct with doctors, which drives good gross margins. We have trailing revenues of nearly $20 million growing at -- growing more than 20%, and we're on track to be EBITDA positive. There is a lot of really good things happening with our business. Next slide. This is a reminder to us all, and a lot of you have seen this slide before about why doctors choose iTrack Advance. People ask, how do you separate iTrack from the rest of the field? It's this slide that is central to our pitch, particularly in the United States, but globally, as our sales team go out and talk to doctors. And as I say to everybody here that reads this, yes, well, of course, this is an Nove Eye deck, of course they're going to have green ticks across everything and where are the red ticks -- where are the red crosses? Well, if we had a red cross, the red cross would be on the right-hand side, it would say global footprint or footprint in the U.S., number of sales reps, number of investment in marketing and sales. We are carefully limiting that investment. We are not taking advantage of all those green ticks at the moment. We are progressing in accordance with what our shareholders demand, which is to improve the bottom line and grow the top line, and that's a balancing act I'm involved every day. FDA approved doesn't do any damage, a light to provide navigation and preserves tissue for future treatments. It is a wonderful procedure. Next slide. The wonderful procedure I described has most recently been put together in a 24-month results paper by our good customers, Simon Ondrejka and Dr. Norbert Koerber in Germany, where it was just recently published. The paper describes a study of 98 eyes, which is a good, as they say, end followed for 24 months. And the treatment with iTrack Advance showed high -- about a 20% reduction in IOP and near elimination of medication over the 24 months. We remember our pitch is, let's get you off drops a patient. A doctor says let's get you off those drops. And because the drops are what the manifestation of glaucoma to a patient is having to daily put drops in their eyes. Getting patients off drops is what patients are happy to do. And we've got some great data here that we are putting in the hands of our sales teams, and it will drive further adoption. Next one. The revenue, which we reported, it's now the -- so we have nearly got quarter-on-quarter growth in our direct markets. I highlight there the fact that Chinese revenue can materially change the amount in a quarter. Our delivery to China took place in October rather than September as scheduled, which is not unusual. It can be very lumpy. And our sales growth was good. I mean it was creditable, but it is a little lower than what we planned. Our commercial expansion of new salespeople in the Southeast of U.S.A. has been slower, and Canada was slower than we expected. They seem small matters, but every dollar, every sale, every day counts when we -- as we continue on our mission to grow our sales in accordance with the guidance we provided and in accordance with our mission of improving the bottom line and improving our operating cash flow. I'm really pleased to report that October 2025 was the biggest month in the history of the company. We will provide more color at the AGM, but that is a great milestone. Next slide. U.S. Medicare reimbursement over the years, the shareholders have been watching this, and we wait and there has been scares in this area. I wrote here during the third week of July that we got the proposed rates. And I write these rates are usually finalized in November. They were actually finalized yesterday. And well, the professional fee, there's 2 parts to reimbursement. One is the amount the doctors are paid and the amount that the facility is paying. And the doctors are paid depending on how they quote, either $542 for their labor or $724 for their labor. And doctors choose which one. And they don't always choose the highest one, believe it or not. But what's important is that, that proposed -- those professional fee rates, the doctors' rates were confirmed yesterday. We have not yet got the facility fee. So they were confirmed in accordance with the proposal, which is great news. We are halfway through making sure that -- more than halfway through, that our reimbursement for 2026 is solid. Facility fee will be expected any day now. Next one, Mark. Trading revenues are important. You can see we're up nearly $20 million. Our quote around across the globe, we're around that $1.3 million, $1.4 million per salesperson across the U.S.A. and Germany where we have sales team. And we -- our research indicates that this is a leading -- industry-leading statistic. Direct sales channels continue to deliver superior margins versus markets with distributors. I know we get questions about that all the time. Why don't you hand it over to a distributor? And I think I've used the term rather colloquially, distributors have no love. They will not look after you the way they will when they present to you at a nice dinner. They will lose interest. Our own sales reps owe us their time, their dedication, they deliver what we want. Next slide. Our FY '26 guidance, we can all study that. Our sales revenues are between $21 million and $24 million. We've got our trailing revenues nearly up there anyway. We expect breakeven in FY '26. That is a slippage against what we hoped, which was the first half, and we attribute that to the slower than below planned sales still ahead of everything, but just below where we wanted to be. And I've got to say that the timing and size of sales into China, which can be difficult to predict, and the timing, both timing and size, we're working on that, can impact breakeven as well. And cash flow from operations is expected to improve. Cash flow, of course, is impacted by working capital, not just EBITDA. So we will provide a little bit of story on that in a minute. Next one, Mark. A lot of questions about drug delivery opportunity. Now just let me recap what we're really here for. The primary mission of the business is to grow revenues and improve the bottom line of our interventional glaucoma business. We were approached by a large pharma, we are approached by large pharmaceutical, plural, companies and to talk about whether this catheter could do other things. We talked about -- we have had some feedback that during some -- feedback that the results are not any -- the results we got do not provide any definitive decision for us on timing. Just remember that because we're not spending our own money, it is not just about our device that's important. It's also about the drug efficacy that the pharmaceutical company wants to put into someone's eye. So the success of the project is not in our hands. The success of the project is in the hands of whether or not that drug -- that particular drug, and there's more than one involved, is important. So we'll continue to work with potential partners on this project, but we are not spending our own money on it. We are responding to requests because our mission is to -- I get lots of questions about your costs is to get bottom line in performance on our interventional glaucoma business. That's just to reiterate. Last slide, I think. Working capital facility. Some of you have noted that we now have working -- an unused working capital facility to fund inventory and accounts receivable. Our business has high-quality accounts receivable. It is nondilutive. It's secured by accounts receivable and the tangible assets of the company, not the intellectual property. We manage our cash very carefully. And before this meeting, we had our weekly working capital meeting. We look at inventory levels, accounts receivable, collections for the prior week, old accounts receivable and average daily collections and the payables that we need to make to keep our business going. That's a meeting that it's not just devolved to the lower levels of the Nova Eye business. We have a very thin management team. I'm directly involved in that working capital management. So I want to reiterate that this is a positive thing. We have sufficient funds to meet our objectives and the working capital facility is part of that. So that's what I wanted to present. There are some questions, Mark. Did you want to ask those? Mark Flynn: Some good questions coming through, Tom, and I've got a couple here, but I'll -- some received earlier and then some through the webinar now. So one question was, "What caused the Q1 expenses to be higher than in other quarters?" Now you may have answered this, but -- and a couple of these, but I don't think it's expenses, but can you answer that one? Thomas Spurling: Yes. We have never released expenses for the quarter. We have reduced cash. And I must admit that what I do know is that our company ratios are changing all the time because our sales are growing and there's leverage with our operating expenses against those sales. And there's nothing special about Q1. But all we really focused on was the key ratio of improving the EBITDA to sales ratio and ultimately cash flow from operations. We have highlighted our cash flow from operations, it continues to decline. And so I -- individual expenses in each quarter is we manage it on a ratio basis, I guess. Anything else? Mark Flynn: One through from Michael Youlden at MST, "What drove the strength in the record October sales?" Thomas Spurling: Well, October is a good month because it is, in ophthalmology, there is some trade shows. It's the end of summer. It's just a period in autumn before doctors want to get some surgeries done, in the northern autumn. And we just keep -- there's some seasonality to it. But we actually -- every month, our sales team has out in the -- and some of them have been here a long while and others haven't. And as the message gets across, the growth keeps happening. So there's no particular reason apart from the investments that we've been making, and the plan is to do that. And so we are just achieving what we plan to achieve. Mark Flynn: Okay. Where is the iTrack Advance gaining share? And who are our main competitors? Thomas Spurling: Well, I think our main competitors are listed on iTrack who -- on that slide I put up before that says why do we -- why is an iTrack-- why does a doctor choose iTrack? We're gaining share across general ophthalmologists and increasingly cataract surgeons. We had a good following with or we have a good following with glaucoma surgeons. The versatility of the device means that it's able to be used in a number of stages of the disease. Glaucoma surgeons tend to be treating patients with later-stage disease, cataract surgeons with earlier-stage disease and comprehensive kind of both. So as our mission, as our reps get into all the territories, and we are underpenetrated in those because we don't have enough reps to truly get to everywhere, we are increasing sales. And the market is growing. So it's not just about share. Mark Flynn: Continued questions on the U.S. sales strategy and potential partnerships. So again, I know you've answered this, but it's probably just a little bit more is, have we considered using partners to accelerate? Or is there any large direct sales teams that could benefit from a glaucoma treatment product portfolio? Thomas Spurling: Yes. So in one of our decks, we talk about -- in the deck I put out in August that we put out in August, we talk about the current cataract and glaucoma. 1 in 5 patients that have -- that need a cataract surgery also have glaucoma. That makes it interesting to those large cataract companies that I've cited in that list. But the direct sales model remains central to our strategy because it ensures we get proper engagement, proper take-up and good gross margins. It is expensive, and I get pointed out every day about why are the expenses so high, why are the expenses? It's because professional sales teams in America cost a lot of money. Now we're getting there. Our sales team is expanding. Partnerships, we have never -- we have not been able to locate somebody that could do a better job than our own sales team. And I think I've said before, we have a small company that helps us sell into the large states west of Minnesota and east of Seattle, east of Washington, D.C., those so-called big sky states because it's very sparse. But apart from that, it's our own sales teams, and that's why we think it's best for our shareholders. Mark Flynn: Something we've put out today, and what is the impact has the new 24-month clinical study had on adoption recently? Thomas Spurling: Yes. Well, I mean, I haven't -- that was released just a couple of days before our quarterly report. And so it's basically been in the hands of our sales reps, and we expect to have -- expect it to be positive. We think our German people because Germans like other German doctors. And so our German sales team have really grabbed it and they're out there doing something about it right now. Mark Flynn: China is obviously a big market opportunity for Nova Eye. What is the outlook now following that NMPA approval of the iTrack Advance? Thomas Spurling: Well, that NMPA approval was a hard one, and it's a major milestone. We had a really good approval in a very large market. Our investment in that market is still very low. To be really honest, it's a single person, helped by Kate Hunt and helped by me, where we are pushing our distribution partner, not pushing. We're working with our distribution partner. The ratio of cataract surgeries in -- to population in the United -- in China is very, very low compared to the ratios of cataract surgery to population in the United States. As health care improves in China, cataract surgeries will rise and the interventional glaucoma, which is mostly about concurrent cataract and glaucoma surgery, will become a bigger business, much like it is in the United States. In the United States, we're delivering 14,000, 14,500 units a year -- surgeries a year. We're currently at about 2,000 -- 2,500 in China. It is a large market opportunity, and it's a long-term value-creating market for us. Mark Flynn: Okay. Just on some research and development and obviously pipeline, but wrapping a couple of questions that have just come through now on IP and our patent strategy. So what's next for that R&D and how are we protecting that patent. Thomas Spurling: Yes. So we've got a constant work on issuing patents, freedom to operate, all those boring things that we have to do to make investments to protect our IP, both with patents and with first-to-market activities. But it's fair to say that our product development focus, and I would not call it research, it is development. We are not a research company. We're a company trying to -- we're a company that has a viable product that is working to increase sales and generate EBITDA. Having said that, the idea of the differentiation of our product to the rest of that space that is highlighted on the why surgeons choose iTrack slide is the central theme of our product development. All those things that make us better is where we see the investment and improvement in the product, giving us the opportunity to increase sales further. Mark Flynn: Sales across the rest of the world outside the U.S. ex China as well, but more around Germany or Europe, obviously moved around a bit. The reasoning behind that lumpiness of those sales in Europe? Thomas Spurling: Yes. So the sales in Germany are relatively smooth because of -- we have our own sales team. But in outside of Germany and the U.S., we use distributors. Obviously, we talk about how lumpy China is and that's its own case because it's materially lumpy. But the rest of the world markets can be lumpy. They're relatively small numbers. So just imagine if our distributor in the U.K. buys 50 catheters in September and then doesn't buy another one -- well, buys 50 catheters on the 29th of June and then buys another one on the 1st of October. It could miss a whole quarter. Now I'm making that number, it's more than 50 catheters, but $50,000 makes a difference on that slide. So it is about the timing of deliveries to our distributor markets. Mark Flynn: Okay. Probably a final question is, and back to China, which is obviously a growth market for Nova Eye, does Nova Eye -- is it the same competitors in the Chinese market as per our comp slide? Thomas Spurling: No. We're aware that Glaukos has a presence in the market. But apart from that is that's the main one that we come across. Mark Flynn: Okay. Thank you, Tom. With that, thank you very much. As Tom said, another record attendance on the webinar. If any further questions, there's a number have come through, and we'll look to answer those directly to others, but please e-mail Tom and I, and we'll endeavor to get back to you. But thank you very much for joining, and thanks, Tom. Thomas Spurling: Thank you. Thank you, everybody. Appreciate your attendance.
Operator: Good afternoon, and welcome to Tarsus' Third Quarter 2025 Financial Results Conference Call. As a reminder this call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to David Nakasone, Head of Investor Relations, to lead off the call. David, you may begin. David Nakasone: Thank you. Before we begin, I encourage everyone to visit the Investors section of the Tarsus' website to view the earnings release and related materials we will be discussing today. Joining me on the call this afternoon are, Bobby Azamian, our Chief Executive Officer and Chairman; Aziz Mottiwala, our Chief Commercial Officer; and Jeff Farrow, our Chief Financial Officer and Chief Strategy Officer. I'd like to draw your attention to Slide 3, which contains our forward-looking statements. During this call, we will be making forward-looking statements that are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors contained in our SEC filings for additional detail. With that, I will turn the call over to Bobby. Bobak Azamian: Good afternoon. And thank you for joining us. This quarter, Tarsus delivered exceptional results that continue to raise the bar for what a successful product launch looks like. XDEMVY is now one of the best-selling prescription eye drops in the market, setting a new benchmark for launch performance across the pharmaceutical industry. We delivered more than 103,000 bottles of XDEMVY to patients and recognized approximately $119 million in net revenue. These results reflect the strength of our category-creating blueprint, the increasing physician engagement and the profound impact we are having on patients. What's more, we strongly believe we are just scratching the surface on the full potential of this launch. More than 20,000 doctors have already prescribed XDEMVY. And once they see successful patient outcomes, they start proactively looking for more patients that can help, broadening utilization across multiple patient segments and bringing us closer to our goal of serving millions of patients. Not only are we seeing this in the numbers, we hear it directly from eye care professionals or ECPs. Recently, I was at 2 of the most impactful medical meetings in eye care: the American Academy of Optometry; and the American Academy of Ophthalmology. Three key themes stood up: first, ECPs consistently described XDEMVY as one of the most meaningful therapeutic advances in eye care in decades; second, even our top prescribers say they haven't come close to reaching their full potential; and third, doctors are changing their practice patterns and broadening their use of XDEMVY across a wider range of patients, particularly in light of our recent meibomian gland disease data in Demodex blepharitis patients. That data has been a catalyst for them to look more proactively for Demodex blepharitis, or DB, across patients coming in for complementary conditions like dry eye, cataracts and contact lens intolerance. "That third point hits very close to home as both of my parents were prescribed XDEMVY after recent visits for 2 different conditions. My dad came in for a cataract surgery and my mom with a stye." During their visits, they were both diagnosed with DB. This expanding clinical recognition is being further amplified by our direct-to-consumer or DTC efforts, which are bringing new patients into offices, many of whom are asking for XDEMVY by name. With patients proactively asking to be screened for DB, broad access and a best-in-class platform and sales force, these strong tailwinds are propelling the next frontier of growth, and we are just getting started. Aziz and Jeff will share more proof points later in the call, but suffice it to say, we are very pleased with the ongoing depth of adoption across multiple DB patient segments. Turning to our pipeline, the progress we've built with XDEMVY gives us tremendous confidence in the trajectory of our next potential category-creating opportunity, ocular rosacea. This is yet another area of uncharted territory that ECPs emphatically told us was a significant area of unmet need. Listening and working closely with ECPs to fully understand the needs of the patients has been foundational to our success at Tarsus, and that partnership is guiding the design of our Phase II trial, which we plan to initiate by year's end. Additionally, we see ample opportunity to expand globally, including in Europe and Japan and to advance our Lyme disease prevention program, which represents yet another opportunity for category creation. We have built remarkable momentum and as you will hear from Jeff, we continue to outperform the eye care market, and we believe Tarsus is positioned to become the next leader in eye care. I am so proud of our team for setting a new standard in treating Demodex blepharitis, and we're applying that same innovation mindset to conditions that have been underserved for far too long. We know what it takes to create a market, shift behavior and deliver long-term value, and this is just the beginning. As we look ahead into 2026 and beyond, we expect this powerful momentum to carry forward as we continue to expand our pipeline and increase our impact, setting us up for years of potential tremendous growth. With that, I'll now turn the call over to Aziz. Aziz Mottiwala: Thanks, Bobby. Echoing Bobby's comments, it's incredible to see our evolution and truly inspiring to know we've helped nearly 400,000 patients with XDEMVY, and we're just getting started. With an estimated 25 million Americans living with Demodex blepharitis, we believe we've only just begun to unlock the full potential of XDEMVY. As more physicians move from monthly to weekly and from weekly to daily prescribing, we're seeing a true waterfall of utilization that demonstrates increasing confidence and expanding reach across patients. I'll share more specific metrics in a moment, but the traction we're seeing gives us great confidence in the durability and scale of this launch and the blockbuster plus potential of XDEMVY. In the third quarter, we recognized approximately $119 million in net sales and delivered more than 103,000 bottles to patients, both up double digits from the second quarter. That kind of growth really stands out in a quarter when most eye care products experienced softer volumes as evidenced by the sequential declines in new prescriptions seen across several other branded interior segment medicines. Our results this quarter reflect not only strong execution, but continued validation from the field, a sign that XDEMVY is becoming a trusted part of daily eye care practice. So let's get into the details. Last quarter, we shared that more than 20,000 eye care professionals have now prescribed XDEMVY and that approximately 5,000 were prescribing weekly. This quarter, I'm thrilled to say that the number of weekly writers has increased by approximately 20% and the number of ECPs prescribing more than once a week has increased by approximately 30%. This significant prescribing depth highlights how effectively XDEMVY is being integrated into changing practice patterns. Underpinning this increased utilization is an easy-to-diagnose disease, a best-in-class therapy, exceptional patient access and affordability, and educational efforts, that are empowering patients to ask for XDEMVY and ECPs to screen every patient. ECPs continue to tell us the same thing. XDEMVY is one of the biggest eye care breakthroughs in the past 2 decades. That comes down to 2 key factors: first, XDEMVY delivers outstanding clinical results; and second, our high-quality access is making it easier for them to prescribe and streamlining access for patients with many paying less than $30. We're equally as excited about our DTC campaign. It's delivering a positive return on investment that continues to grow. Furthermore, we've seen a 90% increase xdemvy.com website visits and a 42% relative growth in unaided awareness since last quarter. This engagement and awareness are correlating to more office visits, more physician diagnosis and more patients receiving XDEMVY. We're also seeing a positive trend in retreatment behavior, which is steadily building. More than 10% of weekly prescriptions are now refills, and that number climbs into the mid- to high-teens amongst our earliest patient cohorts. While ECPs report the consistent efficacy they see with XDEMVY, we know that might can return over time and as many ECPs are now beginning to set clear expectations that XDEMVY is part of long-term patient management, we continue to expect retreatments will stabilize around 20% over time, providing another important contributor to our sustainable and strong growth. This kind of momentum gives us real conviction that we're building one of the best launches in history. When you zoom out, our progress is striking. Demodex blepharitis is now recognized as a mainstream condition. Physicians are screening for DB more broadly and treating more confidently across the various patient segments. Retreatment is growing as XDEMVY becomes part of ongoing care and Tarsus has established a new standard in eye health. Our commercial engine is firing on all cylinders with awareness driving diagnosis, diagnosis driving treatment and positive treatment outcomes reinforcing confidence. It's a virtuous cycle fueling XDEMVY's path to our expectation of blockbuster plus success. In closing, I want to thank our incredible sales team. Their focus and execution is constantly setting a new bar and has been a key driver of our success. It's one of the largest and most experienced teams in eye care. And as Bobby mentioned earlier, it's just the beginning. With that, I'll turn it over to Jeff to walk through our financials and pipeline updates. Jeff? Jeffrey S. Farrow: Thanks, Aziz. Q3 was another tremendous quarter with XDEMVY generating $118.7 million in net product sales. To put a finer point on our results, we delivered double-digit growth in both prescription volumes and revenues in what, as Aziz mentioned, is typically a softer quarter across eye care due to holidays, vacations and fewer office visits. In the third quarter, we shipped more than 107,000 bottles to distributors and dispensed more than 103,000 bottles of XDEMVY to patients, above the top end of our guidance. Distributor inventory levels remained steady at around 2.5 weeks. As a reminder, we recognize revenue when XDEMVY is shipped from our warehouse to the distributors, not when bottles are dispensed to patients. Our gross-to-net discount was 44.7%, in line with the top end of our guidance and essentially flat to Q2, driven by 2 main factors: one, an adjustment to our accrual estimate for the Medicare Manufacturers Discount Program, or MDP, which was implemented earlier this year and added approximately 0.7% to the discount; and two, we saw an increase in Medicare patients entering the catastrophic category of coverage, where manufacturers bear a greater share of costs, a dynamic we expect to continue through year-end. Importantly, this gross-to-net performance reflects broad coverage and rising demand across a broader set of patients, especially Medicare patients, a key indicator of healthy, sustainable growth. It's clear our growth drivers are working in harmony, resulting in steady, weekly prescription gains, driven largely by new patient starts. For the fourth quarter, we expect XDEMVY net product sales to be in the range of $140 million to $145 million. While we continue to expect increases in weekly dispenses as compared to Q3, it is important to remember that fourth quarter demand is affected by several major conferences and holidays. Our Q4 guidance represents annual revenue of $440 million to $445 million, an amazing accomplishment at this stage in the launch. We also expect inventory levels to be consistent with Q3 at about 2.5 weeks; gross-to-net discounts to be in the range of 43% to 45%, driven by ongoing Medicare mix dynamics. Looking beyond 2025, we expect the gross-to-net discount to stabilize in a similar range. We are also expecting Q4 operating expenses to be higher than Q3, reflecting variable costs, tied to increased volumes and demand and an increase in our quarterly DTC investment, bringing our full year DTC investment to the top end of our provided range of $70 million to $80 million. Now, turning to our pipeline. Progress continues across all programs. We remain on track to initiate the Phase II study for TP-04 for ocular rosacea this year, with top-line data anticipated in 2026. We are excited about the potential to bring another category-creating medicine to millions of underserved patients. We anticipate beginning a Phase 2b study for TP-05, our oral, on-demand prophylactic for the potential prevention of Lyme disease in 2026. And we're continuing to evaluate strategic options, including partnerships that will enable us to advance the program efficiently and maximize long-term value. Likewise, we remain on track with international progress. Discussions with regulators in Japan are ongoing, and our preservative-free formulation in Europe remains on track for expected submission in 2026 with potential approval in 2027. Both represent sizable markets with significant unmet need and we're considering flexible commercial strategies from direct sales by Tarsus to partner models, leveraging third-party distribution. In summary, Q3 was another momentum-building quarter with strong execution, deeper adoption and meaningful impact across both commercial and clinical fronts. We anticipate this to continue into 2026 and beyond with a clear line of sight to blockbuster plus potential. Tarsus remains well-positioned to advance commercial growth, deliver key clinical milestones and pursue strategic opportunities that reinforce our leadership in eye care. We're proud of what we're building and even more excited about what's ahead. I will now turn the call back to Bobby for final remarks. Bobak Azamian: Thank you, Jeff. This quarter was a standout in every way, operationally, financially and most importantly, in the impact we had on patients. Doctors are changing how they practice. Patients are finding real relief and XDEMVY is now part of everyday care for Demodex blepharitis. As we look ahead, our priorities are clear, execute with excellence, broaden our pipeline, further our impact and continue building a company that defines what's possible in eye health. Operator, please open the line for questions. Operator: [Operator Instructions] While we are waiting for the Q&A roster, I will pass the call to Bobby. Bobak Azamian: Thank you. I'd just like to highlight a couple of things before we get into the Q&A. First, I am so proud of our progress to date, 8 quarters of growth, 147% year-over-year growth in Q3 is just phenomenal, and we see no end in sight to this growth. And that speaks to the power of category creation, which is what Tarsus is all about. We've talked about 2 pipeline programs already that have the potential to do that in ocular rosacea and Lyme. Looking forward to your questions. Operator: And our first question coming from the line of Andreas Argyrides with Oppenheimer. Andreas Argyrides: Congrats on the impressive progress in the quarter. You mentioned in the prepared remarks that doctors are changing their practice patterns and broadening their use of XDEMVY across a wider range of patients and partly due to the meibomian gland disease data. Can you just elaborate on what changes you're seeing and how broader use translates to the lift you are seeing in prescriptions? Aziz Mottiwala: Yes. Thanks for that question. Really insightful when we talk about how the evolution of prescribing has progressed over the last several months. I think there is a few things to look into here. One is the broad base of prescribing that we highlighted last quarter that continues to grow modestly. I think the real opportunity here is the depth of prescribing we're seeing, which we highlighted in the prepared comments, where you're seeing the increase of 20% in our weekly prescribers, 30% of those who are writing multiple times a week and I think that's great evidence that they are changing their patterns. And we do see the MGD data as one of those drivers. I think it underpins almost every single patient that comes through the door, because what the doctors think about now is who should I be screening for Demodex blepharitis. And as they start their journey, they typically think about the obvious patient. But when they get more experience, they start thinking about other patients, their dry eye patient, their cataract surgery patient, their MGD patient, their contact lens patient. And MGD is such a prevalent disease that it helps the doctor think about the value of treatment beyond just MGD, but also in patients that have DB and other comorbidities. So for example, one of the data points there is fluctuating vision. So, if a doctor says, "Wow, DB can impact fluctuating vision, I might want to think about screening my cataract patients where post surgically, I want to avoid those visual fluctuations." So that's an example where doctors will have that progression. And then what will happen is they'll start to screen, say, their premium cataract patients, and then they'll expand to all of their cataract patients. And that's an example of how you see a doctor progressing from trial to weekly prescribing to being in that 30% growth bucket of writing multiple times a week. And as Bobby mentioned, we're at the conferences lately, and that's something you hear pretty, clearly from the doctors that that's the progression. I try it here, I see great success and then as I get that experience, I look for other opportunities as well. Bobak Azamian: Yes. And I would just add to what Aziz said, I mean, what I heard from both optometrists and ophthalmologists is just that doctors are finding that XDEMVY works great, they find more and more reasons to treat patients with DB based on the data and the different comorbidities and I'm just really astounded by the 20,000-doctor figure. We've really broadened the audience for this, and I hear new doctors saying, "Wow, this is one of the best medicines I've seen." And so it's wind in our sails, and it's reasons why we think the growth is going to continue for a long time. Operator: Our next question coming from the line of Eddie Hickman with Guggenheim. Eddie Hickman: Congrats on the performance this quarter. Just a few questions for me. With regard to the refill rates, do you have any sense of the average time between initial filling and first refill? Is this within your expectations that these patients are coming back the next year, or are they coming back sooner? And what are you doing to keep those early adopters coming back at a minimum year after year? And then in light of the growth trajectory that you're seeing and guiding for, are you updating your internal peak sales estimate for XDEMVY? Aziz Mottiwala: Yes, Eddie, thanks for that question. I'll take the first part, and I'll let Jeff handle the second. When it comes to refills, I think, we're seeing a real positive trend here. We highlighted this last quarter and we provide a little bit more color this quarter, right? So when you look on a weekly basis, we're seeing just over 10% on a weekly basis in terms of what's a retreatment or refill versus the total volumes. And when you look on a cohort basis, meaning if you look at patients that were treated, say, a year ago, what they're getting, it's about in the mid-teens in terms of the retreatment rate. Both of those numbers are progressing positively and in line with our expectation that we could get to a 20% annualized retreatment rate. So, right where we think it should be and progressing nicely towards our expectations. What are we doing to maintain that and to continue that trend? There is a couple of things. I'd say, first and foremost, is education with the physicians and the patients that this is a chronic disease, XDEMVY works exceptionally well at getting rid of the disease acutely, but these might they do come back, and we do share with them the data of recurrence from our pivotal trials. And that encourages the doctors to put together a protocol where they're bringing the patients back. What that behavior looks like for each patient is a little different, some doctors are a little bit more proactive and they may say, I'm going to bring you back every 6 months. Some doctors will say, I'll wait until your annual exam. So I don't know if we can give you a precise average time, we look at different metrics, but that metric is moving as more doctors establish their protocols. I think the takeaway there is that it's moving in the right direction and in line with expectations. The other thing that we are doing is ensuring that our pharmacy distribution network is really helping those patients stay on therapy. So there is reminders that go out that second script is typically easier for the patient because they already have a report established at the pharmacy, they've already got all their information in the database, et cetera. So we've really streamlined the process, not just for patients to get the initial treatment, but also for those follow-up retreatments that are inevitable. So physician education, streamlined patient experience is going to continue a positive and in line trend that we expect. Bobak Azamian: And I'll just add to that. I mean what I heard at the conferences was there's all sorts of different reasons people are getting refills, some patients, the doctor deems that they need a refill when they follow-up after the first treatment, of course, course of treatment. Others like my mom, they come back a year later and they have a new stye and they're seem to have DB again. So that is one thing that I think we can elucidate further through evidence among other areas, we're going to continue to study to fully describe what XDEMVY can do. Jeffrey S. Farrow: Eddie, it's Jeff. Just to address your question on the peak. Look, we are thrilled with how we performed this third quarter, particularly when we look at some of our peers who were flat to down in terms of growth. We saw very robust growth in the third quarter, and we continue to expect to see fourth quarter growth. We're constantly evaluating our peak potential here, and I think, we still believe that this is a blockbuster plus potential. We're not ready to quantify that at this point, but we're continuing to see the sort of continued growth of this opportunity, and we expect next year to be a nice robust growth as well. Operator: Our next question coming from the line of Bhavin Patel with Bank of America. Your line is now open. Jason Gerberry: This is Jason on for Bhavin. With respect to TP-04 in the Phase II ocular rosacea, do you still need an FDA meeting before you start that trial? Just wondering where you stand with FDA alignment before starting that. And then just thinking to 2026 and just the general operational spending needs of the business, I wonder if you can give a little bit of insight there, that would be helpful. Seshadri Neervannan: Jason, this is Sesha. Thank you for that question. With regards to the TP-04 study, no, we don't need another FDA conversation. We had a very robust and productive conversation with the FDA on the program sometime back as we had reported. And we are progressing towards starting a trial later this year. More details to come on the study itself. Jeffrey S. Farrow: And Jason, with regards to your OpEx for 2026, we more or less think about it being in line with what we had spent here in 2025 in terms of the SG&A spend. We expect OpEx to reflect the $70 million to $80 million DTC spend. The only thing I would highlight is there is a variable component, the more we sell, there's a certain aspect that will drop to the SG&A line there. The second aspect is the ocular rosacea program that you talked about, we previously guided to $7 million to $10 million between 2025 and 2026. We still believe that's the right amount. And then the other area that could potentially add some OpEx spend that we're still evaluating whether we're going to move forward whether or not is the Lyme disease program Phase IIb study. So stay tuned on that one. But right now, I would think about those as the key components for OpEx for 2026. Operator: And our next question coming from the line of Andrea Newkirk with Goldman Sachs. Andrea Tan: Sesha, maybe another question for you, just following up on the last one regarding the TP-04 study in ocular rosacea. Can you just provide an update where things stand with developing the assays? And then do those need to be validated with the regulatory agencies before you're able to initiate the Phase II study? Seshadri Neervannan: So the study preparations are ongoing as we expected. We are developing the scales in collaboration with our strong partnership with the ECPs. At this point, the FDA doesn't require validation per se, but we are obviously in conversation with the FDA and FDA gave us input earlier, as we had reported in our previous conversations. And so, we are progressing as planned. Operator: And our next question coming from the line of Lachlan Hanbury-Brown with William Blair. Lachlan Hanbury-Brown: First one, maybe, Jeff, just curious on the change from guiding to revenue from bottles. What was the thinking of the rationale behind that? And then second, maybe for Aziz, you've talked about wanting to see multiples of ROI on DTC, and it sounds like over the past few quarters, you've been seeing that, you've been seeing a pretty good impact. So kind of curious to think or to hear how you think about where you are in sort of reaching the peak effect of DTC and how much more impact is left there? Jeffrey S. Farrow: Lachlan, it's Jeff. We evaluate, and I think we've mentioned this in the past on a quarter-by-quarter basis whether and what we're going to provide for guidance. And I think one of the reasons we held back on providing revenue guidance in the sort of past has been there has been some data points that we wanted to see evolve. And I think we've seen those data points evolve and in particular, the DTC impact. And so, I think we've got that behind us now. So our decision was to provide revenue guidance granted in the fourth quarter here understandably makes it a little bit easier, but we did feel it was the right time to do it. Aziz Mottiwala: And in regards to DTC, I think, this has been a really exciting part of the launch, it had a really profound effect. I think before getting into the mechanics here, I think, a couple of things to highlight are the impact it's having, right? You're seeing the growth in awareness, the growth in website visits. Those are directly translating into prescriptions. Patients are getting more easily identified. You're hearing from doctors at all the meetings that patients are coming in proactively asking to be screened. When doctors make the diagnosis, that discussion with the patient is more streamlined. So there's a lot of color that's happening there that's really enabling us to have such an impact. And what we stated in the prepared comments is we're now experiencing a positive ROI. And I'll remind you, in the past, we've said that it takes a handful of quarters to get to that ROI point. So we're progressing really nicely. I go so far as to say that we're even ahead of schedule from what we expected early on. In terms of reaching the peak potential, I think, there is still a lot of room to see increased ROI from the DTC, right? We have a very high threshold. We want to see multiples, and we're seeing a positive ROI, we're trending slightly ahead of what we'd expect in terms of that impact, and that's reflected in the results here. And I'd expect that impact to continue to scale into next year as we get more and more time with these patients getting exposed to the ad multiple times, the doctors enhancing their experience and I think when you stack that on with the physician experience being so positive, the access being great, our sales force being continuously in these offices, I think, there is a lot of room to grow our impact with DTC. And I'm really excited to see how that takes hold into next year. And I think as Jeff mentioned, we expect it to be a good growth driver for us into the next year as well. Operator: [Operator Instructions] Our next question is coming from the line of Cory Jubinville with LifeSci Capital. Cory Jubinville: Congrats on the update. I guess just sticking with the DTC ROI math, you said it was positive and growing ROI with a plus 90% site traffic, plus 42% unaided awareness quarter-over-quarter. Can you just translate that at all to what an estimated customer acquisition cost or payback period might be? And then sticking with that as well, you mentioned that you're likely going to approach the top end of the range for DTC spend in 2025. How should we be thinking about that in 2026 and beyond? Is there a point at which you dial back DTC spend? And if so, what goes into that decision? And how should we be modeling out that time line? Aziz Mottiwala: Thanks for the question, Cory. Yes, when it comes to DTC ROI, you can imagine we look at a lot of different metrics, and we're really thoughtful about what we share. I think the metrics that you're highlighting are really important ones. But as you can imagine, the ROI here is scaling and things are moving pretty quickly, right? So we're not giving a point estimate on those right now, because they'd evolve in the coming weeks, and we've seen the DTC ROI impact scale. When we say it's growing, it's scaling on a week-to-week basis as we make our investments. I think our focus right now is to continue to sharpen those investments. So you learn, right, which programs are the best, where do you get the best placements, where do you see the best response to these patients. So we're continuing to do certain things to drive and catapult that ROI and scale it even further. And I think as we get more to a steady state, we can provide some of those detailed metrics over time. But right now, I think, the emphasis is on really making sure that that investment is driving direct diagnosis and treatment, which we're seeing, which is fantastic. And I think the plan is to continue to invest in that space. I would expect for 2026, a similar level of spend to this year. And I think beyond that, we're going to evaluate it. I think as you get to a certain level of education where patients become aware to a certain extent, doctors are really establishing their protocols, you can think about maybe pulsing this seasonally or having a different schedule where you might be able to do this even more efficiently. But right now, I think it's still a great opportunity to invest in this to find that education and get those patients into the office, because we're still relatively early in the journey. We've only treated about 400,000 patients out of 25 million Americans that are out there. So still some good work to do, and I'm excited that the ROI is as positive as it is now, and I think we have a clear path to continue to drive that growth. Bobak Azamian: And I would just add, coming off the conferences, there were 2 themes of ROI at the clinic level that I heard. One was some patients are coming in asking for XDEMVY by name or asking, do I have mites? And the second, I think that's a real ease for the doctor as well as the conversation around mites has become more straightforward. Patients have heard of this disease. They say, okay, I saw that commercial. I know what you're talking about. So on the ground, tangible impact, and I think, the ECPs are pleased with the progress of that as well. Operator: Our next question coming from the line of Dennis Ding with Jefferies. Yuchen Ding: I'm going to ask a bit of a longer-term question, and that's on ocular rosacea. So what's the clinical, meaningful benefit on erythema, et cetera., in Phase II? And what are the various pushes and pulls on the magnitude of benefit either through disease severity or how refractory patients are to standard of care? And then number two, remind us what you saw in Phase II for papulopustular rosacea, if that could in some way help derisk ocular rosacea specifically, how similar are the underlying drivers of the inflammation seen in both that you feel like can be addressed with TP-04? Bobak Azamian: Ding, could I just clarify that before I pass to Sesha. The first question was what aspect of clinical meaningful benefit? Could you clarify, please? Yuchen Ding: Yes on erythema and whatever other endpoints that you guys decide to include in the Phase II? Bobak Azamian: The question is what level would be a clinically meaningful level? Yuchen Ding: That's correct. Bobak Azamian: Okay. Great. Sesha please. Seshadri Neervannan: Thank you, Bobby. And thank you for that question. So on the first point of the endpoints, talking to the ECPs and listening to our ECPs, the key hallmark features of the disease are prominent blood vessels that you see that we call telangiectasia in eyelids and eyelid margin. That is one of the key discerning and prominent feature of ocular rosacea as well as redness on the lids and the area around the eye, around the lids and it is called preocular region. So those are the key hallmark features of the disease, and we are really looking to establish the measures around those 2 particular aspects. And so these are features that develop over time, and we are looking to reduce the severity of these 2 measures, and that's our approach at this point. And in terms of the papulopustular rosacea, yes, papulopustular rosacea, we did a study, as you correctly pointed out, some time back. And we had very good results in the key measures for papulopustular rosacea. In fact, the approvable endpoint -- the regulatory endpoints for that indications are lesion improvement, as well as a composite endpoint of investigator-grade assessment. And we actually had very robust, statistically significant improvement in both those measures over vehicle in that particular study, which gives us a lot of confidence, as you mentioned. And we also measured erythema in that study where we also saw a reduction in erythema. And coupled with that, as you may recall, in our Saturn studies with XDEMVY, we also saw significant and meaningful cures, erythema cures, lid margin erythema cures for XDEMVY. So, we know the drug works in reducing redness. And so that is propelling our confidence in going into the study. Bobak Azamian: And I'll just add from conversations with the doctors, I think, from their perspective, any level of improvement in ocular rosacea is going to be meaningful. The telangiectasias can easily be seen by the doctors and the redness on the lids is what brings patients in. So as Sesha said, these are new measures, a pioneering study, and we're hopeful to see those type of reductions that will make a difference for doctors in these patients. Operator: Our next question coming from the line of Matthew Caufield with H.C. Wainwright. Matthew Caufield: Great to see the XDEMVY and pipeline progress. And thanks for taking our question. I was curious if there's any further granularity on the traction you're getting between optometrists compared to ophthalmologists and if the greatest untapped market and focus is among that optometrist population for potential prescriptions? Aziz Mottiwala: Yes, it's a great question. We see great traction with both ophthalmology and optometry. Historically, and even currently, we're seeing about 65% or so of the volume coming from optometry and the balance from ophthalmology. So a good mix, and that's been relatively consistent through the launch. In terms of the opportunity, I think, both audiences are really important to us. I think optometrist does a lot of the in-clinic work, there are some practice dynamics that are very favorable to optometrists here that, I think, they're capitalizing on in terms of being able to have patients stay in the practice, switching to medical insurance to treat a medical condition with Demodex blepharitis. So these things are really important factors for the optometrists. We obviously focus a lot of our sales time and educational efforts with those optometrists, but we also spend a lot of time talking to the ophthalmologists. And for ophthalmologists, cataract patients are their bread and butter. And that is a core segment for us where we see a high prevalence of Demodex blepharitis, and we know that, that inflammation and irritation of the disease can impact their surgical outcomes. So they're very motivated to screen these patients, to find these patients and to make sure that they're getting a clean, healthy eyelid around that surgical outcome. So I think great trends on both. When you look at top prescribing, there is a good mix of both ophthalmology and optometry. And our focus going forward will continue to be educating the optometrists directly and also providing that right emphasis on ophthalmology as well. So I think they go hand in hand. And I think the great thing here is that we're seeing great results from both. And as Bobby mentioned, we just came back from back-to-back academy meetings. And I can tell you, while the practice dynamics might be a little different, the one thing that you hear consistently from both ophthalmologists and optometrists is, one, the top users are saying they're still finding incremental opportunities to utilize XDEMVY. And 2, sort of rank-and-file users are having a great experience, and they're very encouraged with the ease of access, which is really opening their aperture to think about a broader set of patients. Both of those types of feedback are really encouraging for the future potential for the brand going forward. Operator: And there are no further questions in the Q&A queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.