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Operator: Thank you for standing by. Welcome to the NorthWestern Energy Third Quarter 2025 Financial Results Webinar. [Operator Instructions] I would now like to turn the conference over to Travis Meyer, Director of Corporate Development and Investor Relations Officer. You may begin. Travis Meyer: Thank you, Perella, and good afternoon, and thank you again for joining NorthWestern Energy Group's financial results webcast for the quarter ended September 30, 2025. Joining us on the call today are Brian Bird, President and Chief Executive Officer; and Crystal Lail, Chief Financial Officer. They will walk you through our financial results and provide an overall update on the progress this quarter. NorthWestern's results have been released, and our release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning. Please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I'll direct you to the disclosures contained within our SEC filings and safe harbor provisions included on the second slide of this presentation. Also note that this presentation includes non-GAAP financial measures and information regarding the pending merger transaction. Please see the non-GAAP disclosures, definitions, reconciliations and merger-related disclosures included in the appendix of the presentation. Webcast is being recorded. The archived replay will be available today shortly after the event and remain active for 1 year. Please visit the financial results section of our website to access the replay. With those formalities behind us, I'll hand the presentation over to Brian Bird for his opening remarks. Brian Bird: Thank you, Travis. On our recent highlights, we reported GAAP diluted EPS of $0.62 per share, non-GAAP diluted EPS of $0.79 per share for the quarter. We are affirming our 2025 earnings guidance range of $3.53 to $3.65. We -- during the quarter, we integrated our Energy West acquisition of the natural gas assets. We've also integrated the customers and employees, and we've really tucked that business in seamlessly. Very, very excited about that opportunity. I'll tell you what, something we've been a bit more excited about is the announcement of our agreement with Black Hills Corporation for an all-stock merger of equals. Even though we did that announcement in mid-August, we have already filed our joint applications for the transaction approval with the regulatory commissions in Montana, Nebraska and South Dakota. In addition, during the quarter, we filed a tariff waiver request with the MPSC for recovery of our operating costs associated with the Avista Colstrip interest. And recently, we submitted a 131-megawatt natural gas generation project in the Southwest Power Pool expedited resource adequacy study. And that project if we move forward, we'll be approximately a $300 million project, which is currently not included in our 5-year CapEx plan. And lastly, dividend declared during the quarter, 66% -- $0.66 per share payable December 31, 2025, to shareholders of record of December 15, 2025. Moving forward to the Northwestern value proposition with a dividend yield between 4% to 5%, add that to a base capital plan providing a 4% to 6% EPS growth, gives us a total return of 8% to 11% total return. And if you think about that CapEx plan, the vast majority of that is in a T&D investment throughout our total system on both the gas and electric side of our business, obviously, necessary to serve our customers. If you consider the incremental opportunities we have, certainly with data centers and large load customers, FERC regional transmission and any incremental generating capacity, some of which I just spoke to, you could see the dividend yield plus that greater than 6% EPS growth, giving a total return even greater than 11%. And with that, I'm going to turn it over to Crystal to talk about the third quarter financial review. Crystal Lail: Thank you, Brian, and good afternoon, everyone. We are coming to you from beautiful Butte America today following a Board meeting here. And based off those highlights, it feels like we might have had a little bit of a busy quarter. I will cover and update you on our third quarter results and outlook for closing out the year and then turn it back to Brian for some really exciting strategic updates and where we're at otherwise with the business. We are pleased to deliver a solid quarter in line with our expectations here for the third quarter of '25 and are on track to deliver on our earnings guidance and financial targets for the year. For the quarter, earnings were $0.62 on a GAAP basis compared to $0.76 in the prior period. On an adjusted basis, we delivered $0.79 as compared with $0.65. In the upcoming slides, I'll dig in a bit on the details of those drivers, but I would note and highlight what you just caught, which is comparability year-over-year. There's a couple of items I would just highlight that are impacting that. That includes the merger-related costs that are included in third quarter of '25 and also remind you that in the third quarter of 2024, we had a tax benefit. Moving to Slide 9. From a year-to-date perspective, that leaves us at $2.22 from a GAAP basis compared to $2.34 last year. Again, on an adjusted basis, that's $2.41 in 2025 year-to-date compared to $2.27 in 2024. Slide 10 shows you the third quarter drivers of EPS compared to that same period in 2024. I would note that despite mild weather, margin improvement drove $0.52, which was offset in some regards by higher operating costs, again, including those $0.12 of merger-related costs I referred to, higher depreciation and interest and inclusion again in the prior year of an $0.11 tax benefit. Moving to Slide 11. For further detail on the margin, again, I highlighted that, that was $0.52 of improvement. Of that $0.52, rate drove $0.35 of margin improvement. As a reminder, we worked really hard on that regulatory execution to be able to recover our costs and close that gap on earning returns. That $0.35 is certainly key to that, and we are currently awaiting our outcome in our Montana rate review, and I'll address that in a little bit later. Also, customer usage provided $0.08 of improvement and electric and gas transmission and transportation provided another $0.05. These are offset by a couple of things we had highlighted previously of trends for 2025, and that includes the market sales impact in our PCCAM, and that is a detriment during the quarter as well as the effects of Montana property tax legislation that are also a detriment to us in the quarter, reducing some of that favorability in the margin line. Moving to Slide 12, I'll discuss again those adjusted items to hopefully make the quarter make a bit more sense for third quarter '25 versus third quarter of '24. Again, mild weather in this third quarter impacted us by about $0.05, and that's compared to, again, an add-back of $0.05 and add-back of $0.01 in the third quarter of 2024. Also in 2025, we've incurred $0.12 of merger-related costs. And then as I mentioned earlier, the 2024 results included an $0.11 tax benefit related to prior year gas repairs once that final guidance came out. All of that gets us to, if you look at the adjusted columns, $0.79 of earnings in the third quarter of 2025 compared with $0.65 in 2024. Moving to Slide 13. You've heard our commitment to credit quality and maintaining that we've largely executed on our financing plans, and those remain unchanged as we continue to focus on making sure we're keeping that FFO to debt number where it needs to be and expect to see a bit of improvement even on that as we close out the year for 2025. Moving to Slide 14. Our financial performance year-to-date reinforces our confidence in delivering on the financial commitments that we've made, and we expect a final outcome in our Montana REIT review, as I alluded to earlier, during the fourth quarter. And as such, we continue to maintain a wider range of $0.15 as we look to close out 2025. We also expect to provide our 2026 outlook during our year-end call in February, so you can all look forward to that. Moving to Slide 16. You'll see that we -- our capital investment slide and forecast here remains unchanged from what you've seen from us before. Brian mentioned the opportunities, and we've talked many times about what might be incremental to our current plan, but the opportunity for incremental generation investment in South Dakota under the SPP Expedited resource adequacy study, that is not reflected in these amounts. And as I just alluded to with our '26 earnings outlook, we expect to roll forward and update our capital plan also on the Q4 call in February. So with that, I will turn it back to Brian. Brian Bird: Thanks, Crystal. On 18, we talk about our merger with Black Hills update in August 18 seems like a long time ago, but it was about 2 months ago. And in that short period of time, we, with our Black Hills friends have worked collectively to make 3 filings with each of the 3 states that we needed to make filings in. We filed with the MPSC and the North Dakota Public Service Commission, the South Dakota PUC. Those filings are made, and we continue to work on other filings necessary for the transaction. Continue to work on the S-4 and joint proxy statement and expect to release that in Q1 of 2026. In terms of shareholder meetings, sometimes in Q2 or Q3, our respective companies would have hold shareholder meetings on a vote on the transaction. And then developing transition integration implementation plans, what I'd say there is we collectively are talking to independent integration consultants, hope to make a decision relatively soon there. And just really in early planning stages. things will really get going here, I'd argue in the December, January timetable as we continue planning moving forward. And lastly, receiving approvals and closing the merger, I'd like to think that can happen sometime in the second half of 2026. Moving on to the next page regarding large load customers. Off to the right, I think all of you are well aware of the 3 LOIs that we currently have with SEBI, Atlas and Quantica. I'll mention the development agreement with SEBI here shortly. But on the left-hand side of the page, just a quick focus on Montana and South Dakota. We do anticipate making a filing with the MPSC to propose a large load tariff in the fourth quarter of 2025, and we'd like to do that in conjunction with an ESA with SEBI. So going in arm in arm, making sure that we're protecting customers in essence, but also providing what we need to move forward with data centers in the state. In South Dakota, there continues to be significant indications of interest. And any new large load customers require incremental capacity. And in South Dakota, PUC already has an established process for large load customers. The other thing I'd just say in South Dakota, we and certainly other utilities in the state have seen good progress in between legislative sessions on a sales tax exemption bill. You just saw a draft of one here shortly, not too long ago. And so I'm excited about that opportunity. And hopefully, we can deal with that issue in the next legislative session, and so we can have a better means to attract data centers in the state of South Dakota. So I think really good progress in both states. Regarding that process on Slide 20, we continue to lay out for you kind of left to right the process. And we have seen good progress here. From a data center request, we've moved 3 of those parties into a high-level assessment. As a matter of fact, of the LOIs, what we've done here recently of our 3 LOI parties, we've entered into a development agreement. What's that? We notice we show those kind of hand-in-hand here, maybe an incremental step of the LOI portion if you will. But the development agreement is primarily to make sure that we have a commitment in essence, to fund the studies and we've received development deposits along the way to fund those studies necessary, impact studies, facility studies. And that's an important step we anticipate. The other 2 LOIs, we could see development agreements with those other 2 LOIs before the end of the year as well, all with the hopes of getting to energy service agreements as quickly as we can. Moving forward, Colstrip transaction overview. I just on the far right, I think I need to provide a bit of a history lesson for folks. Back in January of 2023, we acquired the Avista piece. And you may recall that our IRP talked about the necessity of incremental 200-plus megawatts of capacity. And that Avista portion provided resource adequacy for us in Montana. And it also brought our ownership interest in the Colstrip facility from 15% to 30%. Unfortunately, 30% interest wasn't going to be high enough, if you will, to protect ourselves from other owners of the plant for various reasons, their states didn't necessarily want them to own coal-fired generation. And thus, there could have been an incentive for them to actually close down the Colstrip facility for us to protect our existing interest, 222 megawatts and the Avista interest in Colstrip. In July of 2024, we acquired Puget's 370 megawatts. What that did is it allowed us to move from a 30% ownership to 55% ownership, providing us a clear advantage to provide the direction for where Colstrip is going to go on a going forward basis and protecting ourselves and our customers from a capacity standpoint. And so we're excited that January 1, 2026, is not too far away. I think we'll sleep better, knowing we have those resources to serve our customers on the coldest days of the year. Those combined interests of course, will deliver substantial benefits to our existing customers, communities and investors, but also support now the integration of some large load customers. And primarily, that would be the Puget issue. So one we think -- 2 things we did to protect ourselves starting on 1/1/26 as quickly as we can here. For the Avista portion, we filed a temporary PCCAM tariff waiver request with the MPSC. We did that in August that'll provide a near-term cost recovery mechanism that is expected to largely offset the $18 million of incremental incremental annual operating costs resulting from the transfer expected on that the first quarter of 2026. I think it's clear you understand with the historic test year in Montana, if we've not done this we would be at risk of not recovering our operating costs of that units, if you will, those incremental 222 megawatts until our next rate review. And so this is a prudent means to try to make sure we protect their financial integrity and hopefully, we'll see a good outcome from the Montana Commission. I think they will respect the concept that we are buying incremental capacity to serve our customers at a 0 upfront cost. And all we're asking here is to get recovery of our operating costs and to a point where offsetting, if you will, sales from that unit to offset those at least to help those sales cover our operating costs before we actually move into the 90-10 sharing mechanism. I think it's a very reasonable ask. And hopefully, the Montana Public Service Commission will see that as well and has hopefully see it as quickly as we get into 2026. On the Puget piece, we anticipate signing a contract in Q4 2025 to sell electricity through late 2027. The revenue from that contract is expected to largely offset the $30 million of incremental operating costs from that transfer. We've already filed with FERC for cost base rates in October 2025 for that portion and expect approval during the fourth quarter of 2025. I want to spend a little bit more time on Puget. I think the question could be asked, why FERC regulated and not MPSC regulated for that 370 megawatts, the Puget portion. While we've received comments through the MPSC that it provides uncertainty around how we will or can serve large load customers in Montana. And clearly, the 370 megawatts were not identified in our IRP as needed for resource adequacy on 1/1/26. And so that's a reason enough to move things from a FERC-regulated -- to a FERC-regulated perspective. And I think the other question you might have is why would you plan to enter into a PPA with another party for the full 370-megawatt output of the Puget portion. Well, first and foremost, that really avoids any affiliate issues that we'd have with our regulated business. Secondly, having a FERC-regulated fully contracted output with an investment-grade counterparty, not only reduces market risk, but it allows us to largely offset our operating costs at the facility. And lastly, the term of that agreement would be through Q3 of 2027 in order to have 370 megawatts available for large load customers in Q4 2027. And ideally, this 370 megawatts, we will ultimately like to move that into our MPSC-regulated business sometime in 2027 and beyond -- or beyond, but we certainly need to persuade the MPSC that is in the best interest of not only all of the customers in Montana, but make sure also for their existing customers in Montana. So with that, I'll conclude just by saying I want to thank all of your interest. As Crystal pointed out here earlier, we've been extremely busy. And I just want to point out, I'm pretty proud of this company for our ability to not only handle our day-to-day jobs to not only run this business, but work with our friends at Black Hills to we think, put together a company that will be better together, certainly much larger, much more financially strong, have the scale, if you will, to better serve not only our shareholders, but equally important, our customers and our employees as well. And with that, Meyer to handle Q&A. Travis Meyer: Thank you, Brian. That was a good update. Prella, we'll open the lines for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Aidan Kelly with JPMorgan. Aidan Kelly: Yes. I just want to hone in on the data center front first. It looks like there was some activity in the request and high-level assessment stages. Could you just clarify if this was a simple pull forward of some of the request stage into the high-level assessment and then maybe one just got added to the request stage? And then just on top of that, what sort of time line you might be able to kind of convert the high-level assessments into incremental LOIs? Brian Bird: They're great questions. I think the data center requests, the queue count there went up 1. But more importantly, we've -- net-net, we've increased the queue count in the high-level assessment by 3. I'll tell you that I can't give you a specific time. One thing I've learned through this process, it takes two to tango in essence to when things move to that next level. But I do think there are at least one of those that could show up in that box here relatively soon, that LOI box, if you will, or directly to a development agreement. Aidan Kelly: That's helpful to know. And then maybe just pivoting to South Dakota. I am also curious on time line there for getting approval of the gas plant. And then ultimately, how should we think about that kind of flowing into CapEx in the rate base? Crystal Lail: I'll take that one. I think both MISO and SPP put out this summer an expedited resource adequacy study window. We submitted based off that study, a facility that would get us to resource adequate and meet the requirements by 2030. We've received feedback -- initial feedback from SPP that our -- what we've submitted meets their initial requirements, and we expect to hear on the transmission piece in early 2026. As such, we will wait to put it into our capital plan until we roll forward that refresh here in probably the fourth quarter call in the February time frame. Operator: [Operator Instructions] And I'm showing no further questions at this time. I would like to turn it back to Brian Bird for closing remarks. Brian Bird: Well, thank you so much. I just -- again, I want to reiterate the tremendous support we've had certainly since the announcement, and I think the feedback we've received, and I know our friends at Black Hills have received tremendous support for the merger. I will just tell you that we both collectively seem to be working really well together to make things happen here and continue to move this process along and both endeavor and understand the importance of this merger, and we'll work really, really hard to make sure it happens. And like I said, hopefully, as soon as the second half of 2026. And so with that, again, thank you for your participation today. Operator: Thank you. And this concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Prysmian's 9 Months 2025 Integrated 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 speaker today, Massimo Battaini, CEO. Please go ahead. Massimo Battaini: Good morning, everyone, and welcome to the earnings call of 9 months 2025. I'm very excited today to share with you this fantastic success. Quarter 3, EBITDA, '25 is the best quarter ever. It is over EUR 100 million higher than the same quarter last year, '24, in spite of the EUR 30 million -- almost EUR 30 million adverse impact. So you should raise on a like-for-like EUR 670 million versus EUR 540 million. Remarkable also the EBITDA margin that reached the outstanding level of 14.8%, 1 percentage point higher than the 9 months comparison to last year. The organic growth in the quarter has been outstanding also with a 9% increase that brings the overall 9-month growth for '25 at 6%. We also continue our successful journey towards sustainable targets. 39% has been the CO2 emission reduction in Scope 1 and 2 versus deadline and recycled content of material in our cables risen to 21%. Let me now enter into each business unit to explain you the strength and the performance of the individual business. Transmission, first of all, strong backlog, EUR 16 billion. We had it in line with what was in the past despite additional revenue consumption. And on top of this EUR 16 billion backlog, we have been pretty successful in the order intake in quarter 3 with EUR 3 billion worth of projects awarded in this quarter. They will turn and convert into backlog in the coming months as this project will be awarded in notice to proceed. Amazing has been the growth of Transmission, 40% in the quarter, which confirmed a solid growth in the 9 months, almost 39%, 40% also for the 9 months and outstanding is the EBITDA that has risen from EUR 90 million last year, same period to EUR 150 million. And by the way, this EUR 150 million, probably already is in 1 quarter, what one of our competitor makes in the full year. Extremely rewarding for us is the EBITDA margin achieved in the quarter, almost 18%. You'll remember that we set goals for 2028 for value, we need to achieve a range of 18% to 20% EBITDA margin by 2028. So we are well ahead of that trajectory. 17.8% is 2.5 points higher than same quarter last year and if you take the 9-month view is the same. We are 3 percentage points higher than last year. Thanks to outflows as a cushion, thanks to better margin in our backlog and thanks to entire team, regions in the Transmission BU working hand in hand to maximize the results and maximize the execution of the CapEx and the relevant projects. Let me now move into to Power Grid space. The organic has been significantly high 15%, basically driven by all countries, with North America actually outpacing this 15% growth, more than 20% was the growth in the United States. When you look at EBITDA, you see a moderate growth in EBITDA, but you have to take into account 2 effects in this EUR 6 million only increase in EBITDA in quarter '23 -- in quarter '25 or '24. There is a ForEx impact of close to EUR 8 million. And there is a Midwest impact driven by tariffs that hit one element, one family of products in our portfolio business in U.S., the overhead business. It's a project-driven business, where we have a firm price and we've been hit by projects landed in quarter 1 and quarter 2, where we could not stand a chance to increase and adjust the price to reflect the Midwest premium impact. So you see a temporary blip in the EBITDA margin, 15.2% last year, 14.7% this year. This will be recovered in the coming months as we flush out the old project backlog and we will end the new project. The rest of the Power Grid business in U.S. is immune to Midwest premium because we have formula in frame agreement to transfer the cost to the market. The organic growth in the 9 months has also been pretty successful with a solid 6%. Moving to Electrification. In spite of this moderate growth in I&C Global, you have to see behind this strong organic growth in United States, 10% year-over-year growth in quarter 3, remarkable growth in EBITDA in U.S. in quarter 3. Despite a weak start with July still affected by negative tariffs, thanks to August, September, we had performed a 15% EBITDA increase quarter 3 '25 over quarter 3 '24 in the U.S. in the I&C space, namely more than EUR 30 million in absolute value. Unfortunately, this has been offset by ForEx and has been offset by some pricing normalization in LatAm, where we had spikes last year in quarter 1, quarter 2, quarter 3 in Argentina, which has normalized over the period -- this period of time. The EBITDA margin, we achieved sustainable 14.5% level. And when you look at the 9-month view, you see the upgrade and the accretion of the EBITDA margin associated to the -- attributed to the acquisition of the accretive and profitable perimeter over Encore Wire. Specialty, I cannot say that we are happy. Actually, we are disappointed about this, nothing that was not foreseen. We are still struggling with the automotive performance. The demand is very weak. Price pressure is very high. We are still working on the disposal of a few plants and a process is -- unfortunately, I have taken longer than expected. We will resolve this in the next months. And we also continue to see some level of softening in the elevator space in the U.S. attributed to the weakness of the residential market in the U.S. Moving to the last business unit Digital Solution, we reported a significant organic growth stand-alone legacy Prisma, 13% in the quarter. And you see the EBITDA left from EUR 45 million to EUR 88 million, thanks also to the perimeter change. There is the inclusion of more or less EUR 40 million coming from the Channell integration. This is the first quarter where we have the full consolidation in the treatments of the Channell perimeter. Amazing is the EBITDA margin. We never had better than 14% EBITDA margin in the business in the past. Now we raised this level of margins sustainable in the future to 20% with additional scope, with additional connectivity in the U.S. space. Before I hand over to Francesco for more financial insight, let me draw your attention to maybe one only of these KPIs in the first one on the top of right-hand side of the page, revenues linked to sustainable solution. We raised this revenue from 43% last year to 44%, 45% already. In 12 months, we will show another improvement over this level. We have a target of 55% by 2028 as per our Capital Market Day. This is our important way, it is an important way, it's an important KPI to read our ability to innovate to drive EBITDA margin improvement. And the 14.8% EBITDA margin achieved in quarter 3 is a real reflection of the efforts that commercial, R&D, operation and rest of the team has put in innovating our portfolio, innovating our solution to increase share of wallet on the one end and improve profitability. And now Francesco. Pier Facchini: Thank you, Massimo, and good morning to everybody. As usual, let me recap our profit and loss and summarize some messages that Massimo has already passed. The -- an outstanding quarter, this 3 quarter. Starting from the revenues, EUR 14.7 billion with an organic growth in the third quarter, very robust, over 9%, which was driven by an outstanding growth in Transmission and a very strong improvement in the growth of Power Grid by the way, across the board, as Massimo said, both in North America, but also pretty strong in Europe. The highest quarter ever in terms of EBITDA. You see the bridge on the right of this page, quarter-by-quarter. I would focus on quarter 3, EUR 644 million, an increase of over EUR 100 million versus Q3 2024 in spite of pretty significant adverse ForEx effect of EUR 27 million, which is mainly in the Power Grid and the Electrification business, but also Digital Solutions business. In terms of margin, I don't have much to add to what Massimo said. At constant metal in the quarter, we grew 1 percentage point from Q3 2024, mainly driven by the growth of the margin, but also of the revenues in transmission, which is obviously changing the mix in the positive sense. It was driven definitely the increase of margin by the full inclusion of Channell in our third quarter results. And I would add also a pretty robust Q3 in I&C in North America, in particular. On the lower part on profit and loss, you see group net income, which is almost doubling compared to the first 9 months of 2024, over EUR 1 billion, EUR 1.022 billion. Of course, this was heavily impacted, positively impacted by the disposal of our 23.5% stake in YOFC, which generated gains in the region of EUR 350 million. But let me say that even taking out this obviously one-off effect on our net income, the net income was very robust. And I like to confirm what I did already in the first half of the year that in terms of growth of our EPS, we are definitely above the level that the CAGR, you remember the midpoint of this CAGR was 17% for the period '24, '28 that were setting last March in New York as a target. I would say we are more in the region in the first year of a 25% EPS growth for the full year versus 2024. Okay, I flip quickly to the cash flow generation. That's the usual bridge of our net financial debt from September '24 to September '25, it's a strong deleverage, which was obviously fueled by the cash proceeds coming from the YOFC disposal. You read the number on the right of this page, EUR 566 million, which were definitely much higher than we expected, thanks to the incredibly strong share performance of the company, specifically in the month of July and even more August. In terms of last 12 months free cash flow, we are a bit below the level that we saw in the last few quarters. You remember that we were last 12 months, half 1, slightly below EUR 1 billion, let me say. And this is not very concerning, in my opinion, because it's almost entirely attributable to a different distribution of cash flows in our Transmission business. To be more specific, last year, specifically in the first 9 months, Transmission was generating very strong cash flows because it was benefiting of a very, very large down payments and milestones that this year are more skewed on the fourth quarter. So no concern. I think that we will come back and we will regain our nice level of EUR 1 billion plus, by the way, in line with the guidance that Massimo will comment in a while. Also in terms of net debt, the boost of -- other than our strong cash flow, the boost of the transactions like YOFC will generate a faster deleverage than we originally expected. And I anticipate a net debt by year-end in the region of the EUR 3 billion, which was -- which is definitely much lower than the, thanks also to YOFC, of course. Back to Massimo for the outlook and the final conclusion. Massimo Battaini: Thank you, Francesco. So let me walk you through the upgrade of the guidance. On the right-hand side chart, you see the evolution of our guidance for the EBITDA. We started the year with a EUR 2.3 billion midpoint for full year guidance. We raised it to EUR 2.40 billion in light of the perimeter change, which was particularly set by the ForEx. So the EUR 40 million additional is the organic growth of the EBITDA of the legacy Prysmian perimeter, excluding the Channell benefit. And now we are happy to raise it to EUR 2.4 billion, so another solid EUR 60 million additional EBITDA coming from the strength of quarter 3 and the expectation of the quarter 4, of course. Free cash flow also you don't see the upgrade here, but we had a EUR 1 billion low range EUR 1.075 billion, now we raised EUR 25 million, the bottom range and by EUR 50 million in the top range. So making a net increase of circa EUR 40 million in free cash flow for the full year. Let me move to the final remark and wrap up the meeting and leave time for you to address comments and questions. So definitely, a quarter, which reported an excellent performance, as flawless execution in Transmission, also supported by a good order intake. The benefits of the accretion of the EBITDA margin coming from the Channell acquisition and a strong driver of the business growth coming from North America, Power Grid, I&C and Transmission with now North America really posed to benefit from the tariff benefit in the coming quarters. So thank you. I'd like now to open the Q&A session and get more insight into the business. Operator: [Operator Instructions] We will now take the first question from the line of Vivek Midha from Citi. Vivek Midha: I hope you can hear me well. My first question is around the I&C margin in the third quarter. Would it be possible for you to give a little bit more color around where the profitability of the U.S. low voltage business stands and how that progressed over the course of the quarter? You mentioned that July was lower and August, September improved. And then also on that, you mentioned just now about the benefits of the tariffs in the U.S. coming through in the coming quarters. Could you maybe give some color around how you expect that to phase in over the coming quarters? Massimo Battaini: Yes. Thank you, Vivek. So the I&C space in the United States, we had many turbulence in the very months -- in many months of 2025 due to the different dynamics interpretation of tariffs in the market. In July, we were still in the old scheme where tariffs were applied to metal, so imported metals, imports of metal and not on import cables. From August 20 -- from August 13, all the tariffs were set in a way that's also the meta content of cable imported were charged with 50% in addition to this called country tariff. So from August 13 onward, we had a full recognition of the fact that we are looking for local producer. So given that circumstances, in August, September, we've seen a reverse in trend. While in July, we saw pricing pressure because we had cost that importers didn't have from August -- from beginning of August onwards, we had certainly more even and normalized competition. Another pressure is on importers. So the I&C margin in quarter 3 in U.S. is the best ever margin achieved by Encore Wire best ever. Despite July was weak due to the former setting of tariffs. We are at least 1 percentage point ahead of the same quarter last year, 2023, which, by the way -- 2024, which, by the way, was a strong quarter, as you recall. Now how we are going to benefit from the tariffs in the coming quarters? We don't know what is going to happen. Certainly, the supply chain from imported is a long one because they're shipping cable from every place in the world. It's normally -- we consider it a supply chain of treatment. So it will probably take another 1.5 months or so before this -- the quantity of product has been shipped and our in stock in U.S. will gradually run down. And so we should be seeing hopefully, certainly from quarter 1 onwards, less lower pressure from importers and more opportunity for us to gain share of wallet. So we think that in the aluminum building wire space, the market started already and will more progressively shift from importers, whose price is not going to give them any more benefit into for -- into local suppliers. So we will certainly have a share of wallet opportunity. Whether this will turn in additional profitability, we will see. We'll have to gauge it. It depends more -- it doesn't depend on tariff. It depends more on the possible dynamics of shortage of cable availability in U.S. vis-a-vis the local demand. Local demand is expected to grow beyond that in '25, driven by the usual data center expansion, but also by some expectation that the residential market in light of the further reduction in interest rate will rebound a little bit in quarter 1, quarter 2 next year and also thanks to our solidity of the nonresidential market. I hope I answered your first question, Vivek. Vivek Midha: Absolutely. Just to clarify to make sure I heard correctly. I think you said was it was from -- at some point in the quarter, that was the best ever margin in Encore Wire, given that they had some very, very good margins after the pandemic. Did I hear that correctly, best ever margin? Massimo Battaini: Yes. July was not the best margin but August, September was few points higher than the same period 2024. So yes, you're right. Vivek Midha: Okay. And my second question is around the Power Grids margin. Just a clarification. Thank you for the color on the Midwest premium impact. Could you maybe confirm then was the margin in the power distribution business and high voltage AC, i.e., the business outside overhead, stable relative to the second quarter? Massimo Battaini: As you noticed, the blip in the EBITDA margin was really minor. The rest of the product -- the rest of the family side of Power Grid, so high voltage AC, power distribution and network components were not suffering any sort of margin contraction. It's only the overhead business in U.S., where we win projects is similar to the transmission space. We win one-off projects. We win projects and the price and the project is firm until you completed there's a cushion. And the Midwest premium has risen in the last 2 quarters due to the additional aluminum tons supplied to metal imported in the U.S. We could not transfer this to those firm price project. While we've been completely successful transferring this Midwest premium increase to the rest of the business, call it I&C, low voltage, medium voltage distribution, no way. We have no issue there. We have formula to reflect the cost inflation coming from Midwest premium, copper rod, all the rest to our customers in the existing frame agreement. In this specific niche on the portfolio Power Grid, we didn't have this chance. We actually renegotiated some contracts, but vast majority at firm price. So when we get past the end of this year, it is a backlog of old projects that suffered this price pressure -- sorry, this margin contraction due to cost increase will fade away and will enter 2025, '26 with a different speed. That's why I call this blip in 1 -- in '26, sorry, quarter 1, this will be fully reverted back to the original level of margin, 15% plus. Operator: We will now take the next question from the line of Daniela Costa from Goldman Sachs. Daniela Costa: I'll ask two, one on Electrification and the other one on Transmission, but given we just talked on Electrification, just following up on the comments there you made before. I think when you think about sort of this potential impact that you'll be better positioned versus the importers going forward on the Section 232, what's your view in terms of like will your intent be to mainly just grab share because they will be much more expensive? Or are you also planning to leverage pricing? Has that gap becomes so wide now out there? Massimo Battaini: Yes, it's a complicated answer because the tariff -- due to tariffs, first of all, been only applied to imported cables in the aluminum space. We expect the same treatment, the same approach to happen from December onwards where also for copper products imports, there will be the same logic. So the metal content of cable or copper cable import in U.S. will be charged with the same 50%. So -- but this still has to happen. Our interaction with the administration suggests that also for the copper space, this will happen. Should this happen, we'll have Electrification, Power Grid overhead, high-voltage businesses, where we see our position in the U.S. strengthened by the fact that importers have additional cost to live with, to bear with. Some of those importers decided to eat this cost to digest it. So they didn't increase the price. By now, after 3 months, we noticed the attitude or the chance to hold the same price and getting charged with is 50% of metal content and on top of country is becoming; too overwhelming for them. So we expect to see a reduction of imports of cables across the board for all importers in U.S., in high voltage, low voltage, medium voltage and electrification. So this reduction of supply to the U.S., driven by the extreme cost impact due to tariff will certainly create some imbalance in the market. So we think that the first immediate benefit will be the share of wallet. It is too early now to say whether on top of the share of wallet, we also have a price benefit. But be reassured that every time we had a chance to increase price and to improve profitability without losing share in the market, we go for it as we've done in the last 9 months. The market was not that strong, but we haven't seen a particular EBITDA margin erosion in any space in the United States, despite tariffs were not in favor of local producer. So price we will see. Certainly, share of wallet is within reach. Daniela Costa: And moving to the question on transmission. I mean, as you've mentioned, you're pretty much there sort of at the 18% and there's upside, as you said, to the 18% to 20% or that you're comfortably in there in the 18% to 20%. But the backlog is not dramatically different to the backlog we had at the CMD. So I guess you had visibility on sort of like what the gross margin on those projects were. So can you elaborate what you changed in execution and whether this is something that we kind of see has more longer lasting? And in that case, what is the ultimate ceiling of transmission margins? Massimo Battaini: To be honest, we also have to be more accurate in setting the target for '28. So the 17.8 today is based on standard metal. Should we base also the 18%, 20% target on the same standard metal, so the historical metal 10 years ago, we should naturally raise 18%, 20% to 18.5% to 20.5%. So in my view, the natural ceiling is 20.5% is the top of the range. It's the top of the range because it is true that the backlog is what it was 6 months ago. We've definitely been more successful or better -- sorry, more successful than anticipating in the execution, let me say. And some of the risks that were in our execution and that we quantify and we assigned to provisions didn't materialize or we handled them with lower cost than anticipated. So it's again back to this execution. The strong team, strong assets. So don't forget, we have now plenty of new assets. And the new Monna Lisa is a new super performing installation asset with different capabilities and Leonardo da Vinci. Alessandro Volta, the asset will join our fleet in December '26 has a different set of capabilities as well. So we have different tools for installing/burying cables underground. We have new factories. We have new vertical lines in Pikkala that has come to -- that came on stream at the beginning of this year. We have a new production line in Arco Felice. We have a fantastic new asset. Our cohesive team working with a strong focus on execution, and this is what has driven the significant uptake in EBITDA margin in quarter 3. And this has given us confidence that the 20.5% top of the range is also achieved over by 2028. Operator: We will now take the next question from the line of Max Yates from Morgan Stanley. Max Yates: Just my question is on capacity utilization in your Encore facility. So you've kind of mentioned there may be the opportunity to take share and take customer wallet share from -- as a result of the tariffs. So could you just give us a sort of indication of if 25% of the market is going to be challenged by these tariffs, how much can you ramp up your Encore facility in the next 1 to 2 years to maybe take advantage and knock out some of that competition that then has to put through higher prices. So where is capacity utilization and sort of how much room do you have? Massimo Battaini: Our strategy is pretty simple. We have spare capacity in the range of 30% in Encore Wire. We are not there in idle wire because we like to have spare capacity. It's there to guarantee the service. But in case we need it to respond -- to fast respond to market demand, we can utilize the Saturday and the Sunday shift to expand this capacity and leverage this available at incremental output. Of course, in the short term, this will be the answer. But as soon as we see stronger structural demand growth, we will resort to the short-term action to gain share and then we back up this action with additional investment, which might take 12 months, 18 months, it depends on what we're going to do in terms of where we want to spend capacity. Of course, it would be [indiscernible] which line. So short term, we respond with the shifts -- available shifts on Saturday and Sunday to avoid to compromise in the long term, the service level, we will immediately activate the CapEx deployment to increase the structure of the capacity. So we are the only one with this benefit, thanks to Encore. We didn't have it in Prysmian because Prysmian run facility at full capacity on 7 days a week. And the same does the other -- the same to the other players in the United States. So with this opportunity, we can certainly leverage the tariff in a better way than the other people and hopefully to gain share in the market. Max Yates: Okay. And maybe just a second question around what the competition are doing in North America? Because I guess when we look at Encore margins, they're clearly at very attractive levels. Obviously, your biggest competitor, Southwire is private, so it's harder to keep a track on kind of what they're doing. But when you speak to your sort of salespeople, what do they say about what the competitors are doing on capacity? How much availability do they have to ramp up? And are you seeing kind of new entrants or people expanding capacity that maybe you didn't see before given how attractive margins are now in this North America business? Massimo Battaini: Yes. The margin attracted new entrants from outside are really not coming because of the challenge. So there could be new entrants from inside, I doubt it. The copper building wire market is in the hand of 2 players, Southwire and Cerro and the aluminum in the hand of us and Southwire, the rest are importers. So behavior in the market is pretty simple to define. Southwire is very disciplined when it comes to price. Of course, they are suffering more than in the past because they are too exposed to the residential market. They have a significant exposure to residential market. This market has been sluggish and flattish over the last 2 years. And so they're probably not enjoying what we've been enjoying on the contrary of our side because with the electrification space, again, from Encore Wire, we have a huge exposure larger than before to the nonresidential space. And on top of the nonresidential space market, we have access to data center, stronger than anyone else because we have a product range, very broad, large and complete, from telecom to Electrification, to Power Grid, to Transmission, which is unique, not common to a telecom player like Corning on Costco, not even common to Sourthwire. So they are disciplined. They always follow our price. Sometimes they are the first at price increase in the market. For example, in the last 2 weeks, we've seen copper increasing -- increases that forced us to increase the price, but Southwire anticipated us. They came with a price increase in the market first. So we are happy about the level of competition. Whether they have spare capacity, I don't know. But what matters to this market is the service level. So if you have gained so much share in the center space, is because we serve these demanding companies, the likes of Microsoft, Meta and so on with our 24-hour service. It is because with 3, 2 days spare idle capacity we can respond with massive output increase that other people cannot respond to. So we are well positioned to leverage now the settlement achieved by the tariffs in the market to leverage our strength, our portfolio and the asset of McKinney and gain additional share in the market. Operator: We will now take the next question from the line of Sean McLoughlin from HSBC. Sean McLoughlin: Can I just build on the previous answer. Maybe could you specify what kind of growth you've seen in data centers, maybe across the different divisions? And my second question is related to fiber, particularly if you could maybe split out the growth in Digital Solutions in the U.S. versus other regions. And particularly, if we're looking at fiber shortages in the U.S., what kind of positive pricing impacts do you expect this might have over the coming quarters? Massimo Battaini: Thank you, Sean. In data center space, we've seen our revenues 9 months to date versus 9 months last year, doubling in value. And this is pretty much across 2 main spaces, Electrification, U.S. and Optical Digital Solutions U.S. So now in the optical space, 40% of our volume -- trade volume in U.S. belongs is for serving this data center business. And in Electrification, I say that we have 25% of the total Electrification business, I&C business U.S. attributed to the data center expansion. This is not the same that we've seen in other regions yet. We are still working in Europe, in LatAm and APAC to become more relevant, to become more engaged with the go-to-market with a proper supply chain to win more share in data center space also as well. As far as fiber is concerned, you are totally right. There is a shortage of fiber in U.S. to the point that we are really backfilling our capacity in the U.S., we have a factory in U.S. producing fiber with fiber production coming from Europe, price improvement happening -- has happened in quarter 1. Quarter 2 is happening as we speak. And so we count on this pricing and profitability enhancement in the coming quarters to set a new level of EBITDA for Optical Digital Solutions business U.S. next year. Operator: We will now take the next question from the line of Monica Bosio from Intesa Sanpaolo. Monica Bosio: I hope you can hear me. The first question is on -- from a strategic standpoint, Massimo. If I'm not wrong, in occasion of a recent interview, you anticipated that Prysmian could be ready for a big acquisition in 2026 in LatAm or Europe. Can you please give us more flavor on this side? And just a question, would you see as reasonable and external growth in the digital solutions space or in other areas? That's the first question. The second one is related to Sean's question in the Digital Solution space. So pricing is coming -- so what kind of margins could we expect on a steady state in the Digital Solution space and more in general, given the exponential growth of the data center, do you see any supply constraints or disruption that could bring to some stops and growth along the trajectory? Massimo Battaini: Thank you, Monica. So yes, our position regarding M&A is the usual one. We consider M&A, the natural to top up our organic actions, organic plans. We think we are well positioned based on our track record of M&A to leverage additional opportunity. We will be ready for large ones. And by that one, that means something closer to the size of Encore from 2027 onwards, not in 2026. We have some more financial flexibility also in '2026 due to the disposal of YOFC shares, the treasury share. So we have still some room for minor midsize acquisition in '26. Another point is to work in identifying the specific targets, the one that we can start the highest level of synergies. And certainly, we are looking at North America, LatAm and Europe as main priorities to expand leadership, expand portfolio and become more relevant within the customer base. I didn't capture the question about the standard growth in Digital Solutions. You mean internal -- the organic -- so there is growth in U.S.A. in Digital Solutions, again, partly driven by the rollout of Fiber to the Home and also complemented by rollout of data center expansion. There is not that much level of growth in the other countries because they are much more advanced in the fiber-to-the-home implementation. France is almost at the end. The U.K. is almost at the end. Spain is made way too. So Europe will not probably give us satisfactory organic growth. North America will continue for 5 years at least to support organic growth of Digital Solution space. Monica Bosio: Yes, my question was -- sorry, Massimo, my question was given the pricing that is coming in the U.S. in the digital solution, this could be a lever for further margin improvement. What you... Massimo Battaini: Okay. So the margin was coming to the point of mind. We reached a 20% EBITDA margin. So I think it's the level we consider sustainable. There will be upside in U.S. There will be probably stability or slight reduction in Europe. So I would not bank on significant expansion beyond 20%, which is already very accretive vis-a-vis the past trend. Of course, there will be additional synergies that we want to leverage, thanks to the acquisition of Channell. Because now we own a satisfactory portfolio of connectivity products with the ones that we had in Europe, with acquisition that we made, a small acquisition that we made in Australia, the Warren & Brown and Channell. Now we can leverage the full portfolio and eventually further enhance the profitability of the business unit. Operator: We will now take the next question from the line of Alasdair Leslie from Bernstein. Alasdair Leslie: I had 2 questions on Transmission. So you talked about 2028. I was just wondering whether you could help us a little bit in terms of kind of calibrating how transmission scales up here in maybe the next 6 to 12 months? I mean how should we think about top line growth margins both in the balance of 2025, but maybe also 2026 as well? Any early thoughts there as consensus only has around 15% like-for-like growth in '26. It feels like maybe that's now too conservative? And maybe also just a little bit more detail around the phasing of capacity coming online, please. I don't know whether you can kind of update us on those lines of Pikkala. The first one, I think you highlighted again, that's up and running. But the second 1 maybe an update there. Can that be brought forward a little bit? And maybe if you can, what's the kind of run rate on that submarine cable now in Pikkala? I think you were talking about starting with 32 tons and wanted to double that. So where do we stand now? Massimo Battaini: Your question is too detailed. I don't like to share all this stuff with -- not with you, but with the other people connected to the earning calls. I'll tell you a simple explanation what is going on. You draw a line from '26, '25 through 2028. You take the, let's call it, EUR 580 million EBITDA this year and take almost EUR 1 billion by 2026. This growth from EUR 550 million, EUR 580 million to EUR 1 billion is supported linearly by additional capacity increase across many sites. There is Pikkala with 3 lines. There is drone for HVDC interconnects with 3 lines. There is Naples with 1 additional line. There is capacity in Abilene, United States for HVDC capability. The capacity will grow linearly from this level of 2025 through 2028 from EUR 550 million, EUR 580 million EBITDA this year to EUR 1 billion. To complement this cable capacity across different submarine interconnectors, offshore and land interconnectors, you have the installation capacity that will grow hand in hand with the manufacturing capacity. So you draw this line, you can figure out what the organic growth for next year will be and for '27 and for 2028. Bear in mind that while we grow, expand the business organically with capacity and with expansion of installation capability, we also benefit from -- as we did in quarter 3 this year execution and better margins in our backlog. So move from the 17.8% margin today to 20%. I hope this clarifies the trajectory. And forgive me if I can enter into these tons kilometers details that really we don't like to share with our peers. Operator: We will now take the next question from the line of Uma Samlin from Bank of America. Uma Samlin: My first 1 is fairly short term. You mentioned that for Encore, you saw record margin profile in September and August this year. So what are you seeing in terms of Encore demand and pricing so far in October? If you could comment on that, that would be really helpful. And also for your raised '25 guidance, how much have you accounted for in terms of the tariff impact on I&C in Q4? And how should we think about this benefit going into 2026? That's my first one. Massimo Battaini: The record margin August, September is certainly an important -- is certainly important trend in the market. It is not really related to the tariff to the reduction of imports related to the fact that there is clarity in the market about where the market stands in terms of tariffs. October is coming in with a strong volume with some pricing or margin pressure due to the cost of copper cost increase that has been kind of sudden and sharp. And of course, us supplier, all keen on passing into the market. So October is coming up in a nice way as well. The big chunk of the 2025 upgrade -- guidance upgrade comes from North America due to the strength in Power Grid and I&C but also it comes from Transmission business. So those 3 family of products, I&C North America Power Grid, North America and also Europe, to a certain extent. And transmission is what has driven the 60-meter increase in 2025 guidance upgrade. Uma Samlin: Yes, super helpful. My second question is a slightly more longer term. Is that -- how should we think about the sustainability of the tariff benefit that you're seeing now? Do you expect to see further consolidation of the market? And what kind of long-term pricing benefit do you expect there? Massimo Battaini: It is a million-dollar question because we've never been in a situation like this where finally the U.S. market is -- that's historically been super protected against importers will be even further protected. So give us a couple of quarters to really assess what the situation would be. I think that things went in the way we think that we go, there will be significant reduction on the imports of cable in U.S. in favorable of local producers. As said before, we have capacity available to respond to the sharp market demand. And we have a CapEx and capital allocation available to be released to support the organic growth of the market in U.S. As we've done in the past, we'll do in the future, the market becomes more solid, more protected in the end of a few players. It's already kind of highly consolidated. And we made the last moving consolidation with the acquisition of Encore Wire. Operator: We will now take the next question from the line of Nabil Najeeb from Deutsche Bank. Nabil Najeeb: My first question is on data centers. Your direct sales into data centers have, of course, been very strong. And I think you previously said that you're on track to double data center-related revenues. Can you give us a sense of how you might look at the overall opportunity within data centers? I wonder if you've got any thoughts on the share of data center CapEx, you can maybe capture across low and medium voltage cables as well as fiber and connectivity. And the second question is on the New York listing. Do you have any updates on your plans there? I think earlier, you wanted to focus on the integration of Encore and Channell, which seems to be well underway. There were also some headlines that pressed on a potential revival of these plans. So just wondering if you can comment on that. Massimo Battaini: So data center, we've seen a significant growth in '25 or '24. We think that growth will continue. We have a visibility of long pipelines of projects and we become stronger and stronger, as time goes by because we add the innovative solution to our product range that can really benefit the data center. In the optical space, they require high-density cables with very compact standard diameter. And we just -- we cannot announce it today, but we have a breakthrough that we disclose to the market shortly in terms of size of fiber for compact cables for data centers. So we will be really benefiting from data center expansion. I think the growth, per se, will probably slow down because this year, we've seen a 150% growth over last year. So the pace of growth will probably slow down, but it still remaining -- this will still remain an important driver of EBITDA expansion and EBITDA margin increase in U.S., for sure, massively and also in other regions. U.S. listing is not an abandoned project. It's something that we parked for a few -- for the moment. I think you are correct. The integration of Encore is proceeding well. The Channell integration is also proceeding well. We will reopen the discussion in 2026. The project is extremely valuable to us. It will give more -- it will give us access to this company to many U.S.-based investors. So it is a priority for us. At the moment, we made the proper decision. Operator: We will now take the next question from the line of Chris Leonard from UBS. Christopher Leonard: Yes, hopefully you can hear me. Just digging in maybe on the margin differential again between North America and Europe. And I wonder Electrification division for Q3 if weakness in Europe was dragging margins down? And could you maybe speak to the potential for you to bridge the gap in the future and grow European margins? And is there anything in your strategy you're looking at to try and improve that? And maybe is M&A into '26 or '27 an avenue that you would pursue within Europe? Massimo Battaini: Yes. You're right, there is a significant difference in and between North America and Europe. Why in other regions, for example, a time a similar margin to U.S. So -- but Europe is not one margin fits all. It's a strong margin in the Nordics, weaker margin in the South Europe. Now how to bridge this gap? We are trying to implement similar mindset as the one we have in Encore Wire, also in Europe. So to leverage -- or to value the service more than the other part of the factory. So to make sure that we become more appreciated by customer for the short-term lead time, for the short-term service than anything else. Differentiation in sustainability and innovation in this space is also important. We have guide to cover, and we are really working across all drivers -- fixed cost organization, factoring footprint and possibly consolidation of the market in Europe to bridge this gap. Bear in mind, there is a structural difference between the fragmentation of the U.S. market, which is minimum and the fragmentation of the European market, which is extremely large, both on customer side and supply side. But we are working hard to reduce and minimize as possible as we get. Hope I answered your question, Chris. Operator: We will now take the next question from the line of Akash Gupta from JPMorgan. Akash Gupta: I got a couple as well. The first one is the clarification on your remarks earlier. I think you said that Encore had all-time high margins. And clarification, is this all-time high since you acquired or in their history? And given question -- given in 2022, they made more than 30% EBITDA margin. So just wondering if you can provide some context to these record margins at Encore? Massimo Battaini: Thank you, Akash. There is an important clarification of cash. Yes, you're right. This is not the all time ever. It's no time not since we acquired, it's no time since the level of EBITDA margin at Encore normalized, level of margin at Encore normalized after the spike in '22 and '23 towards the end of 2023. And since then, so let's say, quarter 4 '23 onwards, we had this kind of a stable EBITDA margin of 15% with some peaks and troughs, especially in 2025. So the EBITDA margin highest ever mentioned quarter 3 is the highest since quarter 4, 2023. Akash Gupta: And my second question is on your guidance range. I think if you recall last year, you had a bit of softness towards end of the year in Electrification because of some weaker volumes in end of the year, which also continued in early this year as well. So just wanted to understand the framework behind the guidance range that have you incorporated a similar scenario as well for this year? And maybe if you can also talk about what will take you to the upper end of the range and what will need to happen to come at the bottom end? Massimo Battaini: Yes. Thank you, Akash. So yes, you're right. Last year, we had a soft volume performance in November, December due to seasonality, but also due to some shortage in demand. October started very strong in volume. And we have visibility of a part of November. Don't forget that this is a very short-term business. We have weighted the month and we gained the orders of the month through the month itself. But prospect is positive, probably volume in October is the first reflection of some slowdown in cable imports, so that there is more demand for local producer. Volume is positive. We think that quarter 4 this year will also be extremely satisfactory versus quarter 4 last year. And so this expectation for quarter 4 I&C has played an important role in the guidance of a grid, but also the performance of Power Grid that at the global level, was in the quarter, 14% organic growth, by North America much more. And the growth we expect to see from North America in quarter 4 is in line with what we've seen in quarter 3. So also Power Grid U.S. has played its important role in convincing us to upgrade the guidance to a midpoint '24. And we think we will end up around the midpoint. So to be in the top part of the range we have to think of something that we don't think is realistic. So an extremely important shift change in the market to a local producer, importers decided to work away pricing going to a different level. So a scenario that we don't see realistic. So the tariff will play an important role benefiting us, but this will gradually kick in, in the market. So I don't see this spike possibly happening in quarter 4. Gradually, we will gain, as I said before, more share of wallet, more relevance and the importers will be neglected. They will be really considered the last resort also because they won't have the only leverage that they had in the past to enter the market, the price. The price will go because the cost they have to bear is immense. So this is how I see how we drafted the guidance and how I see we will end up vis-a-vis the different business movement. Operator: We will now take the next question from the line of Alessandro Tortora from Mediobanca. Alessandro Tortora: I have 3 questions, okay. The first 1 is on the Channell performance on a stand-alone basis. If you can comment a little bit on the organic performance of the company, but also the underlying profitability? This is the first question. The second 1 relates to the around EUR 3 billion net debt indication I got in the conference call. So if you can help understand the underlying assumption on CapEx and also, if you are assuming, let's say, significant advance payment in the last part, I may recall to the [indiscernible]? And then the last question is on the -- let's say, sorry, I don't recall lately, but if you can also give me some ideas on the tax rate level for this year because it was let's say, low in the 9 months and also on the level of financial charges. Massimo Battaini: Channell benefits from the strong rebound of the telecom market. The Channell performance in quarter 3, 2025 is well ahead over quarter 3, 2024 as also North America, our performance in optical cable business, '25 is ahead of that of last year. The market has rebounded. So Channell benefited from organic growth -- benefited organic growth upside, but also profitability side, the level of EBITDA that used to be in the range of 40% in 2024 has risen to a more solid 43%, 44% for quarter 2 this year. So we had this twofold the benefit coming from Channell, which, again, given the strong demand of optical business, U.S. supported by use cases like data center and fiber-to-the-home, we believe that it's going to be sustainable in the coming years. I will hand over to Francesco for the NFP, and tax rate question. Pier Facchini: Yes. The assumptions are pretty simple on the EUR 3 billion debt. First of all, let me highlight that the EUR 3 billion debt, of course, assumes -- is based on the treatment of the hybrid bond as equity, just to be very clear on that point, which is according to IFRS. So nothing new, but better to clarify. The assumption is that we are in the midpoint of the guidance of the free cash flow that Massimo highlighted. And of course, in this assumption, there is the down payment of AGL 4, no doubt. By the way, I commented that the reason why we are confident to recover the level of the free cash flow on a full year basis after the drop down to EUR 859 million last 12 months, September is exactly a very strong cash generation of Transmission business, which is more skewed on the fourth quarter than compared to last year. Nothing else on the extraordinary transactions which has been completed. And so this will not impact -- will not have a different impact from the one that you see in September. You are right. The tax rate is very low. The reason why it's very low is a technical reason, I would say, an accounting reason, which once again has to do with the disposal of YOFC, basically, the big gain of EUR 350 million has a pretty low level of taxation. And so I expect this to be stable also in the full year around 22%. It's a good point that you make because it's not certainly our sustainable long-term rate, it would be too naive to be true, Yuri. I go back to the indication that I gave at the Capital Market Day where our sustainable tax rate is more in the -- between 25% and 27%, I would say. And the financial charges are reflecting, obviously, the acquisition than in the past. The new financing are progressing quite steadily at EUR 70 million, EUR 70-something million a quarter. So an easy projection is in the region of EUR 285 million, let me say, between EUR 280 million to EUR 290 million for full year versus the EUR 216 million year-to-date September. Operator: We will now take the final question from the line of Xin Wang from Barclays. Xin Wang: I'm not sure if I'm the only one confused here, but I want to clarify one thing. So on the tariff impact, I think you explained how the aluminum tariff works, which is in July, it's applied to metals, not to cable. Therefore, you saw cost pressure in July. And then by 16 or 18th of August, is expanded to cables and you saw the best margin of Encore. And then you said we expect the same logic to apply to copper. Does this mean that we haven't really seen the tailwind from the copper side this quarter yet? And do you expect this to come in the coming quarters, please? Massimo Battaini: Yes, you are totally correct. The 232 section tariffs applied to metal has been expanded to import cables as far as aluminum cables is concerned from 18th of August, and our interaction with the administration suggests the same logic will apply to copper. This will probably take another quarter to be implemented. So we expect this to happen from somewhere in quarter 1, 2026 onwards. Then, of course, the copper space is not that relevant as aluminum space. So 80% of the aluminum I&C market is in the hand of importers. In terms of copper wire market, they are barely importing copper cable in U.S. in electrification, in I&C, but there are cable imported into the U.S., copper made in middle-market space and by distribution in HVAC. So we will not see a significant benefit of the total tariffs applied to import cables in I&C space, we will see some benefit in Power Grid and high-voltage should this approach be implemented at some point in the coming months. I hope I clarified the difference between the 2 family of products, aluminum and copper. Xin Wang: Yes. No, the first part is very clear. The second part, I just want to clarify, this is what I heard. Potentially, when we look at the benefit from copper and aluminum tariffs being on the I&C front or the Power Grid or Transmission front, you expect aluminum imports to be a more structural benefit that takes some time to flow through. Obviously, part of that is because aluminum import penetration is higher than copper and also is less exposed to the spot market. Massimo Battaini: Yes, correct. So the aluminum space -- I mean, aluminum cables are lighter than the copper cable. That is why U.S. is importing as other regions are importing more aluminum cable than copper cables. The aluminum space is inside the electrification space and that's the construction. The aluminum cables are also inside the Power Grid. For example, overhead lines are mostly made of aluminum conductors. And so a chunk of our transmission business that we own in U.S. compete head-to-head with importers bringing overhead transmission line from India, from China and other countries. And now also these importers that entered into the Power Grid space through overhead transmission line will feel the extra cost of the 50% tariff applied to metal content. And the conductor lines is only made of conductor, not insulation. So there are other benefits to come through. But again, I really suggested to pause a bit on tariff, it's not too big of a deal. We just had finally settlements in aluminum that will be copy pasted by copper approach in the next months, we will really need a few months to gauge the entire benefit. But be aware that we are really structurally poised to benefit from it. We have capacity available. We have a larger engagement with all major distributors and utilities in the U.S. So we have a strong connection with all customers. So we will be the beneficiary of the tariffs in a way or the other. And this is already starting to open in August and September for the I&C space, and this will carry on in the future. Xin Wang: It is very clear. We can totally afford to be a little bit more patient. My last question is on the high-density fiber cable and system. You talked about the opportunity out there because your peer Corning obviously is also talking about the same thing. I know you have made a technical breakthrough. But you -- but do you -- can you already share some thoughts on if there is any customer dialogue starting already? Or how do you think about the investment that is required out there? And on top of this, I think you made progress with Channell acquisition, but you previously also said you intend to grow -- to expand the portfolio offering on Digital Solutions. Do you have any progress to share, please? Massimo Battaini: So we keep working on innovation and Corning does the same, of course. So we have extremely -- we think that we have at least two breakthrough vis-a-vis Corning, but please don't make me share what we think of the other competitors. We have strong effort in innovating in fiber making very thin fiber solution and very compact cable solution. We're working on the local fiber, which is a new generation of fiber to increase speed of transmission of data, which is key for data center rollout. And we're working on very super compact cables that is also key for data center because there are little spaces in ducts, and they want to squeeze as many fiber as possible in the short space. So innovation is our key driver of profitability and volume and share enhancement in Digital Solutions space. You mentioned also Channell. Channell give us a range of products in connectivity and is completely complementary to that we are in Europe. And so now we will do a cross-selling. We would like to use the Channell product and sell them in European market using our go-to-market channels and do the opposite, the complementary use in our European portfolio connectivity and bring it to U.S. benefiting from the Channell to the market that Channell has. So the go-to-market Channell, Channell is go-to-market that this company we acquired has, which we didn't have before. So cross-selling our connectivity ranges, European one in U.S. and U.S. one in Europe is what we expect to deliver to our EBITDA in the coming quarters. Operator: We will now take the next question from the line of Luigi De Bellis from Equita SIM. Luigi De Bellis: Just one quick question for me. Could you share your current strategic view on the submarine telecom business? So are there any plans to renew the interest in expanding or investing in this area, considering market trend or potential synergies, if any, with your existing transmission and telecom activities, but also different business model, if I'm not wrong, so if you can share some view, please? Massimo Battaini: Let me share what I can because talking about strategy -- strategic decision, I cannot share much. We have a business inside the Transmission space, that is a telecom submarine. We are a small player because we can only play in regional connections, so short length, submarine telecom connection. We noticed that the market has certainly increased a lot in size because the data center expansion plays a significant role in expanding the market between -- especially in terms of long-haul submarine telecom interconnects, so planting interconnects between U.S., Europe and so on. Some players, the key players in the market have neglected the regional space. So we are thinking of expanding our presence in our portfolio in the regional, so short distance, midsized, short distance submarine telecom connection through organic moves and additional investments. I have to stop here. But we want to make this another opportunity for supporting transmission growth with another stream of revenues, more solid and more growing than what we are currently in our portfolio. I hope I gave you the sense of the strategic direction without giving too many details. Operator: There are no further questions at this time. I would like to hand back over to Massimo Battaini for closing remarks. Massimo Battaini: So thank you for your time and for your attention. We really want to give the sense of what's happening, a strong quarter and by more than some quarter a good selling for quarter 4 and what we think is going to turn out for us an opportunity in terms of Channell, organic growth, transmission growth in the coming quarters. So thank you very much for your time, and talk to you soon. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to Gilead's Third Quarter 2025 Earnings Conference Call. My name is Rebecca, and I'll be today's host. [Operator Instructions] Now I'll hand the call over to Jacquie Ross, Senior Vice President of Treasury and Investor Relations. Jacquie Ross: Thank you, Rebecca. Just after market closed today, we issued a press release with earnings results for the third quarter of 2025. The press release, slides and supplementary data are available on the Investors section of our website at gilead.com. The speakers on today's call will be our Chairman and Chief Executive Officer, Daniel O'Day; our Chief Commercial Officer, Johanna Mercier; our Chief Medical Officer, Dietmar Berger; and our Chief Financial Officer, Andrew Dickinson. After that, we'll open the call to Q&A, where the team will be joined by Cindy Perettie, the Executive Vice President of Kite. Let me remind you that we will be making forward-looking statements. Please refer to Slide 2 regarding the risks and uncertainties relating to forward-looking statements that could cause actual results to differ materially. With that, I'll turn the call over to Dan. Daniel O'Day: Thank you, Jacquie, and good afternoon, everyone. We appreciate you joining today as we take you through another very strong set of quarterly results. Our third quarter earnings underscore the growing momentum you're seeing from Gilead today, which is driven by our strong portfolio and the impressive execution of our teams. As you'll hear during the call, our progress is visible in both our quarterly results and in our strong clinical pipeline. Highlights of our third quarter include commercial outperformance across our HIV therapies and Livdelzi. This resulted in 6% year-over-year growth for Biktarvy, 20% year-over-year growth for Descovy and 35% sequential growth for Livdelzi. Disciplined operating expense management contributed to 22% year-over-year growth in non-GAAP EPS. Even excluding a $0.25 benefit from a nonrecurring accounting item, non-GAAP EPS grew 10% compared to 4% base business growth year-over-year, highlighting the leverage in our business model. As a reflection of our strong performance year-to-date, we are increasing our full year HIV revenue growth expectations to approximately 5%. This is despite the $900 million headwind for our HIV business in 2025 associated with the Medicare Part D redesign. Our newest addition to the HIV portfolio, Yeztugo for HIV prevention, delivered third quarter sales of $39 million or $54 million, including the first few weeks of launch in June. Of course, our initial priority has been securing payer coverage, and I'm very pleased to share that we've already achieved our 75% coverage goal, nearly 3 months ahead of our target. This sets a strong foundation for continued growth in 2026. Our confidence in our HIV business comes from both our existing on-market product leadership and our innovative pipeline. We look forward to sharing progress on one of our next-generation HIV treatments before the end of the year with an update on the ARTISTRY-1 and ARTISTRY-2 studies. These Phase III programs are evaluating an investigational single-tablet regimen of bictegravir and lenacapavir, and we continue to target a product launch in early 2027. As I mentioned, Livdelzi was a standout of the quarter, contributing to 12% year-over-year growth in our liver portfolio. Livdelzi exceeded $100 million in quarterly sales for the first time and is already the #1 treatment for second-line PBC in the U.S. We're also pleased to share that we have filed for FDA approval of bulevirtide for the treatment of chronic hepatitis delta virus. This therapy has been available in Europe since 2020 under the brand name of Hepcludex, and we expect to bring it to patients in the U.S. in 2026. Turning to oncology. We continue to make significant clinical progress, most recently with the presentation of our ASCENT-03 detailed data at ESMO and simultaneous publication in the New England Journal of Medicine. Given the particularly aggressive nature of this disease, we are moving as quickly as we can to bring Trodelvy to first-line metastatic triple-negative breast cancer patients. We have submitted sBLAs with the FDA and are targeting a potential commercial launch in 2026 that could extend Trodelvy's leadership in breast cancer. We also continue to target commercial launch for anito-cel for multiple myeloma in 2026 and look forward to sharing an update from the pivotal iMMagine-1 study before the end of this year. In summary, we are very pleased with our performance in the third quarter, building on a very strong 2025 overall. And just as importantly, we have significant potential ahead. The quality, breadth and diversity we built into the portfolio over the past years is now presenting us with multiple opportunities to drive benefits for patients. With several just launched or soon-to-be launched products across HIV, oncology and liver disease and clinical readouts on the horizon with further commercial potential, this continues to be an exciting phase of growth. The fact that we now have no major LOEs until 2036 reinforces our strong position. My thanks as always to the Gilead team for their incredible work this quarter and their continued dedication to doing more for the communities we serve. With that, I'll hand it over to Johanna. Johanna Mercier: Thanks, Dan, and good afternoon, everyone. I'm pleased to share our third quarter results, representing another strong quarter of commercial execution with exciting momentum in our most recently launched products, Yeztugo and Livdelzi, in addition to continued robust Biktarvy and Descovy growth. Starting on Slide 7. Third quarter product sales, excluding Veklury, were $7.1 billion, up 4% year-over-year and up 2% sequentially, driven by strength across our HIV portfolio, offset in part by lower oncology revenue. Including Veklury sales of $277 million, third quarter total product sales were $7.3 billion, up 4% sequentially and down 2% year-over-year, primarily reflecting lower Veklury sales associated with fewer COVID-19-related hospitalizations. Moving to Slide 8. HIV sales of $5.3 billion, represented 4% growth versus prior year and prior quarter, primarily driven by higher demand and favorable inventory dynamics, partially offset by lower average realized price. Year-to-date, our HIV business has grown more than 5%, which is particularly impressive as we managed through a $900 million headwind for the full year related to the Medicare Part D redesign. Consistent with our performance year-to-date, we are increasing our guidance for full year HIV revenue growth to approximately 5%, up from 3% last quarter. On Slide 9, Biktarvy sales of $3.7 billion, were up 6% year-over-year and 4% sequentially due to higher demand, reflecting continued market growth of 2% to 3% and strong commercial execution. Biktarvy's year-over-year market share in the U.S. has grown every quarter since launch and achieved a record high of approximately 52% in the third quarter. Given Biktarvy's clear differentiation and market leadership, we're pleased that the expected loss of exclusivity in the U.S. for Biktarvy has been extended into 2036. Moving to Descovy. Third quarter sales were a record $701 million, increasing 20% year-over-year, primarily due to higher demand for Descovy for PrEP. Sequentially, sales were up 7%, driven by higher demand and average realized price due to channel mix, partially offset by inventory dynamics. As a reminder, roughly 3/4 of Descovy sales are for HIV prevention. This highlights the incredible momentum in the prevention market driven by the growing awareness and increasing unrestricted access as well as excellent commercial execution. Descovy for PrEP achieved a new record market share of more than 45% in the U.S. in the third quarter. This reflects the strength of our PrEP team and the impact they're having in ensuring HIV PrEP reaches more of the people who could benefit from it. Overall, the PrEP market grew approximately 14% year-over-year. Moving to Slide 10 and 1 quarter in, we are really excited with the initial positive reception to our Yeztugo launch across consumers, clinicians and payers. Yeztugo is increasingly recognized in clinical guidelines, including most recently the U.S. CDC. This strong endorsement of Yeztugo offers healthcare providers, public health leaders and communities clear guidance on an innovation that could help shift the trajectory of the HIV epidemic. As we've discussed previously, expanding payer coverage is a critical indicator in our initial launch, and we're working with every payer to accelerate access. I am thrilled that we have already achieved 75% access in the U.S., almost 3 months ahead of our target. This includes coverage by UnitedHealthcare and Express Scripts as well as 20 of the top 25 state Medicaid plans. In most cases, payers do not require prior authorizations or co-pays. Keep in mind that much of our progress to the 75% access goal has been made in the last several weeks. We continue to work on an account-by-account basis to help clinicians navigate the new logistics and reimbursement process and the benefits of this access will pull through in 2026. Looking forward, we're moving quickly to expand access beyond 75% and continue to target 90% by the end of the first half of 2026. Altogether, Yeztugo is off to a strong start, delivering $39 million in sales in the third quarter. From launch in the middle of June to the end of the third quarter, Yeztugo revenue was $54 million, including $15 million of new launch-related stocking at the end of the second quarter. As we expected, most early prescribers are existing HIV PrEP clinicians who are leveraging white bagging to simplify the logistic and reimbursement arrangements. In August, the European Commission approved lenacapavir for PrEP under the name Yeytuo. We look forward to further regulatory decisions across other geographies. Additionally, as part of our broader commitment to access, Gilead has agreed with the global fund and the U.S. State Department through PEPFAR to supply enough doses of lenacapavir for PrEP to reach up to 2 million people over 3 years in certain low and lower middle-income countries. Moving to liver disease on Slide 11. Sales of $819 million, were up 12% year-over-year and 3% sequentially, driven almost entirely by Livdelzi for primary biliary cholangitis. Livdelzi grew 35% sequentially, driven by strong commercial execution, including some new launches outside the U.S. and withdrawal of a competitor's product in the U.S. We are particularly pleased to see strong levels of persistence among users and believe Livdelzi shows clear differentiation and value to those with PBC. Livdelzi is now the market leader in second-line PBC in the U.S. and quarterly revenue topped $100 million for the first time. Moving to Slide 12. Trodelvy sales of $357 million, were up 7% year-over-year, primarily due to higher demand and down 2% sequentially with higher demand offset by unfavorable inventory dynamics and lower ex U.S. average realized price. Trodelvy's continued strength in the U.S. and international markets across metastatic breast cancer more than offset on a year-over-year basis, the expected impact from the bladder cancer withdrawal in the U.S. With Trodelvy's potential launch in first-line metastatic TNBC following the potentially practice-changing ASCENT-03 and ASCENT-04 readouts this year, we look forward to expanding the options available for patients in this earlier line setting. There are almost twice as many patients in the first-line metastatic setting compared to second line and patients typically have a longer duration of therapy. For cell therapy on Slide 13 and on behalf of Cindy and the Kite team, third quarter sales of $432 million, were down 11%, both year-over-year and sequentially with continued competitive headwinds from in and out of class therapies. We anticipate these headwinds to continue in the near future. We remain committed to increasing the adoption and utilization of cell therapies given their curative potential for many patients. Year-to-date, we've added more than 40 authorized treatment centers and now have more than 570 globally. As shared in prior quarters, our efforts to lower the hurdles to community adoption are progressing, but it's clear that we have more to do before all eligible patients have the opportunity to benefit from these cell therapies. In addition to the team's work to expand the reach of cell therapies, Kite is also progressing its next-generation pipeline to offer similar efficacy with better safety, which would result in enhanced outpatient usage potential. Additionally, we're very excited by the development of anito-cel, which continues to show potential best-in-class safety and efficacy as a BCMA CAR-T therapy for late-line relapsed, refractory multiple myeloma. We look forward to providing an update from the iMMagine-1 study later this year. Wrapping up our third quarter, I'd like to thank the commercial teams who are executing relentlessly across both our in-line portfolio as well as our newer opportunities like Yeztugo and Livdelzi. Looking to 2026, we're preparing for a number of additional potential launches across our therapeutic areas of focus and are excited by the opportunity to extend our reach and impact on the patients and communities we serve. And with that, I'll hand the call over to Dietmar. Dietmar Berger: Thank you, Johanna, and good afternoon, everyone. In the third quarter, the team progressed 56 clinical programs across our three therapeutic focus areas with four additions since last quarter as we advance our research with the most meaningful potential scientific and patient impact into the clinic. Building on Johanna's comments on our Yeztugo launch, we continue to lead HIV innovation with 10 clinical programs across treatment and prevention. Lenacapavir and its prodrugs are foundational in our treatment and prevention programs. And in July, we initiated the registrational Phase III PURPOSE-365 trial evaluating lenacapavir as HIV prevention with once yearly injections. This is a single-arm PK and safety study, which, along with the unprecedented efficacy seen in the Phase III PURPOSE 1 and 2 studies is expected to support a regulatory filing with potential for approval in 2028. Moving to treatment. We have seven ongoing clinical programs evaluating daily, weekly, monthly, quarterly and twice yearly regimens based on lenacapavir or one of its prodrugs. Beginning with our next-generation daily oral regimen, BIC/LEN, we continue to expect an update from our Phase III ARTISTRY studies later this year. ARTISTRY-1 and ARTISTRY-2 are evaluating the potential of Gilead's investigational complete regimen that combines bictegravir, the key integrated inhibitor in Biktarvy and lenacapavir, our breakthrough capsid inhibitor. The regimen is a potential option for virologically suppressed people with HIV, including many people currently on complex regimens. Further, we have a suite of long-acting oral and injectable agents in development for a range of dosing frequencies from once weekly oral to twice yearly injectables. Our strategy has been to set up our pipeline for multiple shots on goal and then choose the best option for each dosing frequency. Notably, for our development of a twice yearly treatment regimen combining a novel integrase inhibitor with lenacapavir, we took two INSTI agents to Phase I, GS-1219 and GS-3242. Aligned with the guidance we shared at our HIV Analyst event last year, we have now chosen to prioritize the development of GS-3242 over GS-1219, and we expect to share more details on GS-3242 at a Virology Conference in 2026. On Slide 16, I'm pleased to highlight that we have completed the BLA filing for bulevirtide in chronic hepatitis delta virus or HDV. We're excited by the potential to bring bulevirtide to HDV patients in the U.S. with a potential regulatory decision in 2026. As a reminder, HDV affects approximately 2% of patients with HBV or about 40,000 people in the U.S. Patients with chronic untreated HDV infection can experience accelerated development of cirrhosis or severe scarring of the liver and have higher risk of liver cancer and potentially end-stage liver disease and failure. Beyond bulevirtide, we are also evaluating next-generation approaches to HDV treatment. Specifically, we have advanced GS-4321, a pre-S1 neutralizing antibody into Phase I clinical development. We believe GS-4321 has significant potential given its preclinical safety profile and long half-life with potentially quarterly subcutaneous dosing. Moving to Trodelvy on Slide 17. Earlier this month at the ESMO meeting, we presented detailed potentially practice-changing Phase III ASCENT-03 data in first-line metastatic triple-negative breast cancer patients who are not candidates for PD-L1 inhibitors. Specifically, Trodelvy demonstrated a 9.7 months median progression-free survival compared to 6.9 months for standard of care chemotherapy. This reflects a statistically significant and clinically meaningful 38% reduction in disease progression or death versus standard of care chemotherapy. As we expected when we initiated the study, the median overall survival data are not yet mature. These results were simultaneously published in the New England Journal of Medicine. Additionally, the detailed results from ASCENT-04 were shared at the ASCO meeting in May. These data, combined with ASCENT-03, highlight the potential for Trodelvy to be a backbone treatment across first-line metastatic triple-negative breast cancer. Based on these positive Phase III updates from ASCENT-03 and 04, we have submitted two supplemental biologics license applications for Trodelvy in first-line metastatic TNBC and expect regulatory decisions in 2026. This is incredibly important for patients as metastatic TNBC is the most aggressive subtype of breast cancer with limited treatment options and poor prognosis. Historically, progress in first-line therapy has been minimal and nearly half of patients do not progress beyond first-line treatment, meaning they may never access Trodelvy if it remains a later-line option. Similarly, we are currently exploring Trodelvy for first-line post-endocrine hormone receptor positive HER2-negative metastatic breast cancer patients in the Phase III ASCENT-07 trial. We now expect to provide an update from this trial before the end of the year. On Slide 18, we are highlighting overall survival results shared at ESMO earlier this month from Arm A1 of the Phase II EDGE-Gastric study, evaluating domvanalimab, our Fc-silent anti-TIGIT plus zimberelimab and chemotherapy in patients with locally advanced unresectable or metastatic upper gastrointestinal cancers. In the 41 patients who received a novel regimen in this analysis, the median overall survival was 26.7 months. These findings were simultaneously published in Nature Medicine. These data are in a small number of patients. Survival results for this patient population still need to be confirmed in our ongoing Phase III STAR-221 trial evaluating domvanalimab plus zimberelimab and chemotherapy in patients with metastatic upper gastrointestinal cancers. We continue to expect an update from the event-driven STAR-221 trial in 2026. We also continue to develop domvanalimab plus zimberelimab and chemotherapy in first-line metastatic non-small cell lung cancer in the Phase III STAR-121 trial. Moving to cell therapy on Slide 19. And on behalf of Cindy and the Kite team, you can see that we have strengthened our in vivo capabilities. The in vivo cell therapies are potentially off-the-shelf products that could shorten the time it takes to treat patients and are also expected to have more simplified and cost-effective manufacturing processes. Given these potential advantages over autologous CAR-T, we believe in vivo could unlock broad access to cell therapies. With that in mind, we have welcomed the Interiors team into the Kite family, adding a novel in vivo platform and a strong IP portfolio. We have also entered into a new research and licensing collaboration with Pregene Biopharma. It's early days for in vivo, but we're excited to accelerate our exploration of the opportunities these technologies could bring to patients. As we step up our investment in, in vivo therapies, we remain committed to our current Yescarta and Tecartus portfolios. For example, FDA recently granted priority review for Yescarta in primary CNS lymphoma with a PDUFA date in February 2026. Primary CNS lymphoma is a rare, yet aggressive subtype of non-Hodgkin's lymphoma that affects the central nervous system. Additionally, CD19 CAR-T products, including Yescarta, have recently received a Category 2A recommendation from the NCCN for Richter's transformation. We are pleased with these review and guideline decisions, which will provide HCPs with additional opportunities to prescribe Yescarta. For our next-generation CAR-Ts, we look forward to sharing Phase I data from KITE-753 and KITE-363 in lymphoma at an upcoming medical congress later this year as well as pivotal Phase II initiation of KITE-753 for third-line large B-cell lymphoma in the first quarter of 2026. In autoimmune diseases, KITE-363 is enrolling patients for its Phase I trial in rheumatology and a Phase I study in neuroinflammatory conditions is expected to start in the first quarter of 2026. We look forward to providing updates from these earlier-stage programs. Together with our partner, Arcellx, we plan to share additional follow-up data from the pivotal iMMagine-1 trial of anito-cel at an upcoming medical meeting. We continue to believe anito-cel has the potential to offer a best-in-class efficacy and safety profile for patients with relapsed and/or refractory multiple myeloma. The target commercial launch in fourth-line plus relapsed and/or refractory multiple myeloma remains in 2026. On Slide 20, I will quickly highlight the key milestone updates. First, we have received European Commission marketing authorization of Yeytuo and remain on track to provide updates for our Phase III ARTISTRY-1 and ARTISTRY-2 trials for BIC/LEN and for our pivotal Phase II iMMagine-1 trial for anito-cel in the fourth quarter. Finally, we now also expect ASCENT-07 data in the fourth quarter. With that, I'll turn over the call to Andy. Andrew Dickinson: Thank you, Dietmar, and good afternoon, everyone. Starting on Slide 22. Our third quarter results showed continued strong execution across the company. Our base business was up 4% year-over-year to $7.1 billion, driven by growth in Biktarvy, Descovy and Livdelzi. Veklury sales were down 60% year-over-year to $277 million, which continue to reflect fewer COVID-related hospitalizations. Including Veklury sales, total product sales were $7.3 billion. Moving to Slide 23. You can see we benefited from a $400 million contribution in royalty, contract and other revenues in the third quarter. This relates to an IP asset sale from 2018. Given we are now able to reasonably estimate future royalty and milestone payments, we are required to recognize this revenue in the third quarter. This is a nonrecurring accounting item and does not reflect cash received during the quarter. As a reminder, this contribution was not part of our product sales and therefore, did not impact our product gross margin in the third quarter, but it does otherwise flow through to the bottom line, contributing approximately $0.25 after tax. Moving to our non-GAAP results on Slide 24. Third quarter product gross margin was 86%, in line with 87% in the third quarter of 2024. R&D expenses of $1.3 billion, were down 3% compared to the third quarter of 2024. Year-to-date 2025 R&D expenses were $4.1 billion, in line with 2024, suggesting we are on track for our full year goal. Acquired IPR&D expenses were $170 million in the third quarter, including a $120 million upfront payment to Pregene for a research and licensing collaboration in the in vivo cell therapy space. SG&A expenses of $1.4 billion, were down 4% compared to the third quarter of 2024, modestly lower than we expected due to the timing of spending. Third quarter operating margin was 50%, reflecting the continued focus on operating expense discipline and leverage. The non-GAAP effective tax rate was 18% this quarter, slightly below our expectations due to a $79 million tax settlement. And finally, non-GAAP diluted EPS was $2.47 for the quarter. Excluding the $400 million nonrecurring other revenue, non-GAAP diluted EPS would have been $2.22 for the third quarter. Moving to our full year guidance on Slide 25. We are raising the low end of our product sales range by $100 million to reflect our strong performance year-to-date. As a reminder, the $400 million included in our royalty, contracts and other revenue in the third quarter does not impact our full year guidance as we do not guide to total revenue. We now expect total product sales, excluding Veklury, to be between $27.4 billion and $27.7 billion, primarily reflecting higher HIV growth. Driven by the outperformance of both Biktarvy and Descovy year-to-date, we now anticipate our HIV franchise will grow approximately 5% year-over-year versus our prior guidance of 3%. Consistent with last quarter, I'll note that our assumptions for the impact of the Medicare Part D redesign remain unchanged from the beginning of the year, and we continue to expect approximately $900 million of impact to our HIV business in 2025. Our 2025 assumptions for Yeztugo also remain unchanged, and we remain very encouraged by the launch so far, particularly the accelerated time line for payer coverage. In other parts of our business, strength in HIV is expected to be partially offset by weaker cell therapy estimates, where we now forecast approximately a 10% decline for full year 2025 versus full year 2024. For Veklury, we continue to expect full year revenue of approximately $1 billion. As a result, total product sales are anticipated to be in the range of $28.4 billion to $28.7 billion. As noted earlier, this reflects a $100 million increase at the low end of the range from our previous guidance. Finally, we continue to expect the impact of known tariffs to be manageable in 2025. Moving to the rest of the P&L. There is no change to our prior non-GAAP guidance for product gross margin, R&D and SG&A expenses. We continue to expect product gross margin of approximately 86%, R&D expenses to be roughly flat on a dollar basis from 2024 and SG&A expenses to decline by a mid- to high single-digit percentage compared to 2024. Similar to last year, we expect a step-up in both R&D and SG&A expenses in the fourth quarter, reflecting normal end of year trends. We have updated our IPR&D expectations for the full year to reflect our actuals through the third quarter and our known fourth quarter commitments, including $300 million relating to the Interius acquisition. We now expect full year acquired IPR&D to be $900 million. Rounding out the P&L, we expect operating income to be between $13.1 billion and $13.4 billion, reflecting an increase of $100 million at the low end of the prior guidance range. We continue to expect our effective tax rate to be approximately 19%. And finally, we expect non-GAAP EPS in the range of $8.05 and $8.25, raising non-GAAP EPS by $0.10 at the low end of the range. GAAP EPS is expected to be in the range of $6.65 to $6.85. On Slide 26, our capital priorities remain unchanged, and we returned $1.4 billion to shareholders in the third quarter, which included $435 million of share repurchases. These repurchases are intended to offset equity dilution at a minimum, but can also be used opportunistically as you've seen in the first 3 quarters of 2025. Overall, we are pleased with the strong performance this quarter, highlighted by our clinical and commercial execution and supported by our disciplined operating model. We continue to be well positioned for near-term and long-term growth, and we remain focused on delivering on our strategic commitments. With that, I'll invite Rebecca to begin the Q&A. Operator: [Operator Instructions] First question comes from Geoffrey Meacham at Citigroup. Geoffrey Meacham: Congrats on the quarter. On Yeztugo, I know it's early. I wanted to see if you had any color on patients switching from Descovy versus those who are brand new to PrEP. And then related, but just looking to the balance of the year, are there any demand drivers that could give you some momentum going into 2026? Daniel O'Day: Thanks, Geoff, and welcome. I'll hand it right over to Johanna. Johanna Mercier: Great. Thanks, Geoff. Yes. So we're really excited about the launch so far and really much in line with our expectations of an injectable into an oral market. To your point about where the Yeztugo sourcing is coming from, it's really across the board. So it's more switches, as you'd expect in this marketplace versus naive. But really across the switches, what we're really pleased to see is that we're getting -- the source of business is actually coming from the long-acting injectable currently on the market, also the oral branded such as Descovy, but also oral generics. And so you're seeing a real nice balance mix across the board for switches, and we expect that to continue. And of course, as the market grows and continues to grow and the awareness of Yeztugo increases, we also believe that the naive patient population will also grow with time as well. Operator: Our next question comes from Umer Raffat. Umer Raffat: Quick question. I noticed a $39 million sales number in 3Q. And I'm trying to make sense of it. By my rough math, it sounds like about 3,000 patients initiated in 3Q. Is that consistent with how you see it? And I ask because IMS was implying something like 2,300 patients. So I'm just trying to get a sense of it all. Johanna Mercier: Thanks, Umer, for the question. Maybe I'll give a little bit more context to Yeztugo in light of your question. And not that we've been sharing patients per se, but we do have year-to-date about -- year-to-date as of the Q3 quarter, about $54 million in sales. Some of that was in early June, right -- in late June for inventory purposes, about $15 million of that. And we've really seen that inventory flow through. So there's really no more stocking left in the system. We've been tracking a lot of different indicators to make sure that we -- our launch is on the right track. And so we're really excited because we see the access piece as one of the most important indicators for the future and meeting the 75% coverage for access almost 3 months ahead of schedule with very limited prior auths and basically 0 co-pays, it really sets us up nicely actually as you think about 2026 and beyond. The UnitedHealth, ESI, many other commercial plans are on board. We have about 20 out of the 25 large PrEP states for Medicaid. That represents just over 80% of the PrEP Medicaid volume. So that's really been our focus. And of course, the J-code coming on as of October 1, all of this would support buy-and-bill modeling as well. And so these access wins are recent. Obviously, it's going to take a little bit of time account-by-account to pull it through and integrate it within the practices. But I think it really provides that platform for us to accelerate the uptake for Yeztugo. We've also seen conversion rates basically from script to approval really dropped dramatically. And so we continue to focus on the logistics to make sure we get the drug and the patient schedules aligned shortly after the reimbursement approval. And so I would say from an overall standpoint, super pleased about the -- what we track are the intakes, the access, HCP awareness and interest, the conversion rates that I just referred to, and everything is going in the right direction. So we do expect full year Yeztugo sales of around $150 million or so, including the $54 million year-to-date. So hopefully, that gives you a bit of perspective. And then as you get the full year, you can have a better understanding of patient numbers. Operator: Our next question comes from Mohit Bansal. Mohit Bansal: Congrats on all the progress. Switching a little bit to HIV treatment. Now that you are guiding for 5% year-over-year growth, combine that with the $900 million of Part D redesign impact you're taking, does seem like HIV is growing at, what, 9% to 10%. I mean can you talk a little bit about that? How should we think about it going forward given that you have had such an impressive growth this year? Johanna Mercier: Thanks, Mohit, for that. I do agree with you. I think we've had such an impressive growth, and it's really driven by a couple of things. It's driven by the market, both in treatment and in PrEP, and real demand-driven growth, specifically Biktarvy, Descovy are really the ones that are impacting this year's growth. So as you think about Biktarvy growing year-on-year about 6% and this, to your point, is despite Part D redesign and those assumptions have not changed. And Biktarvy growing at 6 points, but also Descovy growing at about 20%. And if you think about just for PrEP, and if you think about the 3/4 of that product being driven by prevention, you're looking at almost over 30% growth for Descovy, let alone, if you think about HIV prevention at Gilead is over 40%. So both HIV treatment and HIV prevention are really driving the growth. And you could assume that actually if Part D redesign hadn't played out, we would probably be around the numbers you were talking about, 8% to 9%. Operator: Our next question comes from Salveen Richter at Goldman Sachs. Salveen Richter: Could you just comment on the inventory impact for Yeztugo in the third quarter and also how the CVS pricing discussions are progressing? Johanna Mercier: Sure, Salveen. It's Johanna again. A couple of things. One is in the Q3, there's really no inventory buy-in. It really happened in the first 2 weeks -- the last 2 weeks of June, sorry, the first 2 weeks of our launch. And that really got pulled through in the first month of Q3. And then what you're seeing in the 39 is really true demand coming through. So that's the inventory piece of the puzzle. From a CVS access standpoint, payers all have different time lines as to how they make formulary decisions, and we're working with every single one of the payers to make sure we go as quickly as possible to secure access while also ensuring that the innovative value of Yeztugo gets recognized. And so our discussions with the remaining 25% of payers, including CVS, are ongoing, and we're very confident about our ability to reach the goals that we've set forth, which is the 90% at the first year of launch. So we're very confident to -- that we're on track to reach those numbers. Operator: Our next question comes from Evan Seigerman at BMO Capital Markets. Evan Seigerman: Livdelzi continues to perform exceptionally well and appears to be succeeding as a clear strategic fit to your business. Can you just talk to me about the level of appetite for additional BD and liver-focused indications such as NASH? Daniel O'Day: Andy, why don't you start there? Andrew Dickinson: Sure. Evan, thanks for the question. Look, I mean, as we've said, we don't comment specifically on any subsectors. We are looking actively at opportunities across the BD spectrum in all of our areas of strategic interest. That includes liver disease as well as oncology, cell therapy broadly, virology and immunology. And we've said consistently and continue to believe that we would like to add more therapies just like Livdelzi that are best-in-class therapies that serve patients in need on a regular basis. And we would look for those late-stage derisked assets every 2 to 3 years at a minimum to kind of add them to our portfolio. So we're -- when you step back, I think we are really pleased with the size and shape of our portfolio, all of the growth drivers that we have, the additional launches that you heard Dietmar talk about in the prepared -- in his prepared remarks, and we would like to add growth -- additional growth drivers. And of course, we'll be disciplined in doing that. So -- but yes, you should expect that we're going to be looking at deals across all of our sectors, including liver disease. Operator: Our next question comes from Chris Schott at JPMorgan. Christopher Schott: Can I just dig into Yeztugo in 4Q and heading into '26 in a little bit more detail? I mean it seems like you're pointing to a step-up in sales next quarter, but we're getting obviously a lot of coverage. I'm just trying to understand a little bit more about how you're envisioning the shape of the curve. Is this kind of like a gradual acceleration or a bigger step function as we move into 2026. I'm just trying to get, again, a little bit more color on that dynamic. Johanna Mercier: So Chris, it's Johanna. I think that's a fair question. I think what we're seeing is a lot of the access to get up to the 75% goal most recently really happened in the last couple of weeks. And so it's important to understand that those don't turn on just overnight. And so practices need to actually integrate these changes into their working practices. And so we're working with them to make sure that happens. Same thing goes for the J-code. Some people will update right away. Some people update biannually. And so January 1 could be kind of for some that update to really help the buy-and-bill, folks that are interested in buy-and-bill. And so we do believe it's going to be a gradual ramp-up. And then for us, it really sets up the platform for the ramp for Yeztugo in 2026. And so that's what we're kind of focusing on. Operator: Our next question comes from James Shin at Deutsche Bank. James Shin: Johanna, could you just give us an update on Yeztugo's buy-and-bill and white bagging mix? And does reaching this 75% ahead of schedule equate to reaching a bigger portion of white bagging sooner? Johanna Mercier: Sure. So the white bagging and the buy-and-bill, you'd expect -- and if you remember, at our HIV Day in 2024, we did kind of share that it would be heavier to the white bagging and buy-and-bill would build over time, and that's exactly what we're seeing. So much more in -- coming through the scripts are going to specialty pharmacy, going through that process and then white bagging back to the clinic, probably more towards about 3/4 range in the 70% to 80%. And then the rest of that is buy-and-bill. That's not steady state, obviously, and that's going to change over time as people get more comfortable and get in -- and as they integrate the J-code as well into their practice. So all of those things will evolve. But for right now, that's what we're seeing. Operator: Our next question comes from Daina Graybosch at Leerink Partners. Daina Graybosch: Another one on Yeztugo. I mean you've said several times that in the 75% covered lives, you've been pleased by the level of restriction. I wonder if you could give us a little more detail to how much of the lives have prior auths or co-pay or any other restrictions like to certain types of practices, for instance? Johanna Mercier: So what we're seeing thus far, and it's still early, right, because we're trying to see how this all plays out. But most of the plans so far have added Yeztugo to their formulary with zero co-pays. So high 80s, if you're looking for a number and a very few step edits and prior auths. And if they are, they're very simple. And so we do think it's really important. It's one thing to have access. The quality of the access is also very important for us and to make sure that the people who may want or need PrEP can have access to it. And that's very much in line. I mean those goals were set because of Descovy. And Descovy as of September, access is at about 99% of lives covered with about 88% unrestriction, no restrictions. And so that gives you a little bit of a flavor of kind of the direction of where Yeztugo is going. Not there yet, but definitely well on its way. Operator: Our next question comes from Brian Abrahams at RBC Capital Markets. Brian Abrahams: Maybe just another one on Yeztugo. Johanna, can you maybe talk bigger picture about what the patient journey is like here for getting an appointment with the physician obtaining and getting Yeztugo administered? Maybe how that's comparing to your expectations, how that could evolve? And really just wondering like what are the biggest barriers for a patient wanting to switch to do so? Johanna Mercier: Sure, Brian. Happy to do so. And they're changing, right? So I'm going to share with you kind of where we're at, but it's been an evolution even from July on. We're seeing a big difference in the time it takes from prescription. So as a physician writes a prescription for someone for Yeztugo and the prescription goes to specialty pharmacy, for example, and goes through the process, I mean, the approval process used to take over a month. And so it could take 4, 5, 6 weeks. Now it's more than half down from that time frame because the access is starting to play in. But then you also have the piece that you just said, which is then how do you make sure that the logistics play out where you get the approval and make sure that the drug gets to the office at the same time as the patient gets back into the office as well. And so that obviously can take a week or 2, sometimes more depending on the patient's availability and the doctor's availability, of course. And so that's kind of what we're playing out. So that is definitely something that was part of our assumptions. But those conversion rates, both from prescription to approval, but approval to office to injection because that's really when it gets shipped is when it gets captured by IQVIA, for example, that's really what we've been tracking to make sure we minimize that time and support the offices in the logistics of doing so. So we're seeing benefits every single month, and seeing those numbers come down. And obviously, as people get more in tune with the practice, it's going to get easier. On the flip side, I would say buy-and-bill is -- obviously, it cuts out one piece of that because then it's directly within the doctor's office, they get approval, they get product and then they can kind of start -- as buy-and-bill builds, you're going to see a little bit faster turnaround there as well. Hopefully, that helps give you a little bit of a picture of the patient's journey. Operator: Our next question comes from Carter Gould at Cantor Fitzgerald. Carter Gould: I hope you'll indulge me on a relatively short-term minded question here on Yeztugo. But we've seen pretty volatile scripts over here the past couple of weeks. And I guess my question is, are the TRx that we're seeing reflective of what you're seeing? Is that impacted by third-party PrEP campaigns or more standard demand growth or early impacts from the J-code? Any color would be appreciated. Johanna Mercier: Sure, Carter. There's a lot of week-to-week variability with IQVIA versus what we're seeing. Obviously, we track as well. And it really depends on the reports that you're looking at within IQVIA as well. I think it's going to take a couple of quarters for this to stabilize a little bit. I think it's a good directional indicator. And depending on the report, just make sure you're looking at both the SP intakes, but also the buy-and-bill and kind of merging those two pieces together. Those two pieces together, although sometimes accounts are missing, directionally are in line with the overall of what we're seeing. But the volatility with IQVIA is definitely real right now, and I think it's going to take a little while to settle. We've seen that before with other products as well. Operator: Our next question comes from Terence Flynn at Morgan Stanley. Terence Flynn: Congrats on the quarter. Johanna, just wondering if you can comment at all high level about how we should think about overall PrEP market growth. Obviously, it's been very strong the last couple of quarters, 14% this quarter, 15% last quarter. Is that kind of the level we should think about at a franchise for you guys as we head into 2026? Johanna Mercier: Sure, Terence. I think that's the right way to think about it. I think 14%, 15% is the right approach for this market growth. This is obviously fueled by many of us to make sure that there is increased awareness of the options within PrEP. And I think that will continue to be fueled as the noise kind of increases as we go into 2026, whether it's through social media or direct-to-consumer advertising. And so I would assume about a 14% to 15% growth continuing with PrEP. Operator: Our next question comes from Tyler Van Buren at TD Cowen. Tyler Van Buren: Congratulations on the good quarterly results. So for anito-cel, could the filing happen any day or in the very near future? What is left that's required for the filing? And we're excited for the data at ASH, so should the expectation be similar efficacy to Carvykti with improved safety? Or do you believe there's still room to improve on efficacy? Daniel O'Day: Tyler, we'll hand it over to Cindy to give Johanna a break. Cindy Perettie: So with anito-cel, we haven't communicated what our filing dates are nor will we. But what we have communicated is that we're very much looking forward to a launch second half of next year, and we're definitely on track for that. As Dan spoke to and Dietmar earlier, we will be sharing a data cut of anito-cel at ASH. And I would say we're looking forward to sharing that data with everyone. And there's -- you were asking particularly about similar efficacy and improved safety. We continue to see -- we're continuing to be impressed with the safety, we're seeing similar to what we shared at EHA, and we look forward to sharing that data cut at ASH. Operator: Our next question comes from Simon Baker at Rothschild & Co. Simon Baker: Sorry, back to Johanna after that very short break. Back on Yeztugo, I just wonder if you could give us some of your feedback on the patient and physician experience and reaction to Yeztugo. Obviously, your competitor has been suggesting a preference for their product over yours, but I'd be intrigued to hear what you're actually experiencing on the ground. Johanna Mercier: Absolutely. Happy to do so. Yes. So listen, we -- as we look at -- I think you're referring to any ISRs or any injection site reactions, which is kind of normal when you have an injectable. And so that is common with any injection. Having said that, we've done a really nice job, I think, making sure that we educated not only the HCPs, but obviously, everybody in their practice to make sure that they know how to give the injection. They know how to pre and post treat, basically just a short-term ice helps the whole situation. And so we had over 7,000 HCPs that have been trained over 1,500 accounts to date with 98% satisfaction rate with their training. And so this is led by our nurse educator team basically across the board, across the country, making sure we get to every single clinic. And I think that's been incredibly helpful. For those that want to use Yeztugo, we really believe that just with a little bit of information, it can go a long way to make sure that patient and HCP experience is very smooth. Operator: Our next question comes from Courtney Breen at Bernstein. Courtney Breen: I want to, I guess, zoom out a little bit to the White House deals and drug pricing, but particularly in the context of your HIV portfolio and higher Medicaid exposure. Obviously, this year, you've dealt with the Part D redesign and have grown through that. As you're looking at potential flexibility in any sort of deal with this administration on drug pricing, can you give any context to kind of the scale that you're preparing for or your actions or flexibility that you're looking to garner in a deal that might ensure that, that impact is less than what you're experiencing with the Part D redesign this year? Daniel O'Day: Thanks, Courtney. This is Dan. I'll take that one as well, and thank you for the question. So I think it's important to note that we continue to have really ongoing good constructive engagements with the administration across the administration on a number of topics. And I would say a couple of things that -- every meeting that I and the team are in, I think the administration has been very clear that they want the U.S. to remain a leading innovator in the space, in the biotech pharma space. And at the same time, addressing the issues relative to U.S. out-of-pocket patient costs, and having countries outside the U.S. do more to appropriately value innovation. Those are the principles that address our conversations, and I think we're making very, very good progress. Relative to any Gilead-specific information, I can only point to that, that's publicly disclosed. But I would say that recently, we had a -- as a part of an example of this constructive dialogue, we had an announcement with the U.S. State Department related to PEPFAR and our partnership to bring lenacapavir to low and low and middle-income countries. So I think this concept of Gilead's unique role in ending epidemics globally, connecting with administration objectives, whether that be national defense, whether that be any epidemics, is something that I think has been very much appreciated by the administration and continues to be a cornerstone in our conversations. So -- and then I would just lastly, just to remind Courtney, things that we've said in the past. But I would remind you that as we have broader conversations with the agency that -- I'm sorry, with the administration, again, the vast majority of our IP is in the United States. As such, tariffs is related to transfer pricing, may have more of a limited impact on Gilead versus our peers. We recognize more than 80% of our IP in the United States, 90% of our taxes are paid here. We have a strong footprint in the United States. We have almost 100% of our R&D capital infrastructure here. We've committed to significant additional investments in the United States of the magnitude of $32 billion. So these conversations are wide, and I think that we will continue to update you as we have different announcements just like we did with the State Department. But I'd say we feel very good about the constructive nature of them and where they're going. Operator: Our last question comes from Joseph Stringer at Needham. Joseph Stringer: Question on Hepcludex for HDV. You put a lot of effort into getting that resubmitted since the CRL. So I guess, one, what gives you confidence that you'll get approval from FDA this time around? And two, what do you think the market opportunity for the drug is in HDV, just keeping in mind that there are two competitors in Phase III development? Daniel O'Day: Great. So we'll start with Dietmar. Welcome, Dietmar and another quick break... Dietmar Berger: Another quick break. Yes, Joey, thank you for the question. I mean we're not, of course, commenting in depth on the regulatory strategy. But different factors give us confidence. One, we have additional data with regards to how is the medicine injected, what's the experience also that patients would have with the injection. And also, we have really the experience from Europe where the drug is used now for some time, and that gives us additional data from the real-world setting that we can also utilize. So overall, these additional data sets plus then further work on the filing for the U.S. gives us the confidence that we can move forward here. Johanna Mercier: Yes. So maybe I'll just close and talk about the market opportunity. It kind of goes back to the comment that was made earlier about the strategic fit with Livdelzi and how perfect it is. This is kind of the same with Hepcludex. This is -- obviously, these are people that have hepatitis B, and it's very small percentage. It is rare disease. Small percentage of these hep B patients have also hep D, but a much, unfortunately, worsening with liver cirrhosis and potentially even liver cancers and death. And so therefore, important to get to these patients as quickly as possible. And so we do believe that because of our footprint in hep B, it's a really good fit for us to make a difference for these patients across the board. So much smaller, but again, a little change in our footprint overall. So I think that's why we think Hepcludex is important, let alone the unmet need that is out there because there's nothing else out there today. Operator: That completes the time that we have for questions. I'll now invite Dan to share any closing remarks. Daniel O'Day: Terrific. So let me, first of all, thank all of you for joining today. We really appreciate your interest and time. I also would be remiss not to thank the Gilead teams for another great quarter in our growth journey here. And as you've seen, I just want to point this out, strong commercial and clinical execution along with disciplined expense management in a consistent way quarter-to-quarter is what you have seen from us and what you should continue to expect from us. So we believe we're very well positioned as we go into 2026, not only with the current and upcoming product launches that we have today and spoke about a lot today, but also the strong clinical pipeline. And I just want to point out, we have some important readouts coming up in oncology and HIV in this quarter and into next year. I just would remind you again that really, we're in a relatively unique position with no patent expiries before 2036. So for that, I'd like to, again, thank you for your time today. Jacquie and team, as usual, are here to follow up with you on any of the questions that you have. Please don't hesitate to reach out and wish you all a good rest of your day. Thank you.
Operator: Good afternoon. Thank you for attending today's iRhythm Technologies, Inc. Q3 2025 Earnings Conference Call. My name is Jemma, and I'll be your moderator for today. [Operator Instructions] At this time, I'd like to turn the conference over to our host, Stephanie Zhadkevich, the Senior Director of Investor Relations. Please proceed. Stephanie Zhadkevich: Thank you all for participating in today's call. Earlier today, iRhythm released financial results for the third quarter ended September 30, 2025. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. These are based upon our current estimates and various assumptions and reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. These statements involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, filed with the Securities and Exchange Commission. Also during the call, we will discuss certain financial measures that have not been prepared in accordance with U.S. GAAP with respect to our non-GAAP and cash-based results, including adjusted EBITDA, adjusted operating expenses and adjusted net loss. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation of, as a substitute for or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and 10-Q for a reconciliation of these measures to their most directly comparable GAAP financial measures. Unless otherwise noted, all references to financial measures in this call other than revenue refer to non-GAAP results. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, October 30, 2025. iRhythm disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Quentin Blackford, iRhythm's President and CEO. Quentin Blackford: Thank you, Stephanie, and good afternoon, everyone. We appreciate you joining us today. Dan Wilson, our Chief Financial Officer, is with me on today's call. My remarks will focus on our business performance during the third quarter of 2025 and our outlook for the remainder of the year. I will then turn the call over to Dan to provide a detailed review of our financial results and updated guidance for the year. We're pleased to report another quarter of strong commercial momentum, reflecting our disciplined execution and differentiated platform technology. For the third quarter, revenue was $192.9 million, representing year-over-year growth of 31%. This result was driven by record performance in both Zio Monitor and Zio AT, continued success moving monitoring upstream through primary care expansion, penetrating further into innovative health channels and a record number of new EHR integrations that continue to deliver measurable impact. Our competitive differentiators, operational scalability, market access advancements, market expanding innovation, EHR investments and clinical evidence are resonating across the health care ecosystem. Together, these capabilities have enabled us to deliver meaningful impact for patients with iRhythm Services having generated nearly 12 million reports worldwide. Within our core U.S. business, account expansion and system-wide conversions remain robust. We continue to see strong adoption in both hospital and ambulatory settings, supported by our EHR integration strategy and a streamlined digital workflow that improves clinician efficiency. Larger integrated delivery networks are increasingly choosing iRhythm for enterprise-wide solutions, recognizing the clinical and operational value of our scalable platform, enabling full network conversions in a way not previously seen in our company history. Our EHR integration strategy continues to deliver meaningful value as 76 of our top 100 customers are now EHR integrated. We now have 30 systems live with Epic Aura with an additional 65 systems in active implementation or advanced discussions. Epic Aura integrated customers typically see an average increase of nearly 25% in monitoring volume within the first 6 months of going live, reflecting how digital connectivity directly enhances utilization and physician efficiency. We continue to make strong progress expanding into primary care, where upstream use of Zio as a rule-in or rule-out tool supports earlier intervention for improved patient outcomes. This approach helps alleviate specialist bottlenecks, improves physician network efficiency and can allow for more proactive and timely care for the benefit of patients. Clinical evidence remains at the core of our differentiation. At major conferences this year, including ADA, ACC and HRS, new real-world analysis underscores the importance of early detection and monitoring. We consistently see that arrhythmias often precede major cardiovascular events and that proactive monitoring strategies to identify patients earlier in their care pathway have demonstrated significant reductions in emergency visits, shorter hospital stays and lower overall cost of care for patients managed with proactive monitoring. Recent published data further validates our approach. For every 1,000 patients with certain comorbid conditions that are diagnosed with arrhythmias earlier in the care pathway, there is potential for over $10 million in downstream cost avoidance by preventing events that increase health care resource utilization, such as ER visits and hospitalizations. Real-world claims analysis indicates that arrhythmia patients are hospitalized more than twice as often as non-arrhythmia patients. With 2 to 5 extra days of length of stay and ER visit rates more than double compared to non-arrhythmia cohorts. These findings reinforce the strategic importance of proactive monitoring and AI-driven risk stratification, not only to reduce catastrophic events, but to lower the total cost of care. Additionally, the AVALON study published in the American Journal of Managed Care in August, once again confirmed the clinical superiority of Zio's long-term continuous monitoring service, this time in a significantly younger population. In a real-world analysis of more than 400,000 commercially insured patients with an average age of 46 years, Zio demonstrated higher diagnostic yield, faster time to diagnosis, fewer cardiovascular events and lower total health care costs compared to other monitoring approaches. These findings were consistent with the results from the earlier CAMELOT study, which analyzed over 300,000 Medicare patients, reinforcing the strength and reproducibility of our clinical evidence across large diverse populations. Despite this evidence, the fact remains that nearly 2 million short duration Holter and event monitors continue to be prescribed in the U.S. each year, representing a market opportunity of nearly $500 million. Our risk-bearing and innovative channel partnerships have continued to expand, reflecting the growing recognition of the value of proactive monitoring. We now have 18 active partner accounts with a healthy pipeline of additional partnerships currently under discussion. These partnerships enable population health programs generally targeting large undiagnosed arrhythmia populations, particularly individuals living with type 2 diabetes, COPD, chronic kidney disease, sleep disorders and heart failure. Through these programs, we have the potential to prove the value of proactive detection and demonstrating meaningful reductions in hospitalization rates and health care costs. As announced this past July, our partnership with Lucem Health continues to advance clinical AI capabilities by enabling the ability to look across the medical records of large patient data sets and identifying undiagnosed patients at highest risk of cardiac arrhythmias. Early results in pilot settings have been encouraging in terms of the ability to proactively identify with high degrees of accuracy where cardiac arrhythmias exist in these unaware populations, reinforcing the strength of our data-driven approach and our ability to deliver population health insights that improve outcomes for the more than 27 million patients in the U.S. that we believe are living with undiagnosed arrhythmias. As we further validate the accuracy of the predictive arrhythmia solution, we are gathering valuable insight into how to best engage and scale across health systems. We have a number of Tier 1 health systems in active discussions and believe this partnership represents an important step in our strategic evolution from a device-enabled service into a comprehensive digital health platform powered by data and artificial intelligence. The third quarter also set another record for Zio AT with year-over-year unit growth more than double our corporate average. We continue to expand within existing accounts but notably are launching more new accounts with both Zio Monitor and Zio AT from the outset with workflow integration through EHR systems acting as a key enabler to accelerate utilization and improve system-wide physician adoption. In September, we submitted our 510(k) filing for Zio MCT, our next-generation mobile cardiac telemetry solution featuring a smaller form factor, extended 21-day wear, advanced detection algorithms and an improved final wear report. We look forward to continuing to partner with the FDA throughout the review process. Also on the innovation front, we're advancing development of AI prediagnostic and diagnostic pathways for sleep apnea, a chronic condition associated with an increased risk of arrhythmia and cardiovascular disease, particularly amongst undiagnosed individuals. Our internal data suggests that many of existing iRhythm customers are already prescribing home sleep testing and their patients being diagnosed with sleep apnea. Clinical literature has suggested that up to half of patients with AFib have sleep apnea and that the prevalence of AFib increases fourfold in patients with severe sleep apnea. Further, the literature shows that sleep apnea adversely affects AFib treatment outcomes and that outcomes can be improved with treatment of both conditions as well as cardiovascular risk factor modification. Given the meaningful clinical overlap, sleep apnea represents a natural and highly complementary adjacency for our cardiac monitoring platform, reinforcing our ability to expand into adjacent markets that share meaningful clinical overlap. Importantly, by providing broader clinical insights, we can provide the tools to clinicians that have the potential to allow for a more efficient workflow, better patient experience and holistic approach to patient care. Outside of the United States, we continue to advance commercially to drive adoption of long-term continuous monitoring. In Japan, we now have 13 systems live, supported by positive physician feedback highlighting Zio's clear and comprehensive reports, rapid turnaround time and Zio's ability to find arrhythmias that might be missed with other solutions. We are also advancing evidence generation to support potentially differentiated reimbursement with retrospective and prospective studies underway that include head-to-head comparison of Zio versus local Japanese cardiac monitoring devices in local patient populations. With the Japanese Heart Rhythm Society recommendation and high medical needs designation, we are hopeful that this additional real-world evidence will strengthen our reimbursement positioning over time. In Europe, growth in the U.K. private market remains strong, and we continue to grow our presence in the 4 EU countries. Our focus on clinical evidence and key opinion leader engagement is building awareness and credibility across these new markets. The Oxford University led a multi-randomized trial of over 5,000 patients presented at this year's ESC Congress and published simultaneously in JAMA, demonstrated that a remote screening strategy with the Zio long-term cardiac monitoring service led to higher AFib detection rates and faster diagnosis versus usual care and in an older population with more comorbidities compared to prior screening trials, including mSToPS. The data show that just as we have proven in the U.S., primary care initiated home-based monitoring with Zio at scale is feasible and effective, reinforcing the potential for growth in primary care channels in the U.K. and beyond. Overall, our third quarter results demonstrate the operational and financial momentum across iRhythm. We are executing well on our strategic priorities with disciplined execution. While our commercial momentum continues to build, our focus on driving productivity gains and improving efficiencies are allowing us to meaningfully advance our profitability profile at the same time. Importantly, we are now generating positive free cash flow earlier than anticipated and expect this year to be free cash flow positive on an annual basis for the first time in our company's history, reflecting both the strength of our commercial model and the progress we've been making in building a scalable, sustainable and profitable business. With that, I'll turn it over to Dan to review our financial performance in more detail. Daniel Wilson: Thank you, Quentin. As a reminder, unless otherwise noted, the financial metrics that I discuss today will be presented on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release and on our IR website. We delivered another quarter of strong profitable growth in the third quarter with revenue of $192.9 million, up 30.7% year-over-year, combined with an adjusted EBITDA margin of 11.2%. Volume growth was strong across both product lines, driven by continued execution in our core business, sustained Zio AT volume growth and contributions from innovative channel accounts. Pricing also came in slightly favorable due primarily to higher Zio AT product mix. New store growth with new stores defined as accounts that have been open for less than 12 months accounted for approximately 60% of our year-over-year volume growth. Home enrollment for Zio Services in the U.S. remained steady at approximately 23% of volume in the third quarter. Moving down the P&L. Gross margin for the third quarter was 71.1%, an improvement of 230 basis points compared to the third quarter of 2024. This improvement to gross margin was driven by volume leverage and continued benefit from operational efficiencies, offsetting the higher blended cost per unit from increased Zio AT product mix. Third quarter adjusted operating expenses were $141.4 million compared to $143.8 million in the third quarter of 2024. Recall that third quarter 2024 adjusted operating expenses included a $32.1 million charge associated with licensed technology that was recognized as acquired in-process research and development, or IPR&D expense. Excluding that charge, the increase in adjusted operating expenses in third quarter 2025 was primarily driven by volume-related costs to serve and investments to drive future growth. On a normalized basis, adjusted operating expenses as a percentage of revenue improved as a result of thoughtful and intentional initiatives that our teams have implemented to drive sustainable efficiencies while simultaneously investing in growth initiatives and infrastructure investments for future scale. Adjusted net loss in the third quarter of 2025 was $2 million, or an adjusted net loss of $0.06 per share compared to an adjusted net loss of $39.2 million, or an adjusted net loss of $1.26 per share in the third quarter of 2024. Adjusted EBITDA in the third quarter of 2025 was $21.6 million, or an adjusted EBITDA margin of 11.2% of revenue compared to an adjusted EBITDA margin of negative 13.5% in the third quarter of 2024. Excluding IPR&D expenses, adjusted EBITDA margin during the third quarter of 2024 would have been 8.3% versus 11.3% for the third quarter of 2025, an improvement of approximately 300 basis points. Given our strong performance year-to-date and our outlook for sustained growth, we are raising our revenue guidance for full year 2025 to $735 million to $740 million or 24% to 25% year-over-year growth. This outlook contemplates continued strong volume growth as well as a low single-digit pricing tailwind. We continue to anticipate a strong fourth quarter aligned with normal seasonality, but note that our year-over-year growth rate outlook includes a slight deceleration due to the unique strength of our business in the fourth quarter of 2024 as discussed previously. For gross margin, we continue to anticipate full year 2025 gross margin to slightly exceed full year 2024 gross margin as clinical operations and manufacturing efficiencies largely offset impacts from tariffs on global imports. We continue to anticipate approximately 50 basis points of negative impact to gross margin from tariffs for the full year. We are also raising our full year adjusted EBITDA margin guidance to 8.25% to 8.75% of revenues. As discussed in prior quarters, adjusted EBITDA continues to absorb acquired IPR&D expenses, tariff impacts and FDA remediation expense. Finally, we ended the third quarter in a strong financial position with $565.2 million in unrestricted cash and short-term investments. Free cash flow generation during the quarter was $20.0 million, which marks our third consecutive quarter of trailing 12-month positive free cash flow generation. We now expect to be slightly free cash flow positive for full year 2025. This significant company milestone represents our ability to drive sustainable efficiencies while also investing in infrastructure, growth initiatives for future success and next-generation technology platforms. In closing, we were very pleased with our financial results from the third quarter of 2025 and the sustained growth of our business. Our teams are executing at a high level, and we remain focused on delivering durable profitable growth. We see momentum across multiple growth vectors, and we are making appropriate investments in growth initiatives and infrastructure scalability while continuing to improve our profitability profile. We believe this sets us up well for continued profitable growth as we close out 2025 and look towards 2026 and beyond. With that, I will now turn the call back to Quentin for closing remarks. Quentin Blackford: Thanks, Dan, and thank you all for your continued support of iRhythm today. In closing, the continued progress we've made this quarter is a testament to our accelerating momentum. We're expanding adoption, forging new partnerships and delivering innovative solutions that are transforming cardiac care. Our clinically proven platform, advanced AI analytics and seamless digital integration are driving real impact for patients, providers and shareholders. With each milestone, we're building toward a future where early actionable cardiac insights are the standard, and iRhythm is leading the way. Operator, we're now ready for questions. Operator: [Operator Instructions] Our first question comes from Nathan Treybeck with the company, Wells Fargo. Nathan Treybeck: Congrats on a very strong quarter. Just to kick it off, Q3 growth accelerated versus the first half and guidance implies over 20% in Q4. You didn't see the expected seasonal step down. So your core Zio Monitor business has been accelerating for the past couple of quarters on record new account openings. I was hoping you could go into more detail on what specifically has been driving the new account openings and the volume growth? How much of it is share shift versus overall market growth? Quentin Blackford: Yes. I think -- Nathan, thanks for the question. It's good to be talking with you. I think there's a few things that are driving the growth in that core business. And I would point out, it was a record quarter for us in the monitor business, just like it was in the AT business, to be quite honest with you. And a lot of that is driven by new accounts onboarding. But one of the things that's unique about iRhythm in the last 12 months is we've developed the ability to scale and really absorb the entire network of these customers who are coming on board on day 1. And that's very appealing to these customers where historically, we might have to go in and convert an account at a time and work to ultimately convert the entire system over a period of time. Now we're able to do that out of the gate. The other thing that I would note in those new accounts is that we're seeing more than ever new accounts come into working with iRhythm, where they're bringing their entire long-term cardiac monitor business, so monitor, but also bringing their MCT business with AT as well, and that's fueling a lot of strength in the AT portfolio for us, which I think is just reflective of the value of that product line and these customers seeing that. So the quality of the new accounts has gotten stronger and stronger over the course of the year. The size of them has gotten stronger, and we're more bullish than ever on our ability to continue to take share, but also grow the overall market. There's no doubt that the move to primary care continues to expand. We're seeing it within the networks that we're already in. And of course, innovative channel partners continues to grow as well as it did from Q2 to Q3 and stepping up there. So quite a few drivers across the business, but I think it's a combination of market share shift as well as the overall market probably picking up a bit. Operator: Our next question comes from Joanne Wuensch with the company, Citigroup. Unknown Analyst: This is actually [ Anthony ] on for Joanne. Sort of just piggybacking off of Nathan's question. You raised the full year by more than a beat. I think it implies like a $4 million and change over consensus for the fourth quarter. Could you maybe just pick apart what is driving that outperformance you're expecting this quarter? Daniel Wilson: Yes. Thanks for the question, Anthony. This is Dan. I can start and Quentin can fill in with anything. So as Quentin just spoke to, really the beat in Q3 was primarily attributable to monitor in the core business, but also saw a really healthy contribution from AT, record growth for both AT and Monitor and then growing contribution continued from innovative channel. And as we think about the fourth quarter, it's a very similar setup. I would point out the raise for the guidance for Q4 really primarily tied to Zio Monitor, still expect nice healthy growth from both AT and innovative channel. Those are 2 that we've -- particularly with innovative channel have taken the approach to really leave outside of guidance for everything that we don't have really strong visibility to and high confidence. So very similar approach to Q4. Most of that raise is attributable to Monitor. But encouragingly, seeing really good contribution across the different businesses. Operator: Our next question comes from Richard Newitter with the company, Truist. Richard Newitter: Just wondering on AT, momentum seems to be holding strong. As we think about the launch of MCT next year or at least potential approval, I mean, how should we be thinking about growth cadence for MCT? Quentin Blackford: Yes. Thanks for the question. Look, we continue to be very encouraged by the performance in that AT business line. I think when you start to dissect it, what's really encouraging is that we're seeing it grow very well in our existing core monitor accounts that are now beginning to adopt AT, but also more than ever, the new accounts that are coming on board with us are coming on board using both Monitor and AT out of the gate. And I think that bodes well for our expectations into the future when we're seeing that these new accounts are willing to come on board with us using both product lines. In terms of MCT itself, I think that's a hard one for us to forecast exactly when it's going to ultimately make its way to the market. We're planning for that to be in the back half of next year. However, I think without clear visibility from an FDA perspective on what the timeline is from an approval perspective, you're probably going to see us set up expectations for 2026 that don't include MCT contribution until we have real clear line of sight into when that timeline is going to firm up for us. So I continue to be big believers in the AT business, super bullish on the opportunity to convert market share within that MCT category. I think we're probably around a 13% market share player today. I think there's a real path into 25%, 35%. But in terms of MCT itself, I think we want to see some clear line of sight to exactly when that approval might come before we start to really bake in expectations, at least for '26. Operator: Our next question comes from David Saxon with the company, Needham & Company. David Saxon: Congrats on the quarter. So I wanted to ask on the innovative partner channel. So I think it was last quarter, you talked about 100 potential partners in the U.S. I think in the script, you said you had 18 today. That's up 6 from last quarter, I believe. So can you just talk about the sales cycle there? Like how long does it typically take to onboard? And then what's a realistic penetration level for that channel over the next, call it, 1 to 2 years? And then can you also size that customer group at this point in terms of percentage of sales? Quentin Blackford: Yes. Maybe I'll hit that last point first. We continue to see that step up from where it was in Q2. We're not going to disclose it each and every quarter, but you can assume that it did continue to step up. And the overall dollar contribution from innovative channel partners was absolutely higher in Q3 than it was in Q2 as well. So we're seeing good progress there. To your point, we had 12 customers in Q2. We communicated in the prepared remarks, we're up to 18. I would say the size of those customers on average are about similar to what we saw in the initial 12, and we're excited about where that has the potential to go. In terms of the sales cycle, it's so different by customer right now. And I think that's a little bit of the hesitation that we have in putting forward specific expectations in our guidance. I could give you the example of Signify that took well over a year to sort of get to scale. Then I could give you an example of CenterWell that took about 90 days to get to scale. So it's just -- it's a different sales process. It's a different scaling process with each one of them. Some of these move very quickly when you can show the data that is coming together articulating the value of finding these arrhythmias, particularly in undiagnosed unaware populations and some of the economic data that's coming together that is quite compelling around the impact of finding these arrhythmias more proactively. So some move very quick, some take longer. I think as we get more experience here, we'll have more confidence to know exactly how to guide to it into the future. But for the time being, as Dan shared earlier, we're going to take a little bit of a wait-and-see approach on some of these without getting way ahead of ourselves. Operator: Our next question comes from Marie Thibault with the company, BTIG. Sam Eiber: This is Sam on for Marie. Maybe I can ask about the latest and any updates with the FDA on the remediation efforts for the warning letter and 483s? Quentin Blackford: No, it's a good question. There hasn't been a whole lot of communication through the shutdown with the FDA, particularly from a remediation perspective. As a matter of fact, I can share with you that the FDA has been clear with us that they've asked for that to more or less be put on hold and reengage with them on remediation after the shutdown is remediated or lifted, which I think is a good sign. Our understanding is through the shutdown, these folks are focused on the more critical sort of matters and the fact that we've been asked to pick it back up once the shutdown is through is encouraging. There's not been any communication with respect to MCT at this point in time. We are -- as we shared, we've submitted it. They have it, but there's been no communication around it, which is why I think for us, as we think about 2026, it's just prudent to think about that as a year where we'll wait for some more clarity around MCT before we would put it into any expectations out there in the new year. So that's where things sit at this point in time. Obviously, if things change with respect to any communication or feedback, we'll let you know. I think it's important to recognize we're not changing anything from our continued efforts to remediate our internal systems. As you might recall, we agreed and made the decision that we were going to go above and beyond what the FDA had asked us to remediate as part of the warning letter and the 483s. We've been doing that. All of those efforts will be complete here by the end of the year. The other thing we committed to, and this has already started, is we've launched the external review/audit of our quality systems by an independent third party that we were doing on our own. We communicated that to the FDA, and we've also communicated we'd be willing to share those things with the FDA. That's gotten started. It's off to a good start. It's early, but it's demonstrating the good progress we've made, and that will continue on through the remainder of the year. Operator: Our next question comes from Suraj Kalia with the company, Oppenheimer. Suraj Kalia: Quentin, can you hear me all right? Quentin Blackford: Yes, yes. Suraj Kalia: Perfect. Gentlemen, congrats on a fantastic quarter. Quentin, many calls going on. So forgive me if you've already touched on this. The innovative channels, the 100 or so, I thought I heard that, that you cited. Quentin, this question comes up with clients and maybe you can articulate it. What is the incremental patient pool you see in this cohort, the types of patients, symptomatic, asymptomatic, how should we think about it and the durability of this channel so that we can sort of size what is the incremental pull-through? Once again, gentlemen, congrats on a great quarter. Quentin Blackford: Thanks, Suraj. I appreciate it. One of the most encouraging things in this innovative channel effort has been the realization that these folks are monitoring more and more of the asymptomatic, undiagnosed, unaware population. There are a few partners who have targeted symptomatic patients, but we've even seen a few of those move from symptomatic into asymptomatic after recognizing the success that they're having with it. So that's encouraging, and I think it's a great data point that validates that the asymptomatic population is ultimately going to be monitored here. We believe there's roughly 27 million patients in the U.S. alone who are unaware, certainly undiagnosed, maybe confusing their symptoms with other comorbid disease states like type 2 diabetics, COPD or CKD. One of the things that's interesting that we're discovering in a lot of the data that we're capturing in the research we're doing is that just looking retrospectively over the last 5 to 6 years, nearly 90%, this is an incredible stat. Nearly 90% of patients who are either a type 2 diabetic, have COPD or CKD and ultimately get diagnosed with an arrhythmia. Nearly 90% of them were never monitored prior to that diagnosis, which just speaks to the incredible opportunity to get out there and proactively monitor these unaware, undiagnosed populations, maybe even asymptomatic populations. And what's encouraging is with the innovative channel partners is most of these programs are focused on these comorbid disease states. It also leads into sort of what we're doing around Lucem that we talked about last quarter in terms of developing these algorithmic capabilities to look across large data sets, particularly these comorbid data sets and looking through the medical records, finding these patients who are likely to have an arrhythmia, get a patch on them and then with a high degree of accuracy, certainly diagnose arrhythmias. And some of these early pilots that we've run, we've seen those yields 80% to 90% in terms of who we think has an arrhythmia, get a patch on them and find out that they do, in fact, have the arrhythmia. It's important once we diagnose them that now we help reduce the cost of caring for those patients. But the majority of the cost that these partners are saving is a reduction in ER visits, hospital visits, reduction in length of stay in the hospital. These are all things that these partners understand very, very well, and I think speaks to the durability of the channel itself as they see the benefits that are going to continue to accrue for them. Operator: Our next question comes from David Rescott with the company, Baird. David Rescott: Congrats on the really good quarter here. I wanted to ask on the margin front, the profitability front. Obviously, you had really great progress on are now expecting to hit free cash flow profitability this year, and my guess is that extends into 2026. But when you think about some of the moving pieces around Zio MCT the drag there on the gross margin line, maybe some pickup with the downgradable capabilities you have with MCT. I believe with MCT, you're going to be running on the same product manufacturing line, I believe, as what Monitor is. I recall that being talked about in the past. So I'm just trying to get a sense for how we should be thinking about this margin trajectory into -- toward that 15% goal that you called out for 2027. When you think about the pieces from MCT coming in and the scale benefits and this innovative channel partner business ramping as a percent of the business? Quentin Blackford: Yes, David, thanks for the question. So you're right, there are a number of moving pieces there. I think maybe breaking it down first starting with gross margin. We do feel -- continue to feel good about the guidance that we had previously for 2027, where we called out 72% to 73% gross margin in 2027. Obviously, we haven't provided '26 guidance yet. You heard the comments for 2025 being slightly above 2024, so call that low 70%. So feel really good about that path to 72% to 73% with all the different moving pieces, right? There's benefits from manufacturing automation as we scale the business, as we get Zio MCT on the same platform as Zio Monitor and then just continued efficiencies all around the business. So still feel good about that 72% to 73% gross margin. And similarly, with adjusted EBITDA, you've heard us talk about a cadence of, call it, 400 basis points of margin expansion year-to-year. We're set to deliver that this year relative to 2024 and feel good about that cadence continuing into next year and beyond. So absolutely still feel good about those targets that we provided for 2027. Operator: Our next question comes from Stephanie Piazzola with the company, Bank of America. Stephanie Piazzola: Congrats on a good quarter. You talked about the early work you're doing in sleep diagnostics. So I just wanted to follow up if there's any more color you can provide about how you're thinking about that opportunity, any potential economics of a multi-sensing platform and some of the next steps that you're taking there? Quentin Blackford: Yes. Stephanie, thanks for the question. Sleep is something that we certainly have a lot of excitement around. I think the overlap of just cardiac arrhythmia and sleep is a natural one. We see it in our customer channel already. We see it in our patients as well. And it's a great deal of overlap in the customers we're already serving that are ordering these home sleep tests. And so I think there's a natural opportunity for us to step in here and really disrupt that space, but at the same time, really improve the workflow and the efficiency for our physician customers, but also for the patient who many times has a pretty cumbersome experience. So we're excited to be able to do that. I think you're going to see us step into it in a couple of different ways, and I'm not going to get into the real specific efforts that are going underway from a competitive perspective, but I think there's ability to see even within our patient population today and the EKG data that we're capturing where there's a likelihood of sleep disease likely being present. I think that's good information to help our physicians understand and ultimately leads into testing opportunities. And then ultimately, we want to get to where we can have a diagnostic capability right off of the platform on the chest, and that's the multi-sensing effort or opportunity that you mentioned, and that's enabled by some of the BioIntelliSense’s licensed IP that we made last year. So those development efforts are going on as we speak. I think that's a couple of years away in terms of having a diagnostic product, but I think there are a lot of things that we can do ahead of time that can really create some nice opportunity for us within the sleep channel. As a matter of fact, we've got pilots that are beginning to launch in the back part of this year and will run over the course of next year that we'll continue to learn from and help us get even better in this space and excited with where it can take us. Operator: Our next question comes from Max Kruszeski with the company, William Blair. Max Kruszeski: Max on for Brandon. Congrats on a nice quarter here. Quentin, I think you had mentioned in your prepared remarks that 76 out of your top 100 customers have EHR integration and that these integrated accounts see an average increase in utilization of about 25% within the first 6 months. Can you just give us some color on, a, what's driving this? B, how durable is that 25% beyond the 6 months? And how is this 25% evolved compared to some of the earlier accounts you guys had EHR integration with? Quentin Blackford: Yes. Well, look, one of the things that's been unique with integrations is our announced relationship with Epic that we communicated a little over a year ago and really started to step into it in the first half of this year and is really hitting its stride now. And I think I mentioned we've got 30 accounts integrated, and there's another 65 that are in the pipeline that are specific to Epic itself. And when I made the comment around an increase of about 25% 6 months post integration, that's really around the Epic integrations. And so I want to be clear about that. But a lot of it comes down to workflow, making it as simple as the click of a button within their EMR system to be able to order a Zio to have the Zio report pushed right into that EMR system without having to manually upload or transfer files to have everything right there is incredibly important to our physician customers. One of the things that we love about the integration is that once it's integrated, the entire network of whether it's primary care, whether it's cardiology, whether it's EP, whether it's hospital, they see within their instance of Epic, Zio right there in the instance of it, right? So the workflow can become very easy across all channels within these IDNs. And it ultimately ends up enabling the push up into primary care to happen in an easy way. Sometimes the pushback we get with trying to move prescribing patterns up into primary care is that the primary care physician isn't comfortable reading the report and diagnosing. Well, within these integrated accounts, the primary care physician can prescribe the device, the device can be worn, the report can be put right into the integrated system. And then the cardiologist or the electrophysiologist can come into the system without ever seeing a patient read the report and diagnose whether they see an arrhythmia there or not. And then they can even make sort of workflow decisions of do I want to see that patient or do I not. That's a huge enabler when it comes to pushing care further up the care pathway. And that's a big part of why we see the EHR integrated accounts grow the way that they do and have the success that they do. And it's also why we spend a lot of time and effort working to integrate our accounts as we go. Very seldom. I'm not sure I could give you one example of where an integrated account once integrated has ever left working with iRhythm. And so this is very important to us and something you're going to see us continue to pour into. Operator: Our next question comes from Zachary Day with the company, Canaccord Genuity. Zachary Day: Congrats on the quarter. On Zio MCT, I know you're not guiding anything financially. But once you have the approval in hand, what is the launch strategy for it? Is it going to be mainly targeted to new accounts and you're going to carry the momentum of AT into those accounts? Maybe just how are you thinking about it? Quentin Blackford: Yes. Good question, and I appreciate it. As we think about sort of guidance, maybe let me just take a step back relative to that for a second. I'll tell you, we've never been more bullish around the business as we are right now. I think the structural growth drivers in the business are the strongest that we've ever seen. And I think it's demonstrated by the record quarter that we put up with Monitor with AT, innovative channels, even EHR integrated accounts. But when it comes to guidance, when it comes to next year, you're going to see us take an approach that, frankly, is very similar to the approach that we took this year. It's not going to be any different. I think that's one that is very thoughtful. It's going to be prudent. It's going to be calibrated and mindful of the tougher comps that come in, but also being mindful of those things that are really dependent on external timelines like MCT being dependent on the approval from the FDA. In that case, we're not going to put it into our expectations for 2026. And so we'll let that sort of play out as upside. I know where the Street is sitting at right now. I feel good with where the Street is sitting at 17%. I think you're probably going to see us come out and guide to 2026, probably somewhere around that 16% to 18% range that leaves upside with these external factors like MCT being dependent on FDA approval or innovative channels sort of making their decisions when they're going to adapt and when they're going to ultimately step into working together. So we're going to be thoughtful around guidance. We're going to not get ahead of ourselves here. We're going to be responsible and that's how we're going to set up the year. I have not been more excited heading into a new year than what I am right now as we look ahead to 2026. I think there are more drivers in the business, more new features that are going to be introduced into the commercial teams that are going to drive great momentum, but we're not going to get ahead of ourselves either as we head into the new year. Operator: Our next question comes from Daniel Downes with the company, Goldman Sachs. Daniel Downes: Just want to add to David's earlier question and how we should think about your reinvestment priorities as you transition to becoming a positive free cash flow business. Just noting your current cash position of almost $600 million. I guess as a follow-up to that, what level of investment do you expect will be required ahead of the Zio MCT launch once approved? Daniel Wilson: Yes. Thanks, Daniel. This is Dan. I can take that question, and Quentin could fill in anything he'd like. So really very similar to this year, we have been actively reinvesting back into the business. You just heard Quentin remark that next year is setting up really well from kind of an innovation standpoint, and that's through some of the investments that we've been making this year and we'll continue to make next year. Obviously, Zio MCT has been at kind of the forefront of that as we got to submission there with the FDA. We have the multi-vitals platform that we continue to work on and are excited about. And then as Quentin mentioned earlier, some of the initiatives around sleep. That's kind of on the innovation side. And then I'd also say we're making investments operationally as well, right? So AI has been important from a service delivery standpoint that will continue to be, but also starting to embed AI within the organization and really look for those opportunities to scale the business as efficiently as we can. And so that's really how we look at where to invest in the business. As you noted, certainly have the balance sheet to make those investments. And now that we're tipping into free cash flow positive, we have a lot of flexibility there. Operator: Our next question comes from Gene Mannheimer with the company, Freedom Capital Markets. Gene Mannheimer: Great quarter. I just wanted to follow up on the earlier point about your development in the sleep diagnostics. Just for my edification, are you suggesting that any new product for sleep would it be -- would it leverage the same or similar form factor as your Zio MCT today? Quentin Blackford: I think, Gene, thanks for the question. But I think, yes, you're thinking about that exactly the right way. The intent ultimately is for us to get to where we can identify, diagnose sleep right off of the exact same platform that we have today. And I think that provides with it a lot of economic benefit. You can almost imagine a future, if you will, where somebody might wear the cardiac -- or sorry, might wear the Zio for cardiac arrhythmia monitoring and then maybe we suspect sleep disease and they end up wearing that similar patch to diagnose sleep as well. The cost profile for us really doesn't change in that scenario, but the ability to diagnose multiple things could become quite interesting. And so ultimately, we want to serve the patient as well as we can and provide them with as much information as possible. We think that there's a lot of overlap with cardiac and sleep and that there's just natural synergy there. If we can do it off of the same platform, I think there's real financial synergy in that. And so that is the ultimate goal. Operator: Our next question comes from Nathan Treybeck with the company, Wells Fargo. Nathan Treybeck: I just had one follow-up on something that was mentioned on this call. So I think Zio MCT is going to be downgradable to an event monitor, correct me if I'm wrong. I just want to understand what percentage of your Zio AT scripts today are not reimbursed? And being able to downgrade that to an event monitor eventually, does that improve your mix of reimbursed scripts? And I guess, your outlook for the MCOT ASP going forward? Quentin Blackford: Yes, it's a great question, Nathan. Again, we're super excited with that MCT category. I think the biggest reason that we see folks choose not to work with iRhythm today is primarily around duration of report being 14 days and getting out to 21 days is going to be important for us, and I think it's going to close a lot of those gaps that the customers who are not working with us yet are requesting. There is the downgradable aspect. We're going to have that option. It's going to be at our option to enact that or not. How we commercialize that, I think, is something we're going to continue to work through. I'm not real certain yet exactly how we'll commercialize it. We don't have a lot of AT business that we're not capturing the revenue on, although we've been pretty intentional about not serving those customers that are looking to really downgrade the capability, but it does happen where MCT might get denied and then you're left with needing the downgrade or you just aren't able to recognize the revenue. So there is a little bit of that with us. We'll figure out how we're going to commercialize the downgrade aspect if we do, but the functionality will absolutely be there in what we submitted to the FDA, and it's going to be left to us in terms of how we decide to commercialize it. We're not certain just yet. Operator: At this time, there are no more questions registered in queue. I'd like to pass the conference back over to the management team for closing remarks. Quentin Blackford: Well, thanks again for joining us today. We couldn't be more proud of what the iRhythm team continues to accomplish. We're executing with discipline. We're driving innovation. We're delivering profitable growth, all while staying true to our mission of transforming patient care. We're entering the final quarter of the year with strong momentum and a great confidence in the road that sits ahead of us. The future of our company has never been brighter than what it is today. So thank you for your support. Thank you for joining us today, and we'll see you on the road. Operator: That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.
Operator: Greetings, and welcome to the Cognex Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greer Aviv, Head of Investor Relations. Thank you. Please go ahead. Greer Aviv: Thank you, operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our 10-Q was filed this morning. The earnings materials are available on our Investor Relations website. I am joined here today by Matt Moschner, our CEO; and Dennis Fehr, our CFO. Today, we plan to share several key messages with you, including progress on our strategic objectives to be the AI leader in the industry, end market trends, our performance in the third quarter and our expectations for the fourth quarter. After prepared remarks, we'll open the lines for Q&A. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today's earnings materials will cover forward-looking statements, including statements regarding our expectations. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K. With that, I'll turn the call over to Matt. Matt Moschner: Thanks, Greer. Good morning, everyone, and thank you for joining us today. Q3 was another strong quarter for Cognex. We delivered outstanding financial results, which reflect our commitment to profitable growth and disciplined execution. At the same time, we remain focused on advancing our strategic objective to be the leading provider of AI technology for industrial machine vision. Turning to Page 3 of our earnings presentation, let's look at some highlights from the third quarter. I'm pleased to share that our third quarter key financial metrics all came in at the high end of our expectations. We delivered double-digit revenue growth and achieved our highest adjusted EBITDA margin since Q2 of 2023. In addition to the strong financial performance, we are making meaningful progress against our strategic objectives. First, we continue to execute our sales force transformation, acquiring new customers in underpenetrated verticals such as packaging, using easy-to-use AI-enabled products. I'm also very pleased with the progress we've made this year driving productivity in our sales organization by using new CRM tools and updated processes. Second, we are advancing our technology leadership in AI. This quarter, we're excited to announce the launch of our new solutions experience product line in logistics, which we are calling SLX. This release introduces our latest AI vision tools to solve novel applications in this fast-growing vertical. Turning to Page 4, you can see that the SLX epitomizes our mission to make advanced machine vision easy. By combining industry-leading AI with intuitive deployment workflows, we can solve critical logistics applications with minimal user training. Our initial rollout of SLX devices targets specific applications, including object classification and side-by-side detection, both of which complement barcode reading in mixed application workflows. Purolator, a leading freight, package and logistics provider, recently deployed SLX as the next step in their automation strategy, enabling advanced package detection within its sortation process. Since implementation, Purolator has significantly reduced costs tied to processors and seamlessly scaled the solution across its terminals and network. These new products extend our reach beyond traditional barcode reading into higher-value vision applications in logistics. They help accelerate automation adoption by offering customers scalable, easy-to-use solutions that improve efficiency. With SLX, we're also laying the foundation for other application-specific solutions. Next, let's review our current trends across key end markets, as shown on Page 5 of the earnings presentation. Please note that my discussion on end market performance excludes the onetime benefit from the commercial partnership in our Q3 2025 results and an additional month of Moritex revenue in Q3 2024 results. Although the macroeconomic backdrop remains uneven and geopolitical uncertainty persists, we continue to see momentum in consumer electronics, logistics and packaging, while automotive remains soft. Starting with logistics, this market remains a strong growth driver. Q3 marks our seventh consecutive quarter of double-digit year-over-year revenue growth, which was led by large e-commerce customers this quarter. The current cycle is being driven primarily by automation of existing facilities rather than new capacity expansion. We believe automation penetration is still low in this vertical and the ROI on our products is very strong. Next is automotive. As expected, automotive revenue continued to contract, although year-over-year declines moderated through the year. The market remains challenging, but we continue to anticipate less steep decline in 2025 relative to last year's 14% contraction, and we believe we are nearing the bottom. Looking ahead, we continue to see promising long-term opportunities in the automotive market as customers prioritize improving vehicle quality and driving down operating costs. Next, let's talk about packaging. The business delivered solid revenue growth across most geographies in Q3. Packaging remains a large underpenetrated market with less cyclicality than other verticals. We're making progress with new products and expanding sales coverage, positioning us to capture incremental opportunities and drive further penetration. We maintain a positive full year outlook for packaging. Turning now to consumer electronics. In Q3, revenue grew significantly year-over-year, driven by broad-based strength. This market is showing clear signs of recovery following a prolonged down cycle, and we are well positioned to benefit from ongoing supply chain diversification and evolving device form factors. We maintain a positive outlook for the full year as we expect consumer electronics to deliver its first year of revenue growth since 2022. Finally, turning to semiconductor. Q3 revenue increased modestly year-over-year against a very strong comparison, although we maintain a cautious full year outlook. Longer term, we expect semi growth to benefit from the AI-driven investment cycle, reinforcing our confidence in this market. Cognex's deep relationships with leading semi equipment manufacturers position us well for future growth. In summary, Q3 underscores the strength of our strategy and execution. We remain focused on being the #1 provider of AI technology for machine vision, delivering the best customer experience in our industry and doubling our customer base over the next 5 years. These strategic objectives supported by operational discipline and continued innovation position us to drive long-term profitable growth and create sustainable value for our shareholders. Let me now hand it over to Dennis to walk through the financial results and the outlook for the fourth quarter. Dennis? Dennis Fehr: Thank you, Matt. Before reviewing Q3 results, I'd like to address 2 items impacting comparability this quarter. As we discussed last quarter, we entered into a commercial partnership with a strategic channel partner to better serve OEM customers in the specialized field of medical lab automation, which contributed $30 million of revenue this quarter. In addition, our Q3 2024 results included an additional month of Moritex financials as we aligned accounting schedules, which added approximately $5 million of revenue to the prior year quarter. A detailed revenue bridge illustrating these factors is available on Page 6 of our presentation. Revenue growth, excluding the impact of both the commercial partnership and the additional months of Moritex a year ago was 13% on a constant currency basis. We believe this number provides the most transparent and accurate representation of our underlying top line performance for the quarter. Turning to the quarterly details, I'll begin with a discussion of reported financial results, followed by the financials adjusted to exclude these 2 items. Starting with the as-reported financials on Page 7, third quarter revenue of $277 million expanded by 18% year-over-year or by 16% on a constant currency basis. Looking at geographic revenue trends on a year-over-year constant currency basis, Americas revenue expanded by 27% in the quarter, led by continued strength in logistics and the onetime contribution of the commercial partnership. Europe grew 24%, driven primarily by certain consumer electronics customers shifting their ordering from China-based entities to those in Europe. As noted last quarter, this change in ordering entities does not indicate any underlying shift in business mix or customer demand. Excluding this procurement change, Europe grew modestly as strength in packaging and the onetime contribution of the commercial partnership were partially offset by continued weakness in automotive. Greater China revenue increased 9%. After adjusting for the shift in ordering entities and the additional month of Moritex included in last year's Q3, growth in Greater China was very strong with broad-based momentum across all end markets, except automotive. Other Asia revenue declined 5% in the quarter. After adjusting for the additional month of Moritex revenue last year, Other Asia grew 4%, driven by consumer electronics supply chain shift. Staying on Page 7, adjusted EBITDA margin expanded 730 basis points, driven by operating leverage, disciplined cost management and the onetime benefit from the commercial partnership. GAAP diluted earnings per share were $0.10, down 39% from a year ago, primarily due to a onetime discrete tax expense accrual of $33 million related to the One Big Beautiful Bill Act. Adjusted diluted EPS of $0.33 increased by $0.13 or 69%. I will now cover the underlying business performance, adjusted to exclude the 2 items impacting comparability. Starting with the financial highlights of the third quarter, Page 8 of our earnings presentation details our performance on 3 key financial metrics. One, adjusted EBITDA margin was 22.1%, representing an increase of 450 basis points year-over-year to our highest margin since Q2 of 2023. Two, adjusted EPS increased 47% year-over-year, the fifth consecutive quarter of double-digit EPS growth. And three, our trailing 12-month free cash flow conversion rate reached 133%, meeting our target of greater than 100% for the fourth consecutive quarter. Our focus on disciplined cost management and profitable growth ensured that this quarter's strong revenue performance translated into strong bottom line EPS growth and robust free cash flow. These financial results represent another key milestone towards the through-cycle financial framework we outlined at our Investor Day. Turning to the income statement, adjusted to exclude the 2 items impacting comparability on Page 9 of our earnings presentation. Revenue increased 15% year-over-year and 13% on a constant currency basis. Adjusted gross margin was 67.7%, down 170 basis points year-over-year, driven by unfavorable mix and the impact of tariffs. Adjusted operating expenses grew 1% year-over-year and declined 1% on a constant currency basis, driven by continuous cost management, partially offset by a meaningful headwind from incentive compensation in the quarter. We have now delivered the combination of revenue growth and adjusted OpEx reduction for 3 consecutive quarters. While we are pleased with these results, we continue to drive efficiency across the organization and incurred $3 million of reorganization charges in the quarter, which are excluded from adjusted operating expenses. Looking ahead, on an annual basis, we expect adjusted operating expenses to grow at a slower pace than revenue. The mentioned combination of revenue growth and continuous focus on cost management drove adjusted EBITDA margin to 22.1%, near the upper end of our guidance range. Adjusted diluted EPS was $0.28, representing 47% year-over-year growth. This strong EPS performance was driven by robust revenue growth, disciplined cost management and the lower diluted share count compared to last year. We generated $86 million in free cash flow in Q3, exceeding the total amount generated during the first 9 months of 2024 in a single quarter. Trailing 12 months free cash flow reached $214 million, surpassing the $200 million mark for the first time since Q1 of 2023 and increasing 132% compared to the 12-month period ending Q3 of 2024. Trailing 12-month free cash flow conversion was 133%, easily meeting our target of greater than 100%. We continued to drive working capital efficiencies in Q3, and our cash conversion cycle declined sequentially for the sixth straight quarter. Turning to capital allocation, we returned $37 million to shareholders this quarter through a combination of share repurchase and dividends. Over the past 12 months, we have returned $224 million to shareholders, more than 100% of our free cash flow. Over the long term, we remain committed to returning capital as an important component of the disciplined capital allocation strategy we outlined in June. We ended Q3 with $600 million in net cash and investments, providing flexibility to pursue M&A opportunities while continuing to return capital to shareholders. Moving to Page 10 of our earnings deck, I'll now review our financial guidance for the fourth quarter. In Q4, we expect revenue to be between $230 million and $245 million, representing growth of approximately 3% at the midpoint. The implied sequential decline is primarily driven by the seasonal step down in our consumer electronics business and is in line with our historical Q4 seasonality over the past decade. Adjusted EBITDA margin is expected to be between 17% and 20%, with the midpoint consistent with the level achieved in the prior year. Adjusted earnings per share are expected to be between $0.19 and $0.24, with the midpoint of this range representing approximately 7.5% year-over-year growth driven by revenue growth and the reduction in share count. We continue to expect no material impact on full year adjusted EBITDA margin and earnings per share from tariffs announced as of today. Our Q4 guidance implies mid-single-digit full year 2025 revenue growth, excluding the benefit from the commercial partnership. Looking ahead to 2026, average PMI readings in Q3 for major economies, including the U.S., Eurozone, China and Japan were between 48 and 51, signaling that industrial activity has yet to show sustained expansion. These conditions suggest we remain in the initial stage of the cycle. As we shared at Investor Day, this stage is characterized by moderate growth with similar growth dynamics in 2026 as we are experiencing in 2025, excluding the onetime benefit from the commercial partnership. To clarify, this outlook is not formal revenue guidance, nor does it reflect changes in business conditions or visibility. Rather, it represents our view of the cycle based on macroeconomic indicators and our through-cycle financial framework. In this early cycle environment, we remain committed to disciplined cost management while driving margin expansion and EPS growth, combined with strong cash generation. Now Matt and I are ready for your questions. Operator, please go ahead. Operator: [Operator Instructions] Today's first question is coming from Damian Karas of UBS. Damian Karas: I wanted to begin by asking you about the consumer electronics part of your business. How much of the current demand strength you're seeing is a result of rising customer output and product rollouts versus your customers migrating their footprint to other regions? And curious what you're hearing from some of your CE customers in terms of their plans to make further shifts of their supply chain and what that could mean for your business in 2026? Matt Moschner: Damian, this is Matt. Thanks for the question. Yes, we're very pleased with the performance of our consumer electronics business this year. And as we said in the comments, it being a growth year for us in consumer after several years of a down cycle. And so where is that coming from? I think you hinted at a few of them. I was actually in ASEAN and India a few weeks ago, observing some of the shifts in manufacturing from Mainland China, working with a lot of the machine builders that underpin this industry. And yes, I would say there is quite a bit of activity that we're participating in as supply chains diversify in this market. And whether that's countries like Vietnam, Malaysia, India, I think all are really trying to participate in that migration. But I wouldn't say that's the only growth driver, right? I think we've set our business, it's growing broad-based, right? It's not just a few customers, it's many customers that are seeing increased activity. I think we are seeing things like changes in device form factors and entirely new form factors, particularly as consumers are wanting to take advantage of advanced AI technology in different ways. At the same time, advanced AI vision for some of the more complex cosmetic inspections is also maturing, and we're seeing our ability to solve new applications that maybe historically weren't addressable. So I think you put all those things together, and yes, I think we feel very optimistic about where we are and how we can participate across multiple growth vectors. And as a global company, I think customers are looking to us to help them produce, whether it's in one geography or around the world. And so we're excited for how that could carry into 2026. Damian Karas: That's really helpful. And then I wanted to ask you about China, which I think if I heard correctly, you saw 9% growth. And so I guess if I just think about what we've heard from a lot of our other industrial companies that have reported third quarter so far, we seem to be bucking the trend there where I think a lot of others are experiencing some softness in China. So can you just elaborate on what you're seeing? What's driving the broader strength there? Matt Moschner: Yes, absolutely. No, thanks for noticing. In Q3, we saw strong year-over-year growth in Greater China, which, as a note, includes Taiwan for us. And I would say it is broad-based across verticals with perhaps the exception of automotive. Why? We've made great investments in China and the Greater China region. We have landed more localized distribution. We've invested in our sales channel. We have local engineering in country to try to be a more nimble company in that country and in that region. And I think you're starting to see some of those things pay off. As a reminder, a good portion of our business, I think in the past, we've said 3/4 roughly are multinationals operating in China and roughly 1/4 being domestic Chinese manufacturers. And so they like working with Cognex, not just because of our excellent technology, but also our global footprint, particularly as customers are -- our customers are thinking about potentially producing in China and other Asia regions, given some of the trade and tariff news of recent months. So yes, we're encouraged by the momentum. I would also say the competitive dynamic in China has stabilized in many ways, and we're seeing pricing stabilize as a result. And so you put those things together, and yes, we had a great quarter, and I remain pretty optimistic about how the investments we've made in China could pay off for us heading into next year. Operator: The next question is coming from Andrew Buscaglia of BNP Paribas. Andrew Buscaglia: I was hoping you could discuss some of the trends you're seeing in logistics. I mean, obviously, that's been very strong for some time now. But how much more of this existing capacity reinvestment from customers can you benefit from? And at what point do you need there to be another leg up in new warehouse build-outs to grow? Matt Moschner: Yes. No, it's a great question. I mean, as we said in the prepared remarks, most of our growth is driving productivity in existing facilities, and I still see room to grow there. I think we've also said we think this market is still in the early innings of its automation story, and I believe that to be true. You go into a modern warehouse today, you see a lot of vision systems. But today, they're mostly doing things like barcode reading and helping with the sortation process. I think the product release we had yesterday is a really exciting one for us, and I think for the industry because it really is the first meaningful step in bringing vision and visual inspection to warehouses. And it's good to remember why that hasn't happened yet because it's a really, really hard problem, right, given the variation that you see going through some of these facilities, millions of SKUs at very high rates that are very cost sensitive. So we're excited about how we can drive vision penetration in logistics. I think that is -- I almost characterize it as a white space. And I think one that really can only be addressed by advanced AI. And so I think we're well positioned for that. And the SLX is the first step in that journey for us. I think a lot of our customers are still -- have very much a productivity focus, right? So I don't think we're yet over the hump on how we can get more and how they can get more productivity from existing facilities. And then I would just say, right now, our strength is in retail distribution and e-commerce. I think we're relatively newer to areas like the parcel market and helping other areas like airports as they look to automate where we're seeing quite a bit of investment. So I think those are areas where we could grow as well. So I think we remain optimistic that the growth story of logistics is not yet over. But I would just say maybe a bit nonlinear, particularly as some of the larger customers that we serve, how many more years can they have outsized investments, and so over the medium term, I think we feel very good about the growth story. How we get there might be lumpy or nonlinear is how I would characterize it. Andrew Buscaglia: Yes. Interesting. Okay. And then I was surprised to see semis grew a little bit. I think we weren't expecting much, if any, growth at all this year, which you maintained your outlook in that space. I guess what are the -- what's driving that a little pick up there? And then can you talk about maybe your -- how you would benefit from the memory market? I would imagine you guys would have exposure there. That seems to be certainly benefiting from AI. If you talk about that a little bit, that would be great. Matt Moschner: Yes. And I think the underlying demand for chipsets, for memory, for other active components is growing, and I think will, given the demand for new devices and the underpinnings of advanced AI as we see a really exciting set of new computing capabilities being announced. And yes, we would participate in all of those things. It's useful just to remind ourselves how we participate in this market, which is really through selling vision to large equipment manufacturers that produce the machines that handle the wafers or the finished package products. So that's really how we address the market. And the sorts of applications that we solve are really traceability. These are very high-value pieces of silicon wafers that you want to make sure have good traceability, that have good quality. So we do visual inspection. And so that's -- those are primarily how we serve the market. The growth in this market, I would also characterize as somehow nonlinear, right? The ordering of those machines is very much dependent on the build-out of specific facilities. But right now, we're seeing good, healthy activity. And I think there's good underlying demand for chips, but also I think there is a bit of changes in where things get made and where the fabs are located, right? We see a build-out going back to the CHIPS Act and the last administration here in the U.S. We're seeing ambitions in countries like India to have domestic semiconductor production capacity. So I think there's also a geographic angle as more regions and countries participate in the manufacturing of advanced chipsets. So -- and I think Cognex will be there, and we'll serve that market as we do today through our large equipment manufacturing partners. Operator: The next question is coming from Tommy Moll of Stephens Inc. Thomas Moll: I wanted to ask about automotive, Matt, I think I heard you say it feels like you're nearing a bottom there. What details can you give us? What visibility do you have into next year? And to the extent you can distinguish what you're seeing in North America versus Europe, that would be appreciated as well. Matt Moschner: Yes. No, I think it is -- it remains a challenging market for us, although, yes, I think we are nearing a bottom. But I think you're right to point out the geographic differences in growth. And here in the U.S., we are seeing more activity, I would say, relatively more activity than Europe, which seems to be taking a longer time to recover. And it's not hard to imagine why, there's different geopolitical considerations around trade and tariffs for this industry. And so we're definitely seeing larger differences in relative growth rates in the Americas and Europe with relatively more strength in the Americas than Europe. We also serve large automotive manufacturers in Asia, in Japan, in Korea, Mainland China. And I think there, I think it's again mixed. I think it depends on specific OEMs, their transitions between powertrain types, the geopolitics of those things. And so yes, I think it's hard to call. I think we are nearing a bottom. I think this year is going to be better than last. And our teams are working with each of those OEMs on their automation plans, which we still see over the medium and long term as being healthy, right? This is an industry that is still struggling with quality escapes, right, and recalls. Vision helps with that. It's an industry that struggles with labor and qualified skilled labor. Automation helps with that. And generally speaking, mitigating the increase in costs associated with production and tariffs and things like this and automation helps with that. So in the near term, I'd say it's improving and stabilizing. And over the long term, I think we remain optimistic. Thomas Moll: Dennis, a question for you on margins. If we look at what you just reported in the third quarter, and this will be ex Moritex, ex the commercial partnership, you delivered teens top line growth with only 1 point of adjusted OpEx growth. Clearly, that's not repeatable over a long time horizon. And so if we take that as one bookend, the other bookend you gave us is basically a reminder of your long-term framework just that OpEx grows at a slower rate than sales. That's a pretty wide range for us to think about. If we're thinking next 12 months, is there anything you could do to situate us somewhere within that wide range in terms of what's reasonable? Dennis Fehr: Yes. No, fair question, Tommy. I would say maybe first clarifying on the quarter, right, if you take in constant currency, we would be down by 1 point. And that's considering that we had some incentive comp headwinds, right? So last year was an underperforming year, and this year looks a bit better in that regard. And in prior quarters, we have been talking about that we have been 2 or even 3 points down compared on the year-over-year comparison. And that's kind of -- if you think about like constant currency, excluding incentive comp, that's kind of the run rate which we are for this year. And we keep on driving that, right? So we talked about taking on additional reorganization charges in this quarter. And clearly, that's for us to set ourselves up for the future and to drive success, right? And that kind of put that a little bit also in context in my prepared remarks of how we think where we are in the cycle, right? So we talked about like in general, we are a short-cycle business. So we don't have a lot of visibility into 2026. So we use these macroeconomic indicators like PMI, and they tell us we're in the early stage of the cycle, that means moderate growth and then a moderate growth environment for us means to be -- keep on working on OpEx and drive efficiencies throughout the organization. And that basically then sets us up still for hopefully attractive EPS -- adjusted EPS growth, right? So if you look at this year, mid-single-digit growth on the top line, excluding the commercial partnership, but adjusted EPS, if you take the implied guidance, excluding the commercial partnership, that's a bit more than 20% of EPS growth, and that's kind of how we think the playbook could look like that shows attractive growth rates. I hope that helps a bit with narrowing it down to your question, Tommy. Operator: Our next question is coming from Jake Levinson of Melius Research. Jacob Levinson: Just wanted to go back to logistics for one second. I know you folks have seen some pretty nice growth there in the last couple of quarters, but it's been -- it's put some pressure on your gross margins, if I recall, just given the engineering resources that you need to use with implementing machine vision for some of those customers. So the question, I guess, is as you roll out some of these AI-enabled products, does that actually lower your cost to serve those customers going forward? Matt Moschner: Yes. Thanks, Jake. Absolutely. I mean SLX really strikes at the heart of really 2 pieces of the P&L. One is on the gross margin side. We see that the ROI on visual inspection is very strong. And so we're able to command better pricing for a given product cost. So we're excited about that. And you might even expect similar margins as we see in vision in our factory automation business for logistics. And then really, I think one of the special parts of that product is it was completely rebuilt with simplicity in mind, right, really a low-touch, no-touch deployment that maybe takes Cognex out of the loop entirely in terms of doing feasibilities, but also scale deployment. So yes, I fully expect we'll see benefits on the gross margin line as well as on the OpEx line as we can grow without having to grow our field service resources to deploy those systems in a similar way. Jacob Levinson: Okay. That's helpful. And just wanted to touch quickly on the commercial partnership that you announced. I think if memory serves, you've had more of a presence in sort of the medical device space as opposed to lab automation. But are there more opportunities like this to partner with some of these OEMs, whether it's the medical space or others? And kind of how does this fit into the larger strategy around expanding into some of these newer markets? Matt Moschner: I wouldn't say that. I think this is a more specialized case where we found an opportunity with a partner in a more niche area for us. So no, I wouldn't say, I'd want you to extrapolate that as any sort of new playbook for growth for Cognex. I wouldn't say that. Operator: Our next question is coming from Piyush Avasthy of Citi. Piyush Avasthy: Matt, maybe like on your Investor Day, you laid out a 6% to 7% growth contribution from increased machine vision penetration. It's just been like a couple of quarters, but maybe some early feedback on how that is progressing. I see you have been -- it has been associated more with packaging. Maybe comment on how you can see this supporting your other end markets. And then there is this reorganization, maybe just comment on like how you balance these cost actions while still being aggressive towards penetrating new markets. Matt Moschner: Yes. Thanks. Let me take the penetration question first. And you're right, we said there was 6% to 7% penetration growth on top of core growth of each of our industries that led us to a 10% to 11% through-cycle organic growth rate. So I think you had that right. Where are we seeing it? And a big part of that penetration, as we said, I think, was a lot -- that's very technology-driven, right? As we innovate, we are solving often for the first time, applications that haven't been solved before. I think I mentioned logistics as very much one of those. And I suspect and we're seeing that the SLX is solving new vision applications that haven't been solved before. So we're driving penetration in logistics with vision. Similarly, in consumer electronics, we're innovating with new tools today that are doing things around cosmetic defect inspection that were not possible in the past. We're driving penetration in consumer electronics. And then packaging, you're right. I think that is more about how do we educate the market and educate customers who are more regional, smaller manufacturers on the benefits of vision, and we're doing that through investments in our sales channel. So yes, those are just 3 areas I would point to where we're driving penetration through technology, through channel, through sales coverage, and I'm excited about each of those. Your second question is on cost and how we're thinking about cost management and cost reductions in the context of our growth story, right? We take, as we've said in the past, a very long-term view on growth and investment, and that's -- it's a technology company, we have to. But at the same time, we're many months into making sure that given the stage of the growth cycle that we're in, that we are managing our cost bases smartly. And so yes, over the last 6 months, we have moved quickly to rightsize our cost basis in a number of areas. I would say we really took a hard look at all areas of the company. We continue to, whether it be our sales capacity, our engineering capacity, our operations footprint, back-office functions and G&A. And it's been a -- I'd say it's been a very collaborative approach as a leadership team. And I think we've done it smartly. I think Cognoids are bought into the journey, and we're excited for how we can take that into next year and drive profitable growth over the medium and long term. Dennis Fehr: And maybe let me add to that, just kind of how we manage that. So we're taking a very programmatic approach. So it means we have clearly identified areas and work streams defined on which we work on. And then you can see that we're not coming out with like just the one big, whatever reduction in force type of approach, but we're really kind of looking at area by area. Looking for efficiencies, getting these efficiencies and moving on and revisiting after some time again to see like how has that worked and where can we improve further. So it's really -- think about it that we are driving a program, which is not looking like let's just kind of cut costs in the short term and maybe break a lot of things along the way, but it's really a well-balanced programmatic approach, which kind of brings the right balance between supporting the top line growth and at the same time, supporting also the bottom line. Piyush Avasthy: Very helpful. And I know you just gave guidance 1 quarter ahead, but you did spoil us last time with some incremental color on 4Q. So as we think of like 1Q '26, anything you want to remind us in terms of seasonality, any material deviation from the end market commentary that you just highlighted today? That would be helpful. Dennis Fehr: Yes, Piyush, great question. Certainly, as you mentioned, we typically don't give longer-term guidance. Keep in mind, we are a short-cycle business, but there's certainly some modeling comments I can provide. So first, keep in mind on the top line side is that from a seasonality point of view that Q1 often is like the lowest quarter in the year. So that means in that regard, you may want to look at really a year-over-year comparison, right? Don't look at a sequential comparison, look on top line and year-over-year. And then when we think about bottom line and here maybe particularly OpEx, maybe I can remind you that in Q1 this year, we had some favorability in OpEx from exchange rate as well as from stock comp. So these ones may not repeat in Q1 2026. So I think on the OpEx side, it's probably better for you to model sequentially and not on a year-over-year basis. So maybe, yes, 2 comments, top line look year-over-year on the seasonality and on the OpEx side and at the bottom line rather look sequentially and not year-over-year. I hope that's helpful. Operator: The next question is coming from Guy Hardwick of Barclays. Guy Drummond Hardwick: I would like to ask about automotive, which is obviously your softest market. There has been some maybe more slightly positive commentary with some major CapEx announcements by OEMs. And I guess, typically, if you're looking at 2026 and where the model launch cycle looks perhaps a little better in the second half of the year, you sure you have to put the CapEx in like 12 months ahead. So I was wondering whether there's any lead indicators from your customers in terms of models or product refreshes or CapEx plans, which may give you some cause for optimism for 2026 in auto. Matt Moschner: Yes. Thanks, Guy. Yes, I would say we engage with all the major OEMs on their automation plans and on their platform plans, if you want to call them that. And you're right, there have been some big announcements from large OEMs, I would say, in all regions in terms of how they plan to replatform for the future, whether that be hybrid powertrains or fully electric or really just, I would say, bringing a more software-defined customer experience to the car. And as they do that, you would expect a healthy dose of automation and significant retooling, I would say, in terms of how those vehicle platforms are made. But I wouldn't comment on specific expectations for auto next year. I think that would be premature. I would just echo the comments I made, which is we are seeing differences in business momentum across geographies, relatively stronger in the U.S., relatively weaker still in Europe and somewhere in the middle in Asia. So we work with them all. We're staying close to it, but I think a bit too early to call at this point. Operator: The next question is coming from Joe Giordano of Cowen. Joseph Giordano: Can you -- when you talk about like AI making things easier to deploy, like it's also, I guess, helping nontraditional players start to try to deliver solutions here. We're seeing that from like automation players, things like that. So can you maybe talk about the competitive environment, how it's like evolving, like who's trying to participate on the fringes and what that means for you? Matt Moschner: Yes, sure. Maybe I'll just talk about us for a minute. We're on our fourth generation of AI vision. We've been at this for almost 10 years, starting with the acquisition of ViDi Systems in early 2017. And we have great teams focused on taking some of the latest best open-source models and adding our customizations, if you want to call it that, to make them more relevant and run effectively in industrial vision applications. So think of that as very much our secret sauce and Reto, who leads our vision tools development, I think, talked at length at Investor Day about how we do that and why we think we do it in a differentiated way. So I'd call that out. And it's really about model performance on accuracy, on speed, on scalability, and I still see Cognex as leading in those areas. But you're not wrong to say AI is leading to somehow a democratization of folks that are trying visual inspection more and more within industrial environment. So in that context, I see it as actually a great growth engine for getting more users of vision within factories. And then it's on us to make sure that those vision tools are Cognex vision tools. So are we seeing significant changes in the competitive dynamic? We're not, but we keep a close eye on it. And I'm very happy with the progress we're making in AI. Joseph Giordano: And then since you guys have kind of evolved the strategy a little bit, the only part that we haven't really seen a ton of evidence of yet is on the M&A side. So can you maybe talk us through what you're seeing out there? I know valuations are challenging, but a lot of buzz out there on robotics now, humanoids, all these different things. Like where does it make sense for Cognex to participate going forward? Dennis Fehr: Joe, happy to take that question. I think as we outlined at Investor Day, certainly, M&A is part of our capital allocation strategy. And certainly, with the strong cash flow generation, which we have seen this year, we definitely have the potential to do M&A. But at the same time, it's also very clear that we are setting ourselves a very high bar in terms of a, strategic fit and then b, the financial profile of the potential target company. So in that regard, I think definitely, there are areas where we could bring in, especially like adding a broader product basket to our direct sales force where we can really create a lot of synergies from our perspective. But yes, at the same time, I really want to be mindful about that we don't feel like a pressure to have to do an M&A and that we will be very mindful about the financial metrics and financial framework around it, and that could mean that an M&A wouldn't be on the cards for the next 2 or 3 years. It will really depend on actionability and if we can find the right target. Operator: The next question is coming from Ken Newman of KeyBanc Capital Markets. Kenneth Newman: Dennis, I just wanted to kind of come back to those 2026 comments that you made at the end of your prepared remarks. I understand it's not a formal guide, but when you say similar growth trends ex the commercial partnership, is that comment relative to how you see the full year of 2025 playing out? Or is that more so relative to what you've seen in the last couple of quarters? I just asked because you do seem a bit more constructive on most of the end markets that you're operating in. You're even kind of calling out being close to a bottom in auto. I'm just trying to understand the thought process there. Dennis Fehr: It's really about coming back to -- I think I talked about it before, short-cycle business and in the largest part of our business, in factory automation, we have limited visibility. It's 3 months visibility. And certainly, we think about the end markets and Matt provided some of the voice over there, and there's some areas which we really like to see like consumer electronics looks good. And Matt talked about in logistics, like how -- is there the linear growth trend on large-scale customers or not and automotive may be finding its bottom. So there are definitely different aspects there. But sometimes we're trying just not to get too much into the details in each of the markets and take a broader view on like what is macro telling us. And just on that macro side, if you look at that, it just doesn't point to that at the moment from the PMI as of today, the 2026 will look very different than 2025. And that's just another data point which we're taking in consideration. I think mostly important, why are we doing that, right? We want to think about like how do we manage the company also in terms of on the OpEx side and where do we invest and where not. And so we provided that more as a framework in the sense of like how do we think and how do we do management decisions right now and wanting to give you a guidance, right? And I was trying to be very clear about to say this is not a guidance. Kenneth Newman: Yes. No, that makes sense. I appreciate that. And then maybe for the follow-up here, sorry if I missed it, but did you provide an update on the OneVision platform? And just any color on when that becomes more commercially available? Matt Moschner: Yes. Thanks, Ken. Yes. No, we did not in the prepared remarks, but I'm happy to now. It's one of the more exciting things we're working on. And yes, just to remind the group, so we launched OneVision or we announced OneVision, I would say, in June, just before the Investor Day, and we said that it was in a limited release. What does that mean that the technology is still under active development. We're working with select customers, and it can be deployed against specific Cognex embedded systems today. And I would say 4, 6 months on from that announcement, we continue to make very good progress, progress with customers. I think they like it quite a bit. We're seeing it drive great penetration in new applications that previously weren't solved or keeping customers within our In-Sight Vision Suite ecosystem longer. I think both of those are great things. I think the usability of the technology is excellent. It offers customers great ways to collaborate on model training and great ways to track the efficacy of those models after they're deployed. So we're getting great feedback on that. What comes next? Well, we will continue to engage with customers. You can think of us engaging with hundreds of our tens of thousands of customers. So they're still quite targeted, and we are targeting a full-scale launch in the first half of next year. And that would open up the product line to more customers in more geographies that would have broader support of more of our embedded systems. So we're really focused on that, and we're excited with the momentum today. I don't have any updates for you in terms of the commercial model for the product, but just to say, it is performing well against the metrics that we set for it. Operator: The next question is coming from Tomo Sano of JPMorgan. Unknown Analyst: This is Brendan [indiscernible] on for Tomo. Just with the launch of the SLX portfolio, can you talk to the pipeline for the new AI-enabled use cases that you see and sort of how you see that impacting both your TAM and competitive positioning over the next year or 2? Matt Moschner: Yes. So we see ourselves as a first mover in this style of AI vision for logistics, and I highlighted 2 applications, really object classification, right? So telling the system what it's observing as well as side-by-side detection, which is a very common application particularly in high-speed sortation and warehouses where you really want to make sure that when you're identifying an object, it could be a box or a singulated item that it's one of them, not multiples of them. And so that really is helpful so that as those things get sorted and diverted and shipped, you're not shipping multiples of something. And so those are the 2 applications that we're really focused on. And I would say every week and month that goes by, we find new applications for the underlying AI detection algorithms. And so how that affects our total market, we have an estimate for that. And we think it is large and growing substantially faster than, let's say, the traditional barcode reading portion of that market. So yes, let's see how it goes. We've engaged with customers well ahead of yesterday's release and the feedback has been very positive. I'm excited to get to a full release status and update you on the future on how that product line is going. Operator: The next question is coming from Jamie Cook of Truist Securities. Kevin Wilson: This is actually Kevin Wilson on for Jamie. I want to ask on Europe. I think you said grew modestly, excluding the procurement shifts in consumer electronics. Sorry if I missed it, was that modest growth also excluding the onetime partnership in the quarter? And then just more broadly, excluding the onetime and excluding the procurement shifts, how are you thinking about demand trends, organic growth and your visibility in Europe? And maybe if it's possible to strip out auto, think about how that market is performing. Dennis Fehr: Yes. Maybe let me start here and then perhaps Matt will add. So I think if you look at Europe, right, so first of all, where did we saw strength? So we saw strength in the packaging market, thanks to our sales force transformation and kind of increased outreach there and penetration with our AI easy-to-use products. But then at the same time, we see stronger weakness still in the automotive side. So Matt talked about that before. That's the one market in the automotive, which is really still down. So that's kind of balanced itself out a little bit. And in general, I would say Europe, clearly, if you look back to the PMI numbers, PMIs have been improving over the last couple of months. But really from, I would say, almost depressed level more to like maybe close to a neutral level. In that regard, I would say we remain still a bit cautious about Europe and wouldn't call that there is some large growth coming somewhere in the near term, at least that's not what is suggested by the macro data, which we're looking at. Kevin Wilson: That's helpful. And then for my follow-up, now that I think we're about 1 year into your sales reorganization, I wonder if you can update on your assessment of that change in strategy. I know we've long stopped talking about emerging customer in those terms. But with one vision and your broader expanding the customer base into less sophisticated customers, I guess, what inning are we in for Cognex market penetration there? And any specific goals you have for 2026 on your path to doubling the number of customers served? Matt Moschner: Yes, sure. No, I think you have it roughly right. And just to remind the group, we started on this journey of really substantially broadening our sales channel several years ago, really in 2023. And as we expanded our sales force and brought on many new sales noise, as we call them, sales engineers, we made the decision to combine what was really 2 sales organizations into one earlier this year in January. And I would say that was the right decision, and it's going very well, where we've really formed new territories and new teams focused on different missions and those missions are between finding new customers, driving penetration in existing customers, working with more sophisticated customers like machine builders and other OEMs. So I would say I'm very pleased with where we are in terms of our sales strategy and sales organizational structure. I'd say, as we look forward into the new year, it's less about significant substantial change, and it's more about continuous improvement. We made big investments over the years in modern business systems and tools, primarily in the area of CRM. And I would say we're starting to use those tools quite effectively in terms of how we identify new sales opportunities. We get those leads to our sales noids to qualify and consult. And so what inning we're in, I wouldn't say, but I'm very encouraged by the progress we've made since the first of this year. And really, the focus right now is on continuous improvement, driving efficiency and less about any substantial changes heading into next year. Operator: That is all the time we have for questions today. I will now turn the call back over to Mr. Moschner for closing comments. Matt Moschner: Thank you for joining us this morning and for your continued support. We look forward to updating you on our progress heading into the fourth quarter.
Cary Savas: Good afternoon, everyone. Welcome to Grid Dynamics Third Quarter 2025 Earnings Conference Call. I'm Cary Savas, Director of Branding and Communications. [Operator Instructions] Joining us on the call today are CEO, Leonard Livschitz; CFO, Anil Doradla; SVP, Head of Americas, Vasily Sizov; and SVP, Global Head of Partnerships and Marketing, Rahul Bindlish. Following the prepared remarks, we will open the call to your questions. Please note that today's conference call is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainty as described in the company's earnings release and other filings with the SEC. During this call, we will discuss certain non-GAAP measures of our performance. GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and the 8-K filed with the SEC. You can find all the information I just described in the Investor Relations section of our website. I now turn the call over to Leonard, our CEO. Leonard Livschitz: Thank you, Cary. Good afternoon, everyone, and thank you for joining us today. Our third quarter revenue of $104.2 million was another all-time high, fueled by AI demand. AI grew 10% on a sequential basis and contributed to over 25% of our third quarter organic revenue. New business resulted in the highest engineering billing headcount. We remain committed to disciplined capital allocation. I'm happy to report that the Board has authorized $50 million share repurchase program, which we announced in today's press release. This represents about 15% of our company's cash. The buyback reflects our confidence in the long-term prospects of the business and commitment to investing in ourselves. We believe Grid Dynamics shares are undervalued at current market prices, making the repurchase an attractive use of capital. In Q3, we have the strongest pipeline of new large enterprise logos since the beginning of the year. Customers are regaining confidence and beginning to accelerate their strategic initiatives. We're encouraged by the quality and duration of the new engagements. New programs are multi-quarter in nature and with budget extending well into 2026. This is a substantial improvement from the first half of 2025. Our partnership influence revenue continued to grow and exceeded 18% of our third quarter revenue. Investments into partnerships are driving faster growth, stronger opportunity pipeline and deeper engagement with new and existing clients. Grid Dynamics helps customers to build advanced AI and digital capabilities. In addition to the hyperscalers, we are also enhancing our efforts around AI-centric independent vendors or ISVs. In the third quarter, we added 5x more billable engineers than we added in the second quarter. In the fourth quarter, we expect net billable engineers added to be at the similar levels as in the third quarter. This is indeed a remarkable achievement given year-end seasonal trends. We also grew our average revenue per person by 4% on a sequential basis in third quarter. We continue to rationalize our overall headcount as we align our skill sets and geographies. And this will result in greater efficiencies and higher utilization. As a result of the strong momentum in the second half of the year, we expect to end the year with a materially higher billable run rate, positioning us well for the growth in 2026. Our 2026 revenue growth will build on the top of this higher baseline, providing a strong foundation for the continued expansion and operating leverage. I'm also happy to share that we're in the midst of a company-wide initiative to expand our profitability and margins. Over the next 12 months, we expect to improve our margins by at least 300 basis points. We'll achieve our goals through several initiatives that we are currently operationalizing. This includes efficiency improvements with a focus on higher-margin geographies, leveraging enhanced pricing with our AI offering, rebalancing our portfolio of lower-margin business and embracing technologies with our AI-first initiatives. In particular, we found that the AI tools and frameworks used by our engineers in software development life cycle, or in other words, SDLC are making them materially more productive. In short, they're able to produce more code of better quality in less time. We now have an opportunity to monetize this boost in productivity. AI is the fastest-growing practice in our company, acting as a powerful flywheel for our business. I'm delighted to share our progress as Grid Dynamics advances its transformation into AI-first company. Our technology vision is clear and structured across 3 horizons: AI-first delivery, Agentic AI at scale and physical AI. This framework guides how we embedded AI into every facet of our operations and service delivery, ensuring our clients receive the most advanced production-ready solutions. AI First delivery is centered on transforming our engineering and delivery capabilities. This is about operationalizing AI in our core processes. The adoption of AI in SDLC has exploded and our Grid Dynamics AI native service offering known as GAIN is at the heart of this transformation. We're seeing strong adoption of AI First SDLC methodologies with active pilots at major clients, including a leading home goods retailer, a major financial technology company, a prominent health care revenue management provider, a global food distributor and a multi-brand restaurant company. AI First SDLC fundamentally changes project economics and delivery time lines. It enables us to take on labor-intensive legacy modernization projects that were previously inaccessible, substituting extensive parallel human efforts with specialized teams equipped with AI agents. The impact on our presales process is equally transformable. Our ability to create full-fledged proof of concepts in hours instead of weeks provides a game-changing advantage, improving conversion rates and accelerate sales cycles. As we deploy these solutions, we see leaders emerging across industries verticals who are driving measurable ROI through new AI capabilities. While some enterprises are finding success, the vast majority are waiting for commercial off-the-shelf software solutions to become available. It's evident that to achieve meaningful ROI, custom solutions must be engineered for specific business processes, leveraging the foundational capabilities provided by AI leaders such as NVIDIA, Google, Anthropic and OpenAI. This has been the core strength and DNA of Grid Dynamics. We're a trusted engineering partner that builds from AI-first principles, and this positions us perfectly to help the clients to succeed in this new era. Our second horizon focuses on deployment of Agentic AI platforms for customers and our employees. We are partnering with large enterprises to build bespoke Agentic platforms. This platform-first approach creates significant expansion opportunities. Our clients engage Grid Dynamics to architect their foundational platform and leverage the expertise to develop sophisticated AI agents for customers and employees, including automated operations with human in the loop. These initiatives drive Agentic customer engagement and enhance decision-making across enterprises. Our third horizon is Physical AI. It involves integrating AI with the physical world through technologies like digital twins, collaborative robotics and edge computing. The rise of Physical AI is fundamentally transforming the industrial robotics landscape, leading to the replacement of the legacy robotics platform with modern AI-enabled solution. We're advancing our Physical AI initiative through new partnership with selected robotics platform providers. Our recently announced SmartRay software for robotics world inspection marks an important step forward in our strategy to combine AI with robots. We plan to expand these capabilities further in the coming quarters. The key to success in enterprise AI programs is not just deploying new technologies. It's about having a deep understanding of the business and leveraging technology to solve real-world high-impact problems. Many companies are realizing that the value of AI comes from rethinking processes, data flows and decision logic around business outcomes rather than pure technology capabilities. This is precisely where Grid Dynamics excels. Our teams combine strong technical expertise with domain influence, enabling us to translate complex business challenges into scalable AI-driven solutions that deliver measurable financial results. AI projects and engagements serve as a critical entry point for the clients opening the door for larger, high-value platforms and modernization programs. We are seeing a familiar pattern where initial AI engagement such as search or personalization, expands into a broader work across data platform and cloud modernization. We're capturing a higher share of these initiatives, high-margin projects as clients deploy ROI-driven AI initiatives. We're also capitalizing as the market shifts from experimental proof of concepts to enterprise scale implementations that deliver measurable ROI. Our game framework continues to gain strong traction with the clients. The model goes well beyond simply layering tools like OpenAI's Codex or Anthropic's Claude Code for the existing engineering teams. The framework rethinks team composition, engineering workflows and best practices to maximize the productivity impact of AI. The goal is to bring substantially higher efficiency gains than just utilizing stand-alone tools. Over the past quarter, we scaled our expert team dedicated to advancing gain, further strengthening our competitive edge in the AI native engineering space. And now, I will turn the call over to Vasily Sizov, our Senior Vice President of Americas, to discuss some notable projects highlights from this quarter. Vasily Sizov: Thank you, Leonard. Good afternoon, everyone. As Leonard highlighted, we are seeing a clear change in customer tone compared to the beginning of the year. Clients who were previously focused on near-term risk management are now taking a more constructive and strategic view, thinking about how to position themselves for growth in 2026 and beyond. This shift from caution to controlled optimism gives us confidence that the current demand recovery is structural, not temporary. In fact, several of our key customers begin their fiscal year on October 1. Contract renewals we observed and new committed budgets at or above prior year levels indicate maintenance of the momentum. A significant portion of this activity is centered around AI business cases, initiatives designed to drive tangible operational and financial outcomes. As we mentioned in prior quarters, we are already executing on 2 large-scale platform programs with Fortune 500 clients that are implementing Agentic AI across the enterprise. We are now seeing a much broader wave of discussions of similar nature and the results to date have been very encouraging. The ROI profile of these AI initiatives looks more attractive than that of traditional digital transformation programs. Unlike gradual multiyear modernization efforts, these AI business cases often target specific pain points with measurable improvements, revenue uplift, cost reduction or conversion rate gains that become visible within quarters, not years. This creates a strong feedback loop as clients see real results, their interest accelerates and demand begins to snowball, which we observe in our pipeline. With that, I would like to highlight some notable projects from the quarter that illustrate these trends. First, we are developing an AI-driven bug triage solution for a leading multinational technology company. Our approach integrates advanced noise reduction, deduplication and intelligent routing with deep analytical models, custom lock processing and robust domain knowledge base. This combination directly addresses the challenges of engineering operations in bug triage and routing. By automating complex analysis and decision-making, the solution is expected to reduce triage time by up to 70% triage, while significantly improving accuracy and replacing the traditional manual approach for bug triaging. Second, for a leading technology company, we've developed a system to support compliance with the Digital Markets Act by shifting data processing from server site to on device. Using modern mobileto-edge data processing workflows, the system delivers server source data to user devices for local transformation, a critical requirement under DMA, which prohibits certain server side joints and aggregations. The platform processes billions of records daily across a wide range of business domains and data sets. This initiative has significantly strengthened compliance by enabling privacy preserving non-identifiable consumer data collection at scale. Third, a leading financial and investment services firm is modernizing its advanced search platform used daily by over 10,000 financial advisers for efficient search of the client data. The legacy interface required navigating nearly 500 filters and understanding of SQL queries and logical expressions, creating complexity and inefficiencies. The enhanced solution leverages AI and natural language processing to enable advisers to query the firm's databases using simple conversational language. This AI-driven search experience delivers faster insights and an estimated 10% boost of financial advisers' productivity. And the fourth example, a leading U.S. automotive parts provider had a plan to replace an outdated solar-based search engine with a goal of improving online revenues by at least 3% without disrupting operations. Great Dynamics partnered with them to implement a Google Verdicx AI search solution and successfully accomplished the project with results exceeding the expectations, a 3.33% uplift in revenue per search, generating over $600,000 in just 2 weeks at 50% traffic, outperforming their legacy system by 5%. Looking ahead, we plan to expand Vertex AI search to B2C and in-store channels with content enrichment and cloud migration. Now, let me turn the call to SVP Global Head of Partnerships and Marketing, Rahul Bindlish. Rahul? Rahul Bindlish: Thank you, Vasily. Our partner influence revenue has grown to over 18% of total company revenue, underscoring the value of our ecosystem-driven approach. Our partnership framework is purpose-built to advance our mission of enabling enterprises to develop world-class AI and digital solutions. As AI continues to redefine enterprise transformation, we expect these partnerships to play an even more central role in our growth, driving continued expansion in both our pipeline and market opportunities. We organize our partners into 2 primary categories. First, platform partners. This group includes the hyperscalers, our core cloud partners as well as leading data and analytics platforms like Snowflake and Databricks. These collaborations keep us at the forefront of modern enterprise infrastructure, ensuring we deliver cutting-edge cloud, data and AI capabilities to our clients. With the hyperscalers, we are strengthening relationships through targeted investments in AI and Agentic platform capabilities. This includes expanding certifications, earning specialized badges and building new joint solutions, complemented by coordinated go-to-market initiatives such as joint marketing and sales campaigns. We are expanding these initiatives from the U.S. to other regions, including Europe, LatAm and South Africa. Second, ISV partners. These partners bring deep domain-specific capabilities essential for enterprise transformation. Through these specialized ISVs, we deliver tailored best-in-class solutions aligned with specific business needs. Within the ISV ecosystem, we have expanded our partnership with leaders in middleware and workflow orchestration that underpins reliable, durable execution for Agentic platforms. Our blueprints for Agentic AI platform, incorporating such middleware developed from real-world enterprise deployments address critical challenges in scaling and managing AI workflows. We have also expanded our platform partnerships to include NVIDIA. We are actively developing solutions on NVIDIA's advanced software stack, including Omniverse to deliver high fidelity industrial-grade digital twins and simulations. For example, earlier this year, we launched the Interalogistics optimization starter kit on NVIDIA, enabling retailers, manufacturers and logistics companies to optimize facility layouts and picking paths, boosting warehouse efficiency and reducing labor costs. With that, let me turn the call to Anil, who will talk about our financials. Thank you. Anil Doradla: Thanks, Rahul. Good afternoon, everyone. We recorded the third quarter revenues of $104.2 million, slightly higher than the midpoint of our $103 million to $105 million guidance. On a year-over-year basis, this represents a growth of 19.1%. On a year-over-year basis, there were roughly 40 bps of FX-related tailwinds. Non-GAAP EBITDA came in at $12.7 million within the higher end of our guidance range of $12 million to $13 million. In the third quarter of 2025, there was a negative impact from FX fluctuations on our costs, both on a quarterly and year-over-year basis. Grid Dynamics is exposed to a currency basket across Europe, Latin America and India. While we have a natural hedge against some of the currencies and a hedging program with other currencies, the net impact on our EBITDA was approximately $0.6 million or $1.3 million on a quarter-over-quarter and year-over-year basis, respectively. Looking at performance of our verticals. Retail remained our largest vertical, contributing to $27.8 million of our total revenues in the third quarter of 2025. Revenues in this vertical decreased by 2.1% and 2.9% sequentially and year-over-year basis, respectively. The sequential decline came primarily from a handful of large retail customers, while some of them have returned to growth. TMT, our second largest vertical accounted for 27.4% of total revenues for the quarter with growth of 13.5% and 18.2% on a quarter-over-quarter basis and year-over-year basis. This growth was primarily driven by our largest technology customers. Finance vertical accounted for 24.6% of total revenues in the quarter. Revenues were slightly up sequentially and grew 81% on a year-over-year basis. The substantial year-over-year growth was primarily driven by increased demand from our fintech customers, along with contributions from our 2024 acquisitions that brought in global banking customers. Turning to the remaining verticals. CPG and Manufacturing represented 10.5% of quarterly revenues and grew by 3% on a sequential basis and grew by 11.3% on a year-over-year basis, primarily due to contributions from our recent acquisition. Other vertical contributed 7.4% of total revenues, reflecting sequential decline of 1.6% and 10.5% increase compared to the third quarter of 2024. The year-over-year increase primarily came from customers tied to delivery, service providers and acquisitions. And finally, health care and pharma made up 2.3% of our revenues for the quarter. We ended the third quarter with a total headcount of 4,971, down from 5,013 employees in the second quarter of 2025 and up from 4,298 in the third quarter of 2024. During the quarter, we increased our billable headcount meaningfully. That said, we rationalized our overall headcount as we aligned our skill sets and geographic mix. At the end of the third quarter of 2025, our total US headcount was 370 or 7.4% of the company's total headcount versus 8% in the year ago quarter. Our non-U.S. headcount located in Europe, Americas and India was 4,601 or 92.6%. In the third quarter, revenues from our top 5 and top 10 customers were 40.1% and 58.3%, respectively, compared to 39.8% and 59.2% in the same period a year ago, respectively. During the third quarter, we had a total of 186 customers, down from 194 in the second quarter of 2025 and 201 in the year ago quarter. The decline in the number of customers was primarily driven by our continued efforts to rationalize our portfolio of nonstrategic customers. Moving to the income statement. Our GAAP gross profit during the quarter was $34.7 million, or 33.3% compared to $34.5 million or 34.1% in the second quarter of 2025 and $32.7 million or 37.4% in the year ago quarter. On a non-GAAP basis, our gross profit was $35.2 million or 33.8% compared to $35.1 million or 34.7% in the second quarter of 2025 and $33.3 million or 38% in the year ago quarter. On a year-over-year basis, the decline in gross margin was from a combination of factors that included FX headwinds, higher utilization, lower working time and mix shift from our U.K.-based acquisition. Non-GAAP EBITDA during the third quarter that excluded interest income expense provision for income taxes, depreciation and amortization, stock-based compensation, restructuring, expenses related to geographic reorganization and transaction and other related costs was $12.7 million or 12.2% of revenues versus $12.7 million or 12.6% of revenues in the second quarter of 2025 and was down from $14.8 million or 16.9% in the year ago quarter. The decrease of $2.1 million on a year-over-year basis was largely due to higher operating expenses and FX headwinds. Our GAAP net income in the third quarter was $1.2 million or $0.01 per share based on diluted share count of 85.8 million shares compared to the second quarter net income of $5.3 million or $0.06 per share based on a diluted share count of 86.4 million and a net income of $4.3 million or $0.05 per share based on 78.8 million diluted shares in the year ago quarter. On a non-GAAP basis, in the third quarter, our non-GAAP net income was $8.2 million or $0.09 per share based on 85.8 million diluted shares compared to the second quarter non-GAAP net income of $8.3 million or $0.10 per share based on 86.4 million diluted shares and $10.8 million or $0.14 per share based on 78.8 million diluted shares in the year ago quarter. On September 30, 2025, our cash and cash equivalents totaled $338.6 million, up from $336.8 million on June 30, 2025. As Leonard mentioned, the Board has authorized a $50 million share buyback, which we announced in today's press release. This represents roughly 15% of our cash. M&A continues to take priority in our capital allocation strategy. We are committed to augmenting our business organically through our acquisitions that strategically enhance our capabilities, geographic presence and industry verticals. Coming to the fourth quarter guidance, we expect revenues to be in the range of $105 million to $107 million. In the fourth quarter, all our business will be considered organic in nature. We expect our fourth quarter non-GAAP EBITDA to be in the range of $13 million to $14 million. For the fourth quarter of 2025, we expect our basic share count to be in the range of 85 million to 86 million and our diluted share count to be in the range of 86 million to 87 million. Based on our fourth quarter revenue outlook, we expect our full year revenue outlook to be between $410.7 million to $412.7 million. This would represent a 17.1% to 17.7% growth on a year-over-year basis. That concludes my prepared remarks. We're now ready to take questions. Cary Savas: Thank you, Anil. [Operator Instructions] The first question comes from Puneet Jain of JPMorgan. Puneet Jain: So, it was good to see increase in number of billable headcount this quarter, which you also expect to continue into 4Q. Talk to us like about the trends you are seeing for 2026? Like can growth rates next year meaningfully accelerate from like the broad set of clients compared to what you are guiding for 2025? Leonard Livschitz: Thank you, Puneet. It's good to talk at the time when we can be comfortable to discuss the growth. First and foremost, we are the highest billable headcount in the history of the company. The rate of growth has also picked up quite a bit, and we see that going into the Q4. But why we're comfortable looking forward for the next year at this point? First and foremost, the programs we have recently renewed or we signed for are longer in nature. They're not going on a short duration. They're going on multi-quarters. The second part of that is that the programs are related to the AI initiatives, a lot of technology application, which brings the core of us bread and butter of our business. The other part, which is important is that we don't get only stuck with the traditional renewals in the beginning of the year because some of our clients now have the sliding schedule for the new fiscal year. So notable clients had their fiscal year starting in October, which means that we are very comfortable to see the growth coming through, again, longer duration. And finally, as we have told you guys before, we have a number of our top 10 clients who elect Grid Dynamics to be a preferred vendor. It wasn't as evident in the last few quarters because they were a little bit slow on expanding their technology investments. Now they're full swing, and we're taking advantage of that benefiting from being a preferred partner. Puneet Jain: Understood. And then a question on Agentic AI, like the benefits to clients from transitioning to Agentic AI-based solutions, it's clear. But perhaps talk to us about the constraints that are limiting adoption? And what will change that? Like could that unlock higher level of discretionary spend among clients for the overall IT services companies next year? Leonard Livschitz: Very good. I would let Vasili talk about some specific cases because obviously, we're in the midst of the big transformation. And there are a lot of talks about what agentic AI can do. And cannot remember, it's our Phase 2 of horizon, the AgenticI is at scale. So, Vasily? Vasily Sizov: Yes. Thank you, Puneet, for the question. Yes. So Agentic AI and AI in general is the fastest-growing practice for us. So -- and we definitely see the expansion with the business cases, which we already kind of applied during the last few quarters. But the technology doesn't stay on where it is and it continuous evolving. And we are expanding our capabilities to a broader spectrum of business problems to solve. And there are a few notable examples, which we already mentioned during the prepared remarks. And some of them, for example, apply to the cases where lower skilled employees can be replaced with higher skilled employees in a lower number of, I would say, people augmented by sophisticated AI solutions. And for one of the core clients of us, we are implementing right now the Bug Triage Solution, which is basically assumes a small number of highly expert team augmented by AI, replacing hundreds of engineers of low skilled who are basically don't possess enough skills to requalify and can be really replaced by the more sophisticated processes and solutions. Cary Savas: The next question comes from Bryan Bergin of TD Cowen. Bryan Bergin: I wanted to follow up actually a little bit on that last question as it relates to the Agentic work and some of the TAM expansion. So particularly this Agentic managed services activity that seems like it's brand new as far as an opportunity for you versus the custom build activity that you're known for. When you think about the work, the Agentic work that you're doing for clients, is there a way to segment how much of it is in this kind of new managed services area versus what would be kind of just SDLC-enhanced Agentic activity? Because I think, obviously, that's a huge market, the IT managed services industry that you could penetrate here in a new way. Vasily Sizov: Yes. So, thank you so much, Bryan, for the question. I would say, currently, majority of the revenue, which we see are actually related to solving the business cases. As SDLC, I would say, expansion of existing programs and helps to open new accounts, but this is broad in nature. So, it's actually -- it goes through majority of our engagement. So, it's very difficult to discern what exactly would be the incremental gain, I would say. It just fuels overall growth, which we saw in Q3 and was significant. Leonard Livschitz: Yes. So just to comment more specifically, the complexity of scaling the business with the Agentic AI lays in the fact that we cannot just take off-the-shelf program and apply it to the client. When we talk about AI first deployments or more commonly known as forward deployed engineers, it's more or less straightforward. The Agentic AI unveils a very strong combination of the traditional hyperscalers, with their tools, solutions, their ISVs or some specialty tools and there are -- tools created in-house by Grid Dynamics. And mind you, quite a few initiatives are actually driven by Grid Dynamics to be the client zero, which is now very popular within the company. So, we train the programs within the company on a business process as an example, and then we carry out to the clients. So, we're expanding rapidly the market because it's a combination of our traditional kind of open sourcing world, but with embracing the partnership and a big players. That's, by the way, one of the reasons I brought Rahul to the call because the success of enrollment into broader base and Gen AI application is driven by how many cable solutions are developed by our partners in conjunction with us doing something in the middle of their preparation for releases. Bryan Bergin: Okay. That's helpful. That's clear. My follow-up, I'll touch on the numbers here. So just help us with reconciling the 4Q growth view that comes in here a little bit below versus what the prior implied would have been on the fiscal '25 outlook. With all the optimism you're conveying here on billable base on client behavior, is there -- is it just some of the signed work is not immediately starting and it's kind of '26 and thereafter? Is it any client-specific issues? Just anything just on the near-term numbers set up. Anil Doradla: Yes. So Bryan, very simple. It's a timing thing. So, there are three layers of this timing. The pickup in ramp, right? We thought it would be a little earlier. It just was a little delayed, but we're getting to the same point. Second thing is that in the year, we had 2 significant clients that had an impact on us. That was about, what, $25 million, $26 million roughly there. And these 2 things -- and the third thing was that if you look at the high end, there was certain M&A also plugged in. So, when you look at these 3 things, there's nothing structural. As a matter of fact, one of the client, a top 10 client that gave us a little bit of a headache early in the year, that's coming back strong. So, it's all about timing. And that's why when Leonard started off with his opening question, what we are seeing right now going into the fourth quarter sets up very well as we get into '26. Leonard Livschitz: But just to clarify, Bryan, even when we were meeting with you a quarter ago, we could not pinpoint exactly the time of the inflection point. We were reliant first on some time during Q2, then we were not sure. And then finally, the second half of Q3, it happened. So, when Anil refers to the timing difference, if you trace the rate of growth, not from Q1 to Q1, but from Q2 to Q2, you will see significant upside. And what's very important, again, what Anil said, taking away these 2 clients and some delays we had with them, we're in a fantastic organic rate of growth. Now there always something happens. So, we can't say it will never happen with anyone again. Of course, it happens. But what really carried us out into the more success rate of growth is a broader base of clients. With the application of technology tools we were less dependent on certain variations, especially from our traditional legacy retail and the service business around retail customers as a total. Bryan Bergin: Okay. Just one clarification. Did you scale that engineering base, the billable base that's up? I know you've got some things flowing through the net headcount from 3Q. Did you scale the engineering side? Leonard Livschitz: So this is very, very simple because when we do reporting, we're trying to follow the same numerical disclosures, right? So, if you look at the number of the billable headcount, it's significantly higher. So, what happened? -- there are 2 things happen. Number one, we're much more aggressive of optimizing the OpEx, right? The other -- so OpEx is really a big thing. So, we're reducing the bench or anything like that. The second part is it's a small variance of our internship programs. We continue to hire interns, but it happens in the beginning of the quarter. So, when they come to the end of the quarter, it's really not less meaningful, but we really have a robust pipeline of projects and also trained engineers, both from the internship program, Grid Dynamics University, et cetera. But it really -- it looks a bit weird because how you can grow when you have overall headcount. But when you see our engineering headcount, building headcount, utilization, we're extremely positive going forward. Cary Savas: The next questions come from Surinder Thind of Jefferies. Surinder Thind: I'd like to start off with a question about the partnership program. Can you talk a little bit about -- when you think about the future of where those numbers could get to, I feel like we've been kind of stuck in the 16%, 17%, 18% range as a contribution or a percentage of revenues. Can you talk about where we are in that process and where you think you can ultimately get to and why the numbers are what they are today? Rahul Bindlish: Thank you for that question, Surinder. A little bit about myself. I was the first salesperson who joined the company more than a decade ago, and we started the partnership program about 4 years ago with the intention to grow our business, increase pipeline, accelerate the sales cycle. And we are doing pretty well on all those parameters. Now, specifically in terms of percentage of revenues influenced by partnership, we have grown pretty nicely to about 18%. We started off with a goal of getting to about 21-odd percent. But given the growth we have had, I do expect in the long term, we'll end up somewhere between 25% and 30%. Now, you did make a statement that we have been stuck between the 16%, 18%. In fact, if you look at the trajectory, we are growing from 16% to 18%. If you look at we have also done acquisitions. And a lot of our acquisitions, when they come in, they don't come with partner influence revenues. So, our overall percentage is still growing on a total basis, including acquisitions. Effectively on a dollar basis, our rates are significantly higher. Surinder Thind: And then maybe a question on the decision to go with the share repurchase program. Any color there in terms of -- I realize it's not a very large percentage of the cash. But for a growth company, just can you talk about that and what you're trying to signal there? Obviously, I think people recognize valuations are generally depressed, but what's the benefit here? Anil Doradla: So Surinder, I think the first and foremost thing is a signal that we're sending to the markets. We believe that we -- our deployment of this capital at these levels is a clear good return on investment. You're absolutely right. We are a growth-oriented company. So, there is a second aspect of our whole story, which is M&A. And we're fully committed towards M&A. This year, we thought we'd close 1 or 2 deals. It took a little longer. But the second aspect of our capital allocation is definitely M&A. Leonard Livschitz: Just to add on this point, I think it's very important. We believe we really passed from the trough. We're in a clear growth inflection point. And we listen to our investors. We understand the market trends, and we believe it's a value which we will coordinately bring to the market, to our shareholders while maintain a very good position on the cash. And also, there's another added factor. We believe we'll generate more cash as the business grows. And those questions are related to how we're going to improve our EBITDA margin. Why is it important? Why we specifically said something in our commentaries about how actively we're going to do that because we're not just giving away cash. We're making a business-wise decision while demonstrating ability that we'll replenish the cash as we grow with the M&A process forward. Surinder Thind: The final quick question here. Just on the margins and the idea of generating 300 basis points of expansion over maybe the next 12 months. I understand this was a year of investment, but can you put that into context why now? Why not continue to invest given all of the change? And is that kind of a onetime step function change that we should then build off of? Or how do we think about the decision to kind of focus on margins at this point in the cycle? Anil Doradla: Yes. No, no, great question, Surinder, and that's a perfect question. Look, there are a couple of things that are going on here. The first thing is the timing of it. So, on that one, we believe that the macro is going to be what it is. And we're assuming that we're taking a little bit of a conservative outlook on the macro front and saying that given what it is right now, let's look at the way the business is. We've also reorganized our headcount. There was many non-repeatable one-off things, whether it is a sudden expansion of geographies, whether one-off discounts as we went through vendor consolidation with some of our big clients and nonrepeatable events, which we've landed with. So, we're taking a look at that. And the final thing is that, we're embracing these new technologies. So, as we embrace many of these new technologies, we believe that we could get some of the returns. So, where we are on the macro front, on almost like now we are in this new world where we're at 19 countries. Remember, about 3 years ago, we're at 7. We rapidly expanded. So, we're now taking a look at, okay, how should the company look like? What is the optimal model. And we're looking at it on an account-by-account level or region-by-region level. Leonard Livschitz: Let me just add more strategic comment on that. So, there are 3 ways you can manage cost. Number one is on the pricing side. Number two, on the cost. And in this case, Anil alluded to specific regions, which have been affected by the unfavorable exchange rate, and also the transition we had to India as an example. And the third one is a technology investment. And I think you alluded to make sure that we understand how to balance it. So, answering that question. We are definitely bringing the value to the clients, which is reflected in our new contracts. We're bringing our game model, which helps us to identify the business solutions, which is giving us a bit more run rate on the favorable pricing. The cost is what priority is for Anil to work on. We're not slowing down on a technology investment. Had we slowed down technology investments, it will be a significantly higher number. But my goal in life to bring in Grid Dynamics in the future of the growth with the same or better technology improvements as we had before. So out of those 3 elements, we pursue first 2. Cary Savas: The next question comes from Mayank Tandon of Needham. Mayank Tandon: Great. I had a couple of quick ones. First is, are you getting any indication from your clients around a potential budget flush in 4Q? If there is upside to your numbers, would that be the main driver? Or are there other factors that could also be potential upside catalysts based on your guidance? Anil Doradla: So, Mayank, this is a question that I challenge our teams internally, right, in the timing of it. So, some very interesting things are happening here. Number one is that -- and the gentlemen have alluded to, but let me rehash it. Number one, if you look at all our new deals that we're signing, we're signing at levels, the pricing at that level or higher. Second thing is that all these fiscal lending deals, we're now talking about 2026. So, people who are starting the new fiscal year, that's a very fundamental thing. And the third thing, which Leonard pointed out, see, the year of 2024 going into '25 was all about vendor consolidation. And in some many cases, we went from several to a handful and we've succeeded. We had to give one-off discount. But now they are looking at ramping us, and we're talking about 2026. So, if you look at my top 10, top 15, which is what, 50% to 80% of my revenues, we're now talking about 2026. That is a fundamental thing. But you're absolutely right, this is something I challenge the team. At this stage, we do not believe it's a budget flush. I'm sure there might be some marginal things, but our fundamental tone here is driven by what we're seeing in '26. Leonard Livschitz: And what's more important from the business standpoint, this is a financial -- very good financial from the business support, we open new programs. When you have traditional what you define as a budget flush, it's unused funds, which are used for some existing projects. This is not the case. We're opening big multi-quarter programs now, which tells you that it would be very difficult for people to appropriate sums just related to the end of the year. So, we're very bullish that this is not a just budget for short term. Mayank Tandon: Got it. That's very helpful. And then just a quick follow-up on margins. I wanted to just clarify. So, the 300 basis point expansion that you're calling for in 2026, is that gross margins? Or is that EBITDA margins? And then, Leonard, you did go through the levers. Could you just go through them again? I think you went through them a little bit quickly for me, at least. So, I would love to get a little bit more granularity on what the drivers are. Leonard Livschitz: All right. So, I'll let Anil first talk about his favorite topic. Gross margins with EBITDA margin. He loves to talk about it. I'm the one who needs to make it happen. Let him talk about. Anil Doradla: All right. Well, look, at the end of the day, Mayank, EBITDA margin -- the gross margin is part of the EBITDA margin, right? So, look, we are looking at the whole P&L holistically, including the cash generation. So, we're looking at the costs. We're looking at the OpEx. We're looking at capitalization. We're looking at every aspect of it. We have at least 300 bps that we're talking about, so by the fourth quarter of next year. We have some aggressive internal targets, and we're balancing that with some of our investments in technologies. So, I don't want to say it's coming from this, this and this. It's coming from everywhere. And the bottom line is that you'll see expansion. The bottom line, I'm hoping that expansion both on gross margin and EBITDA margin, but we'll see the final numbers. Leonard Livschitz: So now I'm going to repeat what I tried to say to Surinder with a little bit more granularity. So be a little bit patient with me. So, there are 3 elements. One of the pricing increase. The second is a cost optimization. And the third one is the technology investment, okay? So on the pricing side, there are a couple of elements which are critical. One of the main one is application of our game model. game model for us as we talked about it before. It's all about Grid Dynamics AI application solution enhancements. We talked with Brian about ageentic AI and other elements. So ,some of the programs we're signing now become more favorable. It's not because we're just hammering on the dollars per employee. I mean, that happens or some renewals, but it's not the most effective way. You actually need to make sure that ROI plays a huge role. And ROI was a bit up term for a long time because when you have a traditional T&M business, what is ROI. Now when you start applying the business solutions and business practices and eliminating a lot of waste on the client side, it becomes tangible. So that's on increasing the profitability of the pricing side. On the cost side, you asked a very important question. And on the 2 parts, on the gross margin part, Obviously, with -- especially with the dollar versus euro swing, some of the European locations, particularly in European Union zone, become less favorable. So, we're looking at that, how we're going to improve our gross marginality. Of course, you increase the price, but you also look at some of those less favorable locations of the business. That's one of the part. The second part is, if I mentioned before, if you recall, Grid Dynamics is a client 0. For a lot of internal initiatives, we're testing efficiency on our own business process, and then we transfer to the clients. It would be unreasonable for us to just investigate them and don't take advantage of it. So that's an operational efficiency. that operational efficiency in HR, recruiting, hiring, finance and all these elements of the business, which don't fit traditionally into the COGS, it's all OpEx. So that's an element. The second big part of element of the cost efficiency. We are putting a lot of effort here because we see that the trend for Grid Dynamics in recent months and quarters after the start of the war, 3 years has been there already, has not been favorable. And it's time for us to tighten the balance from the operational efficiency, but more importantly, the tools. We have a lot more tools. So, it's not just say, okay, you just get rid of this group of people and hire this group. It's a lot of more intelligence. The third part, we're not touching. -- actually, we're increasing the investment. And again, Surinder asked this question. He wanted to make sure we are not stopping deployment of cash into our technology area. For one way or another, there is -- it's a full P&L. So, whatever we invest in technology is a part of the same EBITDA margin, right? And we invest into all 3 horizons, including the third horizon, which is the physical AI, robotics automation. We work with on the proof of concept and some first project with a very large industrial companies that all takes investments. The partnership work takes investments. So, we are investing in technology, partnership, 3 horizons of AI, maintaining a strong focus on innovation while looking at the efficiency, both on our COGS and OpEx, and we're pushing the game model to improve the rates on the client side. If I'm still slow, I think we need to talk offline. Cary Savas: The next question comes from Matt Dezort from JPMorgan. Anil Doradla: No, no, from William Blair. Cary Savas: Sorry, from William Blair. Anil Doradla: William Blair. Matt, you just got bumped up to JPMorgan. Is that an insult or is that a complement? Matt Dezort: It's Matt on for Maggie Nolan over at William Blair. I guess to ask another one on margins, Anil, maybe a slightly different way. I guess it doesn't sound like it, but is it -- is that 300 basis points of expansion dependent on your growth reaccelerating next year? Or can you guys expand margins even if budgets and growth remain constrained into next year? Anil Doradla: Look, there is some leverage that you get and benefit from a top line growth, right? But as I said in the opening comments, we're not assuming anything much on the macro, not a big positive, not a big help, so to speak. So even if the macro -- even if the demand environment stays the way it was in 2025, we think we -- yes, we are going to expand at least 300 bps. Leonard Livschitz: Right. And I think what's important, again, and you mentioned it before, Matt, we have actually stated this is kind of a bare minimum. So, the market favorable conditions should lift it further. The technology optimization lifted further. It's -- we look with Anil today, it's our 24th earnings call together. It's the first time we're so specific on the margin part because we believe that Grid Dynamics kind of been looked a bit on a negative front from the margins and kind of a little bit tuned down our technology excellence. And we'll look at that and we say, look, we want to make sure that investors truly understand from the granularity how we're going to move forward with a growing business, improving our technology and become really rigorous on our cost-effective initiatives. Matt Dezort: Makes sense. Congrats on 24 calls together. Maybe as a follow-up, can I ask about your guys' AI advantaged? I guess, within AI, where does your competitive advantage come from versus your peers? Is it gain? And I guess, is that helping drive the outsized traction and pipeline within any specific verticals where you guys have historical expertise like e-commerce, for instance? Vasily Sizov: Thank you, Matt. Our history of utilizing AI and in the past, everyone was talking about data analytics, predictive analytics and machine learning. The story started from 2012 when we first started implementing natural language processing for the search engines for the biggest e-commerce and retail companies in the United States. In 2017, we wrote the first book on AI called Marketing. And we have a long story and a lot of investment into building this expertise, and that's what creates a differentiation for us. So, when the truly AI boom started, we were ready. We had business cases. We had accelerators, blueprints, understanding on how to implement that technology on scale. And essentially, with utilizing LLMs, it's just another tool in our toolbox, which helped us to tackle things which were not possible to tackle before. So, I would say that, that's the key differentiation. Right now, we are embracing more and more different business cases, different verticals with specific solutions, specific applications of the technology, I would say. And right now, it's difficult to say which industry benefits the most. I would say, everywhere where we are present, we understand how the technology can help and help with figuring out the strategy and the road map for the implementation of AI technology and going more and more into implementing AI platforms, which can help to implement AI technology on the scale of the enterprise. Leonard Livschitz: So just to also look at the bigger picture, Vasily was very good to define some of the application part. You're absolutely right, you have to start from something. And e-commerce and foundational part of the retail business drove us to expansion into the other areas like CPGs, which is very similar in the application side. But if you look at the recent -- more recent growth, where the applications of AI are becoming more and more prudent, we'll start looking at our growth in a technology TMT segment. We're looking at definitely in fintech. That's been a very successful endeavor for us to expand. And now it's picking up on the industrial side. So, it started from the foundations, but now it expands in the area. And the second part to your question, look, everybody tells that they have the best position for AI. You can talk to the company which is now valued $5 trillion, or you can call a company which values very little today from what it's supposed to value, which is Grid Dynamics. And everybody tells you almost the same thing, maybe not the jacketed the leather. But the thing is we are very, very laser-focused on the key technology foundational elements, which, as you alluded, was built in the past 12 years, 13 years. So, we're not going for the super broad-based clients. We're always on a top 1,000 clients in the world. And you can see that, we are tailoring to the programs with the scale in our past experience can benefit the most to the client. So, you have somewhat narrower band at some of the bigger guys who we're competing with. But where we get into the business, we are getting an excellent job and partnering. And that's where the partnership program also expand us, because we started with Google, Microsoft, AWS and NVIDIA. We have those fantastic partners. And when they see the value of Grid Dynamics, then it really speaks for what we are. But the time will tell who is going to be better. So, we're very bullish, but thank you for checking on this point because you need to be us and everybody else honest how good we and others are at AI. Cary Savas: Thank you to our analysts for all your insightful questions. With that said, this concludes the Q&A session for today. I will now pass it over to Leonard, our CEO, for closing comments. Leonard Livschitz: Thank you for joining us today. Our results highlight the strength of Grid Dynamics business expansion and formidable position in AI-driven industry. We have many reasons to be optimistic about our outlook. A meaningful increase in billable headcount in the second half of 2025 positions us well for the growth in 2026. We focused on double-digit growth in our AI business, scaling our partnership ecosystem, implement margin expansion. All of these underscore our confidence in the long-term potential. Grid Dynamics will continue to deepen its differentiation through technological leadership in the quarters ahead. I look forward to updating you on the next earnings call.
Operator: Good afternoon, and welcome to Alignment Healthcare's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today's call are John Kao, Founder and CEO; and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risk and uncertainties and reflect our current expectations based on our belief, assumptions and information currently available. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors sections of our annual report on Form 10-K for the fiscal year ended December 31, 2024. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on our company's website and our Form 10-Q for the fiscal quarter ended September 30, 2025. I would now like to turn the call over to John. John, you may begin. John Kao: Hello, and thank you for joining us on our third quarter earnings conference call. For the third quarter 2025, we exceeded the high end of each of our guidance metrics. Health plan membership of 229,600 members represented growth of approximately 26% year-over-year. Strong health plan membership growth supported total revenue of $994 million, increasing approximately 44% year-over-year. Adjusted gross profit of $127 million increased by 58% year-over-year. This produced a consolidated MBR of 87.2%, an improvement of 120 basis points over the prior year. Finally, our adjusted SG&A ratio of 9.6% improved by 120 basis points year-over-year. Taken together, we delivered adjusted EBITDA of $32 million, solidly surpassing the high end of our adjusted EBITDA guidance. Our third quarter results now mark the third consecutive quarter in which we surpassed the high end of our adjusted gross profit and adjusted EBITDA guidance ranges and raised the full year guidance. These results were underpinned by inpatient admissions per 1,000 in the low 140s and demonstrate the power of our ability to manage risk in Medicare Advantage by placing care delivery at the center of our operations. As we've demonstrated in 2024 and through our year-to-date performance in 2025, our unique model has positioned us to succeed amidst a paradigm shift in the industry marked by lower reimbursement and higher star standards. We continue to make investments that will improve operations to back-office automation, clinical engagement, AVA AI clinical stratification and Stars durability. These investments will further separate us from our competitors. For the full year, we now expect to deliver $94 million of adjusted EBITDA at the midpoint of our guidance range in 2025 compared to our initial full year guidance of $47.5 million at the midpoint. Jim will expand further on guidance in his remarks. Moving to Stars results, 100% of our health plan members are in plans that will be rated 4 stars or above for rating year 2026, payment year 2027 compared to the national average of approximately 63%. We are once again demonstrating the consistency and replicability of our high-quality outcomes across each of our markets. For starters, our California HMO contract earned a 4-star rating. This is its ninth consecutive year rated 4 stars or higher. Meanwhile, our competitors in the state only have approximately 70% of members and plans rated 4 stars or higher for payment year 2027. Our ability to consistently earn high stars results from AVA's centralized data architecture that provides our organization and clinical resources with a cross-functional visibility to execute on each stars metric. In addition to our strong California performance, we now have 2 5-star contracts in North Carolina and Nevada. Furthermore, we earned 4.5 stars in Texas in its first rating year. Our results outside of California not only demonstrate our commitment to quality, but also underscore the replicability of our outcomes across geographies, demographics and provider relationships. Our latest results set us apart from our peers and create additional funding advantages in payment year 2027. Looking ahead, we believe the improvement we made to the raw star score of our California HMO plan in rating year 2026 sets a solid foundation for rating year 2027 and payment year 2028. Furthermore, we believe CMS' transition to the excellent health outcomes for all reward, formerly known as the Health Equity Index, will add cushion to our 4-star rating in California. This change rewards health plans that effectively serve the most vulnerable low-income seniors, including those who are duly eligible. Our model is particularly well suited to manage this population with the clinical expertise and high-touch care provided by our Care Anywhere teams. Most importantly, we believe the move toward a bonus factor that focuses on clinical outcomes furthers CMS' mission to create greater alignment between quality and reimbursement. Lastly, I'd like to share some early thoughts on the 2026 AEP. For the upcoming plan year, we are continuing to take a measured approach towards balancing membership growth and profitability objectives, consistent with our strategy in the past years. Our ability to deliver low cost through our care management capabilities is creating the capacity to keep benefits across our products generally stable to modestly down. We believe this disciplined approach supports our growth objectives while staying mindful of the third and final phase in of V28. Given continued disruption in the MA industry in 2026, we believe there will be an incremental opportunity to take share while growing adjusted EBITDA year-over-year. Based on the strength of our early AEP results, we are confident that we are on track to grow at least 20% year-over-year. Consistent with our approach in past years, our sales operations are focused on matching seniors with the right products that support their lifestyle and growing in markets where we have the strongest provider relationships. We're very encouraged by the early activity of this selling season and look forward to sharing our full results with investors after the conclusion of the 2026 AEP. Taken together, our core competency in care management, continuous improvement in member experience and ongoing investments in AVA AI are all positioning us for further improvements to quality and outcomes. We believe we were the best Medicare solution for seniors everywhere, and we look forward to serving even more seniors across our markets in 2026. Now I'll turn the call over to Jim to further discuss our financial results and outlook. Jim? James Head: Thanks, John. I'm pleased to share our results for the third quarter, which were underpinned by strong execution across the board. For the third quarter, health plan membership of 229,600 increased by 26% year-over-year. Revenue of $994 million increased by 44% over the prior year. Outperformance in our revenue growth was predominantly driven by continued momentum in our new member sales during the quarter. Third quarter adjusted gross profit of $127 million grew 58% compared to the prior year. This represented an MBR of 87.2% and improved by 120 basis points year-over-year. Outperformance of both adjusted gross profit and MBR was driven by a continuation of disciplined execution of our clinical activities. This drove inpatient admissions per 1,000 in the low 140s during the third quarter. Meanwhile, Part D modestly outperformed our expectations as growth in utilization trends moderated sequentially. Our Part D experience through the first 9 months of the year gives us confidence that all of the moving parts related to the IRA changes have been appropriately captured and that we are on pace to meet the Part D margin assumptions embedded within our guidance. Turning to our operating expenses. Adjusted SG&A in the third quarter was $95 million and declined as a percentage of revenue by 120 basis points year-over-year to 9.6%. The year-over-year improvement to our SG&A ratio was driven by the scalability of our operating platform. Additionally, we experienced a few million dollars of SG&A timing benefit in the third quarter that we expect to reverse in the fourth quarter, leaving our full year SG&A outlook roughly unchanged. Taken together, adjusted EBITDA of $32 million resulted in an adjusted EBITDA margin of 3.3% and represents 240 basis points of margin expansion compared to the third quarter of 2024. Moving to the balance sheet. We ended the third quarter with $644 million in cash, cash equivalents and investments. Cash in the quarter was favorably impacted by the timing of certain medical expense payments, which resulted in higher operating cash flow during the third quarter. This timing difference also increased our Q3 days claims payable, but we expect this timing difference to normalize in the coming quarters. Our reservings methodology remains consistent and excluding this timing effect, we estimate that total cash would have been modestly higher sequentially and days claims payable would have been flat to modestly higher year-over-year. Importantly, this had no impact on the P&L. Turning to our guidance. For the fourth quarter, we expect the following: health plan membership to be between 232,500 and 234,500 members, revenue to be in the range of $995 million to $1.01 billion; adjusted gross profit to be between $104 million and $113 million and adjusted EBITDA to be in the range of negative $9 million to negative $1 million. For the full year 2025, we expect the following: revenue to be in the range of $3.93 billion to $3.95 billion; adjusted gross profit to be between $474 million and $483 million and adjusted EBITDA to be in the range of $90 million to $98 million. Building upon the strength of our third quarter results, we once again increased the full year outlook for each of our guidance metrics. Given our year-to-date momentum on membership growth, we raised our year-end membership guidance by 2,000 members at the midpoint. Expectations for higher membership also drove our full year revenue outlook approximately $41 million higher at the midpoint, and we now expect to finish the year with nearly $4 billion of revenue for the full year 2025. Moving to our full year profitability expectations. Our updated adjusted gross profit guidance of $479 million at the midpoint increased by $18 million. This implies an MBR of 87.9% and reflects nearly 100 basis points of MBR improvement year-over-year. Similarly, we increased the midpoint of our adjusted EBITDA guidance by $18 million, flowing through the entirety of the increase to the midpoint of our adjusted gross profit outlook, while full year SG&A assumptions remain roughly unchanged. Our guidance assumes a portion of the strong year-to-date ADK performance persists through the fourth quarter. However, as a reminder, the final months of the year are expected to have higher utilization due to the seasonal impact of the flu. Meanwhile, we continue to take a prudent stance to our Part D assumptions given significant changes to the program this year. Lastly, on seasonality, we expect our MBR in the fourth quarter to be higher than the third quarter due to the typical seasonality of medical utilization. As a reminder, our MBR seasonality in 2025 is not comparable to 2024 due to changes to the Part D program and prior period reserve development in 2024. On SG&A, we expect an increase in expenses during the fourth quarter associated with growth-related costs, consistent with our past experience and the timing of certain expenses, which we expect to land in the fourth quarter. In closing, consistent execution of our core capabilities in care management is taking root in our financial results in 2025. Reiterating John's earlier remarks regarding 2026, we remain confident in our membership growth expectation of at least 20%, given our progress during the early weeks of the selling season. We believe our balanced approach to growth and profitability positions us well as we close out the remainder of the year and prepare for 2026. With that, let's open the call to questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Scott Fidel with Goldman Sachs. Scott Fidel: First question, and John, appreciate the sort of early insight into the growth on 2026 likely to meet or exceed your 20% growth target. And I know you're not giving guidance at this point, but just curious around the comment that you made around the market share opportunities from industry disruption. And clearly, we know there's a lot of that right now for MA. How would you frame that in terms of thinking about that in the context of California versus the non-California markets? John Kao: Scott, yes, I'd say very, very pleased with across-the-board growth in California and really leveraging the 5 stars in North Carolina and Nevada. So, we're very pleased about the geographic kind of composition of the growth. I'd say even more importantly is kind of the product mix and the kind of provider networks that we think are very high performing and where the growth is actually occurring. And so, I think for all those reasons, we're very, very pleased just we're only 2 weeks into this thing. So, I don't want to get too far ahead of ourselves, but 2 weeks in, we're really pleased with it. The other thing I would just remind everybody, I know there's a concern that we're going to grow too much and we're going to pick up a bunch of bad business, et cetera, et cetera. I'm less worried about that simply because we had a 60% growth year in 2024. And not only do we onboard it well, we manage the risk really, really well. And I think we're proving that we can scale the clinical model and we can actually manage the polychronic population really, really well. And so, it's just a core competency that we have that I'm not sure others can replicate at this point. So, for all those reasons, I'm very pleased as to where we are. Scott Fidel: Got it. And for my follow-up question, John, I know that at a recent industry conference, you had talked about considerations around potentially pursuing some M&A or sort of partnership opportunities on the vertical integration side to unlock the MLR opportunities, particularly associated with supplemental benefits. And just curious around how you think about weighing or balancing the opportunities that would be related to that, like improving the MLR versus the potential risks of sort of entering new markets that may have some different fundamental dynamics and then just maybe sort of moving away from sort of this sort of core strategy you've had that's clearly been working in terms of the focused strategy on MA. John Kao: Yes. No, good question, Scott. I'd say we're looking at a lot of different opportunities. And to your point, we're being very discerning. We're being very, very careful to the extent that there are tuck-in opportunities, I think we have to take those more seriously than others relative to, say, buying books of business in completely new markets. I think we're being very thoughtful about that. I would not worry about that part of it. What I said at a prior conference was around basically supplemental benefits and tuck-in acquisitions related to what we would call captives, ancillary captives. And when you talk about 4% to 5% of premium being really kind of applied to the supplemental business and supplemental products, it just makes sense for us to -- if we bought or started, say, some ancillary business, whether it'd be a dental PPO or a behavioral HMO or whatever it is, that we could seed it with 250,000 lives right off the bat kind of thing. And I think that there's going to be some margin improvement opportunity for us to do that. And I think we can do that with very little execution risk. Does that answer where you're going? Scott Fidel: Yes, it does. Obviously, it's going to be an evolving story, but I appreciate that insight. Operator: Our next question comes from the line of Matthew Gillmor with KeyBanc. Matthew Gillmor: I want to follow-up on the 80,000 metric and the favorability on inpatient costs. I think last call, John, you talked about giving providers more tools and more data and also maybe moving some of the UM and inpatient risk back to Alignment's balance sheet. Can you just remind us where you are in terms of risk sharing with physicians in California? And how do you see that evolving during 2026 and beyond? John Kao: Yes. Matt, great question. We're about 65% to somewhere between 65% and 70% is in what we would refer to as our shared risk business. And what that represents is really where we're working with IPAs, particularly in parts of Southern California where we have shared risk arrangements where we're managing the inpatient -- we're at risk for the inpatient risk. And what we have done starting last year is really take on more of the UM component. And we've done that in a way that is resulting in better clinical outcomes and improved financial outcomes for our IPA partners. And so, it's kind of a win-win for everybody. And the other 1/3 of the business is still kind of globally capitated, but I think you're going to start seeing more and more of that shared risk business. I think it's more durable overall. I think there's going to be less kind of abrasion with kind of global cap kinds of entities as there's more and more shared -- it's more aligning longer term. I think outside of California, you're going to have more shared risk and/or just directly [Technical Difficulty] we really are the IPA. We are the network, and we are supporting the practices in terms of not only UM, but making sure that -- all the stars gaps are closed the way we want and the -- our risk adjustment gaps are closed the way we want. And frankly, that's what's caused us to get to 5 stars in North Carolina and Nevada. We have more visibility and control with the direct providers, PCP specialists and the hospital partners. And so, I think that's a trend that you're going to see more and more from us. And really, I think the team has done a very good job about kind of doing what we -- it's called de-delegation of UM. And we've done it in a win-win way, which is really important to us because we want to make sure that we're aligned with the providers and that collectively we can provide better clinical outcomes and better benefits for the beneficiaries. Matthew Gillmor: Got it. That's helpful. As a follow-up, Jim had mentioned some favorability with SG&A, but that's being reinvested. Can you dimension that a little bit, both in terms of the sizing and then also where that reinvestment is going? Should we think about Stars or other items there? James Head: Yes. Sure thing. The SG&A against the consensus guidance was a handful of million favorable in Q3. And as you noticed, we didn't adjust the full year expectations for SG&A. We kept those intact at around $385 million. So, what you're hearing from us is there was a little bit of timing issue with respect to the investments we're making. I would also say that we want to be well positioned for growth in 2026 and just make sure that we've got those resources ready. And so really, it's a timing issue. We kept our guidance intact and we outperformed a little bit in the third quarter. We think we'll kind of give it back in Q4. John Kao: The only addition to Jim's point is, it's kind of a part. The question you asked about where are we investing is what -- we're not talking a lot about yet, but we will just the continuous improvement that we're making to improve automation across the entire organization, improved AI logic in our Care Anywhere and AVA AI. And just even more, I would say, kind of productivity improvements and efficiency in a lot of our clinical programs. All of that's happening behind the scenes and that's where the dollars are being spent. And I think these investments that we're making now are really going to start paying out even more for '26 and '27. Operator: Our next question comes from the line of Michael Ha with Baird. Michael Ha: Thank you and thank you for commenting on the investor debate about doing too much growth. I want to quickly clarify first on the flip side. If you were to do less growth, I imagine that would only serve to further empower your EBITDA bridge since you have less lower-margin new members. Is that fair to say as well? And then my real question on Star ratings, and congrats on your Star rating results back in September and today, I know you mentioned your overall raw Star rating score increased year-to-year, well within 4 stars. If not, I think you mentioned very close to 4.5, but when I double-click into the contracts, 315, 3443, the summary rating for Part C and Part D seem to be 3.5, but the overall star rating, of course, is 4.0. I know that there are certain measures excluded that go into that rating ending up at 4. But I guess that face value imply your underlying ratings might have declined instead of improved. So I was wondering if you could help sort of reconcile your commentary on the raw star ratings improvement versus the summary ratings that what they appear to indicate. John Kao: Yes, hey, Michael, it's John. Yes. No, our overall raw score went up significantly from 3.7, whatever it was 5.2 or something like that to 4.05 or 4.06. So we're really happy about the raw score increases. I think we can probably have a sidebar conversation with you on the mechanics of it. But really, it's a data science, this kind of how you think about the Part C, how you think about the Part D and kind of all that goes into it. But the raw scores absolutely went up, and we're happy about that. Michael Ha: Okay. And then on G&A, sub-10%, incredibly powerful. I know you're aiming for some more improvement on G&A going forward. And I think you're now actually planning for the first time to invest into your brand. I think I saw on LinkedIn, there's a commercial video. So I was wondering how should we think about the brand investment going forward. It seems like you're implementing it starting this year. And I guess my main question is, how should we think about this new marketing effort in terms of evolving your member acquisition costs near term, long term? I imagine driving member growth through marketing and advertisement might present opportunities on the cost side versus broker commission costs. James Head: Yes. Michael, I'll take the first half, it's Jim here, and I'll let John talk about the brand. But as we continue to scale the business, there's going to be a natural decline in our SG&A ratio. But I think we're going to take a balanced approach to that in the sense that we want to continue investing in the business. And I would say it's not just brand, which John will talk about in a minute, but it's also making sure that we're reinvesting back in our clinical infrastructure and the other parts of the business so we can continue to evolve our model and step ahead of the competition. So I think as we think longer term, the SG&A trends will go down, but we got to be measured and balanced about it because we want to continue to invest. But John, over to you. John Kao: Yes. I think, Michael, we're just getting big enough that it's an opportunity for us to establish not only a brand for alignment, but really, it's an opportunity for us to demonstrate what is possible if you do Medicare Advantage the way it was designed to be operated, which is why we always talk about MA done right. And I think it's going to start really representing what was kind of reflected in that ad, which is it's all about serving seniors, actually changing the paradigm and the expectation, changing how people think about MA and all the good that we do and what all the good that MA can do. And so I think we're being very thoughtful about how to do that and what the brand is going to stand for. So stay tuned for that. Operator: Our next question comes from the line of Jessica Tassan with Piper Sandler. Jessica Tassan: Congrats on the really strong results. So, I wanted to follow up on AEP. Can you just maybe offer some perspective on retention versus gross new adds for '26? Just interested in the dynamic between, obviously, the competitor with really rich dental benefits versus some service area exits from another competitor. Just how should we think about the composition of that 20% net AEP growth between retained members and gross new adds? John Kao: Yes. We're happy with both, Jess. Gross adds are strong across the board and retention is actually better than we anticipated across the board. So, it's a both and situation, which is where we need to be. The investments we've made in member experience is paying off. It continues to pay off. So really happy with both. Jessica Tassan: Okay. Got it. That's helpful. And then just as we look at Planfinder, it seems like Alignment stands out from kind of a core benefits perspective, so really favorable on metrics like average medical move, average outpatient max cost sharing, but maybe a little less generous on supplemental benefit. Is this an appropriate conclusion? And can you just explain the rationale or kind of the decision to structure benefits in this way? And then just secondarily, interested to know how Alignment seems to be managing through Part D redesign despite having relatively low deductible and co-pay versus co-insurance in Tier 3. Obviously, that's working for you guys in '25, and it looks like it will continue next year. So just hoping for some comments on structure of benefits. John Kao: Yes. No, it's -- everything is designed around consistency for the beneficiary. Everything is year-to-year. We're very thoughtful market-by-market. We've shared that with you all in the past, market-by-market business plans, strategies and consistency for value creation for each beneficiary is really paramount. It's the first thing we think about. And so, you're absolutely right. We have taken the same kind of approach this past year as we have in the past, very disciplined and detailed product design strategies. In our markets in California, Part D is very competitive. So, we didn't make any material changes there. There is some shifts to coinsurance in a couple of different markets, but I think we're pretty stable across the board. James Head: John, I'd echo that. Stability is the name of the game. And as we said, we've done a really good job executing against Part D through 2025. And as we went into bids, last year's bids for this year, we were prudent and thoughtful about how we did it, but we were executing well through 2025. And so we're kind of felt good about the stability in our benefits. And so we think that sets up well for next year. John Kao: With respect to your supplemental question, a lot of our thinking around that has been also driven by not just the bid economics, but also by quality. Yes, so, we ensure our members that we provide the right quality of supplement benefits. And so that's just something we always think about in some cases, the answer is we pretty give ourselves [indiscernible] make sure we were absolutely providing like best experience not all. And so we were -- it was just something that was factored into some of our experience. Operator: Our next question comes from the line of Ryan Langston with TD Cowen. Ryan Langston: I guess on the guidance, I think you've raised the full year EBITDA guidance 4x over the last calendar year. I'm just trying to get an appreciation for what sort of levels you were thinking in your internal budgeting? Or was this really sort of a legitimate surprise? I appreciate the conservative guidance. Just wondering how this stacks up versus sort of where you had initially expected the year to shake out. James Head: Yes. This is the new person second call as CFO, but I would say the following. What's happened this year is we've just had a lot of good execution in a very difficult year, okay? So, I guess a couple of things coming into 2025 that, that were new to the Alignment in the industry, which is we continue to have the second step of V28 phase-in. We had a brand-new year of IRA, and we had a -- unique to Alignment was we had a very large cohort of new members. And so against that backdrop, and we weren't ready to bet on final suites from 2024. So, you had all those things swirling around as we set the year out. And what's happened throughout the course of the year is we've executed really well. And I would say executed across a whole variety of dimensions well, whether it's ADK and some of the moves that we've made with engaging with providers to manage utilization in a very constructive way. I think Part D executed well for us across the board. We got some favorability from the final suite from our new members. And so there's an aspect here of working through a pretty big change in the business and the model over the last year successfully. And I think that points well for the future for us. It's one of the reasons why I joined. Ryan Langston: Great. Just real quick. I appreciate the confidence in the 20% growth, but more just to industry growth. PMS is calling for basically flat year-over-year enrollment. I think the plan said they actually expected to decline. Just wondering if you have any view on overall MA market growth in 2026. John Kao: Yes, yes, California typically is lower than the industry, again, year-to-year. There is a lot of disruption out there. There's a lot of changes going on out there. And so again, we feel very well positioned on the growth side and the retention side. Operator: Our next question comes from the line of Craig Jones with Bank of America. Craig Jones: So, I was wondering, as we enter the final year of V28, do you have any thoughts on the likelihood of a potential V29 in the next few years? And if there is one, do you have any thoughts on the positive or negative implications to using more encounter data as part of the risk adjustment calculation? John Kao: Yes. Craig, good questions. I think you're going to see some changes. This is what we hypothesize some changes with respect to how CMS is going to deal with HRAs. I think there's going to be more, shall we call it, program integrity around ensuring there will be clinical validation around an HRA, same with kind of chart reviews. The encounter-based baselining was referred to in last year's advanced notice. I don't know if they're going to be implementing any of that in this advanced notice. I would be surprised actually. It's something that has been discussed. But in terms of how to operationalize it in a timely way, again, I'd be surprised if it was introduced to impact 2027. I think from a policy point of view, a lot of what we're hearing about really is around kind of MA program integrity, so to speak, making sure that trust in the program is high and kind of gaining is eliminated. I think that's what we see. And it's unclear that they did go to an encounter-based baseline methodology. It's kind of unclear as to what the net impact would be. It is one of the reasons why we don't think it's going to get implemented for '27. Craig Jones: Got it. And then just as a quick follow-up to a question earlier. I think you said your raw score for your primary plan was 4.05. And then you've talked about how that HealthEquity index next year will give you like a cushion. I think you said previously 0.25 as a tailwind, all else being equal. Is that still correct and that mean primary plan about 4.5 for next year? John Kao: Depending upon where the cut points end up, that's kind of what we mean by that. It does give us a little bit of cushion, but we just really aren't sure what's going to happen with the cut points. We thought -- I thought that they would not be as aggressive as they were this past year. They were aggressive. We're actually really happy with the fact that we still got the 4 stars for all of our members. And I think you've also heard me say in the past, I'm not going to be happy until we get to 5 stars for every one of our plans. We're making progress on that front. But your logic is right. What we don't know is where the cut points will end up. Operator: Our next question comes from the line of Andrew Mok with Barclays. Andrew Mok: I wanted to follow up on some of the seasonal flu comments in the context of what's going on with the broader policy guidance on vaccines. Are you seeing any behavioral changes from seniors or vaccine uptake this year? And if so, how are you managing that dynamic? James Head: Yes. It's a question that we've been looking at internally, and we follow our -- essentially our Part D cost, which is basically a lot of it is flu shots and literally tracking it daily, weekly. It seems to be trending pretty much in line with what we've seen in the past. I'd say a little bit softer in Q3, but picking up in October. So, I don't think we see a material change in the trajectory of that. And I think we're mindful in Q4 of just kind of flu as it impacts both the Part D costs, but also inpatient ADK. Q4 is typically a seasonal quarter where that impacts us a little bit more. So we are cautious about that, but it doesn't seem to be anomalous. Andrew Mok: Great. And as a follow-up, John, you made a number of comments today on continued investments in all things, operational, clinical, tech stars. Can you help us understand how much of that investment spend is already captured in current spend versus what's new or incremental? And it'd also be helpful to understand how much of that investment or that spend is directly earmarked for things like Stars, especially in the context of cut points moving higher? James Head: Well, I don't think it's any -- there's no leaps and bounds types of investment. What we're doing is we're being very smart in applying investment dollars. I'm talking about OpEx and CapEx across the enterprise. And that will be a little bit in the fourth quarter. What's really impacting the fourth quarter is more making sure we're prepared for growth as we typically are in Q4. But as we move forward, we're making sure that we have enough room to make the investments in the platform, in our capabilities, in our human capital, et cetera, as we go forward. But none of it is dramatic. It's just making sure that we find room as we scale to reinvest back in the business and do it smartly. And we're -- one of the things that I'm very focused on is making sure that we're really kind of underwriting that -- those investments smartly and making our choice as well. Operator: Our next question comes from the line of Whit Mayo with Leerink Partners. Benjamin Mayo: John, do you know what percent of competing plans in your markets were commissionable last year and how that compares to this year? John Kao: I can't answer that question. I actually don't know the answer. I know I do have a couple of plans stopped paying commissions. But I actually don't know and [indiscernible]. Most are still paying, just to be clear. Benjamin Mayo: Yes. My follow-up was just on RADV. I was just wondering where we are on that, what the next steps are and how prepared do you think the organization is. James Head: Yes and there's a little bit of a pause in the action, as you know, given the fact that the Humana case, the courts overturned RADV procedures based on Procedures Act violations. But I think our internal point of view is that CMS still has a lot of ways to pursue this, and we don't think that is going to go away. So, our base case is that it's going to be here. It's just a question of timing. But having said all that, we think we're well positioned. Our compliance or documentation processes are really good. We feel good about the operations and how we've set that up. And especially, we've never been an organization that has really relied on risk adjustment as a revenue tool. So, we're just being prudent about that. But we do feel as the base case is that it's going to be there. Washington is not letting go of this topic just yet. Operator: Our next question comes from the line of Jonathan Yong with UBS. Jonathan Yong: Just in relation to kind of AEP again, just in terms of the live that are coming on to your books, how do they look? What's kind of the makeup in terms of, say, new to MA either and who might be switching on to your books from elsewhere? Just curious on that particular dynamic and if those members, given the volatility we've seen in the market kind of fit into the Alignment model? John Kao: Yes, it's consistent. It's still between 80% and 85% of switches. And really, it's across the board. It's not really concentrated with any particular payer that we're taking share from. It's kind of consistent across the board. And that's really in all geographies as well. Jonathan Yong: Okay. Great. And then just as we kind of just thinking forward a little bit here, but as we think about, say, next year, final year of V28, the pressures in the industry, generally speaking, should hopefully have abated at that point. How do you think about a potentially more competitive environment kind of looking in the medium term, particularly with respect to possibly expanding more beyond your current markets into other states or geographies? John Kao: Yes. Just remember, after V28 final third year phased in 2026, they're not going back to V24. So it's still going to be a tight reimbursement environment. Unclear what's going to happen on [ starters ]. But I think the way that you should think about us is our ability to manage the care for our beneficiaries allows us to control the costs. And in this new world of taking away, this is call the gaming associated with coding, the organizations that can provide the highest quality care at the lowest cost will ultimately be the winners, which is why you've seen us do so well in '24 and '25. And so when you kind of get it into '26, that's going to be even emphasized even more. So we feel really good about how we're positioned in '26 and beyond. And I think heading into '27, you need to start looking at what exactly are they going to do from a policy perspective. And I think we're all kind of waiting for that. I would just underscore program integrity, I think is paramount to where CMS is focused. Operator: Our next question comes from the line of Ryan Daniels with William Blair. Ryan Daniels: Yes. John, maybe one for you. I noticed during your prepared comments, you mentioned the term replicability several times in discussing your business model. And I think we're seeing that with the good Star ratings outside of California. So, number one, how is that also translating into MLR performance and overall margins in those newer markets? And then number two, given that you brought that up several times, it wasn't lost on me. Is that an indication of more willingness from you and the Board to move into additional markets going forward? John Kao: Yes, hey, Ryan, yes, absolutely. What I've stated in the past is we really wanted to fund that growth from cash flow from operations. And obviously, we're going to kind of fulfill that promise. We're being diligent in looking at both new markets within the existing state footprint that's going to be the most capital efficient, brand efficient as well, as well as looking at some new states for 2027. And so, I think you're going to see us take a much more systematic kind of best practice playbook approach toward replicating into these new markets. I think we've come a long way in the last few years with our confidence not only in how we deploy the care model, but how we ensure that our shared services can scale in terms of ingesting the members, onboarding the members and then caring for the members. And I think that's going to be good for seniors everywhere. So, we feel really comfortable about that. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and thank you for holding. Welcome to the Motorola Solutions Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are posted on the Motorola Solutions Investor Relations website. In addition, a webcast replay for this call will be available on our website within 3 hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. [Operator Instructions] I would now like to introduce Mr. Tim Yocum, Vice President of Investor Relations. Mr. Yocum, you may begin your conference. Tim Yocum: Good afternoon. Welcome to our 2025 third quarter earnings call. With me today are Greg Brown, Chairman and CEO; Jason Winkler, Executive Vice President and CFO; Jack Molloy, Executive Vice President and COO; and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results along with commentary, and Jack and Mahesh will join for Q&A. We've posted an earnings presentation and news release at motorolasolutions.com/investors. These materials include GAAP to non-GAAP reconciliations for your reference. During the call, we reference non-GAAP financial results, including those in our outlook, unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Information about factors that could cause such differences can be found in today's earnings news release and the comments made during this conference call in the Risk Factors section of our 2024 Annual report on Form 10-K or any quarterly report on Form 10-Q and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. And now I'll turn it over to Greg. Gregory Brown: Thanks, Tim, and good afternoon, and thanks for joining us today. First, Q3 was another really strong quarter with revenue and earnings per share exceeding our guidance, highlighted by robust growth in software and services across all 3 technologies as well as a strong start for Silvus. Revenue was up 8% in the quarter with 11% growth in software and services and 6% growth in Products in SI. We also expanded operating margins by 80 basis points, led to record Q3 operating earnings in both segments and just under $800 million of record Q3 operating cash flow. Second, demand for our safety and security solutions across public safety and defense remains strong and led to record Q3 orders with double-digit orders growth in both segments. We also ended the quarter with our highest Q3 ending backlog ever of $14.6 billion, up $467 million versus last year, which included a record $11 billion of S&S backlog that is increasingly driven by our Command Center and video solutions. And finally, following our strong Q3 results, we're again raising our guidance for full year earnings per share. I'll now turn the call over to Jason to take you through results and outlook before returning for some final thoughts. Jason Winkler: Thank you, Greg. Revenue for the quarter grew 8% and was above our guidance with growth in all 3 technologies. Foreign currency tailwinds during the quarter were $21 million, while acquisitions added $123 million. GAAP operating earnings were $770 million or 25.6% of sales, up from 25.5% in the year ago quarter. Non-GAAP operating earnings were $918 million, up 11% from the year ago quarter, and non-GAAP operating margin was 30.5% of sales, up 80 basis points, driven by higher sales and improved operating leverage, partially offset by higher tariffs. GAAP earnings per share was $3.33, up from $3.29 in the year ago quarter. Non-GAAP EPS was $4.06, up 9% from $3.74 last year. The growth in EPS was driven by higher sales and margins and a lower diluted share count, offset by higher interest expense in the current year. OpEx in Q3 was $652 million, up $35 million versus last year, primarily due to acquisitions. Turning next to cash flow. We achieved record Q3 operating cash flow of $799 million, up $40 million versus last year and free cash flow of $733 million, up $31 million. The increase in year-over-year cash flow was primarily driven by higher earnings, net of noncash charges. Capital allocation during Q3 included $182 million in cash dividends, $121 million in share repurchases and $66 million of CapEx. Additionally, the company closed the acquisition of Silvus for $4.4 billion and settled $70 million of 6.5% senior notes that were due within the quarter. Moving on to our segment results. In the Products and SI segment, sales were up 6% versus last year, driven by growth in MCN and Video. Revenue from acquisitions in the quarter was $111 million, while FX tailwinds were $11 million. Operating earnings were $555 million or 29.3% of sales, flat compared to the prior year, primarily driven by higher sales and improved operating leverage, offset by higher tariffs. Some notable Q3 wins and achievements in this segment include a $40 million P25 device order for a U.S. federal customer, a $14 million P25 device and mobile video order for Arlington, Texas and a $10 million Silvus order for NATO country. In addition, we received 3 large orders during the quarter for P25 system upgrades to our new D-Series infrastructure, a $110 million order from the State of Colorado, an $84 million order from the Tennessee Department of Safety and an $82 million order for the U.S. state and local customer. These large multiyear orders are a further testament to our customers' commitment to investing in our next-generation LMR infrastructure, and we have a large funnel of opportunities over the next several years. In Software and Services, revenue was up 11% compared to last year, driven by strong growth across all 3 technologies. Revenue from acquisitions was $12 million in the quarter, and FX tailwinds were $10 million. Operating earnings in the segment were $363 million or 32.6% of sales, up 200 basis points from last year, driven by higher sales, improved operating leverage, partially offset by acquisitions. Some notable Q3 highlights in the segment include a $57 million P25 services order for the State of Louisiana, a $25 million command center order for the State of Idaho, a $20 million P25 services order for a U.S. state and local customer, a $14 million mobile video order for the New York State Park Police, a $13 million P25 services order for the Buenos Ares Police and a $10 million mobile video order for the Bulgarian MOI, yet another win in Europe, where we've had good success in mobile video. In fact, Bulgaria represents the 18th European country where we will be deploying our mobile video solutions. Moving next to regional results. North America Q3 revenue was $2.1 billion, up 6% versus last year. International Q3 revenue was $888 million, up 13% versus last year. Growth in each region was across both segments and all 3 technologies. Moving to backlog. Ending backlog for Q3 was $14.6 billion, up $467 million or 3% versus last year, driven by strong demand in multiyear software and services agreements and favorable FX, partially offset by strong MCM shipments and revenue recognition from the U.K. home office. Sequentially, backlog was up $452 million or 3%. The sequential increase was driven by strong demand in multiyear software and services agreements, partially offset by revenue recognition for the U.K. Home Office. In Products and SI, the segment ended backlog with an increase of $148 million sequentially driven by MCN. Year-over-year ending backlog was down $604 million due to strong MCN shipments. In Software and Services, backlog increased $1.1 billion from the prior year to $11 billion, an all-time record for the segment and $304 million sequentially up, driven by strong demand for multiyear contracts across all 3 technologies and favorable FX, partially offset by revenue recognition for the U.K. Home Office. Turning to our outlook. For Q4, we expect revenue growth of approximately 11% and non-GAAP EPS between $4.30 and $4.36 per share. This assumes an effective tax rate of 24% and a weighted average share count of 169 million shares. And for the full year, we continue to expect revenue of approximately $11.65 billion or 7.7% growth and based on our year-to-date performance informed by a strong Q3, we are increasing our non-GAAP EPS guidance to between $15.09 and $15.15 per share, up from our prior guidance of $14.88 to $14.98 per share. This outlook assumes a weighted average diluted share count of approximately 169 million shares and now assumes an effective tax rate of approximately 22.5%. Before I turn the call back to Greg, I'd like to provide some perspective on 2 areas. First, as it relates to the ongoing government shutdown, while the vast majority of our public safety business serves state and local customers who are unaffected by the federal shutdown, we do serve certain federal government agencies, including both DoD and DHS. As the extended shutdown continues, we will monitor the potential revenue timing impact to this part of the business closely as it relates to Q4. Secondly, a couple of highlights on the strength of our balance sheet. We ended the quarter with approximately $900 million in cash and are on track to generate $2.75 billion in operating cash flow this year, which will mark the third consecutive year of double-digit growth. We maintain significant balance sheet flexibility, inclusive of the debt issued for Silvus. We have no senior debt maturities until 2028, and the payment schedule of our $1.5 billion term loans gives us continued flexibility to enable our M&A priorities. I would now like to turn the call back to Greg. Gregory Brown: Thanks, Jason. Let me end with a few thoughts. First, I'm very pleased with our Q3 results. highlight the strength of our portfolio. Revenue was up 8%, highlighted by 11% growth in software and services. Additionally, we achieved Q3 operating earnings -- record Q3 operating earnings in both segments, record Q3 operating cash flow of just under $800 million, record Q3 orders that included double-digit growth in both segments and record Q3 backlog of $14.6 billion that puts us in a strong position as we move into next year. Second, earlier this month, our teams met with hundreds of customers at 2 of the largest trade shows in our industry, the Army's USA AUSA Conference in D.C. and the International Association of Chief of Police in Denver. And what was clear from these discussions, we have the right solutions at the right time to address the evolving challenges that our customers are facing. In defense, countries around the world are significantly increasing investments in drones and unmanned systems, seeking advanced autonomous capabilities to enhance mission effectiveness and operational resilience in complex environments. Our acquisition of Silvus positions us well to support our customers across these areas, and I'm really pleased with the momentum we're seeing since closing the acquisition in August. And in public safety agencies, harnessing the power of new technologies and artificial intelligence to improve first responder safety, dramatically reduce incident response times and automate routine tasks, thereby freeing up critical time for public safety personnel to focus on high-impact priorities. We've made significant investments to integrate these new technologies and AI into our solutions, and I anticipate this being a growth driver for the company for years to come. And finally, as we look to close out another exceptional year, we're extremely well positioned for continued growth. We got the right set of solutions that are highly critical for our safety and security customers, both in the U.S. and abroad. Customer funding environment globally for safety and security remains strong. Our deep customer relationships and continued innovation is driving increased scope across customer workflows and our solid balance sheet and cash flow continues to provide us with the flexibility in allocating capital, both organically and inorganically. All of this is informing our expectations for another year of strong revenue growth and earnings growth in 2026. And with that, I'll turn it back over to Tim. Tim Yocum: Thanks, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question. Operator: [Operator Instructions] The first question is from Tim Long from Barclays. Timothy Long: Yes. Two, if I could. Greg, you talked about kind of sustainability of growth into 2026. Curious if you can dig into that a little bit more. Maintaining this last few years has been kind of high single-digit growth rate. Obviously, you're adding Silvus to it, so it's a little inorganic. But can you just give us a sense of what you're seeing as the real puts and takes and what could keep this growth rate above where it had been historically and kind of in line with the last few years, that would be helpful. And then the second one, SPX has been out for a little while. If you could just maybe give us a little sense on how that's doing? And related to it, if you can kind of update us on what you're seeing from software and applications on the APX NEXT side, so kind of a little bit on the newer products and technologies that are out and how they're doing. Gregory Brown: Sure, Tim, thanks. I feel good with where we are. I like the setup. We're not going to guide '26, but this is usually a time I give some color about it. As we think about next year, we think about spot revenue, we think about revenue in the area of $12.6 billion from an expectation standpoint. I say that because we've had strong orders growth in Q2, strong orders growth in Q3, expected strong double-digit orders growth in Q4 and double-digit product orders in Q4 and exiting Q3 with a record backlog. So Jason talked about the timing of the shutdown. It looks like it's going to be the longest shutdown we've ever had. But whatever impact, even if there was an impact is timing, the underlying demand is strong. I think we also think about in '26, Tim, continuing to grow operating margin, and that's inclusive of tariffs that would hit as headwinds in the first half that were not there this year, and we expect to continue to grow operating cash flow growth. But I think the overall demand drivers are strong. That's our view for '26. John Molloy: Sure, Tim. I think the second half of that was really a dual question, SPX and APX NEXT app. So first of all, as you know, we started shipping the SPX in July. We've always contended that the market wants an alternative. We're really pleased, really pleased with the early traction. Our orders are outpacing expectations. In fact, we've doubled the number of agencies that have actually purchased. We've now got 70 different police departments. We view every one of those, and that number will continue to grow is an opportunity to flip those customers to DEMS as well. just last night. And I think what we talked about in the August call was there's really a dual benefit, meaning upgrading and refreshing the APX NEXT family in tandem with the SPX device. Last night, we secured an award that we went head-to-head with our primary competitor. We were awarded the business. That's great that we secured the SPX, the AI-driven assistant, but also they refreshed and upgraded the APX NEXT family of radios. And we think that's the strength of our story. As it relates to APX NEXT applications, we had said we would have 200,000 devices by the end of this year online. We'd now like to update you that we'll have 300,000 APX NEXT devices by the end of '26. So I think good momentum, good traction on both ends there. Mahesh Saptharishi: Yes, Jack already mentioned this, but we do look at the SVX as a body-worn assistant. And what we are also seeing is incredibly good traction on real-time translation capabilities. We announced SVX integrated with our assist chat capabilities recently as well. And also at IACP, we announced the ability to be able to summon a BRINC drone for DFR based upon the SVX and the APX NEXT integration as well. So across the board, we see traction in applications for APX NEXT and SVX as well. Operator: The next question is from Tomer Zilberman from Bank of America. Tomer Zilberman: If I do some back of the envelope calculations using your commentary from last quarter that Silvus would be about $185 million this year and the reported acquisition-related revenues from this quarter, I get that the core business grew about 5% this quarter, and I think guiding to 8% next quarter. I guess the question is a 2-parter. One, how is Silvus faring versus the 20% growth outline you gave us? And is there anything embedded in the core growth maybe in terms that gives you pause as it relates to the government shutdown as we look into next quarter and 2026? Jason Winkler: I'll answer the Silvus part first. So Silvus is off to a strong start. We talked about on the last call, our expectations for it on a calendar basis to achieve $475 million in revenue. That's now looking more like $500 million, in part based on a $25 million order that was pulled in from Q4 to Q3 that's going to benefit Ukraine. So our expectations of $500 million have increased. And as we think about next year, given that strong start, continue to expect 20% revenue growth on that bit higher base for '25. And together with the strong start in sales, we would expect earnings contribution from Silvus next year more like $0.30 to $0.40. We had formally given an output of about $0.20. But given its performance, given our debt paydown plans, Silvus itself next year, we view as accretive to $0.30 to $0.40. So we're really pleased with early engagement with that team, working with Jack Molloy, our COO, and how they're executing. Tomer Zilberman: And maybe just following up on is there anything that might give you pause in any of your segments as it relates to the government shutdown? Jason Winkler: Well, I mentioned it on the script that we do serve the federal government and select agencies there. The bulk of our business serves state and local. And we're watching carefully the timing impact. If there were to be an impact, it would likely increase our expectations for next year in the 12, 6. But we've lost 5 weeks. The government needs to reopen. Budgets need to be approved and the queue and the backlog needs to be worked in an efficient way. Those are our expectations in the guide that we've given for 11650. Gregory Brown: Yes. And I think that Tomer that point that Jason made is really important. I talked about in answer to Tim's question expected revenue of $12.6 billion. If there is any impact, we expect that to be additive to our $12.6 billion. So the demand is there. and we look to capture if not in Q4 in early next year, but the demand is strong. Operator: The next question is from Joseph Cardoso from JPMorgan. Joseph Cardoso: Maybe just for the first one, pretty big product order or backlog number this quarter. Is there any way you can contextualize or give us a little bit of color on the contribution from Silvus and whether you're actually starting to see any of the [indiscernible] funding tailwinds there just yet? And then maybe just as a second part to that, given we're already at the mid-3s that you provided last quarter, any updated thoughts on how you're thinking about product backlog exiting the year? And then I have a follow-up. Jason Winkler: Yes. So Greg mentioned earlier that our orders within the product segment in Q2 grew double digits. They grew in Q3 double digits, and we expect them to grow solid double digits in Q4. That growth is largely ex Silvus. We did have the addition of backlog to Silvus of about $200 million. That's a onetime, but the growth vector of the products in SI is driven by the core. We talked about some large deals on D-Series. Devices continue to be a strong driver. The core is what's driving that product orders. And Greg, on backlog? Gregory Brown: Yes. And therefore, while I talked about ending the year in product backlog in the ZIP code of mid-3s, given the strength of the product orders as Jason referenced, we now expect it to be mid- to high 3s product ending backlog by the end of the year. But we're pretty pleased. John Molloy: Joe, specifically to Silvus and [indiscernible] for Q3 performance, no. In fact, the overperformance Silvus in Q3 was related to a Ukrainian order that was pulled forward. If you think about the growth drivers for Q4 and beyond, it's really the unmanned, the autonomous unmanned system market. I was at AUSA last week and the store was unmanned. That's a growth driver as well as defense and borders, both in the U.S. and internationally as we kind of move into 2026. Joseph Cardoso: Got it. Super helpful color there. And then maybe as a follow-up, as we think about the various growth drivers that you're highlighting, particularly on the product side of the portfolio. It seems like there's a lot of irons in the fire here. Many parts of the portfolio are doing well and are expected to do well going into next year. As we think about that evolving product mix, how should we think about the implications to product margins from a high level? Not asking you to guide next year, but just trying to think about as we think of try to contemplate all these different moving parts across the portfolio, how should we be thinking about the gross margin trajectory here, particularly as it relates to the product portion of the portfolio? Jason Winkler: Well, within LMR, we talked Jack did about APX NEXT and how that's trending and trending well. Those are more feature-rich devices and our customers increasingly are choosing those. That helps. At the same time, we have faced some margin challenges related to tariffs. Those are largely in the second half of this year. somewhere between $70 million and $80 million in the second half of this year. But despite those tariffs, the product mix favorability has led to increased margins. And as we look forward in the developments that we have, we have a strong product portfolio. Gregory Brown: The other thing to think about, we talk about product, and we typically talk infrastructure devices. But with the success of APX NEXT, we talked earlier, I think a quarter ago, where we thought there would be about 200,000 users subscribed to APX NEXT applications by year-end. And that shows up in the S&S bucket, not necessarily in Product. We now expect that to be about 300,000 or slightly over exiting next year. That's a good trend. And even though Joe, you talked about product, we're also -- we love the fact that Software and Services this year, we now expect to be growing low double digits, up from our earlier guide of 10%, and that's a friendly fact. Operator: The next question is from Andrew Spinola from UBS. Andrew Spinola: I wanted to follow up on the comments you just made about the tariffs in the second half and the ability to still raise margins. I think this is going to be about your third year in a row with incremental margins at the operating line of over 40%. And you made the comment that mix is helping. And I don't know, is that -- are you making the comment that it's a temporary shift in mix? Because I'm getting a sense that there's a longer-term shift, obviously, to more software and APX NEXT apps, a number of things you've highlighted. So I'm trying to understand, it seems like there's something fundamentally changing in the business. You're outperforming the tariffs and still raising margins. So I'm just wondering if we can think about the 40% incremental margin as where the business can deliver going forward from here. Jason Winkler: Well, we see opportunity. And you're right, we've continued to expand margins. Some of that's driven by the strong growth within software and the applications as well as services. It's also in part driven by the product portfolio. And keep in mind, we continue to sell, while APX NEXT is a very compelling device, it has its predecessor, Jack's team still sells today. So as we mix, there are customers that will into the future, continue to buy APX NEXT. The penetration is still low. And so as customers choose devices every 6 to 8 years, they'll increasingly still choose an APX NEXT device. And Jack and his team, do you want to talk about some of the road map items and what you're thinking about for APEX into the future, too? John Molloy: Yes, there's a lot. I mean I think that first of all, one of the things we focused on is tiering, right? We continue to verticalize and there's more places that we can take the APX family. I think about places like critical infrastructure. There's also more that we can do from an application services. Mahesh and his team are developing Assist applications that ride over the top of the standard APX application services. So there's a lot we're going to -- I think a lot of work to do. I think if I could capture the APX family in a word, it's 2 words, continued momentum, and I expect that into '26 and beyond. Gregory Brown: Andrew, the only other thing I'd add, and maybe it's just we do have a strong commitment. We've got a good P&L that yields well to operating leverage, which is the margin expansion we've talked about multiple years in a row, which is why we also believe we can continue with operating margin expansion for the firm next year. And we're pretty judicious and thoughtful around budgets and managing expenses and thoughtfully and surgically deploying AI for some commensurate benefit. I think we've rolled it out in certain cases around customer service or whether it's Copilot or Cursor and engineering teams. And I think we'll increase the penetration of AI as well, which will yield some operating expense benefits. But yes, it's the portfolio. Yes, it's the tiering. It's all the things that Jason and Jack talked about, but it's also the continued expectation by management that you got to not just grow top line, you got to expand operating margins and you got to grow cash flow, and that's our expectation into next year. Andrew Spinola: Got it. And just one follow-up. You've talked about the new introduction on the infrastructure side of the -- into the ASTRO platform. I was just wondering, if I'm not wrong, the upgrade cycle there is very long, possibly 10, 20 years. And I'm just wondering if with your client base knowing that, that upgrade was coming, did that create somewhat of a pause on the infrastructure side prior to the release? And are we going to see a little bit of pent-up demand on infrastructure with that new product in the market? John Molloy: Yes. I think the thing -- so as you said, we typically think about infrastructure. I mean, one of the things is we have a very large footprint of statewide networks. So I think we have a great baseline to draw within. We're in regular contact with those customers. In fact, I think one of the really great stories as you think about infrastructure, the days of infrastructure as a stand-alone investment no longer exists. It's infrastructure and managed services because the care and feeding that need to be done on -- when networks became digitized, you have to think about your cyber threat surface. And we've seen our cybersecurity services up 22%. We manage a lot of these networks, and we've seen a pretty substantial growth in terms of the amount of scope that our customers expect to us to take on. So I think the infrastructure footprint that was out there fueled a lot of our services growth. And now we look at it and we're looking, our customers are asking for things like, hey, we want to improve coverage. We want more capacity. We want better energy efficiency and more resiliency within the network. And that's really what the D Series ushered in. But if you think about it, it's a really good question. Our 2 biggest statewide networks being Colorado and Michigan, Michigan upgraded, we got our first upgrade order from Michigan in Q2. Colorado gave us an upgrade order in Q3 and then the state of Tennessee, which has been the highest growth network, also gave us a D series. So I think it makes us feel good that, number one, they trust us to support their networks and manage them. But number two, that they continue to see reasons to upgrade, and we continue the R&D dollars we spend, I think they realize from an investment standpoint. And they look at it and say, "Hey, this is the network we're going to look at and care and feed for the next 10 to 15 years. Gregory Brown: And Andrew, as Jack mentioned a quarter ago, this new infrastructure upgrade is really the first time we've done that in like 12 years. And these orders of Colorado and Tennessee and Michigan that Molloy is referencing are large multiyear deployment orders as well. So yes, we are excited, and we think that this next-generation infrastructure upgrade is a multiyear journey with multiyear orders with multiyear deployments. That's a good thing. It speaks to the durability of LMR. That's what we think about. John Molloy: yes, It speaks to the durability of LMR. That's what we think about. Operator: The next question is from George Notter from Wolfe Research. George Notter: I want to just dig into the SVX a bit more. Any anecdotes or data that you can give us in terms of just traction with customers turning on the body camera functionality or AI assist or the reporting pieces. I know you have, I think you said 70 or 80 customers. But I'm just curious how many of those are kind of moving beyond just SVX as a [indiscernible]. Mahesh Saptharishi: So a couple of things that I think are worth noting. We've had over -- since we launched Assist for digital evidence management last year, we have over 1,000 customers who have actively adopted and are using Assist for DEMS. And by the way, that includes reduction, reduction allowing us to effectively reduce the amount of time it takes for someone to share critical information by over 80%. We've added assisted narrative quite recently to it and assisted narrative allows you to reduce not just the report writing time, but the cycle time that it takes to revise narrative by over 50% as well. And I think that's quite powerful for us. You asked about an anecdote. We launched translation along with SVX. And we have a handful of customers who are now actively using it. And quite recently, there was a domestic disturbance that an officer responded to. And it was critical that they were able to actually leverage real-time translation to mitigate that situation. So we're hearing a lot of good powerful anecdotes of how translation as a key capability of this body worn assistant in SVX is starting to have an impact along with the APX NEXT application portfolio. Operator: The next question comes from Adam Tindle from Raymond James. Adam Tindle: Okay. I'm going to start off with a little bit more of a challenging question for you, Greg. I know you're up for the challenge and then a more big picture question. But just near term, if I look at Q3 here from an operational standpoint, obviously, I see EPS upside, but it's mainly below the line items on interest and expense. If I look at the operating income line, it was kind of more in line, let's call it. So I wonder if you just kind of assess the quarter and the moving parts on the operating line for this quarter. And I ask that in light of your comments on expecting to improve margins from here next year. I guess what gives you the confidence based on what you're seeing here in Q3? Gregory Brown: I think the operating performance and the leverage we had was part operating leverage of the core business, part Silvus, part tax benefits, that's good. But I think that given what we see with customer engagement, the continued movement toward software and services, I'll give you an anecdote on video. Video grew 7% this year in Q3, yet we're sticking to the 10% to 12% annual guide. Why? Because Avigilon Alta, the cloud video solution, is growing over 4x faster in Q3 than the 7%. When you look at the orders growth of cloud video, it's even higher than that. So I think, Adam, when we look at where we exited Q3, the backlog, the composition of it, the increased software and services component, the strong demand across the portfolio, up leveling Silvus to now $500 million of this year and 20% next year. Maybe it's a little stronger than 20%. We also will have leverage perhaps on when to pay down some of the short-term debt associated with Silvus, which will give us EPS flexibility from that standpoint. And I think we've done a good job mitigating tariffs. And the incremental tariffs for next year is Q1 and Q2 because we'll be lapping the back half. And I think we know how to manage expenses. So the high-level answer is top level growth and the confidence of that, the existing mix and the composition we see and the expected operating leverage that we think we can continue. Jason Winkler: And Adam, you mentioned Q3. If I expand to the year, included in our guide for the year is over 100 bps of operating earnings expansion. And that's despite $70 million to $80 million of tariffs that we have absorbed in the P&L in the second half. As we look forward to next year, of course, we'll face some headwinds in Q1 and Q2 because tariffs weren't in place last year at that time, but they'll be more moderated than that $70 million to $80 million. So I think there's opportunity for us to continue to, as Greg mentioned, expand operating margins. Adam Tindle: Got it. Super helpful. And helpful color on Q1, Q2 as we shape our models. I think we'll try to keep that in mind. Just as a follow-up, Greg, I would love it if you could maybe just take a little bit of time to reflect on early learnings from Silvus now that you have the deal closed and kind of gotten to look further under the covers. A lot of us compare this to the potential for Avigilon and a lot of similarities there. But I wonder if you could maybe just talk about early learnings and similarities and differences maybe to prior acquisitions like Avigilon and biggest areas that could surprise us when we look back at this. Gregory Brown: Yes. High level thematically, Adam, more bullish and more enthusiastic than at the time of the close. That's not a victory lap or a raw speech. That's a fact. Why? in part, raising the full year expectation from $475 million to $500 million in addition to the commentary Jack provided with the real high-level engagement just in the last few months since we've owned the asset around defense, borders, high bandwidth and all things unmanned. I think Silvus, the other nice thing is the growth is primarily international that we see with Silvus, not necessarily Fed. We think it's super highly complementary. Look, the reason we renamed LMR to mission-critical networks is we're the market leader in mission-critical voice. We're the leader in mission-critical voice through TETRA and P25. Now we're the leader in mission-critical data as defined by high-speed, low latency mobile ad hoc networking. That's a great complement as we envision and these are new markets we're going after because Silvus gives us new market, new market in defense, new market in autonomous, new market in drone infrastructure, new market in manned. And they're the market leader. And I think, Adam, the other thing I'd say is since owning the asset, we have seen validation of the lead we thought they had technically validated in the engagement with the customers. I think the learning also is Molloy has a first-class sales engine. We will be -- and Jason mentioned $0.30 to $0.40 of EPS accretive with Silvus anticipated or expected for next year with additional investment in Silvus. We can expand their outreach on international go-to-market. Jack and Bhavik are looking to fund headcount, and we're adding it as we speak. We will put more holes on the fire around their R&D, which is top-class engineering and research. So the learnings are great asset. We took a long time, and we're patient and measured with the due diligence. It's a new market. I think it's complementary. It's defense oriented. I think it's the right market, right technology, right place, not going to take anything for granted. We'll invest go-to-market, invest sales, invest North America strategic projects and invest in engineering. And I think there's a lot of room to run. John Molloy: Yes. Greg, the only thing I'd add is the thing that I've been just so uniquely impressed with is Bhavik and his team, no question. Cultural fit within Motorola, everything they do, everything when they wake up early and go to work and they leave late at night as they think about the customer and how do we co-create and do something and distance ourselves from the competition with our customers. They do that first class. He's built a great team. All they want to do is continue to grow and take care of their customers. I'd tell you, it's just a completely refreshing group of people to work with. Gregory Brown: And by the way, one other Adam, what learning validated to Jack's last point, Culture matters. You can look at all these assets on paper. You can justify anything. You can do an ROI, an IRR, you can have the model sing to whatever answer you want. But one of the most important things that's a difference, and it was true with Avigilon, and I think it's true with Silvus, is there has to be a cultural chemistry and a mission orientation around innovation. And the cultural compatibility with the engineering and sales team is very complementary with the core LMR mission-critical people we have here. We felt that way. We sense that. That's been proven to be true so far. Operator: The next question comes from Keith Housum from Northcoast Research. Keith Housum: Sticking along the lines of the Silvus acquisition, Jack, can you remind us like what's the breakout between like your international versus domestic business? And what's military versus like state and local? And is the opportunity -- I'm sure the opportunity is in both, but how much is Silvus products used in the state and local market today? John Molloy: Yes. So I think right. The majority of their business today, as we stand today, and remember, it is international. Do not, and this is 1 of the things we want to make sure we get across. When you think about Silvus, the opportunities are international defense U.S. DoD orders, federal police. Those are the opportunities. State and local, there's -- listen in a perfect world, would the FCC authorized [indiscernible] spectrum but they haven't. We're focused on what we have. We've got the team focused on. There's a lot of markets to go after an unmanned international DoD, U.S. DoD and border security that's enough for us to say grace over, and that's really where we're focused right. Gregory Brown: And by the way, that doesn't mean domestically here in North America, Super Bowl, Presidential inauguration, FIFA World Cup, where there's FCC exemptions on bandwidth, yes, Silvus technology can be used in a multiagency interoperable environment for high speed. John Molloy: Exactly Olympic -- and by the way, really proud. I mean, one of the things -- a number of us were out -- we sponsored the Ryder Cup. It was so cool to see Streamcaster Radios, which is the brand -- that's the Silvus brand named Radios to be piping video back from live video feeds, security feeds back to the joint operation center in NASA County, so cool, made us all really proud. Keith Housum: Great. I appreciate that. Switching gears a little bit over the command center side, great growth of 16%. Perhaps could you unpack a little bit there about where was the success greatest which is a command center where are you guys getting the best traction right now? Jason Winkler: You're right, Keith, it was 16% growth. Drivers for that, as we talked about earlier, continue to be APX NEXT applications. They are exceeding our expectations. That's why we now outlooked already a next year ending number of 300,000 devices connected and subscribed to that package. And additionally, we saw some strength -- additional strength in the control room or 911 international parts of our business. And of course, the continued cloud adoption and subscription is also helping in that business as well. Gregory Brown: And obviously, we're not going to guide any specifics until the February call. But I think the Q3 command center performance reinforces our confidence in the overall 12% expectation for the year and sets us up well for another strong demand center performance next year. Stay tuned. Operator: The next question comes from James Fish from Piper Sandler. James Fish: Nice to be covering you guys. Just going back on SVX, understand the penetration that you're seeing already. But can you just talk to the competitive nature now that you've got that in the market for a full quarter? Are you seeing any change in aggressiveness from competitors on the pricing side given some of the technology that you guys have embedded with SVX? John Molloy: Yes. Maybe I'll start, James. First of all, I want to -- SVX is a North America, ultimately, Australia. It's a P25 device. I want to make sure, internationally, you heard Jason talk about we're the market leader internationally in body worn. And I would just break the 2 apart. If you look at the success we've had, the largest deals in Europe, and we continue to pick up countries in Europe. And so North America, the market leader, everybody is aware who the market leader is. We've always felt that the market wants an alternative. Now ultimately, even with the 70 customers we've already secured post announcement over the course of the last few months, even the ones that aren't video using video today, they have a decision to make. It comes down to a total cost of ownership, how many devices does a police officer want to wear. It's our contention that they like to wear 1 device as opposed to 2. It's ours that they would like a swappable battery that elongates the useful life. We also think they don't want to pay for 2 different coverage plans. They can take advantage of the coverage plan that they get inherently with the APX NEXT radio. And we think that's the discussion that a lot of our customers are going to be navigating. They're going to navigate them today, and we'll continue to be navigating those over the future. And we love the device. More importantly, what Mahesh and his team have continued to drive in this device, it's not a body-worn camera, I think, as he very eloquently said, it's an AI assistant, and we'll continue to make sure that we do more and more for our customers in that capacity. So we'll see more to follow. Mahesh Saptharishi: One more thing that I'd add to that is we have a long history of building mission-critical audio quality capabilities. when you think about a body-one assistant, this is not like using your iPhone or your Android device and talking to a voice assistant where there are sirens blazing, there's lots of ambient noise. This is an area that we have historically excelled in, the ability to isolate voice, enhance voice and now have it feed to an AI capability. That is something that we are uniquely capable of. We have expertise in, and that is paying off in the context of SVX and competitively as well. Operator: The next question comes from Amit Daryanani from Evercore ISI. Jyhhaw Liu: This is Irvin Liu on for Amit. I have 1 and a follow-up. I realize that it's been less than a quarter since you have closed on Silvus, but can you talk about your long-term potential as it relates to developing Silvus specific software and solutions. And does your 20% Silvus growth outlook for next year embed any S&S revenue? Jason Winkler: As it begins with us today, Silvus is largely recorded in products and SI. That's the nature of what they have today, although we see significant opportunity and much like we did with LMR a decade ago, offering more and more software and services around a strong platform of very, very differentiated hardware and software-enabled devices. So we see opportunity to grow the SMS contribution, but from the beginning or where we're starting from, it's largely products in SI. Mahesh Saptharishi: Maybe 1 important thing to note is within the Silvus Streamcaster Radios, we do introduce things like low probability of detection capabilities, anti-jam capabilities, almost as features or software upgrades. It's important to remember that Silvus is a software-defined radio built on COTS hardware. And I think this allows us very rapidly to include new capabilities into the existing installed base. Jyhhaw Liu: Got it. And then for my follow-up, you mentioned that your expectations for APX NEXT installed base is reaching 300,000 by next year. But can you confirm whether or not this uptick is an acceleration relative to what you have seen historically in prior LMR product cycles? And just given that a lot of your expanded capabilities related to SVX, AI and VFR are relying on the connectivity provided by APX NEXT. Do you see potential for the percentage of your installed base using flagship devices expanding over time? Jason Winkler: Well, the installed base that we've talked about is about 2 million first responders in the U.S. So even at next year's year-end we'll have 300,000, there's a long opportunity ahead of us in terms of eventually penetrating that entire base. Operator: The next question comes from the line of Meta Marshall from Morgan Stanley. Meta Marshall: Great. Appreciate the question. I guess just 2 quick questions for me. On the OBAAA or OBBA impact. Just any impact that you guys are foreseeing to your tax rate just as you guys have looked at it. And then second, just as you look to mitigate some of the tariffs, is that largely being done through pricing? Or just kind of how are you rejiggering manufacturing to accommodate tariffs? Jason Winkler: Thanks, Meta. We've done the analysis around what the tax rate is. There's some small puts and takes at the effective tax rate and the cash tax rate, but nothing meaningful. It does afford us with some -- a little bit more flexibility. As I think about what the OBBA means for us, it's really more what it means for our customers and the sources of funds that they have, whether it's governments and the focus on borders and security or even whether it's enterprises and some of the availability around accelerated depreciation and the like, we view it as favorable to our overall selling environment. John Molloy: And in terms of mitigating actions, we've done for tariff mitigation inventory acceleration, dual sourcing with 2 EMSs, there is some load balancing we can do with some lead time. A lot of the manufacturing is USMCA compliant, which is a friendly fact in a way to mitigate tariffs. But the team has done and our supply chain team has done a great job kind of proactively in anticipating what could be in different scenarios and feeding that to the operational improvements of the firm and what actions we need to take. Operator: [Operator Instructions] Our next question comes from Ben Bollin from Cleveland Research Company. Benjamin Bollin: Jack, could you talk a little bit about the sales motion with Silvus. How does that look versus other technologies in the portfolio? Specifically, I'm trying to understand the duration, just how similar or different the process is and your overall visibility? And then I had a follow-up as it ties into backlog and how that develops over time. John Molloy: Sure. So there's really -- think of it in terms of where we're going, where we're making it. Greg alluded to the fact that we're making investments into the selling motion. There's really a couple -- there's -- number one, what I would call longer-cycle sales efforts, which is getting on the program of records. We're going to be increasing our sales coverage on all levels as it relates to that. The second piece of it, I think it's been well documented, if you're reading up on what's happening, particularly within the U.S. DoD right now, the DoD is going through, under the current administration going to what I would kind of call some nontraditional procurement. So there's a lot of trialing of new technologies, particularly around products, particularly in around the space, as I talked about earlier on unmanned systems. Silvus has mandate technology for all levels, including down to Class 1 drones right now with the StreamCaster 5200, which is the newest, smallest form factor. so we can play in all of those areas. Internationally, they have grown -- I mean, this is an incredible company that's grown from a technical pedigree. They had kind of limited international coverage. A lot of that was brought to them through partners. We're investing more people, particularly at some of the leading NATO countries to go help shepherd our long-term benefits there. And then there's just the unmanned systems. So I think we mentioned last quarter, there's around 120 domestic drone manufacturers right now, and we're on almost all of those platforms. So there's just the work to do to continue to go and trial and make sure that our technology is validated and being used on all those platforms as well. So there's really -- those are really 3 different facets that we're focused on right now. Some Silvus was resourced. Some will be incremental investments. And then the last piece of it is all the relationships that we have in the 120 countries that we do business in, the relationships we have in defense and border security, federal policing in those places and to make sure that we're providing some synergies across the Motorola and Silvus sales teams as well. Benjamin Bollin: That's great. And can you -- I think I heard it earlier, but how much is still this contributing to backlog? Or how does that develop as a backlog contributor over time? Jason Winkler: So this came with about $200 million of backlog. Operator: Our final question today is from the line of Louie DiPalma from William Blair. Louie Dipalma: Great. We picked up that AeroVironment is using the Silvus StreamCaster radio for their new Switchblade 400 loitering missile. You guys discussed Silvus in terms of how it's well positioned for 20% growth next year. I was wondering how do you view Silvus as positioned for more like longer-term like major Army programs such as the next-generation command and control and the Soldier Borne Command Center that Anderol is prototyping right now. John Molloy: Yes. So Louie, yes, it's good to see. We're very pleased with the relationship we have with AeroVironment. But specific to the next-generation command and control, we will be a key part of the architecture in both the Anderol and the [Lockheed solutions]. So we're really pleased there. We think -- by the way, we think we think there's more that we can do within NGC 2 as well. So stay tuned there, but really good relationships on both fronts there. And then the soldier borne mission Command as you know, that's really been the transition from IVAS to soldier borne mission Command. We're working with both Anderol and Rivet in the Soldier Borne Mission Command architecture. But I would say with, particularly with SPMC, it's early days. So I think there's still a lot to do on those fronts. But yes, rest assured, we're involved there. There's also -- there's also a big project going on with the Bundeswehr in Germany, the DLBL project. And we're piloting with integrators there. And if you remember, we're a long-standing partner with the GMOD, that we're doing their work both with the Army and Navy, big long-tenured projects, and so we're leveraging our relationships there within Germany there. In fact, some of our team is over in Germany as we speak. So a lot of really interesting projects going on around the globe right now. Louie Dipalma: Fantastic. It seems as though you're involved in all of these big projects. Operator: This concludes our question-and-answer session. I will now turn the floor over to Mr. Greg Brown, Chairman and Chief Executive Officer for any additional comments or closing remarks. Gregory Brown: Yes. I simply want to say thank you to all the Motorola people, Motorola Solutions people. All of our partners that work closely with us. Again, welcome Silvus. We couldn't be more proud to have you on our team. We feel good about where we are, like the fact that we had a record Q3 orders and all the other records that we referenced in the underlying demand and momentum of the business. Silvus is exceeding our expectations. I think the portfolio investments that we've made are resonating with our customers, and we're planning for another year of strong revenue and earnings and cash flow growth next year, and we'll talk to you on the next call. Appreciate the questions. Appreciate your engagement. Operator: This does conclude today's teleconference. A replay of this call will be available over the Internet within 3 hours. The website address is www.motorolasolutions.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time.
Operator: Hello, and welcome to the Q1 Fiscal Year 2026 ResMed Earnings Conference Call. My name is Kevin. I'll be your operator for today's call. [Operator Instructions] Also, please note, this conference call is being recorded. [Operator Instructions] Let me hand the call over to Salli Schwartz, ResMed's Chief Investor Relations Officer. Sallilyn Schwartz: Thanks, Kevin. I want to welcome our listeners to ResMed's First Quarter Fiscal Year 2026 Earnings Call. We are live webcasting this call, and the replay will be available on the Investor Relations section of our corporate website later today. Our earnings press release and presentation are both available online now. During today's call, we will discuss several non-GAAP measures that we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for GAAP financial information. We encourage you to review the supporting schedules in today's earnings press release to reconcile these non-GAAP measures with the GAAP reported numbers. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions. However, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I'll now turn the call over to Mick. Michael Farrell: Thank you, Salli, and good morning, good afternoon and good evening to everyone on the various time zones, and welcome to ResMed's First Quarter Fiscal Year 2026 Earnings Call. I'm very proud of our global team of 10,000-plus ResMedians, who have delivered a strong quarter with 9% reported revenue growth or 8% on a constant currency basis, with multiple areas of high performance. Across U.S., Canada and Latin America, our team drove high single-digit growth in devices at 8%, and the same team also delivered double-digit growth in the masks and other category with 12% growth. For Europe, Asia and Rest of World devices, the team achieved high single-digit growth at 7% on a constant currency basis. These businesses collectively comprise more than 75% of our quarterly revenue. For Europe, Asia and Rest of World in the masks and other category, we had mid-single-digit growth at 4% on a constant currency basis, following a strong comp from Q1 last year, where we grew at 11% in constant currency in this category and region. I'm confident that we will accelerate to high single-digit growth in this category, starting in the current quarter. We are focused on continued strategic expansion of our mask portfolio with new product innovation, which I'll talk about in a couple of minutes. And we're also focused on driving mask resupply through education, awareness and execution. Increased mask resupply benefits patients, home care providers as well as payers and health care systems. And yes, it also benefits ResMed. This increased focused on mask and accessory resupply is fully aligned with our ongoing investments to accelerate growth in our direct-to-consumer markets around the world, including China, India, Korea, Australia and New Zealand. As I noted above, I'm confident these efforts will accelerate our Europe, Asia and Rest of World masks and other category with solidly and sustainably back to high single-digit growth. ResMed's residential care software or RCS business delivered mid-single-digit growth with 6% reported and 5% constant currency growth. We saw strong performance from our MEDIFOX platform, our core Brightree platforms with good growth in the MatrixCare home health business, yet a challenging growth environment for the skilled nursing facilities segment. Now that we have integrated our RCS business into our global revenue team, we will drive portfolio management with increased investment in the high-growth higher-margin parts of that RCS portfolio while reducing exposure to the lower growth, lower-margin areas, such as the services businesses. We're confident that we will execute successfully on our portfolio management work and reaccelerate growth in our RCS platforms, moving from mid-single-digit growth here at the start of fiscal year 2026, accelerating to mid- to high a single-digit growth in the back half of fiscal year 2026 and achieving sustainable high single-digit growth with double-digit operating profit growth in 12 months from now. RCS is a key synergistic enabler of our core sleep and breathing health business through demand generation and especially through resupply programs. In this way, our RCS business forms a core part of our long-term growth strategy. During the quarter, we also continued to execute well on our ongoing work, driving operating leverage. Our global supply chain team delivered 280 basis points of year-over-year gross margin expansion. These results, along with our disciplined approach to business investments in both R&D and SG&A translated to another quarter of strong double-digit earnings per share growth. I'd like to take this opportunity to thank not just our supply chain team, but the entire ResMed global team for their ongoing commitment in serving patients in more than 140 countries worldwide. ResMed continues to build the world's largest digital health ecosystem, encompassing sleep health, breathing health and health care technology delivered right in the home. Over the recent quarters, I've highlighted 3 key themes for these earnings calls, one that ResMed is committed to operating excellence and driving operating leverage while simultaneously delivering new products to the market. We are an innovation machine and an operational excellence machine. Two, ResMed is a compelling investment opportunity with huge addressable and growing markets and strong executable growth especially amidst global macro uncertainty. And three, ResMed's excellent free cash flow and strong balance sheet position, position us to both invest in the business and simultaneously return capital to our shareholders. Our first quarter results are another demonstration of these important business elements, and I'll talk briefly about each of these 3 themes. On the first theme of operating leverage, I shared with you last quarter that ResMed has a pipeline of opportunities. One key area of focus has been optimization of our freight expense. Another area of focus has been our multiyear productivity programs that include improved planning systems and large-scale automation. These efforts, among others, helped deliver the 280 basis points of year-over-year gross margin expansion that we saw in this first quarter. We will continue to execute on these opportunities over the remainder of fiscal year 2026 and beyond. We'll update you here every quarter as we continue to deliver great results. I've also previously highlighted the evolution of our global manufacturing footprint. In addition to our recently announced expansion of our Calabasas, California facility, which doubles our U.S. manufacturing capacity, we are pleased to announce that with our strong ongoing growth in the United States that we are investing to establish a third facility, a third distribution center. This new facility will be in Indianapolis, Indiana, the heartland of the Midwest, and it will expand our distribution capacity. It will improve product velocity of delivery and enhance our overall network resilience by positioning inventory closer to our customers. We expect the Indianapolis facility to be operational in 2027. Once this facility comes online, ResMed will be able to ship to around 90% of our customers within 2 days. These efforts will also increase the capacity for our Made in America product to build on what we already do right here in the U.S. On the topic of ResMed as an innovation machine, our R&D investments in the next generation of market-leading masks, cloud connected device platforms and digital health software position us well to keep delivering the world's smallest quietest, most comfortable, most cloud-connected and most intelligent therapy solutions for sleep apnea, insomnia, respiratory insufficiency and beyond. Just this week, we rolled out 2 world firsts for ResMed. These are the first 2 full face fabric masks available on the market. This brand-new AirTouch F30i mask platform is so innovative. We are launching 2 masks variants right out of the gate. First, the F30i comfort, which is a premium price mask with a fabric-wrapped frame as well as an incredibly comfortable fabric-based oronasal patient interface. This amazing new product was launched earlier this week in Australia and will be launched into additional markets in the near future. Second, just yesterday here in the U.S. market, we launched the F30i Clear, which is a traditional silicon frame mask, but it still has that innovative, incredibly comfortable fabric oronasal patient interface. This variant will be launched into our B2B channels and our home care provider customers as we continue to launch to additional markets beyond the U.S. These products expand ResMed's AirTouch portfolio of fabric-based mask offerings, delivering advanced comfort, mobility and interchangeability for patients. They're designed to help more people start, stay and be on therapy, CPAP therapy for life. We're also excited to continue executing against our road map for incorporating ML, AI and generative AI technology into our digital health products. Last quarter, I talked about how we integrated our personal sleep health digital assistant that we call Dawn into our myAir platform in the Australian market. Dawn allows ResMed to provide personalized 24/7 support to our users, giving them an intuitive, empowering way to get help right at the moment they need it, right on their own time. Based on that success, during the first quarter of fiscal year 2026, we launched Dawn on the myAir platform right here in the U.S. market. Ultimately, Dawn strengthens the role of myAir as the central hub for therapy support for patients. This connectivity leads to increased long-term adherence, which in turn leads to better patient outcomes, lower total cost of care for payers and better resupply volumes for providers and for ResMed. Watch this space as we build and scale this amazing AI-based technology globally. We also recently launched in a limited beta program in Australia, a new feature that we call Comfort Match. Now Comfort Match is an AI-enabled comfort setting technology that sits on the myAir platform. Comfort Match is intended to help people become more confident, more comfortable and more adherent to therapy. By engaging with patient settings such as humidification levels, air temperatures, heated tubing options and beyond, we will help patients define their optimal sleep health and breathing health environment faster, more easily and more efficiently, right from the start of their therapy journey. Drink set up, the Comfort Match technology receives information about a person's profile and through advanced machine learning suggests a personalized combination of comfort settings with the goal of maximizing adherence. We will measure the success of this technology in consumer engagement, improved patient perceived comfort as well as hard clinical outcomes such as patient adherence. Based on early trials, we are very excited that this technology will deliver for patients, for physicians, for providers and for payers and beyond. At ResMed, we view AI as a technology resource that will amplify and personalize care by identifying patents surfacing insights and enabling personalized interventions, we are creating AI-based technologies that will help caregivers spend more time focusing on people rather than paperwork. For our patients, our AI technology translates health data into clear guidance, clear support and encouragement, empowering them to take an active role in their own therapy. As a result, we believe that our AI tech investments will provide returns through accelerated access to care through improved patient outcomes while also making care more personal, more proactive and ultimately more effective. Moving on to ResMed's SG&A investments. We remain focused on demand generation, demand capture and demand curation, as critical components to our long-term growth. Earlier this year, we expanded our offering of continuing medical education or CME programs to educate and to enforce or reinforce with physicians the benefits of CPAP, APAP and bilevel therapy as the clinical gold standard frontline treatment for any patient diagnosed with sleep apnea in accordance with Sleep Medicine guidelines. We have continued to see incredible uptake from primary care physicians or [ PC piece]. To date, the CME programs have been completed nearly 40,000 times by more than 22,000 unique PCPs, demonstrating that health care providers have taken multiple courses. Surveys at the end of these courses have consistently shown that 75% of providers intend to change their clinical practices related to improving sleep and breathing health based on what they learned. We will continue to drive select and targeted direct-to-consumer awareness campaigns to build sleep apnea awareness as well as ResMed brand awareness globally. The ultimate goal is to help undiagnosed patients to find their optimal path weighted treatment. With more than 2.3 billion people worldwide who need our solutions for sleep apnea, insomnia or respiratory insufficiency, it is our clear obligation to help them know the world's leading brand in the field, which is ResMed. Immediately after that, though, our role is to be what I call a digital sleep health concierge to help that person find a path to screening, to diagnosis and ultimately, to therapy for life. On the sleep medicine clinical research front, you will see ResMed continue to invest in important studies that highlight new evidence in sleep health. In late August, we announced the publication of a landmark study in the Lancet Respiratory Medicine Journal projecting a significant rise in obstructive sleep apnea, or OSA, prevalence in the U.S. over the coming 3 decades due to a variety of factors, including an aging population and increased chronic disease awareness. The study estimates that by 2050, OSA will affect nearly 77 million U.S. adults representing a relative increase of nearly 35% from 2020, and ultimately impacting nearly half of all adults age 30 to 69. These epidemiology data include all of the estimated impacts of new drug classes, including GLP-1s. The bottom line from this epidemiology research is that the prevalence of sleep apnea will continue to increase. So our work is ongoing to help the many millions here in the U.S. and the billions worldwide who need us. Last month, ResMed announced the launch of the Sleep Institute, a global clinical insights initiative, which is partnering with clinicians, researchers, policymakers and health system leaders to deliver objective noncommercial evidence-based insights that help inform care innovation, support policy decisions and elevate sleep as a global health priority. The Sleep Institute debuted at the World Sleep Congress in Singapore with an expert-led symposium examining barriers in diagnostic pathways for OSA and new scalable solutions to help improve access and outcomes. Even as we have continued our investments in both R&D and SG&A, ResMed again delivered strong net operating profit growth in the first quarter. Indeed, ResMed remains a compelling investment opportunity amidst global macro uncertainty. We continue to closely monitor the global trade environment and the evolving regulatory landscape. As I noted last quarter, because our products are used to treat patients with chronic respiratory disabilities, they have been subject to global tariff relief for decades, and we have reconfirmed that with U.S. authorities earlier this year. It's important to note that this relief has continued in the context of other Section 232 investigations, and we expect it to remain true for the investigation of medical supplies that was announced in late September. ResMed was one of the many organizations across Medtech that submitted formal public comments regarding this investigation to the U.S. Department of Commerce. There were over 800 official comments made from our industry which we see as a good show of strength from our colleagues in the field. Our submission at ResMed focused on ResMed's significant and expanding, in fact, doubling of our U.S. manufacturing, our broad domestic hardware and software R&D teams our global headquarters that's located right here in San Diego, California as well as our expansion of not just our U.S. manufacturing, but also our many U.S. jobs in research, development, and commercial operations here in the U.S. As the incoming Chairman of the industry group called AdvaMed from January 1, I'll be -- on the front lines of our med tech industry's response to this 232 investigation. 1 Of 14 industries that has been investigated by the department. And I see our industry as actually quite analogous in potential outcome to that of the aircraft industry. And the aircraft industry saw some very favorable outcomes after their investigation and the details of their commentary. We are confident that ongoing tariff relief should still apply for ResMed and for our many patients with important disabilities that need access to care. Let me also briefly comment on the competitive bidding program that CMS has stated that it plans to resume in late August, ResMed its comments on the proposed methodology that will apply to our home medical equipment or HME customers. We remain committed to advocating for policies that protect patient access to care and for policies that promote fair and sustainable reimbursement for HMEs. At this point, like everyone else in the industry, we are awaiting further information, including intended timing for the program, product categories that will be included or not included in bidding methodology details. ResMed will continue to support our HME customers and the millions of U.S. Medicare beneficiaries who rely on us, both for access to market-leading, high-quality sleep and respiratory care at home. We are fortunate to be able to remain fully focused on executing our 2030 strategy, including delivering value to all of our constituents. ResMed's strong free cash flow, our robust balance sheet provide us with significant flexibility to both invest in our business and return capital to shareholders. You guys will see us continue to selectively invest in our digital Sleep Health Concierge capabilities, including screening protocols, clinical tools, seamless workflows and cloud connected care pathways. We'll be looking to expand the diagnostic funnel to keep up with the new patient flow that will come from ResMed's own demand generate -- demand generation efforts as well as the greater awareness of sleep apnea that has been and will be generated by the promotion of GLP-1 medications that can be used to partially treat or, as I say, half treat OSA. And the accelerating momentum in consumer wearables that are capable of not just sleep health monitoring, but also sleep apnea detection. ResMed's ability to integrate with multiple other wearable ecosystems and the growth in patients using ResMed products has driven the number of API calls per second up more than 40% year-over-year in this quarter. The first quarter of fiscal year 2026 was the first time that we had more than 3 billion total API calls in a single quarter. The bottom line is that interoperability works, digital health works. People want to combine health data for lower costs, better outcomes and to bend the curve of chronic disease and to better manage these disorders and diseases that they have and that we treat. ResMed also returned significant capital to shareholders through a combination of dividends and share repurchases. As you're aware, last quarter, ResMed's our Board of Directors authorized another increase in the quarterly dividend for fiscal year 2026. We also increased our targeted share repurchase activity for fiscal year 2026. And during the first quarter, we returned over $238 million to our shareholders. Before I turn the call over to Brett, I would like to take this time to thank the ResMed Board Director has just recently announced his retirement, Rich Sulpizio, for his amazing years of contribution to ResMed. We announced that Rich will not stand for reelection at our upcoming annual meeting of shareholders, which will be November '19, 2025. And he will retire after that meeting. Rich has been a long-time mentor to me and to many executives in the technology and health care industries, including at Qualcomm, CI Technologies and of course, right here at ResMed. Rich had always brought Canada Energy and a people-first mindset to every boardroom conversation. We'll continue to do that in his legacy. I'd also like to formally welcome Nicole Mowad-Nassar to ResMed's Board of Directors. The call was elected to our Board August 15 and has been appointed to the Compensation and Leadership Development Committee. Nicole is President of the Global Allergan Aesthetics business, and she's a Senior Vice President at AbbVie. Nicole brings 3 decades of pharmaceutical industry experience, a sharp commercial lens, a deep commitment to patient access and a strong orientation towards digital health as well as consumer and patient engagement. Nicole is a great addition to the ResMed board. One final note on the Board, I'd like to congratulate Chris DelOrefice on his recent appointment as Chief Financial Officer of Ulta Beauty in the consumer cosmetics retail industry. We are fortunate to have both Chris and Nicole bring their experience with consumer-driven aesthetics products and retail products to our Board discussions. Their insights will be increasingly critical as ResMed builds its brand presence with consumers around the world to augment our amazing B2B businesses. Quarter-after-quarter, ResMed has demonstrated its ability to consistently deliver both financially and operationally. We've established a leading market position globally in an underpenetrated market that still has a very long runway for growth. This underpins our confidence in our ability to deliver for consumers, for patients, for physicians, for providers for payers, for our communities and, of course, for you, our shareholders. With that, I'll hand over to Brett to go through a deeper dive into our financials, and then we'll open the floor for questions. Brett, over to you in Sydney. Brett Sandercock: Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2026. Unless noted, all comparisons are to the prior year quarter and in constant currency terms, where applicable. We had strong financial performance in Q1. Group revenue for the September quarter was $1.34 billion, a 9% headline increase and 8% in constant currency terms. Revenue growth reflected positive contributions across our product and resupply portfolio. Year-over-year movements in foreign currencies positively impacted revenue by approximately $16 million during the September quarter. Looking at our geographic revenue distribution and excluding revenue from our residential care software business, sales in U.S., Canada and Latin America increased by 10%. Sales in Europe, Asia and other regions increased by 6% on a constant currency basis. Globally, on a constant currency basis, device sales increased by 7%, while masks and other sales increased by 10%. Breaking it down by regional areas. Device sales in the U.S., Canada and Latin America increased by 8%. Masks and other sales increased by 12%, reflecting continued growth in resupply, new patient setups and incremental revenue from our recent VirtuOx acquisition, which we acquired in Q4 FY '25. In Europe, Asia and other regions, device sales increased by 7% on a constant currency basis, and masks and other sales increased by 4% on a constant currency basis, impacted by a strong prior year comparable. Residential care software revenue increased by 5% on a constant currency basis in the September quarter, led by robust performance from our MEDIFOX DAN business, partially offset by weaker performance in our senior living and long-term care software business. As Mick mentioned, we are reviewing our investment priorities within RCS and are working on initiatives to drive improved growth in the RCS portfolio. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our first quarter earnings press release. Gross margin was 62% in the September quarter and increased by 280 basis points year-over-year and by 60 basis points sequentially. The increases were primarily driven by component cost improvements and manufacturing and logistics efficiencies. Changes in average selling prices had a minimal impact on our gross margin, both on a year-over-year and on a sequential basis. Our supply chain team continues to make progress on our pipeline of gross margin expansion initiatives, and we remain focused on making sustained long-term gross margin improvements. Looking forward and subject to currency movements, we still expect gross margin to be in the range of 61% to 63% for fiscal year 2026. Moving on to operating expenses. SG&A expenses for the first quarter increased by 8% on a headline basis and by 7% on a constant currency basis. The increase was primarily attributable to additional expenses associated with our VirtuOx acquisition and growth in employee costs as well as ongoing marketing and technology investments. SG&A expenses as a percentage of revenue improved to 19.4% compared to 19.5% in the prior year period. Looking forward and subject to currency movements, we still expect SG&A expenses as a percentage of revenue to be in the range of 19% to 20% for fiscal year 2026. R&D expenses for the quarter increased by 10% on both a headline and constant currency basis. The increase was primarily attributable to increases in employee-related expenses. R&D expenses as a percentage of revenue were 6.5%, consistent with the prior year period. Looking forward and subject to currency movements, we still expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% and for fiscal year 2026. During the quarter, we recorded a restructuring related charge of $16 million, following a company-wide workforce planning review to better align our capabilities with our 2030 strategic priorities. Restructuring costs were comprised of employee severance and other onetime termination benefits. The restructuring charge has been treated as a non-GAAP item in our first quarter financial results. Operating profit for the quarter increased by 19%, underpinned by revenue growth and gross margin expansion. Our operating margin improved to 36.1% of revenue compared to 33.2% in the prior year period. Our net interest income for the quarter was $9 million. During the quarter, we recognized unrealized losses of $6 million associated with our minority investment portfolio. This negatively impacted our Q1 earnings per share by -- sorry, by $0.04. Our effective tax rate for the September quarter was 22.3% compared to 19.2% in the prior year quarter. As we noted in our last quarter call, the increase in our effective tax rate was primarily due to the impact of global minimum tax legislation introduced in certain jurisdictions that became effective from July 1, 2025. We still estimate our effective tax rate for fiscal year 2026 will be in the range of 21% to 23%. Our net income for the September quarter increased by 15% and non-GAAP diluted earnings per share increased by 16%. Movements in foreign exchange rates had a positive impact on earnings per share of approximately $0.02 in Q1 FY '26. The cash flow from operations for the quarter was $457 million, reflecting strong operating results and disciplined working capital management. Capital expenditure for the quarter was $43 million, and depreciation and amortization for the quarter totaled $48 million. We ended the first quarter with a cash balance of $1.4 billion. At September 30, we had $669 million in gross debt and $715 million in net cash, and we have approximately $1.5 billion available for drawdown under our revolver facility. We continue to maintain a solid liquidity position, strong balance sheet and generate robust operating cash flows. Today, our Board of Directors declared a quarterly dividend of $0.60 per share. During the quarter, we purchased approximately 523,000 shares under our previously authorized share buyback program for a consideration of $150 million. We plan to continue to purchase shares to the value of approximately $150 million per quarter during the remainder of fiscal year 2026. Going forward, we will continue to invest in growth through R&D, deploy further capital for tuck-in acquisitions and continue our dividend and share buyback program. And with that, I will hand the call back to our operator, Kevin, to provide instructions for our Q&A session. Operator: [Operator Instructions] Our first question today is coming from Davinthra Thillainathan from Goldman Sachs. Davinthra Thillainathan: Yes. Mick and team, I appreciate the time. Can we just touch on your new mask that you have launched in Australia and in the U.S. Could you just highlight the unique attributes of this product? And also, if I understand this right is in the full face category and it builds on the nasal launch towards the back end of calendar year '24. So if you could just help explain just the importance of that full face category and tie that into your ambitions to accelerate growth in March, especially in ex U.S. regions? Michael Farrell: Yes. That's a great question, David. And so yes, it's the AirTouch F30i and really incredible, I would say, fabric-based technology that, as you know, in Singapore, we've had a fabrics engineering team working for a while. And we had recently launched our AirTouch N30i, a couple of quarters ago and have had really good success with that nasal mask with fabric touching the face. And so we had this in development. We accelerated it up. And you're right, this is a full-face mask. So it's high price, high margin. It's about the roughly 30%, 40% of people breathe through both their nose and their mouth while they sleep. So they need an oronasal mask. And so for those people, 1/3 plus of people, the AirTouch F30i is coming to market. And we've got 2 variants of it, one, which I'll call sort of the premium one, which would be more, as you said, in the sort of direct-to-consumer cash pay markets. I think China, Australia, New Zealand, India, Korea, Singapore, et cetera, et cetera. And that's called the F30i comfort. And that has fabric not only in the part touching the face, but all over the head gear as well. So every part touching your body is like the sheets that you sleep in the bed. The other variant is called the F30i clear. And that is for markets sort of that are B2B markets, our home care provider markets, where we have a more economical version, but it's still has the advanced technology where the part touching the face has this new fabric or nasal patient interface. So watch this space. We've seen really good success with the N30i over the last couple of quarters. I think we're going to do the same in the full face category here. We're changing the basis of competition in masks away from liquid silicon rubber LSR away from silicon to fabrics. We're going to sell both, but I think this is going to be a very exciting product for us and it will help us, not only have high single-digit growth in the Europe/Asia rest world category, which we're going to be back to that this quarter and continue on it. I'm more excited about what it can do for patients around the world who want more comfort and more care and these masks do that. Thanks for the question, David. Operator: Your next question is coming from Laura Sutcliffe from Citi. Laura Sutcliffe: I think you spoke at the end of the prepared remarks to potential sort of tuck-in acquisitions. I think historically, you've said there'll be focus sort of refining the patient funnel improving retention within the funnel. I assume that because there's most for you to gain here. So could you just talk to how much work there is to do, how leaky is the funnel right now and perhaps sort of allude to how that fits into the ResMed 2030 strategy? Michael Farrell: Yes. Thanks for the question, Laura. Look, it's a good one. And as you saw, we have done a couple of tuck-in acquisitions in this area of the patient funnel, helping with access to very easily usable home sleep apnea testing tools like our Ectosense acquisition and the NightOwl product. That is now being launched to our U.S. sales force. We did that at the sales meeting a couple of months ago. And so then in addition to that, we acquired a home sleep apnea testing services company called VirtuOx. And that team is hard core, dedicated entrepreneurs that now have -- and they came to our salesman here in the U.S. as well. They now have access to the ResMed capabilities. And I actually just got the quarterly update from the team on the advisory board and their numbers are doing really well. We are doing really well in terms of getting NightOwl, getting other homes sleep apnea tests to patients and bringing them through the funnel. So that really strong 8% growth we saw in U.S. devices. I do think that sort of, I would say, beating sort of that mid-single-digit growth, which we say is the market growth without that, some of these tuck-in acquisitions of VirtuOx and the NightOwlproduct have helped with that. In addition, of course, we had the tuck-in of the Somnoware acquisition, which is software, for pulmonary and sleep medicine practices. So we're helping provide efficiency, seamless flows, so that the pulmonary doctors and the PCPs have better interactions and easier interactions with each other. Yes, I'm not going to single exactly what we are looking at for the future, but I can tell you more like that technologies and capabilities to help with that seamless, frictionless flow from sleep concern consumer to screening, diagnosis, treatment and set up. As you said in your question, Laura, there is churn in the channel. There is leakage in that funnel. And our goal is not only to bring more patients into the funnel at the top through demand generation, capture and curation, like our CME programs that I talked about in the prep remarks, but also to minimize the lots of people as they go through there. And how do you do that? You interact better. You provide seamless and easier alternatives to go through the system. So I think having Dawn our generative AI product, there's sort of digital sleep health Concierge, improving access to that capabilities of that, interoperability of that. Think of the 3 billion calls, API calls into and out of our AirView system. That means people want to know about their sleep health and their breathing health. And we need to combine it with all those other data around chronic disease. So I really do think the investments from big pharma, they're putting in D2C advertising, including using basketball stars and all this late night stuff don't sleep on OSA campaign. It's going to bring patients into that funnel. And so ResMed's goal is to maximize the opportunity of getting that screening, positive diagnosis, positive therapy for the gold standard, whether or not they have additional therapies like GLP-1s or others, making sure the gold standard happens at that time and that we maximize that 90-day adherence, year 1 adherence and beyond. So the game is not done. There's a lot more to do. We're going to keep executing on NightOwl and VirtuOx and Somnoware and looking at others that can help drive further growth in the future. Thanks for the question, Laura. Operator: Next question is coming from Saul Hadassin from Barrenjoey. Saul Hadassin: Mick, you touched on this made in America strategy, Mick, and the Indianapolis distribution center expansion. I'm wondering if you can talk to your plans as it relates to actually manufacturing in the U.S., and I know you spoke about this last quarter at Calabasas. But just to be clear, how do you see product manufacturing evolving in the U.S. as it relates to being able to develop all products, CPAPs, masks, not just the motors. If you could touch on that, that would be great. Michael Farrell: Great question, Saul. And I won't go into the detailed plans that we have to expand in Calabasas and Moreno Valley in Indianapolis and Atlanta. But I can tell you across our footprint here in the U.S., we've got a really broad manufacturing and distribution capacity world-class. And Shane Azzi and his supply chain team not only looking at inbound supply, but that manufacturing distribution, getting 90% of customers within 2 business days of delivery is sort of world-class and well above top tier for Medtech. And so that's where we're looking at going. Yes, look, we do see certain policies coming in from Washington and being the incoming Chairman of AdvaMed I'm very much across all that is coming and may or may not come. And you think about customers like the VA and others that the U.S. government approach. I think it's just a good strategy for ResMed to not only have our Made in America motors, as you said, our made America masks that we already have, but to have capability for Made in America devices. And so we will be setting up lines for that and be able to flex up and down as the needs of our U.S.-based customers and our global customers go there. The bottom line is the vast majority of our global volume does come out of the U.S. It's well over 50%, 60% of our global volume. So bringing more manufacturing here. And we learned this in COVID that having manufacturing close to where the demand is, is needed when there's uncertainty -- geopolitical uncertainty. And so we're looking at all that and saying ResMed is a steady ship through all this macro uncertainty. We've been so good with all these changes in up and down. I'm just being really good at delivering for our customers. We want to have the ability to do that no matter what happens. And so we're preparing for that. And we're doing things for the long term. We're not doing them in response to a particular government. We're saying, well, what's right for us in 2030, 2035 and then what overlaps what rules may or may not come in. And that's why we're doubling our U.S. manufacturing capacity and broadening from just motors to masks and potentially devices as well. So watch this space. Operator: Our next question today is coming from Lyanne Harrison from Bank of America. Lyanne Harrison: I might ask on U.S. devices. Obviously, very strong growth there in comping a strong previous quarter as well. Can you talk about the demand in initiatives that you have in place? And how do you measure which ones are really delivering in terms of generating that demand? And you do mention mid-single-digit growth for the device market. But certainly, what we are seeing this quarter is at high single digits. Can we expect high single digits going forward, given all those demand initiatives that you have in place? Michael Farrell: Yes, Lyanne, look, it's a really good question. And you and many of the other analysts here have followed our work here very closely on demand gen, demand capture demand curation. And so you know it's not a simple algorithm. It's not a simple customer acquisition cost to lifetime value that you might see in a retail industry or an online-only type company where those equations are relatively simple. [indiscernible] dial, you get this response. It's quite complicated in health care. And so we've actually become quite sophisticated. I think, in where, how and when we have targeted social media and digital media driven demand gen campaigns where we look at not only is there an age group and a demographic that's open to that demand gen, so that it's available demand gen, but the capacity for screen diagnosis and prescription of referrals is there within that particular demographic, geography and capability. And so -- yes, look, I do think we outperformed what the market growth would have been without good execution there in Q1, right, with 8% growth in our U.S., Canada and Latin America devices on a reasonable comp as you noted. I'm not here to raise our guidance and say, "Oh, we're suddenly going to go to high single-digit growth in devices on a consistent basis in the U.S." But I do think that we can systematically move up 25, 50, 100 basis points from what the growth will be. We can move ahead sometimes and do really well and then we can just slowly and steadily move it up as well. And what we're looking for is that sustainable market demand, demand generation improvement. It is nice to have the tailwinds of $400 billion, $500 billion pharma company throwing a lot of D2C advertising that we can't afford to do with our P&L. That don't sleep on OSA campaign and all their other stuff is going to bring patients into the funnel. So our question then comes like -- how many of those 22,000 PCPs were trained are actively now prescribing CPAP as gold one front line therapy to every patient that comes through. They say they're going to do that close to the education, but what happens in practice? Have we connected them to a VirtuOx? Have we connected them to other home sleep apnea testing services because it doesn't have to all be from us. We want that patient well taken care of and brought through the funnel. So yes, I think it was a great work by the team in U.S., Canada and Latin America in the quarter. And let's not forget, they also did great work in resupply, you saw 12% growth of U.S., Canada and Latin America masks and other categories. So that very good growth in the mask resupply and the VirtuOx services and all the other parts that go into that. So very excited about this growth and its ability to continue it. But it's an ongoing game of innovation in marketing technology, demand generation technology and then also channel evolution, which relates to Laura's question about making sure the infrastructure is there as well. So we're combining all this together well. U.S., Canada and Latin America team did very well in the quarter, and we're going to continue to execute on that. Thanks for the question, Lyanne. Operator: Our next question is coming from Steven Wheen from Jarden. Steven Wheen: Just a question for Brett in response to the global minimum tax jurisdiction and the impact on your tax rate. I think from your previous calls, you've indicated that there's other benefits that you're likely to get through R&D sort of credits or offsets or sort of staff concessions. I wonder if you could sort of help us understand what the sort of compensating factors may be for that lift in the tax rate in out of Singapore? Brett Sandercock: Yes, sure, Steve. Yes, we now have an agreement under refundable investment credit or ROIC with the Singapore government, which is now effective into this quarter. So we are getting some offset that would flow through COGS, SG&A, R&D through the P&L. So that offsets it to some extent, but not completely, but we do get some benefit that's coming through. You'll see that over time. I think that will build over time as well. Through FY '26 into FY '27. So we are getting the benefit of that, but it's not -- it doesn't offset the tax impact. Operator: Our next question is coming from David Bailey from Morgan Stanley. David Bailey: Yes. Mick, just the commentary around PCP awareness rising prevalence in the U.S. in relation to OSA. First part is, where do you think the penetration of the U.S. market is at the moment? And then secondly, in terms of RePAP as an opportunity for growth, how do you sort of see that at the moment and going forward as well? Michael Farrell: Yes, David, it's a good question because it looks at both parts the RePAP, which is a growing part of our devices side and the new patient flow that we spend a lot of our time for in the devices category. Look, I think PCP awareness is key. I want all 40,000 of the PCPs that I think will be targeted by this work from the pharmaceutical industry that are high-volume GLP-1 providers, and that already have access to home sleep apnea testing protocols. And so we're going to work through really strongly to make sure that we hit all of those primary care physicians and make sure their education is there and that we are there with commercial solutions for them to be able to drive that. And yes, the rising prevalence from the data that was published in the Lancet. We're ready for that. We know there's an aging population. We know there's increased chronic disease awareness, and we know that people are finding out more, not just in the big pharma ads, which is sort of temporal compared to these wearables that people are now managing their health and their fitness. And when it starts to identify sleep breathing disturbances or specifically sleep apnea. They're going to seek treatment and they are. And so we've got to be aware for both of these at the primary care level. To your question around penetration in the U.S. market. Look, I think when you take those numbers up to $77 million by 2050, where we're at in our penetration rates and the growth towards that. The U.S. market is sort of in that sort of 15% -- under 20%, sort of 15% to 20% penetration. The Europe market is in that sort of 10% to 15% penetration rate. And of course, in Asia Pacific and Rest of World, we're well sub-5% penetration. And our growth rates are struggling to keep up with the rise of prevalence. And so those percentages don't change as fast as I'd like them to change in terms of penetration. I'd like them to increase higher and higher because ResMed is finding better and better solutions to get there. But we're just finding more and more patients as people age and get aware, frankly, of these chronic diseases. And so both of those are good things. But yes, sort of in that 15% to max 20% sort of in the U.S. range is sort of where we see penetration now. And thanks for your questions. It's a complex equation of getting that PCP awareness and driving people appropriately into the funnel, but we're working on it and the team performed very well this quarter. Operator: Next question is coming from Brett Fishbin from KeyBanc Capital Markets. Brett Fishbin: Nice overall quarter for Sleep & Respiratory, but I think the 1 area to maybe nitpick was just the mid-single-digit growth trend in SaaS which is a little bit below your typical levels. I was hoping you can maybe just unpack a little bit more in terms of the incremental headwinds you saw in those couple of end markets. And then just the assumptions underlying your expectation of returning to mid- to high single-digit growth near term and high single-digit growth next year? Michael Farrell: Great. It's a good question. And yes, as you know, the Software as a Service part of our RCS business is incredibly strong, and that's where we're really looking to focus. So core MEDIFOX, core Brightree and then MatrixCare home health, all Software-as-a-Service businesses that have higher growth and higher margins. So we are investing in those. What you saw in the quarter and what I talked about for this fiscal year is that we're going to focus less on what I would call the lower margin, lower growth areas. Their services revenue, I think IT services, implementation services, which you need to have some of, right, for new customers that are coming on board with your ecosystem, but you don't need to expand on them and have them beyond what is needed. And you can actually use third parties to provide those lower-margin areas where private companies are happy with lower growth, lower margin areas and they're not best suited as part of a strategic like ResMed in a global RCS platform. So I'm going at portfolio management that we're looking at for that, where we're going to invest more and more in the SaaS platforms, as you noted, and less and less in the services part of that. And that was what contributed to the couple of hundred basis points delta there from Q4 to Q1. But as I said in the prepared remarks, and we've got the plan and we're executing on it. I spent a lot of time. We've now rolled this business into our global revenue side. So Michael Fliss, our Chief Revenue Officer, and really importantly, with Joachim who runs our MEDIFOX business, Tim who runs our MatrixCare business and Gregg, who runs our Brightree business. We're looking at every element of portfolio management is saying, let's invest for the long term. Let me get investment into the core platforms that are really servicing these home medical equipment companies, really servicing this home nursing and home health companies and our expandable and sustainable growth and can get us back to where we should be, which is high single-digit growth in the top line, but also double-digit growth on a net operating profit basis. So watch this base as we go through that. I think it's the right time to do this because our core business is performing so well. And I think it's the right thing to do for the long term because there's great synergistic impacts -- look at the growth of masks and accessories in our U.S. at 12% this quarter. That was helped by our Brightree, not only Brightree resupply, but Snap and not just Snap and Brightree, but Snap for other areas. And so have we over-indexed on the resupply and a little less on the core platform maybe. And so I think what we're signaling here is we're going to invest in the core platform in Brightree and really make sure that's not only best in class and best market share, which it is, but it's innovating faster and faster to help more and more HME customers come on board. So I think it's the right time for this portfolio management, and we're investing with those businesses. We've got 3 really strong leaders that are putting their plans together and executing and I met in person with them all this quarter. And I'm really excited about what we've got ahead for our SaaS-based businesses in Brightree in home medical equipment and synergistic impacts as well as our work in MEDIFOX and home health on MatrixCare. Operator: The next question is coming from Mike Matson from Needham & Company. Joseph Conway: This is Joseph on for Mike. I appreciate taking our questions. I guess maybe just a quick one on NightOwl. Obviously, it's pretty early days into the launch, but I was just wondering if you could give any more color around metrics? And how it's converting fleet patients and lowering that pretty high fleet patient backlog that you guys have called out? Much appreciated. Michael Farrell: Yes. Thanks for the question, Joseph. And yes, we don't really split out exactly what the NightOwl numbers are. But what I can tell you is, compared to where we thought we'd be in the growth of our VirtuOx, which is the home sleep apnea testing service that runs NightOwl as well as ApneaLink as well as even competing diagnostic tools, but mostly NightOwl. We're seeing really good growth. That team is performing well and driving patients through the funnel. I mean, you saw that in the 8% growth in devices in U.S., Canada, Latin America. Do I think there's more room for growth? 100%. Do I think that the big pharma, big tech, bringing patients in is going to be a tailwind? For sure. But it's an ongoing game of saying, let's make sure we get those NightOwl's to every geography, to every primary care position who needs them. And more importantly, frankly, offer the service to that primary care physicians so they don't have to buy the diagnostics because most of them want a service that can provide it for them. So it's really a combination of NightOwl wrapped in the VirtuOx service as well as providing for the pulmonary physician growth of somewhere, so that they can manage the systems and read the studies and get them back to the primary care physicians who can then see their own patient, write the prescriptions and then the care can be managed for life. So a bit of a complex equation. But I can tell you that the growth is good in VirtuOx, growth is good in NightOwl and that's what's contributing to our core business growth, which was strong, not just in the U.S. but also in Europe, Asia, Rest of the World. We saw pretty good sort of 7% growth in devices across Europe, Asia, Rest of World this quarter. And obviously, not driven by NightOwl its not as available there, test some more on larger, more complex on sleep apnea testing systems and in lab, but we're even doing well in driving patients through there. So no patient left behind. We want to make sure the $2.3 billion have access to care and the $1 billion with sleep apnea have a better approach and NightOwl is a good part of that. Operator: Our next question today is coming from Andrew Goodsall from MST. Dan Hurren: Sorry, it's actually Dan Hurren. Look, thanks for your comments that you made before around competitive bidding. But sort of reflecting back, I'm not sure you actually gave us your thoughts on what you think the range of outcomes will be. But your commentary is bullish and confident as ever. So I guess you must have a view on how competitive bidding will play out, So perhaps I'll push you there a little bit just to narrow your thoughts on the range of outcomes there? Michael Farrell: Yes. Thanks for the question, Dan. I mean look, this is our 15th year probably 60th quarter of watching the competitive bidding landscape right from when this launched in sort of 2010. And I think the HME customers are very sophisticated. They understand their costs and they understand how to bid, and so they're working through all that. So no matter what the scenarios are, the last round that we saw in 2021, just 4 years ago, they did a really good job of looking at their costs and bidding appropriately. And then we saw those bidding rates be right in line with what they thought. And then the government sort of went back and reassessed. Look, maybe we'll just stick to an inflationary adjustment approach. Look, I think the HMEs will do the same thing. They'll bid appropriately. They know where ResMed is, which is we're here to support you. But this is something where we know where the costs are, their costs have gone up from 2021 to now, there's been inflation across it. They should bid appropriately in there working through the process through AAHomecare and all these groups to work out how to do that well. So I think we've got a mature sophisticated HME base that will bid appropriately. And I think the outcomes will be appropriate for them because they know the inputs they put into that system are the outputs they'll get. And they know that ResMed will be here to support them with the best smallest, quietest, most comfortable most cloud-connected and most capable systems, and that together will help take cost out of the system by keeping people out of hospital, out of ERs and that this is about really that equation, which is sleep apnea diagnosis and treatment is a cost saver for the health care system. That's what I advocate for us as Head of [indiscernible] there about all of Medtech. There's an ROI of Medtech for the U.S. government. It's a very good investment for them. And so that applies to both the lobbying on the 232 as well as on competitive bidding. So I'm confident that the outcome of this will be good because the sophisticated players going in and they know what to do and they know that the beneficiaries are the ones they should focus on. And that's what we're all here to serve them. Operator: Thank you. We are now at the 60-minute mark, I'm going to turn the floor back over to Mick for any further closing comments. Michael Farrell: Well, look, thank you for joining us for the earnings call today. Our fiscal year 2026 is off to a great start, strong 9% headline, 8% constant currency growth. On behalf of more than 10,000 ResMedians serving people in 140 countries worldwide, I'm pleased that they were able to deliver you another strong quarter of performance and for all our shareholders. We look forward to speaking with many of you over the coming weeks and to all of you here in 90 days. I'll hand back to Salli. Sallilyn Schwartz: Great. Thank you, Mick. I'll echo Mick, thank you for everyone for listening, and we appreciate your time and interest. If you have any additional questions, please don't hesitate to reach out directly. Kevin, you may now close the call. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good afternoon, everyone, and welcome to Data I/O's Third Quarter 2025 Financial Results Conference Call. Please note, today's event is being recorded. At this time, I'd like to turn the conference over to Mr. Jordan Darrow, Investor Relations. Please go ahead, sir. Jordan Darrow: Thank you, operator, and welcome to the Data I/O Corporation Third Quarter 2025 Financial Results Conference Call. With me today are the company's President and CEO, Bill Wentworth; and Chief Financial Officer, Charlie DiBona. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, results from operations, financial position, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, product releases, new industry participants and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied in such statements. These factors also include uncertainties as to the impact of global and geopolitical events, international tariff and trade regulations, order levels for the company and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, pricing and other activities by competitors and other risks, including those described from time to time in the company's filings on Form 10-K and 10-Q with the Securities and Exchange Commission in our press releases and other communications. The company may also reference GAAP and non-GAAP financial performance measures, including onetime items, which are intended to provide listeners with a means to better understand the company's performance. Please refer to reconciliations in our third quarter earnings press release issued today after market close. Finally, the accuracy and completeness of all discussions on this call, including forward-looking statements should not be unduly relied upon. Data I/O is under no duty to update any forward-looking statements. And now I'll turn the call over to Bill Wentworth, President and CEO of Data I/O. William Wentworth: Thank you, Jordan, for that introduction. I want to thank the people that have taken the time to -- out of their day to listen to our earnings call and look forward to the conversation and specifically the Q&A after. I spent the last week thinking about the last year since this month marks the year that I started as CEO of Data I/O. And one of the things that I noticed as a Board member that the company was certainly doing well in the automotive industry, but it was also a fairly high concentration in that business. And it's still a great business for Data I/O and has continued even in this softness, it's still driving quite a bit of our revenue, but it's also one of the things that needs to drive us to get to new markets, but also new businesses. So what we've done and I look back at the year and look at where we've invested in the first couple of months of discovery, was looking at the team and kind of what the members brought to the party and really where were the strengths and weaknesses of the company from a people standpoint. We brought in a new Director of Engineering, John Duffy, who's done a phenomenal job. He started in January, getting our refresh of our manual product line and getting the development of our next-generation program, which will be introduced at productronica at the end of this month, which I'm very excited about. We've won a couple of awards already at some shows with the new reskinned LumenX, which has made the ability for us to really go out and pitch the platform and really get back into the engineering communities, which has been exciting and started to drive some ramp in our manual systems and started to look at some preorders as well, which will really start to kick off in Q1. Rounding out the product portfolio is probably the most important thing we had to do this year outside of the people. Without the people, you have to have the right people to design the products and bring these things to life. And I have to say, if you look at our product portfolio from a year-ago and look at it today, it's night and day. It's really what Data I/O stands for, and that's what we're excited to bring to market. We are starting the next generation already of our long-term platform, which started its design cycle this quarter. I would kind of call it Data I/O's AI moment at the end of next year when that product gets released. That doesn't preclude us from driving revenues and new revenues this year with the reskinning of the LumenX and getting to the new platform that we're launching at productronica. We're also starting the refresh cycle of our automation. We've also noticed some gaps in the solutions area of automation for processing programmable technology. So we're pretty excited about rolling out some new automation platforms sometime around the middle of next year. And that leads to kind of process. And Charlie is going to get into some of that process and how we're going to be managing margins and look for margin expansion throughout next year quarter-over-quarter, there are some areas that we can definitely improve there. But really, the exciting part is getting into these new businesses in adjacent markets. The market we serve today is $100 million to $200 million at best. Services definitely needs to be a pillar of this company, and we are starting those conversations now. But that's a $1 billion-plus market that really brings in recurring revenue, not necessarily always contractual, but you're always managing a supply chain and those consistencies take out a lot of the lumpiness of the CapEx business, but it's a directed case at play. It allows us to drive very competitive pricing in the market. It puts us in a position to really drive that business, both for partners that we may partner with to provide them services or OEMs that decide that they don't want to buy CapEx and they need a service for Gartner instead. So it gives us an opportunity to have both conversations. We are in conversations now about embedding our technology in testers, which is a big part of the market. That's probably a multibillion-dollar market. Now we're opening up a market that used to be 10% to 15% that we could play in upwards of 60% to 65% of where data gets provisioned. And that's where Data I/O is going to be able to finally grow. These activities are going to have traction next year. I can't tell you when these revenues will start. I just know that we're in conversations, and we're actually in them earlier than I thought. I really didn't think that we would -- the company would be engaged in these conversations until Q1. So the great thing is that we're out of the gate pretty quick. And then there's some vertical integration that we're going to be doing. People on the phone know the company, Cohu, they invested in sockets years ago. It's a big part of how they go to market with their technology with testers and handlers. It's a big part of -- and a very important part of our business because the second most important thing to a programmer is being able to make contact with the device. And it's something that Data I/O should have expertise in. It's a $7 billion market. And so it's a business where we can make a small entry into a small player here in the U.S. or even abroad, have that expertise internally, lowers our operating costs, but also gives us a secondary offering, but also as a lead generator as well. All three of these new business units do drive revenue for the other. And that's the great part about being in adjacent markets, you can leverage your core, which is exactly what we'll be able to do next year. So I'm excited about 2026 because we can finally start to drive the growth engine. We're going to have the products and the people and the services to be able to go do that. And that's what we're investing in between now and the end of the year, and we'll continue to make those investments next year. We've invested also in the engineering department. We've brought in some additional algo writers to drive our algo migration from our older platforms to the new platforms. So we're getting ready for that growth. I'd like to -- that's all I have for now. I look forward to the Q&A session. I know there's some coming. So I look forward to this Q&A. I'll hand the rest of it over to Charlie. Charlie? Charles DiBona: Thank you, Bill, and good day to everyone. It's a pleasure to speak with you all today, which is my first call as a CFO of Data I/O, and I'm excited about the prospects of this company and of this role in particular. In my remarks, I'll address our recent financial performance in more detail. My comments today will focus on key points of interest for the third quarter of 2025, recent trends and our outlook. Net sales in the third quarter of 2025 were $5.4 million, down from $5.9 million in Q2 '25 and flat from the prior year period. Bill mentioned some of the pressures that continue to drag on our current performance, revenue performance. These include the temporary realignment of tech spending related to AI and the changes in the global EV landscape for manufacturers and the impact on automotive electronics generally. Global trade and tariff negotiations, which had been a gating factor earlier this year, remain but are now tertiary concerns. Automotive electronics as a primary business segment represented 78% of our third quarter of '25 bookings compared to 59% for all of 2024. For the third quarter of 2025, consumable adapters and services represented 24% of total revenue, providing a base of reoccurring revenue, while capital equipment sales represented 76% of total revenue. Similar to the second quarter, Asia was led by customers in China and Korea for a relatively strong third quarter in the region, particularly within the EV sector of automotive electronics. Europe, however, remains pressured with capital equipment spending impacted by tariff and trade uncertainties as well as EV disruptions in the regional market. The Americas bolstered by systems to be deployed in Mexico has been relatively flat. Global bookings for the quarter were $5.2 million, up over 7% from $4.7 million in the third quarter of 2024. New bookings activities were driven by demand for the PSV7000 automated programming system. A total of 8 of PSV7000 systems complete with LumenX programmers were booked in the third quarter of 2025. Backlog on September -- as of September 30, 2025, was $2.7 million, down slightly from $2.8 million as of June 30, 2025. Three systems were booked and shipped within the third quarter with 7 systems remaining in the backlog. Gross margin as a percentage of sales was 50.7% in the third quarter of 2025 as compared with 49.8% in the second quarter and 53.9% in the prior year period. A higher margin product mix and configuration of automated systems driven by demand for the PSV7000s led to the improved margins on a sequential quarter comparison. Direct material costs remained steady and consistent with prior periods as supply chain planning and other actions have mitigated the impact of new tariffs, trade and inflationary pressures. The third quarter gross margin benefited from this positive product mix and configuration of automated systems, as I mentioned. We've begun a thorough review of gross margin enhancement strategies. Some of these initiatives are already underway and should support our gross margins this year. We expect other aspects of this plan will lead to higher sustainable gross margins in the longer term, meaning next year and thereafter. These strategies are likely to include pricing modifications and new pricing models, labor and costing efficiencies, supply chain optimization and a focus on more direct sales engagements with key customers, particularly in the Americas and Europe. Moving back to my review of third quarter performance. Operating expenses for the third quarter were $4.1 million, up from $3.8 million in the second quarter of 2025 and $3.3 million in the prior year period. Third quarter 2025 spending tracks closely with the company's operating expenses early in the year after excluding approximately $585,000 in onetime expenses. $200,000 of these expenses were related to the investigation and remediation of the cybersecurity incident first identified on August 16, 2025. $130,000 are related to executive transitions and another $130,000 are onetime expenses tied to technology and IT-related growth initiatives. For comparison, total second quarter 2025 onetime expenses amounted to $480,000. As with cost of goods, we are undertaking a thorough review of operating expenses to find opportunities for savings and efficiencies. Q3 '25 onetime investments and expenses reduced our profits, adjusted EBITDA and cash in the period. Backing out those onetime expenses in the third quarter of 2025 would have left us with an operating loss of $808,000 versus the reported third quarter operating loss of $1.393 million and the third quarter operating loss of '24 of $325,000. Again, backing out onetime expenses, adjusted EBITDA would have been $563,000 versus a reported adjusted EBITDA loss of $1.15 million and a positive adjusted EBITDA of $37,000 in the prior year period. Our cash balance, absent the onetime expenses would have been approximately $600,000 higher or just over $10.2 million as of September 30 versus the reported amount of $9.7 million and the $10.3 million as of December 31, 2024. The company's continued discipline in spending and cash management reflect an improving -- constant cost structure as well as investing in our Unified Program platform and other new products and fortified our IT systems, both of which allow for greater top line growth and scaling of the business. Data I/O's net working capital of 14 -- just over $14.4 million as of September 30 was slightly lower than $16.1 million as of the end of last year, in part reflecting onetime spending through the three quarters of the year. Finally, the company continues to have no debt. This concludes the remarks for the third quarter of 2025. Operator, would you please start the Q&A portion of the call? Operator: [Operator Instructions] The first question comes from David Williams with Benchmark. David Williams: Congratulations on the progress here and just the confidence in the tone. Certainly good to hear. Yeah, so lots of exciting things going on. And I guess maybe first, I wanted to touch on, Bill, you and I have talked before about just the technology and progressing that and taking it into the future. And outside of maybe what you discussed just now, what do you think if you look out maybe two years or three years from now, how do you envision just the platform overall? Do you think that all of the growth and the areas of growth that you have that you're looking towards, can you do that, I guess, and still maintain kind of your focus on the core business? William Wentworth: Yeah. It's a great question, David, because I know it sounds like we have a lot going on, which we do, which is great. But it all revolves around the platform. That's the beauty of it, right? So when you think about the platform that we're building that we're in design now, that's really going to be a platform that will last a good 10 years. We had to kind of round out the existing portfolio of platform that we had and just kind of filled some small gaps until we could build this next gen. But that platform will be the platform we move algos on to and they'll be forward compatible to the new real -- our long-term platform, which will be released at the end of this year. So it kind of fills a gap, but then gets that product. And it also in the design of this will be designed for the things such as the embedded opportunities we have with some very large test companies, global test companies. Can't disclose any names or really describe what they do, but it's certainly a large opportunity for Data I/O. And it's a part of the data provisioning market that represents probably 25% to 30% or 35% of the overall data provisioning. And then there's the services piece where we would also use our platform. And the great thing about providing services is you get to test your technologies on these services. So instead of the customer finding some of the problems, we get to find them upfront as a service provider. But that's also a market that's $1 billion-plus market and really hits all domains, right? And the great thing about some of the partners that we're -- we will be talking to about providing these services and generating these services for is that they serve multiple markets. So it does insulate the company in the future from any domain concentration like we're dealing with now. And then thirdly is the automation that we have today. We need to be a little more specific because we do program various different types of technologies, from microcontrollers to programmable clocks to sensors all the way up to large density UFS flash. And the platform has to be able to handle all of that. But the solutions you provide need to be a little more specific to the technology, such as microcontrollers typically be programmed in less than a few seconds. So it doesn't make much sense to program a lot of microcontrollers on a huge 7000, right? So we're looking at providing and generating newer handler technology that is faster -- it's more functional. It's made for very fast programming times, and it's more economical. You get a lot more value. So we're getting very specific. And then there's also been a gap in the services space, whether it's an OEM that wants to do their own programming in-house or a services provider that needs to provide services for their OEM customers is like a tabletop automation, something that can go tray to tray or tray to tape. It's been a huge gap in our industry for many years. It's never really been addressed very well. Data I/O did try to address this back in 2008 with what they call the FLX500. It was a great machine. It was just overengineered. And so we're kind of -- the good thing is we still have a lot of the specs and the drawings and software for it. So we're digging that out of engineering, and we're going to rebirth that machine. We do believe that's going to be a great seller for the company. And it's also something we'll consume internally as a service provider. I hope that answers your question. David Williams: No, that was fantastic color. And then maybe secondly, just thinking about your customers and how they're viewing some of these changes, obviously, in a positive way. But do you feel like you're gaining traction there? And I'm assuming that your customers are really leading the way in some of these new technologies. But just anything on the feedback or traction you're seeing, I think, would be very helpful. William Wentworth: Yeah, sure. As a customer myself, these are some of the gaps I've seen for years. So it's easy for me to look through their lens. But we've got a customer here this week that's been a long-term customer of Data I/O. And the great thing about having them on site is you get to share a lot of information. They can share with us. We share with them what we're thinking and they kind of like say [ and they nod ] and say, yeah, that's a great idea. And so customer has been here all week. It's a customer that's in the automotive space. Meetings are going great and getting that feedback directly from customers is nothing better. So yeah, I think we're building the things, the products that they need today going forward. When we introduce them to our new manual program, they were like, oh, yeah, I need that. So I think there's no doubt in my mind, we're building what customers do want to consume in the coming years. And there's nothing better than getting direct customer feedback. Operator: The next question is from David Marsh with Singular Research. David Marsh: Bill, I mean, obviously, you're still -- I hate to say new to Data I/O, it has been a year. But I mean, given all the changes you've made, I mean, the product suite is pretty new, but you're certainly not new to the industry. So I mean, I would first offer congrats on the awards that you're receiving at the trade shows. But my question is, just given your history in this business, I mean, what have you seen as typical kind of sales cycles from getting kind of critical acclaim at trade shows and getting -- generating that kind of customer interest and then actually getting the pull-through on the orders? William Wentworth: Yes. A lot will depend on the technology event. And the reason why I say that is that technology events, meaning silicon, right? A big change in silicon usually drives big spend. You reach certain technology hurdles. UFS has been one of those. The industry has -- our industry has struggled with getting to the yields that are necessary. We -- I thought we'd be past that for this quarter, and we're not. And I mean Q3. We made some pretty big strides in the last four weeks. So I think we can announce some really good yield rates on UFS. That's a technology that's -- it's very high-density flash. It has to be programmed offline. You can't do it in line. It's just something that we need to do a better job of perfecting. And I think that would be an example of a pull-through, David, is that when you get that you get that technology conquered, they come to you. The thing is that UFS was mainly used in automotive, which is fine, but that's also a market that's still relatively depressed. But at the same time, when that market picks up, they're going to be in a position plus a few years have gone by, they'll be refreshing and looking to advance that UFS technology with a company such as Data I/O that has a solution that can solve the problem. And then you've got in the next year or two, 2027, you've got 1 terabyte flash coming out. And that's across UFS and NVMe will -- is capped out, but UFS will be driving those. We will have the technology available to program those high-dense flash. And it's one of the things when we look at our product portfolio, we're going to refresh the 7000, but that's mainly going to be a system, an automation system that's going to be made for programming high volumes of high-density memory. The new system will be focused on microcontrollers. You can do both on both machines. They'll have the flexibility, but there'll be a main purpose for those solutions, which will drag our platform in with it. Does that make sense? So I see these -- our PSV line is over 10 years old now. So we are focused this quarter of driving a target list of accounts that have these systems that are 8, 9, 10 years old and going out and being very proactive to get them to refresh. And the good thing is that we'll have the new platform for them to be able to refresh on. So there'll be a couple of reasons for them to really take a serious consideration of refreshing now even when times are a little slow because, look, this is the best time to invest, right? It's easy to adopt, adapt change or adopt a new platform when things are slow. David Marsh: That's a great lead-in for my next question, which is as rates are starting to come down a little bit in the U.S., and we're starting to hopefully get some clarity on global trade. William Wentworth: I love your hope. David Marsh: We got the President now making a lot of deals, hopefully. William Wentworth: That's right. Well, deal away. Good for all of us. David Marsh: I mean, I guess it is kind of a real-time question. I mean, are you seeing any kind of optimism, particularly outside of the country in terms of the trade partners with some of the -- hopefully, some of this tariff stuff clearing up and giving us a little bit more clearer path forward? William Wentworth: Yeah. I'd say -- and I'd say this cautiously because this is not just the trade issues. I don't know if you read recently, there was a passive supplier that was technically owned by a Netherlands company that became Chinese-owned and the rare earth minerals were getting shut off to them, and they're in about 40% of the automotive products. We had a call with one of our larger automotive customers early this week, and they said we're shutting our factory for three weeks. Now that can change quickly, right? Just like trade talks can change the tide pretty quickly so can things like turning that back up, right? And so you hope that these trade agreements that are evolving include things like rare earth minerals. I know that's a hot subject, but it's one that does cause huge ripple effects through the supply chain. So with your hope, I'm hoping that, that's part of these negotiations. But for right now, it's still pretty shaky. Operator: The next question is from [ George Marima with Pareto Ventures ]. Unknown Analyst: Welcome aboard, Charles. A lot there. So let's pull on the partnerships and accretive acquisitions thread. What -- like what kind of hurdle rates are you looking at for that? And what sort of like categorically speaking, what sort of acquisitions we would be looking at in partnerships? What would that look like? William Wentworth: Well, partnerships, those are mostly going to be around the embedding of our technology, right, where our technology can fit inside somebody else's solution that gives them added capability for their customers and their customers are asking for that, such as app test. So those -- we've had some pretty significant conversations with one of the larger test companies in the world. Those conversations are going to continue at productronica and will probably result in a contract that will start to drive our building of that technology for their platform. So I can't say when that's going to drive revenue. They're looking for a second half of next year release to give you an idea. So this is -- it's real. They have like a scoped release time second half of next year. A lot will depend, George, on how much they put us in the driver's seat. We're pushing to be the actual provider of the technology from the ground up, meaning developing the whole product versus co-developing. You know how big companies can be. They're not going to work as fast as a small company can. We would like to have this early in the second half, not later in the second half. So that's why we're pushing our own agenda. We'll see how that goes. They're open to it. There's just a couple of conditions that I need to make sure that our intellectual property is protected. That's the most important thing. As far as things like services, we're in some communication now with some potential opportunities that are really a carve-out. There's not a huge cash need to bring that business over, could add some good revenue to the business, but get us more importantly into services, which we need to be in. So there's a couple of different methodologies. There are some smaller acquisitions we can do to get there, small acquisitions versus large acquisitions. They're both the same amount of work. I prefer to do a larger one. So we're opening as many doors. We did hire a boutique advisory firm, by the way, last week, we had our first kickoff call. I've given them 25 targets. We've gone through that pick list, and that is an ongoing activity was just launched last Thursday. Unknown Analyst: On the services, are we talking about just programming services or beyond that? William Wentworth: No programming services. Unknown Analyst: And would this be -- kind of explore this a little bit. So let's say, a company hired you, what would this look like? William Wentworth: Well, it depends on the relationship, right? I mean some of it would be -- I mean, right now, because we don't have a programming services division, they wouldn't really be able to hire us right now. So we're going to get the programming services in there with the expertise and the software control system and things, which would come from an acquisition or a carve-out. Once we get that, yeah, that's kind of the first domino that has to follow, George, because then at that point, then I can open up in somebody's warehouse, I could open up on the production floor, I could open up. Once I have that software control, I can parachute that thing anywhere. The advantage of being the equipment manufacturer is, certainly, we make the equipment that needed to process the programmable parts. So that's the advantage we have. And that's why I've always thought services should be a cornerstone of a company such as Data I/O, if not the other way around. It's a bigger market. Unknown Analyst: So as we look out to next year, it sounds like the cadence of things would be your internal new product launches and then embedded applications and socket manufacturing and then later services kind of roll in. William Wentworth: Yeah. I would see services coming first, actually. Unknown Analyst: Oh really? Okay. And then when you talk about leading the semiconductor road maps, are we talking about just UFS flash or is there other things you're talking about as well? William Wentworth: No. I mean the important part is just staying connected to them because they're rolling out new silicon all the time and sharing road map. So it's more just engaging the semi houses. Like I said, we signed 6 or 7 information sharing agreements with various semi houses. We need to do a better job though there and really engaging. I think at that point when we could start growing again, I'd certainly like to allocate a resource or two to be calling on the semi houses on a regular basis because they can also help generate leads, too. Unknown Analyst: Yeah. Okay. Well, I really like to start energy guys, keep it going. William Wentworth: No, pretty excited. It's finally, George, it's been a long year, as you know. So it's nice to start looking at execution of plans instead of just dreaming about them. Operator: [Operator Instructions] The next question is from Casey Ryan with WestPark Capital. Casey Ryan: Interesting conversation. So I'd like to ask about the EV, I guess, disruptions. I don't know if that's the word that was used in the press release, but you did sort of suggest Asia was sort of okay and then talked about Europe a little bit and maybe the U.S. and like kind of two things I'm interested in around EVs. Is it kind of the headline thing where we see credits going away and there's some policy stuff impacting it or are there fundamental things with what the OEMs are thinking about those types of platforms, I guess? William Wentworth: Yeah. Well, I think, obviously, it's no secret that the Asian manufacturers are doing very, very well across the globe. I mean you've seen BYD move up the ladder in Europe as far as share. Domestically, they're doing very well, self-consuming their EVs. That's where we received a bunch of orders. South Korea, some of their automotive kind of parts manufacturers are doing well. There's a company there called Bobis, who actually feeds into a lot of the different supply chains. So it's -- there's different pockets, I guess, is the best way to say that are pretty strong, and we play in not all of them, but some of them, which has helped this year. The European auto manufacturers are in a lot of hurt. I mean we had a big call with all our reps. We had 95 of them on the phone last week and really talking about next year and where we're going. Just to get them all kind of geared up and excited about the new products coming, which they are. I will say they applauded the call. They were like, finally, we have products that you're going to make that we can sell in our own geographical areas, which if you're not in heavy manufacturing, what are you going to sell, right? If you're in engineering and development communities, you need things like manual systems, tabletop systems to do low-volume medium production. We need to help fill the gaps for them so they can address a bigger market that we haven't been addressing in the past. So they were pretty excited about that. So still, again, automotive is -- it's a little -- it's still -- it's fragmented in the way of the revenue is still in pieces across the globe. And some of it's just not buying anything. I mean some of these reps came back from their August break, and they said it was -- their business was down 50%, 60%. This is Europe talking. U.S. has been -- and we had a good friend of mine that had a chance to talk to the VP of Supply -- Technology Supply Chain for BMW. And his comment was, look, the loss of films, kind of inventory is kind of cleared out, but end demand is slow. And it's not -- if you take out the AI spend in the U.S., we don't really have much of an economy after that. Casey Ryan: Well, and so I appreciate that, too. Is there some delineation between auto overall and EVs in particular? And does that distinction matter, I guess, from where you guys sit? William Wentworth: Not really because you've got so much technology in cars, honestly, as those markets tune back up, where we have customers that deal in all aspects of that, EV, hybrid and pure petrol, but -- and then a mix. So no, it's across the board. It's just right now, the EV makers are doing -- and some of the key component manufacturers are still shipping a decent amount of product. Now automotive numbers could stay flat. Content will still be up 10% this year. So you're still seeing that content still drive. You can still have down years [ in that ] but the problem is that when they're not clicking on all 8 cylinders, [ excuse the pun ], but they have excess capacity of our equipment, too. So when that fills up is when the next buy signal will happen. And I think next-generation products that are using high density flash is going to require more capacity. So as these things start to turn up their new revs, I think the sweet spot right now is 128 gigabyte on UFS for automotive. Those go to 256, 512, you're going to see a spend cycle. Casey Ryan: Right. Okay. And then it looks like systems are pretty good in the quarter actually. I think if I just took 76% of revs number, it's like $4 million, $4.1 million. And so it's really consumables that were kind of challenged. And I guess consumable kind of related to units? And is that sort of how we're sort of seeing that inside of the numbers, I guess? William Wentworth: Yeah. We had some pretty good socket spends in the first two quarters. I wasn't surprised to see a little softness in Q3 in that. Always like it to continue. But as things slow down, people aren't processing as many parts, which means they don't have to replace as many sockets. So again, as volumes tune up, you should start to see that number come back. It's off to a decent start this quarter. I wouldn't say it's flying off. But sometimes you've got CapEx budgets and they may start placing some orders at the end of the quarter. I don't know. I mean we don't get a lot of forecast in that. It's because -- it's not a long lead time item, we pretty much can spend those once they come in within 3, 4, 5 weeks and usually have some inventory going. So it's -- look, the more you get your platform out there, the more that number goes up. And that's the reason why having the new product portfolio, driving that platform out to market, getting more sites out there means more sockets. Casey Ryan: Yeah. Okay. Then three quick margin questions, I guess. Overall margins were pretty steady even though your mix changed quite a bit. So where do -- do systems and consumables carry the same margin? I guess in my mind, I was thinking consumables might be. William Wentworth: No, margins are much higher in consumables, probably 60% to 70%, sometimes a little bit more. But margins, look, we're carrying a little extra expense because we're trying to, again, scale the business, get the business in the right position. We've got some consultants that will probably take off the P&L during the first half of next year for sure. But where margins are going to get better are going to be better pricing. I mean, honestly, we've just done a -- the company historically on the custom systems has gone off of a list price methodology. Every system we do is custom. I don't know why you go off a list. You should just custom build from the ground up. We've done this a couple of times already in a couple of orders, and we've come out with not only capturing our costs better, but improved margins on top of it. And now we're getting the reps to do more -- add more value. I mean I'll give you 5 points, but go earn the rest. Why am I protecting your margin? I need to protect. Casey Ryan: Well, right, sure. I mean, sort of what I'm drilling into here is that there is really good margin expansion opportunity that you guys are going through. William Wentworth: Absolutely. Yes. Casey Ryan: Because mix was sort of off this quarter from a margin preference standpoint and you guys still were flat to up, I think, on gross margins versus last quarter. Charles DiBona: Yes. We’re up sequentially. We do expect -- look, we're focused on opportunities, both of the -- on the cost of goods side and as well on the operating expense side, not just -- rooting out some efficiencies, but then as Bill mentioned, I mean, the opportunities on the pricing side for gross margin improvement are -- we believe, significant. We're exploring them. We have -- we still have to understand a little bit better what those dynamics look like. But there's opportunity there that's worth exploring in some depth. William Wentworth: And so Charlie and I and [ Monty ] are going to be digging into that pretty deep this quarter. Casey Ryan: Okay. So at some point in the future, we'll say in the far distant future, if revs were split evenly, could you see 55% gross margins or something like that? In your imagination, you guys aren't guiding. Charles DiBona: That's theoretically possible, yeah. William Wentworth: We've done that before so I don't see any reason why we couldn't get back there with better rigor around everything we do, expense control, but also more importantly, how we price our products. Casey Ryan: Right. Well, like it sounds like pricing, understanding how to price better has a lot of leverage to it. And then as you say, as you grow systems and consumables go up and that's a margin adder to the overall. Just to refresh the last margin question, services, I'm thinking sort of range-wise is sort of a 30% business, but like tell me what you're thinking about its contribution to your margin. William Wentworth: I can tell you from my experience, we ran between 52% and 58%. Casey Ryan: On services? William Wentworth: Yes. That's historically. Now obviously, with making the equipment, we have an advantage a little bit because, obviously, we have the margin in that. And we don't want to penalize the core business, right? So we'll sell it obviously at a competitive price. But we have the advantage there for service sockets, things like that. So no, I expect the services business to run pretty healthy margins, definitely not [ 30% ]. Operator: Ladies and gentlemen, at this time, we've reached the end of the question-and-answer session. I'd like to turn the floor back over to management for any closing remarks. William Wentworth: No, I just want to thank the people on the phone. Great questions. Always love the questions. It's always great to dig into the business. And it's been an interesting year, I have to say. The great thing about it is we -- I think we really have a great team now that we can build from, but we are more importantly, building out the products and the product portfolio. I think we've got a great focus for next year to grow and grow into these new businesses. And we're initiating discussions with, I think, some really great future partners for our technology. So I want to thank everybody for logging on to the call today and those who are listening in and look forward to updating you next quarter. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Rimini Street, Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Dean Pohl, VP, Treasurer and Investor Relations. Please go ahead. Dean Pohl: Thank you, operator. I'd like to welcome everyone to Rimini Street's Fiscal Third Quarter 2025 Earnings Conference Call. On the call with me today is Seth Ravin, our CEO and President; and Michael Perica, our CFO. Today, we issued our earnings press release for the third quarter ended September 30, 2025, a copy of which can be found on our website under the Investor Relations section. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables following the financial statements in the press release. An explanation of these measures and why we believe they are meaningful is also included in the press release and our website under the heading About Non-GAAP Financial Measures and Certain Key Metrics. As a reminder, today's discussion will include forward-looking statements about our operations that reflect our current outlook. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We encourage you to review our most recent SEC filings, including our Form 10-Q filed today for a discussion of risks that may affect our future results or stock price. Now before taking questions, we'll begin with prepared remarks. With that, I'd like to turn the call over to Seth. Seth Ravin: Thank you, Dean, and thank you, everyone, for joining us. In the third quarter, we continued to simplify and refine our go-to-market strategy and messaging around Rimini Street's 3 core service pillars: support, optimize and innovate and our SmartPath methodology that allows clients to capture cost savings with their existing ERP software, enabling them to invest in and leverage the benefits of AI innovation without spending above the current IT budget. To this end, Rimini Street has staked out its position as the software support and agentic AI ERP company, a specialized partner in ERP that can extend the useful life of current ERP system assets while also delivering the latest next generation of ERP technology to clients. We also continued our focus on methodical, predictable sales execution in both new logo acquisition and cross-sales to existing clients. Third quarter results. Overall, sales bookings and billings continued to improve, and we delivered strong ARR subscription renewals as well. We closed 17 new client sales transactions in the quarter with TCV of over $1 million each for an aggregate TCV of $63.1 million compared year-over-year to 19 new client sales transactions for an aggregate TCV of $48.7 million. We also added 79 new logos and achieved a record RPO backlog of $611.2 million, up 6.4% year-over-year. New logo sales include major global and regional brands. Sales to new clients and cross-sales to existing clients span the mix of our products, services and solutions and a broad set of industries and geographies. Achievements included record third quarter SAP support sales, surpassing the key milestone of more than 100 VMware support contracts signed to date and closing more than 2 dozen client engagements around our new agentic AI ERP innovation solution powered by the ServiceNow AI platform. We plan to provide more insight and information on our agentic AI ERP solutions at our upcoming Analyst and Investor Day on December 3, 2025. While the majority of our sales in the quarter were completed by our direct sales force, we also achieved sales transactions through our maturing indirect channel. As the indirect channel matures globally, we see building sales opportunity pipelines. Billings growth was driven by a mix of new ARR subscriptions and project-based professional services and the combined ASP for Oracle support services, SAP support services and all managed services grew year-over-year. In the third quarter, we had more global quota-carrying sellers, a greater number of sellers participating in the total quarterly sales attainment and a greater number of sellers achieving or exceeding quota when compared to the first half of 2025. Exiting the quarter, we had 82 quota-carrying sellers globally compared to 73 during the prior year third quarter. Also during the third quarter, we continued upgrading sales leadership talent with new leaders in EMEA and Southeast Asia and Greater China and materially expanded sales opportunity pipelines for future quarters, along with broad progression of many pipeline opportunities. Growth drivers. We continue to pursue growth drivers that leverage direct and indirect sales channels. We continue to hone the skills and capabilities of our direct seller team, continuing to build our partnerships that provide expanded sales reach and sales cost leverage. Additionally, we continue to build our go-to-market execution by industry, which will give us the opportunity to sell more deeply into clients with industry-based knowledge, insights and Rimini solutions that solve specific industry challenges. Two notable achievements were announced in the third quarter. First, we were added to the United States GSA Multiple Award Schedule as an approved supplier of support and security services for Oracle, SAP and VMware software. United States federal, state, local and tribal government agencies can now procure Rimini Street services directly from the GSA schedule without a need for competitive procurement. To leverage the GSA contract opportunity as well as our new management sales partnership with Merlin Cyber, Rimini Street has launched a U.S. federal and state local education sales team. Second, we entered into a strategic partnership with American Digital, a leading IT solutions provider specializing in custom data center solutions based on HPE infrastructure to provide a full stack solution with Rimini Street providing the enterprise software support and managed services. The partnership includes working together to help clients fund modernization with AI solutions and implement workflow and task automation on top of their current SAP and Oracle applications without any pressured, expensive or low ROI vendor upgrades or necessary migrations. Oracle litigation update. On July 7, 2025, the company and I entered into a confidential settlement agreement with Oracle. The parties entered into the settlement agreement to provide a full final complete and global settlement, the U.S. federal case known as Oracle International Corporation and Oracle America, Inc. versus Rimini Street, Inc. and Seth Ravin filed in 2014. As reflected in the settlement agreement, the company intends to complete its previously announced wind down of its support and services for Oracle's PeopleSoft software no later than July 31, 2028. The company has continued to make progress towards achieving this requirement. As the Oracle litigation noted above has now been settled, this is the last Oracle litigation update we plan to provide during earnings calls. We will, however, continue to provide financial disclosures around the Oracle PeopleSoft wind down until the wind down is complete. For additional information and disclosures regarding the company's settled litigation with Oracle, please see our disclosures in our Form 8-K filed on July 9, 2025, our second quarter Form 10-Q filed July 31, 2025, and our third quarter Form 10-Q filed today, October 30, 2025, with the U.S. Securities and Exchange Commission. Summary. We continue to focus on our support, optimize and innovate solutions, including our new agentic AI ERP solutions powered by ServiceNow's AI platform, executing the right go-to-market strategy to fuel sales growth, increase profitability and enhance shareholder value. Now over to you, Michael. Michael Perica: Thank you, Seth, and thank you for joining us, everyone. Q3 2025 results. Revenue for the third quarter was $103.4 million, a year-over-year decrease of 1.2%, with the United States representing 45% and international representing 55% of total revenue for the quarter. Excluding revenue derived from support and services provided solely for Oracle PeopleSoft products, revenue increased 2.5% versus the previous year. Annualized recurring revenue was $391 million for the third quarter, a year-over-year decrease of 2.6%. Revenue retention rate for service subscriptions, which makes up 95% of our revenue, was 89%, with approximately 85% of subscription revenue noncancelable for at least 12 months. FX movements for the quarter were minor, impacting total revenues positively by 0.2% during the quarter compared to a negative impact of 1% for the prior year third quarter. Billings, as defined in our press release, for the third quarter were $66.5 million, up 2% year-over-year. Adjusted billings, which exclude the PeopleSoft associated billings, were $63.9 million, an increase of 6.7% on a year-over-year basis. Gross margin for the third quarter was 59.9% of revenue compared to 60.7% of revenue for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, gross margin was 60.4% of revenue for the third quarter compared to 61.1% of revenue for the prior year third quarter. The year-over-year reduction was largely the result of decline in revenue, primarily revenue associated with PeopleSoft services. Excluding PeopleSoft associated revenue and related cost of goods sold, gross margin was also 60.4%. We continue to focus on driving operational leverage through improved systems, analytics, processes and global staffing models across all of our offerings with the focus of continuous improvement of our best-in-class support. Operating expenses. Reorganization charges associated with our continuous cost optimization plan for the third quarter was $752,000 and totaled $7.7 million since we instituted this plan. Our focus moving forward will be to continue the momentum we are building in our core business and allocating our investments to fund incremental skill sets that will help drive growth across our 3 pillars. Nonetheless, we do expect to incur additional reorganization costs during the remainder of 2025 as we optimize our model to capitalize on the existing opportunities ahead. Sales and marketing expenses as a percentage of revenue were 36.7% of revenue for the third quarter compared to 34.2% of revenue for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, sales and marketing expenses as a percentage of revenue was 35.7% of revenue for the third quarter compared to 33.6% of revenue for the prior year third quarter. General and administrative expenses as a percentage of revenue, excluding outside litigation costs, was 17.6% of revenue for the third quarter compared to 15.8% of revenue for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, G&A was 16.5% of revenue for the third quarter compared to 14.6% of revenue for the prior year third quarter. G&A expenses in the quarter were negatively impacted by slightly over $1 million due to nonrecurring international transaction tax associated costs. Professional fees and other costs of litigation were $621,000 for the third quarter compared to $879,000 for the prior year third quarter. The net income attributable to shareholders for the third quarter was $2.8 million or $0.03 per diluted share compared to the prior year third quarter net loss of $0.47 per diluted share. On a non-GAAP basis, we had a net income for the third quarter of $6.9 million or $0.07 per diluted share compared to the prior year third quarter of $0.22 per diluted share. Our non-GAAP operating income, which excludes outside litigation income and spend, stock-based compensation, reorganization expense and litigation settlement expense was $8.5 million or 8.3% of revenue for the third quarter compared to 12.8% for the prior year third quarter. Adjusted EBITDA, as defined in our press release, was $10.1 million for the third quarter or 9.8% of revenue compared to the prior year third quarter of 13.1% of revenue. Balance sheet. We ended the third quarter September 30, 2025, with a cash balance and short-term investments of $108.7 million compared to $119.5 million for the prior year third quarter. On a cash flow basis, for the third quarter, operating cash flow increased $24.7 million compared to the prior year third quarter decrease of $18.5 million. The operating cash flow was positively impacted by the receipt of the litigation settlement proceeds during the quarter of $37.9 million. When excluding this payment, cash used during the period was approximately $13 million. In the quarter, operating cash flow was negatively impacted by the effect of foreign currency, which was unfavorable by $1.3 million. Deferred revenue as of September 30, 2025, was $226 million compared to deferred revenue of $223 million for prior year third quarter. Backlog also referred to as remaining performance obligation, RPO, which includes the sum of billed deferred revenue and noncancelable future revenue, was a record $611 million as of September 30, 2025, compared to $575 million for prior year third quarter, a year-over-year increase of 6.4%. When excluding the PeopleSoft associated backlog, RPO expanded 9.3%, underscoring the momentum we are building in our core underlying business. PeopleSoft update. In 2024, we announced the wind down of our services for Oracle's PeopleSoft products and have now agreed as part of the Oracle settlement that we will wind down all PeopleSoft service revenue by July 31, 2028. We have made progress in reducing both the number of PeopleSoft clients and related revenue since announcing the wind down. PeopleSoft revenue was approximately 5% of revenue for the 3 months ended September 30, 2025, compared to approximately 8% of revenue for the prior year third quarter. PeopleSoft calculated billings were $2.5 million during the quarter compared to $5.3 million for the prior year third quarter and year-to-date Q3 2025 billings were $9.7 million compared to $19.7 million for the same prior year period. Business outlook. The company plans to provide forward-looking guidance at its Analyst and Investor Day to be held on December 3, 2025, where the executive team plans to outline the company's market opportunity, solutions, go-to-market strategy and financial goals. This event will be open to attendance by the public via online registration and a live webcast link available on our website. This concludes our prepared remarks. Operator, we'll now take questions. Operator: [Operator Instructions] Your first question comes from the line of Jeff Van Rhee from Craig-Hallum. Jeff Van Rhee: Can you hear me all right, Seth? Seth Ravin: Yes. Got it. Jeff Van Rhee: Okay. Good stuff, having some phone difficulties here. So a couple. I heard -- I believe I heard the mention of 24 agentic AI wins with ServiceNow. I think I might have missed some of the context there, but expand on that. I mean it's been relatively quiet since you announced that relationship a year ago, and this is a notable call out. I mean what are these wins? What's an average deal size on these wins? How many of these you have prior quarter versus this quarter? And then kind of what does the pipeline look like? It sounds like maybe you're really starting to see some traction here. Seth Ravin: Yes, Jeff, it's a great first start for us. As you know, we announced the partnership with ServiceNow when Bill McDermott launched that in his earnings call a year ago. And it's taken about a year just to get the organizations aligned to work on a full global rollout. As you know, they've got over 6,000 sellers that we're going to leverage to move the Rimini Street and ServiceNow combo. And what we've accomplished, as we said, it's taken a while. We've got 26 customers on their way with a ServiceNow component, and we're building agentic AI ERP first transactions over those systems. So more to come. Our goal is that by the end of this year, we will have 26 great use cases, all different types of ERP transactions, different customers around the world and different industries. And as you know, the whole challenge with AI isn't the technology. It's everybody trying to figure out use cases that are really leverageable, and that's what we're going to deliver to the market. Jeff Van Rhee: And so how does that impact the P&L in terms of deal size? Seth Ravin: I think right now, it's negligible to P&L in terms of materiality. I think we always said '26 was going to be the time that we really start to monetize because we needed to get these use cases done first so that the sales teams for ServiceNow and Rimini Street can take these out into the marketplace and show other customers how AI in this agentic ERP model is going to be deployed, the value and the creation that we're able to bring to the market with it. So really look for this to be a '26 number. Jeff Van Rhee: Got it. And then I guess, again, maybe a very high-level question, but coming into the really difficult initial decisions from the court as it related to the Oracle case, the company was a solid double-digit grower. It's been a tough couple of years. You certainly seem to be putting in a bottom and showing some acceleration on a bunch of metrics. What do you think it takes to get this company back to double-digit top line growth? How do we get there? What are the components that get us there? Seth Ravin: Well, I think, again, we'll go over this nicely in the Investor Day coming up on December 3. But generally, we're looking at 2 components. I mean we're becoming the support and agentic AI ERP company because we're uniquely positioned to extend the life of the existing systems, driving a huge amount of our higher-margin support business. And at the same time, we're building the next generation of technology over it and helping customers avoid these big upgrades. So we expect this to be an acceleration to our core business, and we expect to see that grow nicely because whether a company is looking to save money or immediately leverage the AI technology, and we hope they will. The combination starts off with them moving to Rimini Street on a wider variety of their platforms for support in order to save that money and reinvest it in technology. So I think, again, we're on the right track. I think all of the things we've been putting in place in terms of the products we built out over the last few years are all coming to play now in this new agentic AI ERP model and the combination of what we're able to do to continue support on a wider variety of platforms. Jeff Van Rhee: Okay. And maybe 2 last quick ones, if I could. Just indirect and channel, I love it. I think there's so many potential ways to increase sales efficiency in terms of what you're working on there. Where is it now as a percent of revenues? Where do you think it's going? And then my last one is also a numbers question. Just thoughts on retention rates over the next few quarters. Seth Ravin: Sure. The first one, in terms of where we think this is going to go, again, I think we're going to follow the plan that we've laid out. We'll get the numbers to you in the Investor Day. So I think we want to just be careful about getting to any kind of numbers in this particular call. But the other side of this, I just think, again, we're going to lay out exactly the model that's going forward. The retention, I think, becomes extremely sticky, especially when you're taking systems and now you're able to put the agentic AI ERP over the top of the existing system, no upgrades required, no reason to switch to other ERP systems. We've declared ERP software is officially dead. It will be usable for the next 20, 30 years as a core transaction system. We're going to do that for customers, but all future changes we believe, as you'll see with the software vendors, all believe will be done outside the system, and we're going to use AI to deliver it. Operator: Your next question comes from the line of Brian Kinstlinger from AGP. Brian Kinstlinger: If you could just help remind us your role in that partnership with ServiceNow. Are you providing support services on top of the technology that ServiceNow is bringing? Is there an application development piece? Just remind us broadly what you're bringing to the table in this partnership. Seth Ravin: Sure, Brian. They are producing a tool. And we are using that tool to create solutions, and we're calling them the agentic AI ERP solutions that we then layer on top of the existing ERP system. So what they get out of it is they get the licenses for the tool, the AI platform, and Rimini Street does all the work. So we have all the consulting labor to install the system, to design these agentic AI ERP components and install them, then we will run the system underneath the ERP component. We will also run the ServiceNow piece. So we pick up most of the revenue in that entire picture. Brian Kinstlinger: Now are these 24 to customers or POCs, whatever they are, are they with your existing client base? Are they generally new customers? Seth Ravin: They are, I believe, most of them, if not all of them, are existing customers who were very excited about the offering, and we engaged with them to deploy this first set for them. Brian Kinstlinger: Great. And then you spoke of a higher number of new client wins in TCV year-over-year. What was the split between the U.S. and international? Seth Ravin: That's a good question. I don't have the answer on the exact split. I don't believe we published that particular number. But if you look at the... Brian Kinstlinger: How about a high level with -- I guess the key question for the last several years, obviously, is U.S. versus international. So is U.S. beginning to make any material impact on the bookings side to replace what is usually 10% attrition? I'm just trying to understand the bookings in the U.S. mostly. Seth Ravin: Sure. Well, the bookings in the U.S., I can tell you, if you look for the first 3 quarters of 2025, bookings are up 6%, and it's actually up higher if you take out the PeopleSoft component. But we are absolutely seeing a bookings growth in the U.S. and you saw that the bookings growth was strong outside of the U.S. on the international. So yes, I do think what we're seeing is a turn in the ship. I do believe when we look at the logos, we look at the size of the transactions, the ASP, we even had on top of a record SAP quarter across the world, we had a record bookings for Oracle in the quarter as well, which was, again, another important piece of business that moved forward, and we, of course, want to highlight that as well. Brian Kinstlinger: Now if bookings are up 6% in the first 3 quarters, year-over-year ex PeopleSoft U.S. is down about 4.4% you highlighted. And while that number wasn't given last quarter, I'm sure it was a stronger comp. It was -- it declined less than 4.4% based on what you did provide. So what's behind the accelerated decline in the U.S. unless I'm wrong? Seth Ravin: Well, remember, you've got accumulation of some prior quarters where we did have some losses and those have carried forward. But the new bookings aren't going to be reflected, obviously, in revenue on a ratable basis for a while. So we're saying -- what we're seeing is current. We're seeing the bookings coming up, which, of course, is a great precursor to understand where we're going. We're watching the RPO come up. All these numbers are coming in, again, sort of in this mid-single digits. And then you look, if you take out the PeopleSoft, your revenue growth was actually positive over 2%, 2.5%. And so I think when you look at those numbers, Brian, you're really looking at metrics that are all supporting the idea that the business is turning around. We're starting to return to growth on the top line. And I think that's the key indicator for this quarter. Brian Kinstlinger: Great. On the international side, we've seen an acceleration of growth. Can you just kind of point to where that is? Is there a specific solution like SAP, Oracle or VMware? Is it a new service? Is it geographic specific? Maybe you can point to 1 or 2 things that are driving that accelerated pace of growth. Seth Ravin: Sure. Internationally, as you know, SAP is a bigger product than Oracle, except on the technology side for database. And so this represents a significant amount of SAP business done on the international side. Operator: Your next question comes from the line of Richard Baldry from ROTH Capital. Richard Baldry: I know it's kind of early, but when you look at the very top of the funnel sort of prospects at the highest end, has there been any change in the engagement levels with those people you've been willing -- who've been willing to return calls, whatever, post the Oracle settlement? Or do you think it's too soon to really gauge that? Seth Ravin: No. I think we're roughly, what, 90 days or so after the settlement announcement. So from that point of view, do we see a change in the business relative to that? I would say, Rich, that we definitely have real cases where prospects came back to us that were off the table before because they were concerned about litigation for the company. So I think that's a great measure that we're seeing. We've also had partners come back. Some rather large tech companies have come back to us who didn't want to do formal partnerships before because of the litigation where they cited it specifically. And now they've come back to us because the litigation has been settled and they're anxious to have conversations to move forward. So I think there's evidence building that as we suspected, there would be customers, there would be partners, people who didn't want to do business with a company that was involved in litigation, and now we're seeing that clear. Richard Baldry: Got it. One sort of small one and then one a little bit bigger. Will litigation costs pretty much trend towards 0 near term? And would there be any in 2026? And then more importantly, can generative AI materially lower your cost of service delivery? I'm sort of curious where it could fit inside of your dealing with customers, if there's head count that either would go steady or you could pull out, how do you think about using that in terms of your own business? Seth Ravin: Sure. So question number one, we will continue to have some litigation costs because we associate that with the wind down of PeopleSoft and there's compliance components related to litigation, things like that. So there will be some continuing costs. But as we've said, we used to talk about $10 million a year in litigation costs. We would expect to see substantial reductions, and we already are in terms of the wind down of the litigation process. So that will absolutely inure to the benefit of shareholders and the financials in the years ahead. Second question, we are absolutely focused on deploying AI across our entire company. We are looking at ways to reduce cost. We already use AI to improve service to customers, and we've been doing that for several years. We have an internal team dedicated just to looking at ways to improve systems and processes, using technology for leverage and reducing the amount of labor that we require as a business. We brought in a new global CIO, Joe Locandro, who has previously been the global CIO for Cathay Pacific Airlines, Emirates Airlines, China Light & Power and has deployed a significant amount of AI in those businesses and including being a Rimini Street customer as part of this portfolio. And we intend to aggressively pursue reducing internal costs with AI. Operator: Your next question comes from the line of Derrick Wood from TD Cowen. Jared Jungjohann: This is Jared on for Derrick. For the new GSA schedule, how do you expect this to impact your ability to do business with the U.S. government? Have you seen any initial proof points along these lines, of course, understanding the current circumstances? Seth Ravin: Sure. We, of course, have sought GSA for a long time. It's a complicated agreement to get through with all of Rimini Street's different products, and we got approved for Oracle, SAP, VMware support as well as security products. So obviously, a great win for us. We see this as a very important purchase vehicle, not only for the federal government, but for the local and state government and education institutions that look to the GSA. And if you're on the GSA, just like our framework agreements with many governments around the world, you're able to buy off that agreement without a procurement process. So that is a big one for us, considering public sector is our second to third largest group of customers globally. So that's number one. Number two, on the federal side, we are engaged with different federal agencies. Again, this is a new team. This is a new motion for us. But in addition to the work we're doing directly, we are partners with Merlin Cyber, who is a well-known player in the federal space and also some local government, and we've done deals together already. And so we're going to be working together both through with Merlin's capabilities and experience in the federal government and along with our direct work under the GSA. Jared Jungjohann: Awesome. Appreciate all that color. And then just a follow-up on the government topic. Should we be expecting any impact in your next quarter's results from the current shutdown? Seth Ravin: No, I don't think we would expect to see any impact based on the shutdown. Jared Jungjohann: Appreciate that. Last one from me, 100-plus organizations on VMware, great to hear. Similar to the prior ServiceNow question, could you break out sort of the mix of net new customers, new clients landing on the solution versus your cross-sell motion into your existing base? Seth Ravin: Yes. We haven't broken that out as far as I'm aware. I'll have to go back and take a look, and we can certainly follow up with you on a couple of these questions with the other breakouts. I think that from what I can tell you in looking at the deals, there are a good number that are in the existing client base. But I will tell you, I believe the majority of those customers are net new logos. Operator: Your last question comes from the line of Alex Fuhrman from Lucid Capital Markets. Alex Fuhrman: I was wondering if you can talk a little bit more about the partnership with American Digital. Is the goal here to be able to leverage the full stack solution in order to be able to go after more customers? Or is this something your existing clients have been asking for in order to better leverage cost-effective AI tools? Any color there would be very helpful. Seth Ravin: Sure. And welcome, and thanks for picking up coverage of Rimini Street. One of the things that we've been looking at is there has been a big change in the way that VMware and other software suppliers have been working with various partners. And these are companies, especially in the hosting space, as you saw with our T-Systems announcement in North America as well as American Digital, these are hosting providers. And what's happened is, for example, if you were to upgrade your systems with SAP and you went with their -- what was formerly known as RISE, you would have to be moved over to Azure, which, of course, means that the customer would no longer be their customer. So you have a lot of these providers who are in a pickle because their customers don't want to upgrade and Rimini Street provides a great solution. But if the customer does upgrade, they could wind up leaving and having to go to a different provider for hosting service. So that's the kind of situation that's happening. And so this is one where we can come in, in a big win-win and help them with their customers who don't want to move forward, don't want to upgrade, provide a great solution and keep them on their platform, which, again, is a win-win for us in American Digital and HPE. Operator: We don't have any other questions at this time. I will now turn the call over back to Mr. Seth Ravin, CEO. Please continue. Seth Ravin: Thank you very much, and thanks, everyone, for joining us. We hope you join us for our Analyst Day 2025 on December 3. You can get registration right off our website on the Investor Relations page. And again, looking for a good health for everyone, and thank you for attending, and we look forward to seeing you at the Analyst Day and future calls. Thank you very much, everybody. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the SPS Commerce Q3 2025 Earnings Conference Call.[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irmina Blaszczyk, Investor Relations for SPS Commerce. Please go ahead. Irmina Blaszczyk: Thank you, Dave. Good afternoon, everyone, and thank you for joining us on SPS Commerce Third Quarter 2025 Conference Call. We will make certain statements today, including with respect to our expected financial results, go-to-market strategy and efforts designed to increase our traction and penetration with retailers and other customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to our SEC filings, specifically our Form 10-K as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com, and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on the Investor Relations section of our website, spscommerce.com. During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP income per share. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. And with that, I will turn the call over to Chad. Chad Collins: Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. SPS Commerce delivered solid third quarter results across our core business despite ongoing macroeconomic uncertainty and continued spend scrutiny. Third quarter revenue grew 16% to $189.9 million and recurring revenue grew 18%. Our fulfillment business grew 20% year-over-year. The net increase of 450 customers exceeded our expectations in the quarter, primarily driven by strong retail relationship management programs. I'd like to take a moment to review the key dynamics that impacted our revenue recovery business, which came in approximately $3 million below our expectations in Q3. Firstly, we now recognize that there is more seasonality in this business than we had originally anticipated. In Q2, for example, we benefited from a higher-than-expected volume of shipped products related to Amazon Prime Day. Due to the seasonality effect in Q2 and the change in Amazon policy related to inventory capacity for third-party sellers, Q3 shipments came in below our expectations, which resulted in lower-than-forecast revenue recovery rates in the quarter. We've taken both of these factors into consideration in our updated outlook for that business. Revenue recovery is an important offering within our portfolio. It represents a $750 million addressable market across 1P U.S. sellers and a significant cross-selling opportunity within our network, where we're making progress and building momentum. In addition, we're pleased to report we completed our combined go-to-market strategy ahead of schedule, and we are now better positioned to unlock the full potential of this emerging product category. For example, Cyber Power Systems, a global manufacturer of power protection and management solutions, has partnered with SPS to modernize their business systems and processes since 2014. As a long-standing fulfillment customer, they recently engaged with SPS to drive further efficiencies across their supply chain, leveraging the revenue recovery solution for some of their key customers, including Amazon, Walmart and Home Depot. Having realized immediate benefits in ROI, Cyber Power Systems is evaluating other revenue recovery opportunities across their retail network. As we discussed at our Investor Day in September, SPS Commerce is well positioned to capitalize on the long-term growth opportunities driven by an ever-evolving retail ecosystem. Having made strategic acquisitions over the past two years to expand our product portfolio and market reach, we shared updates at Investor Day to address how our product strategy and our reimagined go-to-market motion have evolved to empower the kind of trading partner collaboration that enables supply chains to work like they should. We also hosted a broad cross-section of customers who provided their perspectives on why they chose to work with SPS and how we help them manage supply chain complexity to strengthen their trading partner ecosystems. Most importantly, you heard firsthand accounts of the return on investment that comes from partnering with SPS, such as driving greater operational efficiency and fueling business growth. An example of a recent partnership is Petco, a pet retailer who operates over 1,500 locations in the U.S., Mexico and Puerto Rico, providing both in-store and online omnichannel services. Leveraging SPS' retailer management solution, Petco transitioned over 700 suppliers to standardized digital supply chain requirements. As a result, the retailer reduced manual data reconciliation across merchandising and supply chain teams, delivered measurable efficiency gains and improved trading partner performance tracking. To summarize, despite the spend scrutiny we are experiencing this year across some of our customer groups, we believe the ever-evolving retail ecosystem will continue to drive the need for supply chain efficiencies. With our data-driven solutions, SPS Commerce is competitively positioned to improve collaboration between trading partners. We are the industry's most broadly adopted retail cloud services platform and the world's leading retail network. We provide unmatched value in the data that powers AI-driven use cases and a unique network-led growth motion. Before we dive into our financial results, I'd like to take a moment to share an important leadership update. After nearly 10 years with SPS Commerce, Dan Juckniess, our Chief Revenue Officer, has decided to retire. He will remain with the company through the end of the year to ensure smooth transition. Dan helped shaped SPS' modern go-to-market organization, growing the sales team in both size and strength. On behalf of SPS Commerce, I wish him all the best in retirement. In addition, I'm excited to share that Eduardo Rosini will be joining the SPS Commerce team as Chief Commercial Officer starting December 1. In this new role at SPS, Eduardo will strengthen our commitment to total customer relationship, maximizing the entire customer life cycle from acquisition to onboarding, retention and expansion and ensuring we deliver consistent, intentional and customer-first experiences around the world. As SPS continues to scale, this evolution helps us deepen relationships, maximize customer value and stay aligned with how global customers view their partnerships with one trusted full-service connection. Eduardo brings more than 30 years of growth, go-to-market and full customer life cycle experience across industries and markets, most recently serving as Chief Growth Officer at Sage, VP of Mid-market and Corporate Sales at Intuit and in large-scale commercial leadership roles at Microsoft, operating in North America, South America, EMEA and APAC. His experience leading global organizations, paired with his passion for people and obsession with customers, make him an ideal fit for SPS' next phase of growth. And with that, I'll turn it over to Kim to discuss our financial results. Kimberly Nelson: Thanks, Chad. We reported a solid third quarter of 2025. Revenue was $189.9 million, a 16% increase over Q3 of last year and represented our 99th consecutive quarter of revenue growth. Recurring revenue grew 18% year-over-year. The total number of recurring revenue customers in Q3 was approximately 54,950, an increase of 450 from the prior quarter. ARPU was approximately $13,300. For the quarter, adjusted EBITDA increased 25% to $60.5 million compared to $48.4 million in Q3 of last year. We ended the quarter with total cash and investments of $134 million and repurchased $30 million of SPS shares. In addition, the Board of Directors has authorized a new program to repurchase up to $100 million of common stock, which becomes effective on December 1 this year and is expected to expire on December 1, 2027. We expect to fully utilize the current program before its termination on July 26, 2026. Before we dive into guidance, I'd like to highlight the factors currently shaping our fourth quarter and 2025 outlook. First, a continued impact to our revenue recovery business resulting from the dynamics Chad laid out in his prepared remarks. Second, ongoing invoice scrutiny and delayed purchases affecting spend across our fulfillment customers. Lastly, across retail relationship management programs, several large enablement campaigns were pushed from Q4 into the first half of 2026. As a result, we expect a decline in onetime revenue from testing and certification fees associated with these programs. Now turning to guidance. For the fourth quarter of 2025, we expect revenue to be in the range of $192.7 million to $194.7 million, which represents approximately 13% to 14% year-over-year growth. We expect adjusted EBITDA to be in the range of $58.8 million to $60.8 million. We expect fully diluted earnings per share to be in the range of $0.53 to $0.57 with fully diluted weighted average shares outstanding of approximately 38.3 million shares. We expect non-GAAP diluted income per share to be in the range of $0.98 to $1.02 with stock-based compensation expense of approximately $15 million, depreciation expense of approximately $5.8 million and amortization expense of approximately $9.5 million. For the full year 2025, we expect revenue to be in the range of $751.6 million to $753.6 million, representing approximately 18% growth over 2024. We expect adjusted EBITDA to be in the range of $229.7 million to $231.7 million, representing growth of approximately 23% to 24% over 2024. We expect fully diluted earnings per share to be in the range of $2.31 to $2.34 with fully diluted weighted average shares outstanding of approximately 38.1 million shares. We expect non-GAAP diluted income per share to be in the range of $4.10 to $4.15 with stock-based compensation expense of approximately $58.3 million, depreciation expense of approximately $21.1 million and amortization expense for the year of approximately $37.1 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings. Additionally, as a result of the dynamics that are impacting our customers and retail partners this year, we are providing our initial outlook for 2026 and expect to deliver revenue growth without future acquisitions of approximately 7% to 8%. We continue to expect adjusted EBITDA margin expansion of 2 percentage points, driven by continued improvement in gross margin and operating efficiencies. Longer term, we remain confident in our competitive position and market opportunity and our ability to deliver at least high single-digit annual revenue growth without acquisitions and 2 percentage points in annual adjusted EBITDA margin expansion. And with that, I'd like to open the call to questions. Operator: [Operator Instructions] Our first question comes from Scott Berg with Needham. Scott Berg: So I've got a multipart revenue recovery question here. I guess we're all going to have the same questions on this one is, try to help us understand, I guess, when this became apparent in the quarter that the seasonality was a little bit different than you had expected Chad. And as I think about that business going forward, I thought the seasonality in that business was supposed to be stronger in Q4, but it looks like you're reducing your fourth quarter revenues by roughly $6 million, likely all attributed to that business. And then as the natural extension of that is how do we think about that business as impact on that fiscal '26 initial guidance Kim just gave? Chad Collins: Yes, sure. Thanks, Scott. Let me speak maybe to the visibility and how that developed and let Kim speak to the outlook going forward. I'd say late in Q3, we did pick up that the volume of shipments that our customers were sending into Amazon warehouses were a little bit lighter than expected. In many cases, that can be a leading indicator to revenue that will develop, but I would say not necessarily in all cases. Unfortunately, as we closed out the quarter, we did see a correlation in that reduction of shipments into Amazon warehouses from our customers did result in less revenue than expected. So the shipment visibility kind of became apparent pretty late in Q3, and we really didn't understand the full impact to revenue until we close things out after the quarter ended. Kimberly Nelson: And then when you think about the expectations that we have for the remainder of the year, when you think about the Q4 guidance that we just provided and the variance from that versus the implied Q4 guidance from a quarter ago, the impact on the revenue recovery in that, you should look at that similar as Q3. So there were three sort of dynamics that I highlighted that went into that, one of them being the revenue recovery, and that component was about similar impact in Q3 and Q4. Then the other two components were a continuation of where we're seeing some invoice scrutiny and delayed purchase decisions as well as some of those retailer enablement campaigns or relationship management campaigns we were initially thinking were going to happen in Q4. Now those are happening in 2026. And as such, the impact to the P&L in Q4 would be most notable on that onetime revenue of testing and certification just because of the timing of how the subscription revenue works, more of that would show up negatively on the testing and certification in the quarter. Scott Berg: All right. Understood. I guess from a follow-up question, I saw that Dan is leaving. Good luck, Dan. It's been fun working with you, is new Chief Commercial Officer coming in. I guess questions there revolve around what would you expect this new individual to do differently, if anything? I see his background has been not at one, but at two ERPs that you all certainly partner with today for customers with tightly at least. And just trying to help understand what we might see maybe differently going forward, if anything. Chad Collins: Yes. So let me start with what I think will stay the same, but continuing to improve over time. And that's, first, our differentiated go-to-market that we have with retailer relationship management, where we partner with the retailers to help them establish all their digital connections, that in turn, uncovers suppliers for us and is the largest source of new customers for us. We've been refining that approach at SPS Commerce for 20 years, and I expect we'll continue to refine that approach for the next 20 years, and it will be great to have Eduardo partner on continued refinements to that, but I expect that will continue. I also expect that our channel go-to-market where we work with a lot of mid-market ERPs will absolutely continue and very excited to what Eduardo can bring to that, which I think will just be a further advancement of that strategy. Yes, he's worked with a couple -- at a couple of ERP companies that we do partner with, but his whole career has been utilizing a lot of channel to drive mid-market sales, which very much lines up with our business. I think in terms of what may evolve over time that Eduardo will be able to bring us, we'll be really maximizing that expansion and cross-sell motion that we have with existing customers and managing that full life cycle that we have with customers. We've been quite clear that we believe as our product portfolio expands, the opportunity to increase ARPU is probably going to be the faster growing in our growth algorithm between net new customers and ARPU increases. I think Eduardo's background is really going to help us with that. And then as we become a more global organization and continue with our efforts to expand in Europe, Eduardo certainly brings operating experience across multiple cultures and multiple continents and multiple geographies that I think will help us with that continued growth. Operator: And the next question comes from Chris Quintero with Morgan Stanley. Christopher Quintero: A lot of moving pieces here. We just went over the revenue recovery piece. But maybe on the organic side, you all called out invoice scrutiny and some of those retail go-to-market programs getting pushed into next year. So just to clarify, are those incremental impacts that you're seeing this quarter versus the last quarter? And why are some of those projects getting pushed out into next year? Kimberly Nelson: Sure. So specific in Q3, Q3 hit our expectations on both of those. The color that I was providing was specific to Q4 and two dynamics in there. So as it relates to 90 days ago, what we were anticipating for the quantity of retail relationship programs and the timing of those programs, that has changed. So instead of many of those happening in Q4, they're now happening earlier in 2026. So the impact there is on the P&L in 2025. They're not lost programs. It's just the timing of when those are going to happen. Now in some cases, if you think about Q4, it's a really busy time, holiday season. And so it's possible that maybe some of those retailers were a little bit more optimistic of what they thought they would be able to accomplish in Q4. And in those cases, some of those now are just getting moved into '26, primarily due to the holiday season. And then the second part of that, as it relates to the invoice scrutiny delayed purchase decisions. Again, we hit on that expectation in Q3, but we're starting to see some signs that, that's still continuing on. And in light of that, we wanted to also add that continuation at a little bit higher factored into our updated guidance. Christopher Quintero: Got it. Okay. So some of the retailers maybe got a little bit over their skis on their expectations for Q4, I guess. As my follow-up, maybe on the network-led growth motion. I know we talked a lot about it at Investor Day, but is there anything you all need to do from an investment standpoint to make that successful? And is there any kind of early evidence that you're seeing how that's progressing or any kind of early proof points? Chad Collins: Yes. I mean we are making investments in this area. I wouldn't describe them as incremental investments to achieve what we want here, more just where we're focusing our team's attention, and we're having great success. So I think a great example of how this is working is like in revenue recovery, where we're able to get based on the network data, the volume that our customers have trading with certain retail partners where we provide revenue recovery and immediately identify that they are a highly qualified candidate for that revenue recovery solution and automatically serve that up as a leader opportunity to the expansion salesperson that's responsible for that customer so they can engage with them about the benefits they receive from revenue recovery. That type of motion and triggering it off the network is sort of up and running, and we look forward to continuing to scale that and using that to drive more cross-selling activity. And that's just one example. There's multiple examples where we can identify opportunities right from the network data for further expansion in our customers. Operator: And the next question comes from Matt VanVliet with Cantor. Matthew VanVliet: Obviously, across a lot of the software landscape on the application layer, there's a concern that toolkits from various AI tools and LLM providers are enabling more companies to look internally to maybe build functionality that they don't currently have rather than go out and find a vendor to do that. Is that at all being mentioned by some of your prospects as to something they're at least exploring and delaying deals? Or any other thoughts there that maybe your stronghold on this position in the market could be cracking a little bit as customers see the -- I guess, the utility of buying something prebuilt isn't as high as it's been for some time? Chad Collins: Well, we are seeing a few headwinds in our demand environment that we mentioned. This AI as a replacement is not one of those things that we're hearing from prospective customers. And I think that's really for a couple of reasons. One is the breadth of the network itself in terms of the rules that are in there and the way that we have built out the compliance capabilities to so many different retailers to where you can connect once and access those. That's years and years of that intelligence about retailer requirements being built into the network. And quite frankly, it would be very difficult to replicate with LLM or Agentic AI. The second reason is customers are seeing the power of the data that we have in our network and actually seeing that by participating in our network and having access to that data as they advance their AI strategies, the input mechanisms from that data on our network is going to be very powerful to them to execute on their AI strategy. So it's actually quite complementary there. So I think it's really for those reasons that we're not seeing that as a disruption with the end customers. And then I'd say more broadly about our business and business model, unlike some of the other application providers that provide seat-based licensing, if there's less users and more agents, they're vulnerable because our pricing model is really based on the connections in the network, we think that, that's going to be a more durable model that we have with our customers as more AI kind of takes over. Matthew VanVliet: All right. Helpful. And then I guess as you look towards kind of out to next year and the initial guidance you gave with a little bit of a slowdown, at least relative to where we were expecting, does that change the appetite or the strategy around M&A? And will you potentially look for more tuck-ins that offer a broader set of solutions to appeal to more customers to try to revamp growth? Or anything on that front that you think will be impacted by what's going on today and kind of what the expectations are over the next several quarters? Chad Collins: Yes. I wouldn't necessarily say it drives a change in philosophy. We have a lot of conviction in our M&A philosophy and continue to be active with our M&A pipeline really across what I'd say is kind of a couple of three different areas. One being continued consolidation in the core digital connection or EDI market. There still are opportunities for further consolidation there. And when we're able to execute on those types of opportunities, one, it's just really good for the customers because they're typically moving from a much smaller network or a point-to-point set of connections and then you move over to our network and really see the benefit of being on this broader connection, our network with lots of connections built in. The second category is more of the solution expanding or portfolio expanding type acquisitions, similar to what we've done in revenue recovery, and we continue to believe that there'll be more opportunities where we find a solution, it's very applicable to our 50,000-plus customers already on the network and therefore, will drive cross-selling. And a lot of times, we find that these solutions actually get improved by connecting to the network and having access to the data on the network. And then the third category would be geographic expansion. Admittedly, this one is probably a bit of a lower priority as we continue to drive the execution of our Europe strategy on the back of the TIE Kinetix acquisition. But I think as we continue to get traction in geographies outside of the U.S., we'll be able to use M&A over the long term to continue to build up business and capture more markets outside the U.S. Operator: And the next question comes from George Kurosawa with Citi. George Kurosawa: I wanted to dig in on some of the spend scrutiny you called out. This is something you mentioned last quarter as well. Is it right to think of that as being tariff-driven primarily? And then if you could just compare what you saw in Q3 versus Q2. At the time, it seemed like some of that was sort of ring-fenced within your mid-market customers. Have you seen any -- is it more that, that's customer cohort has seen incremental weakness? Or has it maybe spread a little further across the customer base, if that makes sense? Chad Collins: Yes, it makes sense. So I think if we look at customer sentiment right now, and there is some more spend scrutiny coming primarily on the supplier side of our network, I would -- wouldn't say it's exclusively tariff related, but it definitely has a tariff impact. It does seem that many of our suppliers are absorbing incremental costs for the products that they're selling to retailers and not passing a lot of that on. So therefore, they're looking for other types of cost savings in their organization. And I would say that trend has been consistent. It sort of picked up in Q2 and has carried through Q3. As it relates to Q3 results, I think that was factored into our original thinking about Q3. The variance that came from Q3 was quite specific to revenue recovery and related to some of the shipment volume changes for Amazon third-party customers. George Kurosawa: Okay. Great. And then as a follow-up on that line of thinking in the revenue recovery space, is there any way you can help us think through the performance of maybe the SupplyPike assets versus Carbon6, just to get a better feel for if there's anything sort of underlying happening in this market or if this is just exclusively a function of Amazon-specific dynamics? Chad Collins: Yes. So first, I'll say we have high conviction over the long term in this revenue recovery opportunity. We're seeing very strong interest in it and demand from our fulfillment customers and have some great early adopter customers on the fulfillment side who have taken it. We also believe in the strategy where we were quick to build out a comprehensive set of solutions that one covered a wide set of retailers and two, offered both models kind of a SaaS subscription model and Take Rate model. We're also pleased with the work that we've done integrating those teams across SupplyPike and Carbon6 now into a common go-to-market team that is offering all retailers and offering both sort of pricing models to customers based on their specific needs. The headwinds that we saw as a result of shipments in Q3 was exclusive to the 3P side of that business. So if you think all of SupplyPike and the retailers they support are primarily 1P, meaning they're shipping wholesale or direct to store for certain retailers. A good portion of the Carbon6 fits with that because it's the 1P model in Amazon. And then there's another portion of Carbon6 that is the 3P. The variability we saw was in the 3P area. We have not seen much disruption in the 1P area. And as we think strategically, the 3P part of the business is certainly important to us, and it was a sizable portion of Carbon6, and we will continue with that piece of the business. But we really think of the 1P side as a lot more strategic for us because that 1P seller really lines up with our ideal customer profile on fulfillment. And so therefore, we think over time, we're likely to have a broader product portfolio for that 1P seller. And therefore, the fact that the 1P was the piece that was a little less disrupted, probably a little bit more favorable for us. Operator: And the next question comes from Parker Lane with Stifel. J. Lane: Kim, maybe if we look to the 7% to 8% outlook you have for '26 initially here, can you just go into the assumptions on the macro environment that are embedded in that? Is that assuming any sort of normalization or improvement in the environment that you're outlining for 4Q? Anything you can offer there? Kimberly Nelson: Yes. So Parker, what I would say is our initial guidance that is on the -- call it, the lower end of the high single digits takes into account the dynamics that we're seeing this year. And obviously, the way recurring revenue works, there are certain aspects of the dynamic this year that just naturally, right, feeds into next year. And so I think of it more a mid-ish case, meaning we're reflecting what's happened this year, but we also do have optimism as it relates to the business and the opportunity next year that has been taken into account as well. And taking all of that into account, our best view is, call it, that lower end of the high single digit of 7% to 8%. J. Lane: Got it. And Chad, you just alluded to the new go-to-market team that's combined here for revenue recovery. Can you just talk about how quickly you anticipate that you'll start seeing some of the benefits from that new structure? Is that something that can impact 4Q? Or is it more of a couple of quarters for the team to get its feet underneath it and start to execute? Kimberly Nelson: Yes. So we are seeing some early success in pipeline development and pipeline management and moving deals forward with that combined approach in terms of the -- on the Amazon side, where we did see the headwinds in shipment, actually, some of the new customer acquisition has been tracking ahead of where we expected, which gives us conviction about the total market opportunity. The thing about Q4, I would say, is most of the customers that we sign up in Q4 are not going to have a meaningful impact on revenue in either the subscription or the take rate model. So I think continued benefits from this new go-to-market are more likely to have may show up kind of through the P&L in the second half of 2027 in a more meaningful way or 2026, excuse me, than in Q4. Operator: And the next question comes from Mark Schappel with Loop Capital. Timothy Greaves: This is Tim Greaves on for Mark. I guess I want to ask around -- with leveraging your customer change events such as ERP and WMS replacements. Could you provide some directional insight on activity levels you observed there with ERP and WMS replacements, like anything upgrades over the past quarter or two? Chad Collins: Yes. Those -- majority of those change events, which lead to new customers for us are on the ERP side. WMS can be one of them, but I'd say the majority of them are on the ERP side. We have seen some softness in ERP -- sort of changeout or replacement market. And that has come mostly in the area of the what we call the mid-market ERPs. So meaning the very high-end enterprise ERPs, we don't do a ton of business there, but we have seen those deals go through as expected. And the very low end, the small kind of QuickBooks type systems, those actually have moved forward in more of the mid-market ERPs, the Sage, the Microsoft, the NetSuite, in these areas, we have seen some softness in that market, which then kind of slows down the ability to capture new customers via these change events. Operator: [Operator Instructions] Our next question comes from Dylan Becker with William Blair. Jackson Bogli: This is Jackson Bogli on for Dylan Becker. I was wondering if you could go into the new logo side of the equation here. We saw a little bit of a step-up in the quarter. I was just curious to get your thoughts on how we should think about the new logo momentum going into 2026 despite enablement campaigns getting pushed out, but maybe how you're feeling about going into 2026 with some new logo momentum behind you? Kimberly Nelson: Sure, Jackson. So through the first three quarters of this year, we've added a net 1,100 customers. So to your point, that's at a much higher clip than last year -- last year -- well, and that number excludes M&A. And then last year, the number, excluding M&A was 300 for the year. So to your point, we're at a much accelerated rate. And that's primarily driven by these retailer relationship management programs. In Q3, we also exceeded that expectation. We had assumed it would end up being, call it, a net 350. It ended up closer to a net 450 based on those activities. So that's great momentum. Specific -- I know you're asking about next year, but I'm just going to give a little color about Q4. So specific to Q4, because of the comments that I made in the prepared remarks, where we have a fair number of those relationship management programs that are pushing from our original expectation of Q4 into 2026, super logical reason why with the holiday season, but knowing that, that is different than we originally anticipated. Our lens for Q4, when we look at our net customer add perspective, we're assuming similar churn to what we've seen in the last couple of quarters. But since those -- many of those programs have moved out, our expectation for net customer adds in Q4, we expect that number is flat to slightly down potentially in Q4. Again, just that's really timing driven. So then when we think about 2026, we really like the pipeline that we're seeing on relationship management programs. At this point, similar to what we would have shared at Analyst Day, when we think of that mix of what gets us to that high single-digit growth rate, the expectation would be that customer adds are certainly a part of it, but a larger portion of that growth would be coming from the ARPU side of the equation. Nothing's changed there relative to our expectation of the mix being more on the ARPU side and less being on the customer growth side, both important, but similar comments to Analyst Day would still remain. Jackson Bogli: Great. That's helpful. And then one follow-up, if I could. We saw continued margin expansion in the quarter. And I was curious, we've talked about AI a little bit in this call, but what areas are you guys looking to really lean into to drive that further operating leverage in line with your long-term model and maybe how that leads to better network monetization and that AI differentiation building that competitive moat that you guys have? Chad Collins: Yes. Jackson, thanks for picking up on the expanding margins. A lot of that coming from the gross margin. And the driver there in the gross margin is primarily the investments that we have made in our customer experience and in particular, our customer onboarding to the network. That's become much more efficient and that leads to a better customer experience, and that efficiency also has led to some margin improvement. There's continued improvement that we will drive there, first and foremost, to improve that customer experience and then secondarily, to have that efficiency drive better margin for us. Also, I would say, on the G&A lines and sales and marketing lines, as we continue to scale the business, we think we will get continued efficiency there over time and work towards the targets that we have in our long-term model. You did mention AI. I would say we do have internal initiatives now to apply AI technology to continue that efficiency journey and looking, first and foremost, at our go-to-market teams, so a combination of marketing and sales and our customer success teams. One, those are probably the most meaningful workflows in terms of they're all customer-facing workflows. That's also where a lot of our people are today. So we think we continue to drive efficiencies that way as well. Operator: And the next question comes from Joe Vruwink with Baird. Joseph Vruwink: Carbon6 and SupplyPike, when they were originally announced, I think they added to $65 million in revenue in fiscal 2025, bringing a faster rate of growth with it. If I annualize this $3 million to $12 million for a year, it's taking off a double-digit proportion from those businesses. Is that the right way to think of it? And then if I do that into next year, and I'm subtracting off their elevated or what was an elevated growth rate, can you maybe talk about the embedded assumption for revenue recovery within that 7% to 8%? It maybe seems like that side of the business is in line to below the 7% to 8% and the SBS fulfillment business is still kind of above there, but I want to be sure on all that analysis. Kimberly Nelson: Sure. So when we think about that business and we think about it first for the year 2025, we're in around, call it -- within, call it, 10-ish percent of what our original expectations were. When we think about what next year that business represents for us, we still do expect that, that grows at a faster click than our core business. And keep in mind the comments that Chad added, when we think about the cross-sell muscle here, now that we have the combined go-to-market strategy and the combined teams in place, we do believe there's a lot of opportunity for us in 2026 to really flex that cross-sell muscle. We have some at bats that have worked well for us this year, but it's still very early on. So the fact that we're going to have that for all of next year has also been taken into account and leaves us with strong conviction that, that business still will grow at a faster click than the core business next year. Joseph Vruwink: Okay. That's helpful. And then going back to the customer count, if my math is right, it looks like the 3P side of the count is down maybe 500 logos or 5% since the start of the year. One question, how much of that is churn that you're okay with going back to Chad's comments of you're inheriting a business, but now you're looking to refine it and optimize it for what's going to be more enduring for you going forward? And then the silver lining of this question is that if you add the 500 logos back to those 1,100 number you were talking about earlier at the corporate level, 1,600 added for legacy SPS Commerce is a pretty good number. And I wanted to just ask kind of where that's being driven within the environment of spend through the need. Kimberly Nelson: Sure. So when you think about the customer count, to your point, we show the number as total customers, but then we do break that out within supplemental in the 10-Q. So if you think about the 3P side of the business in the quarter in Q3, the 3P customer count declined approximately 150. So just as a reminder, when we acquired the Carbon6 business, that added about 8,500 customers, of which the vast majority were 3P, about 8,200 of that 8,500 were 3P. So what we've seen in that business is specific -- it's actually specific in Q3, where that is down approximately 150. And when I think about the business, one, there tends to just be more churn, right, in that 3P business. It's also a much smaller ASP per customer. And there's also some, I'd call them, nonstrategic ancillary type products that we offer to 3P customers. And in those areas, we have seen some of that churn off. Our expectation would be in some of those areas, we'd expect to see that 3P customer count decline a little bit, very immaterial on the overall revenue, but that trend we saw in Q3, we would expect that, that trend would also continue into Q4 and beyond. So when you think about the business overall, there's the 1P side and the 3P side. The 1P side has much larger revenue per customer or ARPU per customer. The quantity of customers acquired was much skewed to the 3P side. Again, we definitely see a bit more churn there and also the nonstrategic part of the business. But where we saw a decline, really, I would characterize that as really starting in Q3 at that sort of net 150 and wouldn't be imprudent to assume that we're sort of at that clicked going forward as well. Then last thing, to your point, that means the -- over the 1P customers actually grew more. So the net 450 would actually be a higher number when you're looking at the 1P customer adds to your point. Operator: This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and thank you for joining at Atlassian Earnings Conference Call for the First Quarter of Fiscal Year 2026. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations. Martin Lam: Welcome to Atlassian's First Quarter Fiscal Year 2026 Earnings Call. Thank you for joining us today. On the call with me today, we have Atlassian's CEO and Co-Founder, Mike Cannon-Brookes; and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our first quarter of fiscal year 2026. The shareholder letter is available on the Investor Relations section of our website where you will also find other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks, and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time. including the section titled Risk Factors in our most recent filed annual and quarterly reports. During the call today, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter earnings release and investor data sheet on the Investor Relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. Out of respect for others on the call, we'll take 1 question at a time. With that, I'll turn the call over to Mike for opening remarks. Michael Cannon-Brookes: Thank you all for joining us today. As you've already read in our shareholder letter, we're off to an incredible start to FY '26 with total revenue in Q1 growing 21% year-over-year to $1.4 billion. Our strong execution fueled cloud revenue growth of 26% year-over-year to $998 million and accelerated growth in RPO to 42% year-over-year to $3.3 billion. We continue to make great strides across our strategic priorities of enterprise, AI and the system of work. Not only do our results reflect this, but our customers are taking notice. All up over 300,000 customers, including Databricks, Expedia, Ford and Wells Fargo rely on Atlassian's AI-enabled cloud platform to power their business processes and mission-critical workflows. We're proud of our ability to continue to deliver AI into the hands of those customers to use today. We've amassed over 3.5 million monthly active users of our AI capabilities across the platform, once again, up over 50% since last quarter. This usage is widespread across both business teams as well as technical teams. I'll repeat what you've heard me say in the past, AI is one of the best things that's ever happened to Atlassian. They need to track, plan and manage work while harnessing your organizational knowledge are things that don't change in this era. And I'd argue those things become even more important as more software is created and more people have the ability to create amazing technology that changes our lives. AI is also directly driving demand for our cloud offerings. Customers are choosing to migrate to the cloud and they're upgrading to the Teamwork collection to take advantage of our AI-powered cloud platform. In fact, in less than 2 quarters since we launched Teamwork collection, we've seen it drive a double-digit percentage increase in users as well as upgrades to higher value additions and the consolidation of competitive tools as our customers standardize on Atlassian. We're putting world-class AI at the center of our platform and throughout our entire set of collections and apps. We've showcased our relentless pace of innovation just a few weeks back at our sold out Team '25 Europe event in Barcelona with AI still in the show. Of course, you can read more about all these announcements in our shareholder letter. I want to take a moment to thank Atlassians for their tremendous execution and dedication this quarter. Without them, none of these exciting opportunities would be possible. I've talked to hundreds of customers this past quarter from all over the world, small to the biggest enterprises on the planet. And what I'm most proud of is how they're turning to us as a strategic partner to help them transform how work gets done, during a time when AI is changing their world. Collaboration becomes even more important as more creation is enabled, as work evolves and as new opportunities are created for their businesses. And our customers are looking for our help. I feel incredibly bullish about how we're partnering with them and helping their businesses thrive. With that, I'll pass the call to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from Keith Weiss from Morgan Stanley. Keith Weiss: Congratulations on a really strong start to Q1. A lot of really impressive product innovation, a lot of impressive numbers. I was hoping we could drill into the total revenue guide for the full year. And just to better understand the moving parts in this, and I'm looking at the chart that you guys put forward in terms of total revenue guidance going from 18% to 20.8%, but 3.2% of that coming from data center end of life, which means you're effectively lowering the non sort of end-of-life impact by 50 basis points. So given all of the strength that you're talking about in the letter, the product momentum, why is the full year absent the data center end of life coming down by 50 bps? Joe Binz: Keith, this is Joe. I'll go first, and Mike will follow on with additional context. I'd say the key development that we saw in Q1 was that we had significantly stronger-than-expected cloud migrations from data center, which is a great thing for our business. As you know, this has been a big area of investment for us. It's a key strategic priority. It allows us the opportunity to provide more value to customers in ways that we simply can't on data center, and we can offer capabilities such as automation, analytics and AI, and so basically, it's definitely the most valuable and secure experience we can offer to our customers. So it's a great thing for the business. Cloud migrations also, however, have an impact on the timing of revenue recognition because cloud revenue is recognized ratably and data center has a combination of upfront recognition and some ratable. And then lastly, the move to cloud also impacts marketplace revenue because we have a lower take rate on cloud app sales than we do on data center apps. All other organic growth drivers in our business in Q1 were either slightly better or in line with our expectations. And we've maintained that same guidance approach on those factors that we held 3 months ago. So we continue to hold a very conservative and risk-adjusted outlook for all the other variables in the growth equation outside of migrations. So with that Q1 performance and momentum, we've adjusted our full year outlook for a greater cloud migration forecast. And we've left all other organic driver assumptions in place. And because of those revenue recognition timing differences between cloud and data center and the impact to Marketplace, this drives the 0.5 point decline in our organic revenue growth outlook for the rest of the year. And so that's the math underneath the guidance that we're giving for the full year on the organic part of the business. Mike? Michael Cannon-Brookes: Keith, I just wanted to follow on. Joe has laid out the math for you and how it pencils out. I just want to reiterate, this is a really good thing. Increased migrations is good for Atlassian, and it's great for our customers. And you can see that coming through in our results, 26% cloud growth rate this quarter, 42% RPO growth rate and an increase -- significant increase in cloud guidance, right? All while reiterating our long-term 20% CAGR growth rate that we gave out at the end of FY '24. We feel just incredible confidence in our ability to deliver against that. And I think all of the movements that Joe laid out are incredibly positive for Atlassian as a business. Operator: Your next question comes from Kasthuri Rangan from Goldman Sachs. Kasthuri Rangan: I have to applaud you on your decision to do data center end of life. I think this is likely to accelerate the cloud transition, something that personally I have been waiting for, for a few years now. So kudos on that on pulling the plug there. So the strategic question is, given that we've got line of sight into cloud migration, we're not fighting multiple good battles. I wonder if, Mike, you can talk about the playbook -- the clean playbook for cloud migration in the years ahead. What are the things that you have learned from the last quarter or so in terms of tactics, especially with the new CRO coming on board? How are you tackling the field engagements and partnerships with the systems integrators to take this full on because I do think it's pretty exciting what you're on to. Michael Cannon-Brookes: Thanks, Kash. Look, I always appreciate the applause, I guess. Let me say a few things about Ascend and cloud migrations. Firstly, the partner and customer reaction has been fantastic. I think that's because we have well telegraphed to our customers, our partners, the entire community, that cloud is the future. It's the best experience for our customers. So we had very little surprise. We're very thoughtful and long term about how we've managed the transition, I think, and the reaction has been very positive as a result. I think the removal of technical barriers and the delivery of innovation in the cloud has been a combination of effects that's really bringing that through. You see that in the number of customers that mentioned to me, for example, AI is one of the big reasons that they are moving to the cloud. We've learned an awful lot about how to help those customers manage that upgrade through the fast shift program, through our amazing partner network, through a lot of different things over the last 5-plus years. And you see that in doubling the number of migrations -- seats that were upgraded in the last quarter that doubled year-on-year. That's a huge achievement for us. And it is thanks to those partners that you talked about and everybody else, and you see it in us raising the cloud revenue outlook. So I think cloud is ready for our customers. You see that in FedRAMP Moderate in government cloud, isolated cloud, multi-cloud strategy. So we feel incredibly bullish that we have the experience to do this. We feel that it's the right experience for our customers, and we are thoughtfully managing that migration as you pointed out. So I don't think the playbook has necessarily changed as much as every year and every quarter that goes by, we get better at it. We did lots and lots of large migrations last quarter across different geographies, different industries, pretty much any country that I go to, any city, I can point to a large customer in that geography in their industry that has already moved. So that's what gives us a lot of that confidence going forward, and allows us to reiterate those long-term targets that we laid out. Operator: Your next question comes from Arjun Bhatia from William Blair. Arjun Bhatia: Yes. Perfect. I'll add my congrats on a great quarter here. Mike, maybe I'm curious just -- obviously, we kind of knew the end-of-life on data center was coming at some point. I'm curious kind of what made you decide to do that now? Or is it just sort of the technical advancements in cloud that you've talked about comfortable -- more comfortable customers with cloud. And then just -- you're seeing the -- maybe the second part of this question, you're seeing the migration impact already, but I'm curious how you think it impacts cloud migrations for the rest of this year and through 2027. When do you think we start to see the next step of acceleration in data center to cloud migration? Is it still going to take some time? Or is that more immediate? Michael Cannon-Brookes: Look, thanks. Look, I would say that we've -- it's a continuum. So we've been investing in building an enterprise-grade cloud platform with AI and all the compliance and governance and scalability and data residency and government cloud. All of the amazing technical achievements that we've invested in over the last 5-plus years are a continuum. We will continue to invest in those. But we feel like good about the ability we have right now to accommodate the vast majority of remaining data center customers in the cloud that we have today. We feel great about our execution of the cloud road map that we've laid out in front of us in things like isolated cloud. And we fundamentally spend a lot of time with our customers. We feel like now is the right time for that, that we have prepared. They are ready, that our partners are ready. We've said many times on calls, we no longer get the -- if we're moving to cloud. It's a when conversation with every single customer that I deal with. So I would say we just feel very good about the delivery we've had, and so now is a good time for that. In terms of the expectation of migration, look, I would say that's all -- obviously, we've -- open company [indiscernible] is a core customer value. So we've laid out what we see in front of us for those customers. The multiyear period of that EOL giving them time to migrate, giving them the partnerships and everything else that we need. And we have included that into our guidance and into our results. So the confidence that we feel is included in the guidance that we've given out. Joe Binz: And then Arjun, I'd just ask -- I'd add one other point that while we expect more momentum on migrations in the short term, there is going to be variability in the pace of these migrations quarter-to-quarter, and they will take time to move, and we expect most customers will migrate as we get closer to the data center end-of-life date in March 2029. So we expect migrations to accelerate in the '28, '29 time frame. Operator: Your next question comes from Ryan MacWilliams from Wells Fargo. Ryan MacWilliams: Mike, this is kind of like a high-level question, but there's been a lot of investor conversation around like a super app world where AI interacts with multiple different parts of your software stack from 1 pane of glass. But Atlassian has always made it easy to integrate Jira with some of the other software solutions. And I thought the browser company acquisition was interesting that it also makes it easier to use Atlassian and some other tools. So how do you think about a future where you try to use AI across a bunch of different software solutions and how Atlassian fits in that world? Michael Cannon-Brookes: Thanks, Ryan. Great question. Firstly, I would say we are making amazing progress in our AI capabilities and delivery to customers. I think the company broadly should be incredibly proud of shipping AI to our customers. It turns up as one of the reasons that they are migrating to the cloud when you talk to them. It shows up as one of the reasons that they're moving to the Teamwork collection. It shows up as one of the reasons they are deepening their relationship as a strategic partner with Atlassian is our core investment in AI, which is world-class. We are doing an incredibly good job at delivering AI to customers to give them the benefits today and giving the confidence that we will continue to deliver that into the future. Jira has always been an incredibly integrated tool. We're very proud of that. The Atlassian platform is incredibly integrated. You can see that there are a number of partnerships that we've signed up in the last quarter, a lot of which are listed in the letter to integrate our platform with other offerings that customers have. It's a core part of our customer value proposition is we believe that your best technology world, your best software world, is a deeply integrated and deeply connected world. You can see that in the ability to use Atlassian's AI off Atlassian from within other tools. and vice versa to use other tools from within the Atlassian world. And I think that will depend on where the customer workflows are and where they are working. Most prominently, recently, you can see that in Jira's ability to assign work items to agents. Whether those are technical agents from GitHub or Cursor or whether those are nontechnical agents from Canva or Box or someone else. This is about taking your Jira workflows and business processes, assigning parts of them off to AI or agents as that world evolves and then bringing it back in for collaboration with further users. So I think we will continue to be integrated. I think that's the best outcome for our customers. And I think that our -- everything from the Teamwork graph to the design expertise that we're putting into our AI offerings to just a world-class set of capabilities that come with Rovo is showing up in our customers, and it is a reason that they are more deeply partnering with us. So incredibly proud of the delivery we've had there and a lot of work to do every single quarter as we go forward. We're rolling. Operator: Your next question comes from Alex Zukin from Wolfe Research. Aleksandr Zukin: Sorry about that. I was just having some voice issues. Maybe guys, just -- some of the most interesting commentary from the letter, I think, was your commentary about looking at your cohort of customers that are also using some of these AI coding tools and how they're up. Those customers are adding seats to the tune of 5%. What other anecdotes do you have to share in terms of other product attainment and adoption trends that you're seeing from that kind of super user cohort? And then maybe just a quick one on DX, specifically, how you maybe see that accelerating some of the uptake in expansion with respect to the cloud portfolio. Michael Cannon-Brookes: Thanks, Alex. Look, I'm well on record at this point as saying, I firmly believe there will be more developers in 5 years' time. There'll be far more people creating software and a far greater amount of technology in the world, which is great for all of us. And that significantly expands Atlassian's opportunities. Why do I have such conviction? Maybe important to note. We have the best data. We have amazing visibility right now, 300,000 customers, 80% of the Fortune 500, 60% of the Forbes AI 50 Atlassian customers, right? We're mission-critical and central to their business processes. We have tens of millions of developers, engineers, product managers, designers that use our applications across millions of teams. So we have some pretty phenomenal insights into how customers get work done, how they build software and how they build technology. And as we said in the shareholder letter, we continue to see really healthy user growth. The statistic you gave. We look at a cohort of our customers that were using co-generation tools, GitHub Copilot, [indiscernible], Cursor. We excluded Rovo Dev on purpose, so as to remove bias of our own sort of customer base. And those customers using those cogeneration tools were expanding their paid seats on Jira at a rate 5% faster than those who didn't. They were managing more than 20% more projects than those that didn't. And importantly, all of those 3 and others are working with us in partnership to bring their agents into Jira, into the business processes and workflows that they are using because that's where customers are doing work. The other anecdotes that we might have. Look, we've given a lot of statistics here, right? The Teamwork graph is phenomenal. It's up over 100 billion objects in connections and continuing to grow at a really incredible clip. Our AI interactions are up. I think it's almost 150% in the last 6 months. We've tripled the number of tokens we processed quarter-on-quarter. So millions of workflows, which involve automation and agents. We are doing a really good job in AI. AI is a fantastic thing for Atlassian's business. And for our customers. It creates lots of great opportunities for us. You mentioned DX. I think as customers are changing the way they build technology and software, they want to make sure that they are getting the right amount of productivity, where their investment is going and where they're getting back from this increasing engineering force that they have. Every business is becoming a software company at some point. And hence, DX doing a fantastic job at explaining the customers their developer productivity, where they can improve and how they can take actions on that. And especially when it comes to bringing in all of the AI coding tools we have today and the ones that are coming tomorrow and to show those customers how that is working. I think it will be a really great part of our portfolio. It's a fantastic team. So we're incredibly bullish about that when the deal closes, and we can move forward. Operator: Your next question comes from Gregg Moskowitz from Mizuho. Gregg Moskowitz: Congratulations on a really good performance. Mike, I also, like Alex, was pretty fascinated by the data you provided that you just spoke to a moment ago. And I'm wondering if it's possible to give us a rough sense of the size of this cohort that might shed some light on if these data would, in fact, be a fair representation of what your customers may be doing, again, particularly the ones who are utilizing vibe coding. And then secondly, for Joe, just to clarify, because the guidance puts and takes are a bit confusing. Is your fundamental growth outlook stronger, weaker or unchanged as compared with 90 days ago? Michael Cannon-Brookes: Thanks, Gregg. Look, we wouldn't give out any statistics that we didn't feel were statistically relevant in terms of the size of the cohort that we are going through. Obviously, we are very invested in making sure that this is the case. And I think it's a fair representation of what the best companies in the world are doing, and we believe there will be many more companies that following those parts over the years ahead. As do we believe that AI will continue to improve those abilities and processes. We saw that in our Rovo Dev going GA this quarter, which is doing a fantastic job at a lot of different things, right? I believe, over half of the security incidents that occur at Atlassian, the findings are coming from Rovo Dev, right? So there are a lot of abilities for AI to continue to improve technical business processes in building software, but also in the service collection, and in AI Ops and the ability to run and operate software. There is a lot of work to be done, a lot of amazing things to be built. But we do think it's going to be great for Atlassian's business. And we think that human-AI collaboration, whether that's in a software team, whether it's in a business team, whether it's in a service team, is right at the heart of what we do for our customers. And at the same time, I will point out there's a lot of enterprise concerns when I talk to customers around governance, controls, auditability, traceability, permissions. There's a lot of new issues coming up with a lot of this AI technology. And we're right at the forefront of giving enterprises as we've shown in Rovo and in our AI cloud platform, the ability to have the right level of controls and governance that they need and the right level of those change and movement. So incredibly bullish from my point of view on what AI is doing for Atlassian's business, as I've said, and how our 3 big transformations, AI, enterprise and the system of work are delivering today in the cloud growth rates that you see, in our RPO growth rates and our commitment to our long-term targets. So I'll let Joe answer on the financial question. Joe Binz: Yes. Thanks, Mike, and thanks, Gregg. Gregg, we fundamentally believe our business in FY '26 will be stronger today than we did 90 days ago. That will show up in better bookings. That will show up in better CRPO, and it's driven by the Q1 outperformance and the fact we expect greater volume of cloud migrations through the rest of the year. Hope that helps. Operator: Your next question comes from Fatima Boolani from Citi. Fatima Boolani: Mike, you have A/B tested effectively this concept of consumption pricing. There was some of that introduced last year under the confines of JSM. I'm wondering if you can share an update on how pervasive that modality is in terms of monetizing some of your innovation that's come down the pike in the last 12 to 18 months. And maybe more specifically, how does vibe coding and coding assistant related code generation that is poised to absolutely load software code generation. How do you get to capitalize on that as all of that gets shipped inside Jira environment and is held captive and worked out of a Jira environment. I'd love to get your perspective on how you can capitalize on that trend by way of consumption pricing. And again, how pervasive that is generally within the base today? Michael Cannon-Brookes: Thanks Fatima. Look, we have a series of different consumption-based pricing offerings as we have announced and shown from the Rovo and AI credit world to the service collection world of agents and assets to Bitbucket pipelines to Rovo Dev to Forge, CDP, that is certainly something that we have as an option set for our customers. It's one of our elements of monetization. I think it is certainly, something customers are interested in. It's certainly something that they're also cautious about. I think the most important thing for us when it comes to your question about AI monetization, I would say we are already seeing it, our 3 strategic priorities, right? We reiterate them because they are so important to us, delivering a world-class AI platform, continuing to grow our enterprise capabilities and the system of work across our customers' teams and enterprise. We're making amazing progress in all 3, and I will say that it's directly driving the results we see in Q1. It's directly driving the cloud growth rate of 26%. It's behind accelerating our RPO to over 40%. So we are already seeing that in everything from cloud migrations to the AI stats we have to the addition upgrades. So this question of monetization -- Teamwork collection, right? Customers that move there, talk about AI. Every customer I talk to mentions AI is one of the reasons that they're moving to the Teamwork collection to the cloud, et cetera. And we have a huge number of customers that presented at Team '25 a couple of weeks ago in Barcelona from Mercedes Benz to Sonos to FanDuel to 24-hour Fitness, all giving amazing feedback on our AI capabilities across business teams and technical teams and our ability to connect both of these is at the core of the system of work. I think this question of cogen and capitalizing, we've a lot of stats on how it improves Jira. And I think the fundamentals there are about human and AI collaboration you will still need and you will have work items that are assigned to various AI agents that come from probably a lot of different platforms, ours and others. We solve human problems. We always have. And at the core of those human problems is collaboration and that's why we're putting that at the core of our AI platform and making sure we deliver world-class capabilities in all of these ways. And I think we're already seeing that flow through in our monetization and bullishness as we head into the future on our ability to continue to build the R&D to do the world-class work and hence, have greater customer partnership is very strong right now. Operator: Your next question comes from Raimo Lenschow from Barclays. Raimo Lenschow: Congrats from me as well. Mike, one question as we kind of evolve in this new AI world, how do you think about M&A or build versus buy in this for you. I'm thinking about the browser company. I got a lot of questions of people how that would fit into the new world, et cetera. Can you just speak to that, please? Michael Cannon-Brookes: Raimo, sure. I can talk to that question. Let me say firstly, I would say that there's no change in our M&A philosophy when it comes to AI or anything else. That's a really important point. We've had the same philosophy for well over a decade now. We look for companies with a great strategic fit to Atlassian. We look for great teams that feel like they belong in our tribe, an opportunity that fits both sides. We have to have the capital to execute. And the timing has to be right. That philosophy hasn't changed. We don't believe all the innovations outside of Atlassian. We don't believe all the innovations inside Atlassian, we take a very pragmatic and long-term view. I think you can see in some of the stats we gave in the shareholder letter from the Loom acquisition, it's just lapsed 2 years, and it's built a fantastic business north of $100 million ARR already. That's stand-alone. That's with no contribution from Teamwork collection, driven by AI, and the AI SKU, right, which is growing over 100% year-on-year. Why is that well? If you go back 2 years ago and have a look at what we said at the time of that acquisition, younger people joining your workforce, video becoming a bigger part of how they want to communicate and collaborate, remote work, distributed companies and AI changing the nature of how video collaboration can work for both consumption and creation. I think we've done a pretty good job of paying out all of those trends and movements as we've navigated through the last couple of years. And Loom is a fantastic part. It's a huge reason why customers are also talking about moving to the Teamwork collection in terms of media reportings and the team has done an amazing job to continue to deliver on innovation. So we continue to think about that when it comes to our acquisitions. The browser company and DX, look 2 very different acquisitions with different strategic rationales as we've tried to communicate. On the browser company specifically that you mentioned, I think our belief is that AI is going to continue to reshape how and where knowledge workers get their work done, that technical disruptions and changes if you look back at history, have tended to change and shift the interface layers, the points of interaction. And today's browsers were built before we had this explosion of SaaS apps and well before we had any of this AI era, and they weren't really built for knowledge workers. And we think that by optimizing for knowledge workers and the SaaS apps they use and building an amazing product that fits into today's world and the enterprise world, packing it with AI skills and agents and the Teamwork graph and all the things that we have as well as enterprise-grade security, compliance, governance, especially when it comes to AI, there is a fantastic opportunity for us and that browser company fits all of those criteria I gave earlier in terms of M&A. They're doing an amazing job. And we think between the 2 companies, we can really make an impact here. So just closed, we'll get cracking on doing some amazing work and hope to have some similar results to report to you in 2 years' time. Operator: Your next question comes from Robert Oliver from Baird. Robert Oliver: Great. Mike, you guys have done a lot of preparation for this cloud move. And it seems like projects like Ascend are working really well, fast shift team. When you think about your extended partner network, how well developed is the cloud motion with them currently? From our checks, a lot of them have been out kind of early on that. But as you guys really accelerate in end of life on D.C., how prepared is your extended partner network to help you guys manage this transition? Michael Cannon-Brookes: Thanks, Rob. Yes. Look, I would say we continue to be a long-term thinking company that makes these changes over the multiyear period. I think we've seen that play out over the last 5 years in this cloud migration and I expect it to play out over the next 5 years. The partner program and our channel broadly play a critical role in that transition. I spend a lot of time with lots of different partners all over the world. We have continued to communicate openly with that partner network. It's been well telegraphed to them. and they have continued to evolve their businesses to understand both how to help customers migrate to the cloud. Fast Shift is an additive element to those partners, and how to explain to customers the benefits of AI, for example, in their business, which is a positivity of moving to the cloud, but again, one of the areas where our partners can really excel and are starting to hit some real wins in terms of delivering those workflow improvements to customers on our cloud platform, which further incentivizes other parts of those large customers to move to the cloud. So a very thoughtful and measured approach, long-term thinking from Atlassian at the same time with execution. I think the channel touching about 50% of our revenues, you can look at it that way are well mature in how to handle this over the last few years. And I believe that as I said, we are at the right point for the Ascend program to help continue that momentum in the channel. Operator: Your next question comes from Brent Thill from Jefferies. Brent Thill: I know Brian Duffy is about 10 months in, but I think everyone's curious just to get an update on the go-to-market, some of the changes he's making, what's starting to resonate well and what's ahead. And Joe, if I can sneak one in for you, it's been a great couple of decades working with you. Just maybe the question of why now? Michael Cannon-Brookes: Brent, sure. Let me talk a few things about maybe go-to-market and the movement we have there. Brian, it's amazing to think he only arrived 9 months ago. I have to remind myself of that quite often. He obviously brings vast experience and to say he's hit the ground running is an understatement. Huge impact in continuing to evolve our go-to-market motions. It's not revolutionary, as I said. We've been on an enterprise journey for a decade. We continue to strive to be a better and better strategic partner to the largest organizations on the planet. And this is a part of our continued evolution. We obviously have a massive serviceable -- addressable market, as we've talked to, right, a $14 billion opportunity in our existing customer base along with our existing products, 80% of the Fortune 500, representing just sort of 10% of our business between DC to cloud migrations with Ascend and the Teamwork collection, service collection, software collection, we have a lot of opportunities in our base. And I think Brian has done a fantastic job, along with all of the sales and marketing teams and go-to-market motions on continuing to execute this quarter, right? We've made great progress with large enterprises. We have signed some of our largest deals in the quarter in almost every sector, industry vertical and geography, right? Some of the world's largest technology companies, huge global financial institutions, large telecommunications companies have all come on board this quarter, multiples in each category. Moving to the cloud, moving to the Atlassian platform, consolidating on multiple tools into the Atlassian world and at the same time, excited by AI opportunities. And that's up to Brian and team to continue to explain to our customers and help them on that journey over a multiyear period. So I'd say the entire go-to-market team is executing extremely well this quarter, and we should be incredibly happy, and our customers are the beneficiaries of that. I'll pass to Joe for the second half. Joe Binz: Great. Thanks, Mike. And thanks, Brent. It's been great working with you as well. I would make one clarification, as Mike reminds me, it's announced now but transition later. So I wouldn't say the timing is now. In terms of why the announcement now and the transition timing, Just -- I've got a lot of big life events coming up, and I really want to be fully present for those. And I'd say this is something my wife and I have been discussing pretty intensely over the last year. And from a work perspective, I feel like the finance team is in good shape. I'm a big believer in new energy and new ideas and those being a good thing. And I think that applies to me as it applies to just about anybody else. So that's sort of the logic behind it. And right now, I'm really focused on making sure there's a clean transition and a lot of work to do around that. And I'll be able to update you on what's going to happen next after that when we get down the road and I get a little bit closer to the transition date. Operator: Your next question is from DJ Hynes from Canaccord. David Hynes: Joe, one of the questions I've been getting is whether you're raising the cloud revenue guide only on the back of better than forecast data center to cloud migration. Can you just talk about what you're seeing with the non-migration cloud business? How you're feeling there? And what's actually contributing to the increased cloud outlook? Joe Binz: Yes. Great question. Thanks. And I'll try and clarify. So we are raising our cloud revenue outlook by 1.5 points to 22.5% year-over-year. That is only to reflect the stronger migrations performance and the outperformance in Q1. So we now expect migrations to make a mid- to high single-digit contribution to cloud revenue growth in FY '26. And for that migration upside to land in the back half of the year, just given the data center expiration base. And to your question directly, it's important to note we haven't made any changes to our other organic drivers of cloud revenue growth in our guidance. So we continue to maintain a conservative and risk-adjusted approach on all those other variables in the cloud and from a cloud revenue growth driver perspective for the rest of the year. Michael Cannon-Brookes: I can probably jump on DJ, just to say 1 or 2 things, if I might. Firstly, it's worth reiterating that our expansion rates 120% NER, et cetera, aren't changing. So when Joe says, we are continuing with our cloud, the guidance in other areas I think those are really strong numbers, and we should reiterate that. We feel great strength in the cloud, right? Teamwork collection going very, very well, only 2 quarters in. Our AI delivering our enterprise platform. All of these things lead to a very strong cloud business in and of itself that continues to grow. And the Ascend program and migrations are additive to that, which is really great. When I talk to our customers that are already in the cloud at scale, they are bullish about their continued adoption of more apps and collections of more areas that they will move to Atlassian. And you can see that showing up in both our paid seat expansion rates, our cloud growth rate in and of itself, our RPO growth rate and our recommitment to our 3-year 20% CAGR that we gave out. So incredibly bullish about the cloud business as a whole as a result of AI enterprise and the system of work. All the things that we've been saying for a while now continue to come due with our customers. And I'll tell you, having spent a lot of time with them. they're all incredibly excited about what we are delivering to them every single day, and it's a credit to the entire Atlassian team. Operator: Thank you. That's all the questions we have time for today. I will now turn the call over to Mike for closing remarks. Michael Cannon-Brookes: Thanks, everyone, for joining the call today. As always, thank you to all of the Atlassian team for an amazing quarter. To all of those on the call, we appreciate your thoughtful questions and continue to support and have a kick ass day, and let's go.
Operator: Thank you for standing by, and welcome to the Rocket Companies Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Sharon Ng, Head of Investor Relations. You may begin. Sharon Ng: Good afternoon, everyone, and thank you for joining us for Rocket Companies earnings call covering the third quarter 2025. With us this afternoon are Rocket Companies CEO, Varun Krishna; and our CFO, Brian Brown. Earlier today, we issued our third quarter earnings release, which is available on our website at rocketcompanies.com under Investor Info. Also available on our website is an investor presentation. Before I turn things over to Varun, let me quickly go over our disclaimers. On today's call, we provide you with information regarding our third quarter performance as well as our financial outlook. This conference call includes forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties. We undertake no obligation to update these statements as a result of new information or further events, except as required by law. This call is being broadcast online and is accessible on our Investor Relations website. A recording of the call will be posted later today. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued earlier today, as well as in our filings with the SEC. And with that, I'll turn things over to Varun Krishna to get us started. Varun? Varun Krishna: Good afternoon, everyone, and thank you for joining our third quarter 2025 earnings call. Today, I'll walk through 4 key areas: Third quarter results, continuing progress on AI, integration with Redfin and Mr. Cooper, and finally, the new Rocket we're building for the future. The third quarter was a defining moment for Rocket, and I am so proud of our team. We gained market share, we beat our adjusted revenue guidance, and we brought 3 public companies together. This performance reflects our ability to balance short- and long-term execution. You know a company and a team are special when they don't take their eye off the ball while still dreaming big. Only the best can deliver today while shaping tomorrow, and this team proves it every single day. Let's start with our Q3 execution in the context of the market. We operate in a complex housing environment. Affordability is slowly improving as rates ease. In the third quarter, the 30-year fixed rate dropped by 40 basis points to 6.3%, giving those buying and refinancing some much-needed rate relief. Home price growth also continued to moderate, slowing to 3.1% year-over-year in Q3, down from 5.5% in January. These trends signal a purchase market that's beginning to thaw, but that recovery still has a ways to go. Existing home sales continue to hover around 4 million units, putting 2025 on track to be the slowest year for existing home sales since 1995. Despite this, people want to buy homes. That pent-up demand is very real. Buyers are watching the market closely, they're waiting for clear signals and increased affordability before making their move. The true measure of a company is its ability to grow in a challenging market. Rocket's Q3 results demonstrate exactly that. We delivered $1.783 billion in adjusted revenue, exceeding the high end of our guidance. We generated $36 billion in net rate lock volume, up 26% over the second quarter and $32 billion in closed loan volume, up 11% over the second quarter. We gained market share in both purchase and refinance. And in fact, Q3 was our strongest purchase and refinanced quarter in the last 3 years. Gain on sale margin remained stable sequentially. Adjusted EBITDA reached $349 million, expanding margins to 20% from 13% in the prior quarter. Adjusted diluted EPS came in at $0.07. Our guidance beat was driven by a surge in refinance activity as rates move lower and our execution that drove our market share gains. Rocket's platform enables our team to shift into overdrive and capture market opportunities on a dime. We consistently gain market share when these opportunities arise. We also closed the Mr. Cooper transaction on October 1, and will consolidate their financials in the fourth quarter. Let me now turn to AI. The reason that we are so obsessed with this technology is because it helps us with every single aspect of our business. It helps us grow the top of the funnel. It helps us lift conversion rates. It helps us reduce production costs, and it helps us increase recapture. The Agentic era of AI has been particularly impactful. This quarter, we launched three AI agents that have changed the game. First, our Pipeline Manager Agent, ranks banker leads in real-time, highlights who to call next, and drafts custom texts based on past conversations to drive responses. Managing our massive and complex sales pipeline is critical. That's exactly what this agent helps our loan officers do using our own data and market knowledge to surface the right leads and engage them instantly. During the September refinance wave, this agent drove a 9-point jump in client follow-ups and a 10% lift in conversion for both daily credit pools and refinance applications directly increasing locked loan volume. Second, we deployed a purchase agreement review agent, previously reviewing a single purchase agreement required more than 80 manual steps, ranging from extensive paperwork and data entry to countless validation and compliance checks. This agent cuts processing time by 80% and achieves accuracy that exceeds the legacy review process. This translates into more than 150,000 team member hours saved annually. Third, our Rocket Pro broker underwriting agent gives our mortgage broker partners speed and certainty. It verifies documents, checks e-sign compliance, confirms eligibility, and creates task summaries. What took 4 hours now happens in less than 15 minutes. What gets me excited is that we build each of these enterprise-grade agents in less than 3 weeks with some even going live the same day. This is thanks to proprietary technology. as we extend these tools across all our teams and partners, we expect the impact on capacity, conversion and volume to keep accelerating. This quarter was also significant as we began integrating 2 public companies into the Rocket family. The true value of these acquisitions lies in combining distinct strengths to create something greater than the sum of its parts. In a nutshell, Redfin brings a low-cost, high intent lead pipeline that enhances the top of our funnel, while Mr. Cooper adds an ongoing servicing revenue stream that expands our ability to drive recapture. Now recapture means turning servicing clients into repeat borrowers by proactively offering new loans when they're ready to refinance or purchase a new home. Combined, we now have relationships with approximately 60 million clients and prospects who are now part of the growing Rocket ecosystem. We've seen momentum accelerate 4 months into our integration with Redfin, giving homebuyers on Redfin the ability to get prequalified with Rocket is fueling engagement. In September, over 500,000 Redfin users started applications for home financing. That's more than double the number we saw in July. The combined power of Redfin and Rocket is driving Redfin's mortgage attach rate, defined as the percentage of Redfin buy-side clients who use Rocket Mortgage for their home purchase, from 27% to nearly 40%. Homebuyers are seeing the benefits, better matches with agents and loan officers, bundled pricing through Rocket preferred and a stronger mortgage platform offering for more products and greater scale. And the results speak for themselves. In September, 13% of Rocket Mortgage retail purchase closings came from clients who use both Redfin and Rocket. We expect this to only increase. Now let's talk about Mr. Cooper. We are combining the industry's largest servicer and the top originator to create a massive recapture engine. Making this integration a success has been a top focus for our team. We closed the transaction on schedule, and we were ready to hit the ground running from day 1. On October 1, we rolled out our co-branded identity, Mr. Cooper powered by Rocket Mortgage, and set the pace for everything that followed. Our servicing and origination platforms connected seamlessly, data and documents move smoothly between systems, no disruption, no hiccups for clients. On day 9, 40,000 leads for Mr. Cooper's servicing book flowed directly into the Rocket pipeline. By day 12, we closed our first Mr. Cooper client start to finish in just 3 days. And just this week, 400 Mr. Cooper loan officers are fully onboarded into Rocket Mortgage, leveraging our technology and tools to raise the bar for service. With a combined servicing portfolio nearing 10 million clients, we're now running the largest, most powerful recapture engine in the industry, fully integrated and delivering right here at Rocket. The recipe for success is simple. When you get the people right, strategy and solid execution follow. With a combined team across Rocket, Mr. Cooper and Redfin, we've got the best team in the business, bar none. This team represents experience, capability and the best track record on the planet. If there's one thing I hope you take away from today, it is simply this, that Rocket is in a category of one. Historically, our industry has operated in silos. Companies have typically been either originators, servicers or real estate companies, each focused on a narrow slice of the client experience. Rocket breaks that mold. We are not just one part of the process, we are all of them. We are a homeownership company, bringing end-to-end integration to housing at a scale the industry has never seen. Our platform is vertically integrated by design, powered by AI, and it represents the future of home buying. This platform also reflects a new type of business model. Traditionally, each of these business models, originator, servicer, real estate, has its own strengths and limitations. Servicers tend to excel in higher rate environments with predictable recurring cash flows that attract value investors. But growing and replenishing mortgage servicing rights often require significant capital. Origination companies shine when rates are low, capturing market growth, but they can struggle with volatility, high client acquisition and capacity costs. Real estate companies excel at attracting millions of consumers to the top of the funnel, but they often fall short on monetizing that traffic effectively, lacking a comprehensive monetization engine. So by bringing together Rocket, Mr. Cooper and Redfin, we've created something unique, one company solving the industry's most complex challenges in three transformative ways. First, we've built a business model that thrives in any interest rate environment. When rates rise, our servicing portfolio, the largest in the industry delivers stable, recurring cash flow and increased value in our mortgage servicing rights. And when rates fall, portions of our portfolio become eligible for recapture, generating significant refinance and purchase opportunities. Meanwhile, our origination business continually replenishes and strengthens our servicing pipeline. Second, we've cracked the code on unit economics by transforming how we acquire clients and manage capacity through the combined lead funnel of Redfin, Rocket and our servicing book, we attract high intent clients at scale and we do it efficiently. Our AI-powered tools further amplify our impact unlocking team member capacity, so our team members can serve more clients with greater efficiency, driving higher client lifetime value and a better, faster experience. And finally, speaking of clients, what matters most is the consumer. Everything we build, every integration we pursue centers on delivering for our clients. When we execute on this vision, our brand comes to stand for speed, certainty and low rates in fees. That is the new Rocket. We take care of every client, every time, which earns us lifetime value and the privilege of being their lender for life. We are setting a new standard for homeownership and the journey is just beginning. And with that, I'll turn things over to Brian. Brian Brown: Thank you, Varun, and good afternoon, everyone. We are executing with focus and intensity at Rocket, and I'm excited to share our progress with you today. I'll recap our third quarter performance, provide updates on the Redfin and Mr. Cooper integrations, and discuss how the Rocket business model is transforming. Finally, I'll conclude with our outlook for the fourth quarter. Q3 was a standout quarter for Rocket. We delivered strong operating results while moving full speed ahead on the Redfin integration and completing the largest acquisition in our industry, right on schedule. And even though we're just 30 days into the Mr. Cooper integration, we're already seeing the kind of traction that gives us tremendous confidence in what's ahead. Let's start with our third quarter results. Adjusted revenue was $1.783 billion, exceeding the high end of our guidance range. Net rate lock volume totaled $36 billion, up 26% quarter-over-quarter and 20% year-over-year. This growth outpaced the broader market in both purchase and refinance, resulting in market share gains and our largest purchase and refinance quarter in over 3 years. Gain on sale margins remained healthy, coming in at 280 basis points, right in line with the previous quarter. Redfin revenue performed in line with expectations. Total expenses for the quarter came in at $1.789 billion, up $450 million from the second quarter, driven by 3 factors: one, the inclusion of Redfin's expense base; two, higher variable costs tied to the increase in production; and finally, roughly $90 million in onetime costs. We delivered $349 million in adjusted EBITDA or a 20% adjusted EBITDA margin. We reported adjusted net income of $158 million and adjusted diluted EPS came in at $0.07. All of this took place against the backdrop of a housing environment and the third year of a gradual recovery. As Varun shared, when the going gets tough, the strong standout. And the results of this quarter are clear proof of that. The third quarter began with the 30-year fixed rate at approximately 6.7% in early July, easing to 6.5% by early September. During a 2-week period in September, ahead of the Fed's first rate cut of the year, the 30-year fixed edged down another 20 basis points to reach 6.3%. This favorable rate move sparked a surge in our refinance volumes. We moved swiftly to capitalize on this opportunity, leveraging AI tools that enable us to rapidly scale up our capacity. This execution drove our outperformance and market share gains. For those of you that have followed Rocket for a while, this shouldn't be a surprise. We have a track record of outpacing our competition during market shifts. It's also worth noting that our home equity product continued its momentum, doubling year-over-year. And on the purchase side, the third quarter marked our strongest performance in over 3 years, as Redfin is already contributing meaningfully to our retail channel. Redfin's source purchase closings make up 13% of our direct-to-consumer purchase closings today, and that's a number we're excited to keep growing. Now I'd like to provide an update on our capital position. In June, we proactively issued $4 billion of unsecured notes in anticipation of refinancing Mr. Cooper's unsecured debt and pay down of existing MSR debt. Upon closing, $3 billion of Mr. Cooper's legacy unsecured notes were refinanced with the proceeds from that issuance while the remaining $2 billion were refinanced through an exchange offer. Importantly, the total combined corporate debt balance remains unchanged with a simplified capital structure. In addition, we upsized our revolving credit facility from $1.150 billion to $2.300 billion, further enhancing our liquidity profile. As of October 1, inclusive of Mr. Cooper, Rocket Companies pro forma available cash was approximately $4 billion, and total liquidity stood at approximately $11 billion. Next, let me highlight the progress we're making with the Redfin. Our integration is exceeding expectations and showing strong momentum. Redfin's robust lead funnel of nearly 50 million MAUs, the related mortgage experience and the real estate brokerage are now fully integrated with Rocket Mortgage. Since launching in July, we've seen the number of Redfin users going directly to home financing through the get prequalified button more than double, surpassing 0.5 million by September. Mortgage attach rates, which are the primary driver of revenue synergies, have climbed from 27% to 40% today, that's ahead of our goal in just the first 4 months since closing, and puts us well on the way to hit our 50% target attachment rate. The feedback from Redfin agents has been extremely positive in the months since closing, and the power of the Rocket preferred pricing bundle is helping to drive up those attach rates. These early results reinforce our confidence in achieving $60 million of revenue synergies over the course of 2026, with full run rate realization expected in 2027. And on the expense side, I'm pleased to share that we have already executed the majority of our $140 million annual expense synergy as measured against Redfin's Q1 2025 cost structure. We realized a portion of these savings in the third quarter, and we expect to see the full run rate benefit in the fourth quarter results. Turning now to the Mr. Cooper integration. Our planning began well before day 1, and executing a seamless integration remains our top priority. For six months, leading up to our October 1 close, our leaders and integration teams from both organizations work side by side to ensure we're ready to hit the ground running. To lead this process, we tapped Kurt Johnson, Mr. Cooper's former CFO. Kurt is a seasoned leader with deep industry expertise and a proven track record of managing large complex integrations. We are fortunate to have him guiding these efforts. The integration connects Mr. Cooper's servicing portfolio directly into Rocket's recapture engine. Rocket Mortgage and Mr. Cooper loan officers are working side by side and have access to a massive lead pipeline and deep client insights. Just 30 days in, we're already seeing strong momentum in an increased conversion on Mr. Cooper's servicing portfolio leads. While more work remains, we are even more confident in our ability to capture the full value of our planned synergies. With those integrations underway, let me take a step back and look at how Rocket's business model is transforming. This is a stronger rocket, a company in a category of one. By combining Redfin's broad real estate consumer reach, Rocket's origination engine, and Mr. Cooper's servicing expertise, we have unified three industry leaders to unlock even greater potential at scale. Rocket has a more durable business model grounded in three pillars: Stability through recurring cash flow, a larger platform for growth, and a cost advantage that creates sustainable operating leverage and superior unit economics. First, our combined servicing portfolio, the largest in the industry, generates $5 billion in stable recurring annual cash flow, providing a dependable earnings base in any environment. Origination and servicing naturally offset each other as rates move. Lower rates drive origination, while higher rates increase MSR value, stabilizing earnings. Even in the toughest mortgage market in decades, a combined Rocket and Mr. Cooper would have delivered positive GAAP earnings every quarter from early 2023, through the third quarter of 2025, on a pro forma basis. This shows our resilience through cycles. Second, our opportunity for origination growth is even bigger. Redfin and Rocket together have the industry's largest purchase funnel, 62 million monthly active visitors, reaching 1 in 5 prospective homebuyers. We have a robust recapture engine tied to our servicing portfolio of nearly 10 million homeowners. Recapture means turning servicing clients into repeat borrowers by proactively offering new loans when they are ready to refinance or move. With advanced data and AI, we target the right client at the right time. Rocket's recapture rate is 3x the industry average. Here's an example. If the 30-year fixed rate falls to 5.5%, 25% of our servicing portfolio or about $300 billion in unpaid principal would be positioned to refinance, representing significant growth potential and all at a very low cost of acquisition resulting in strong operating margins. Third, we have a clear cost advantage in both origination and servicing. Historically, the bulk of origination expenses come from client acquisition and supporting production capacity. By leveraging Redfin's MAUs, Rocket's brand, and our servicing recapture capabilities, we efficiently attract high intent clients at scale. Our AI-powered platform further expands our lead funnel and improves conversion, driving even greater efficiency. AI unlocks capacity of our production team members so that we can grow origination while keeping fixed costs flat. Every loan requires a licensed loan officer and a licensed underwriter. With AI, our production team members can now handle 63% more loans than they could just 2 years ago. We're building the foundation for infinite capacity at Rocket, allowing us to scale without limits and pursue growth unconstrained by human capacity. As we scale, our structural advantages and client acquisition and capacity provide sustainable operating leverage. Once fixed costs are covered, 70% of additional revenue goes to EBITDA, supporting further margin expansion. In servicing, Mr. Cooper operated at a cost to service roughly 1/3 lower than the industry average. With our larger combined service portfolio, focused on recapture and low servicing costs, we are optimizing the strengths of both companies. With this new Rocket, we define our own future, and a resilient business model thrives in any market environment. Looking ahead to the fourth quarter, Q4 will be the first quarter that both Mr. Cooper and Redfin are fully consolidated into our operating results. We expect adjusted revenue, inclusive of these acquisitions, to range between $2.100 billion and $2.300 billion. On a Rocket stand-alone basis, excluding Mr. Cooper and Redfin, we expect adjusted revenue at the midpoint of the range to be up roughly 7% year-over-year. This guidance reflects our expectation for continued market share gains and the typical seasonality we experienced in the fourth quarter with softer housing activity and slower mortgage demand during the holidays. As always, our forward-looking guidance reflects the latest market data in our current visibility. Now switching to expenses. On a consolidated basis, including Redfin and Mr. Cooper, we expect total expenses of approximately $2.300 billion. This figure includes $140 million of onetime transaction-related costs and $120 million of new amortization of intangible assets associated with the Redfin and Mr. Cooper acquisitions. Excluding these items, underlying expenses are expected to be roughly $2 billion in the fourth quarter. This expense guidance includes $215 million of interest expense related to unsecured debt in MSR facilities. To wrap up, we are executing at a high level. Integrations are on track. Our teams are focused and we're delivering results. We are well positioned to finish the year strong and carry this momentum into the New Year. Rocket's future is bright, and we are in control of our destiny. With our AI-powered vertically integrated homeownership platform, we're setting a new standard for homeownership in America, helping everyone home in driving long-term shareholder value. Operator, we are now ready to open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Jeff Adelson from Morgan Stanley. Jeffrey Adelson: I guess just maybe to dig in on the revenue guidance a little bit more closely here, appreciate the breakout of what the ex-Redfin, Cooper guide would look like up 7%. At the midpoint, I guess just a couple of questions there. Could you maybe help us understand how the core ex-Redfin, Cooper, what's trending this past quarter and how that relates to the 7% at the midpoint for the fourth quarter? And maybe just what's embedded in your outlook for the Cooper and Redfin business in the fourth quarter as well. And then as you think about the momentum you're highlighting from all the businesses and the Cooper transaction so far, how are you thinking about the 2026 outlook as it relates to the market and the combined entity today? Varun Krishna: Jeff, thanks for your question. So let me start with just a little bit on Q4, and then I'll comment on the outlook for '26, and then Brian is going to unpack just some specifics on our guide for Q4. So just as a reminder, obviously, we're in Q4, but as always, historically in Q4 in the mortgage market, it's a little bit softer traditionally, and that's just for some basic reasons. You've got fewer working days. You've got Thanksgiving, Christmas, New Year's and the holidays, and consumers in general are just not as focused on the housing market. But the great news is that even with that seasonality taken into account, our purchase pipeline is at record levels. And so that gives us a lot of confidence in the quarter, which is reflected in our guide. And again, Brian will unpack that in just a minute on why that guide is not just strong, but it also reflects taking share. But what gets me pumped up about 2026 is that when we look ahead, we think it's going to be a very strong year for Rocket. And what gives us confidence, in particular, is when you look at like the Fannie Mae forecast, they're expecting the market to grow 25% year-over-year. And there's also some forecast that has rates potentially dipping below 6%. And I think as you know, that is a great thing for Rocket when you consider both the purchase and the refinance funnels that we have at scale. And that's a stand-alone observation. So what's particularly interesting is when you look at Rocket with Redfin, with Mr. Cooper, all of this becomes force multiplied because you have significantly improved lead flow, you have this recapture pipeline between origination and servicing, and you also have these new revenue streams. So we feel very excited about 2026. We see our momentum just continuing to accelerate. But just coming back to Q4, Brian, maybe you can unpack the quarter in some more detail. Brian Brown: Yes, sure, happy to do it. Jeff, thanks for the question. Good to hear from you. Let me actually start a little bit with Q3 and build on that because I think that will help understand the transition from Q3 to the outlook. But the third quarter was really strong. Obviously, you heard the numbers, we did great on a revenue perspective, but I'm actually more impressed with the share gains in the third quarter. We got a little help in the month of September from rates. There's no surprise there. But the good news is we capitalized on that, and we took share using AI and technology. So we believe that the fourth quarter was one of our biggest share gains. So looking forward to the fourth quarter, Varun mentioned it, but we do expect some of that traditional seasonality to come through, particularly the week around Thanksgiving and the two weeks around the Christmas holiday, consumers get distracted. When I look at some of the mortgage forecasts in the fourth quarter, I see some that have it about flat with Q3, some that have Q4 actually up. And that's just not normally what we see. So that's probably worth pointing out. Even on the purchase side, it kind of makes sense because consumers aren't necessarily looking for homes during those times, but even on the -- I'd argue on the rate and churn and cash outside, consumers are just focused on other priorities. So the range, as we said, was $2.100 billion to $2.300 billion. And just a little color, Jeff, on October. The purchase pipeline that we have that Varun mentioned is at record highs, and Redfin is starting to contribute to that in a meaningful way. About 13% of our purchase pipeline today is generated from Redfin clients, clients that were searching for homes on Redfin and looking to connect with the real estate agent and then connect to mortgage. So that gives us a lot of excitement there as you can see that synergy value starting to transpire. And then when I look at the refi side in the month of October, the beginning of the quarter started really nice from rates. Obviously, the Fed meeting didn't necessarily help yesterday. So there's more to be seen. But the thing I look forward to is on the Cooper side. As we mentioned, we are starting to work the servicing portfolio of Mr. Cooper on the Rocket platform, and we're starting to see a really nice conversion lift there. And I mentioned this in the prepared remarks, but to give you a little more transparency on Rocket on a stand-alone basis, if I look at Q3 Rocket only, the results would be up 14% year-over-year. And if I take the midpoint of the guide in Q4, that's 7% up year-over-year. So look, we think both the jumping off point of Q3 is really impressive, and we think the Q4 guide is very strong and incorporates market share gains. Operator: Your next question comes from the line of Mihir Bhatia from Bank of America. Mihir Bhatia: Maybe just going to the Mr. Cooper acquisition. Can you just talk a little bit more about the confidence and timing of the synergies associated, maybe both on the revenue and cost side? And then while you're on that note also just in terms of the OpEx for Q4, just a stand-alone Rocket OpEx or just to be able to track that. Varun Krishna: Thanks, Mihir. So I think we'll jump into the synergies in a minute, but I think it probably -- maybe it would be helpful for me to just give a general integration progress update as well. So I'll start there. So look, we closed the deal on October 1. And this deal was transformational, not just for Rocket, but we think for the housing industry itself. It's the first time that origination and servicing have ever been connected at this scale. And the combined companies have a balanced business model, as we shared earlier, to thrive in any market and rate environment. And so we've been executing pretty strongly right out of the gate, very similar to the Redfin acquisition. And it is a large integration, but we've made pretty significant progress. And I just want to give you a few highlights. Day 1, we had a co-branded identity, Mr. Cooper powered by Rocket Mortgage. By day 9, 40,000 leads were flowing through our pipeline from the Mr. Cooper servicing book, and that number only continues to increase. Day 12, we had our first Mr. Cooper client close a loan with Rocket Mortgage, and the turn time on that was unbelievable, it was 3 days. And just within 30 days now, we've integrated the servicing and origination platforms. We've onboarded our loan officers and mortgage bankers and we've had zero client disruption. And so with an acquisition of this scale, that's something that we're very proud of. And look, there is obviously a lot of hard and fun work ahead, and we're taking it seriously. Right now, we're focused on the system integrations, the data integrations, the culture integrations. But the good news is this is what we do. And it's why we're good at what we do and what we do best. So the teams are clicking very well. The leadership is deeply integrated. The culture is already starting to feel very strong. And that gives me a lot of confidence in our synergy and our goal targets. And so we're very pleased with the progress thus far. And that's probably a good time, Brian for maybe to go a little deeper on to the synergies. Brian Brown: Yes. Thanks, Mihir. I mean, I think you said it well. On the Cooper side, Mihir, the only thing I'd add is the work, Varun mentioned, around the pre-closed planning is really key to hitting those synergy numbers. And we talked about $500 million in total synergies, $400 million is expenses and $100 million is revenue. And you can see all that laid out in the IR deck. But I mean I'd tell you at this point, I'm happy to report that we have line of sight to the $400 million of expenses, and that's been identified. Probably just on the revenue side, what I can say is just take you back to those comments about the lead flow to the Rocket platform from the Cooper servicing book and the increase in conversion there, that really will translate to the enhanced blended recapture rate that will drive those revenue synergies. So we feel really good. It's early days. We're only a month in, but we feel really good. And just, Mihir, to make sure you caught the comment, I can go more into the expenses as well. But on the Redfin side of the house, we talked about $140 million of synergy numbers, and that is all identified and will be realized in the fourth quarter. So you're talking about $35 million of full quarter realization in Q3. If I just kind of zoom back out, excuse me, in Q4, Mihir. But if I kind of zoom back out just to give you color on expenses, we said we expect Q4 to be about $2 billion, that's all three companies combined, and that's net of onetime costs and the purchase price amortization. There's probably a couple of call outs for you as you're thinking about your models. In Q4, I have about $140 million of onetime expenses. These are things like severance and deal-related expenses. That compares to about $90 million in Q3. And then remember, the other thing to think about is this purchase price accounting amortization. In the fourth quarter, I expect it to be about $120 million, that's the amortization of both Redfin and Mr. Cooper. That was $50 million in Q3, which was just the amortization around Redfin. And the last thing, just in terms of unique items, remember, in June, we issued about $4 billion of additional debt, and that was in anticipation from triggering the change of control provisions on Cooper's unsecured debt stack. So for about 4 months, which was all of Q3, you had $4 billion of additional unsecured debt, and you have that cash. So the net expense, which is essentially the difference from your earnings rate on the cash and the note rates, the interest expense on the debt was about $10 million. That will all go away in Q4. And just to give you a little more color, I expect about $140 million of unsecured debt expense sort of on a run rate go-forward basis, that will come through in Q4. But I think the important takeaways are, look, we continue to be very disciplined on the expense side of the house. We are focused on realizing our synergy values and now even exceeding those, and that's even before AI and technology really unlocking capacity and efficiency for us. Operator: Your next question comes from the line of Doug Harter from UBS. Douglas Harter: I was hoping to talk a little bit more about the revenue progress at Redfin. Can you talk about what you see as kind of what's going to be the driver to get from the 40% attach rate to kind of the target 50% that you had? And whether that's -- I guess, first, whether that 40% was kind of the exit rate for the quarter or the full quarter average. Varun Krishna: Yes. Maybe I can use this opportunity, Doug, just to give a quick overall update on Redfin, and then we can dive into some of the specifics. So I think it's important to highlight that it's just been a fast 4 months since closing, and I'm very, very pleased with the execution. We've got momentum. We're building fast. And a few things that I would just highlight on the execution progress that drive just revenue and client growth. First thing is, we've added a prequalification experience and a funnel to every listing on Redfin. So that's millions of access points that represent every single home listing that's on Redfin. And because of that integration, because of the optimization, the number of clients that actually have started applications using that access point that get prequalified button has doubled. So about 0.5 million clients have started applications in September, and that's doubled since July, where it was around $0.25 million. And what's great about that is, this is the start of what we think is a very performance funnel. So that is the top of the funnel. It's obviously very big. But as you take that funnel down, it represents leads that we can nurture, right? Those are clients that we have long relationships with, not just in days or weeks, but really over months because that's typically how the purchase pipeline works. And what's also important to call out is that Redfin is becoming a very big part of Rocket's purchase pipeline. It's already contributing to 13% of our total retail purchase closings. And for a company of Rocket size and scale, it's obviously a very significant number, and we expect that to grow. And then as you pointed out, we also have our mortgage attach rate, which we talked about, and that's basically Redfin clients that choose to work with Rocket via a Redfin agent. And that's climbed from 27% to 40%, which is ahead of our plan, and we expect to see that continuing to grow. And we think that that's going to exceed expectations. And there are really 2 things that are driving that. The first one is the strength of the integrated brand, Redfin powered by Rocket. And the second is we have a very compelling bundle that's competitively priced, and that's unique to the Rocket-Redfin ecosystem, and it delivers value to clients, and it's something that our agents really like. And what's exciting for me is that moving forward, this is just a lot of progress in a very short period of time. We've only been doing this for 4 months. And we think about next year, we want to blow the doors off this, right? We want to add the refinance funnel into our Redfin ecosystem. We want to take more of the mortgage application process and bring it up into the Redfin app so you can start and finish inside of the Redfin experience. And so we think that, that's going to increase opportunity. We think that, that's going to optimize the funnel and we have a lot of room to grow there. And then lastly, I think similar to Mr. Cooper, strategy is one thing, but these integrations are also really about cultural integration as well. And I'm really pleased with just how well the leadership teams are working together. You just can't tell where one company starts and the other company finishes. Culture is strong, engagement is high, the agents and team members are very engaged. And that just gives me a lot of confidence in what we're going to do next year. So in summary, we've made pretty solid progress in four months, but I really think that's a drop in the bucket compared to what's ahead in '26. Douglas Harter: I guess, Varun, on the top of the funnel, the number of leads that are kind of going through the prequel, I guess are you seeing -- or do you have any data as to like how those are moving through or some falling out and going to competitors or the ones that are falling out just because they're not -- they haven't actually transacted on a home yet. Just any more color on kind of how that -- how leads are moving through that funnel would be helpful. Brian Brown: I mean, Doug, it's typical to, I would say, a regular mortgage funnel where -- I mean, the thing we know is happening today in the home buying world is that there's a lot of intent, but the time to buy is extended when we compare to historical periods. We're seeing the same thing as Redfin is we're seeing the same thing in Rocket stand-alone, which is you have consumers coming in, they have high intent. By the time they're ready to get prequalified, that means they either have started searching in a lot of cases, they're about to start searching for the home, they want to know how much they can afford and they want to be serious about it. So we see them go take the exercise to get preapproved, and then they're in our pipeline, and we start nurturing them. But we also know that in most cases, they're not getting the home, the first home they find and the first offer they make, at least in a lot of the geographies, and we also know that sometimes what they get qualified for isn't quite as exciting as they might have thought just given where interest rates and inventory are. So I wouldn't necessarily call it fall out. I would call it just clients that are very interested. They find out how much they can afford. They begin their shopping experience, but that shopping and looking experience for home is definitely in an extended period, at least compared to historical levels. Operator: Your next question comes from the line of Bose George from KBW. Bose George: Actually, can you give us an update on how you're feeling about the market share targets that you provided last year at Investor Day? And then can you also remind us, is the Cooper market share going to be additive to that? Varun Krishna: Thank you for the question, Bose. So I'll comment on our growth targets in purchase and refinance, and Brian, feel free to jump in. So I mean, in short, we feel really good about our growth targets. We talk a lot about refinance, and that's obviously something that we're very good at. But let me just drill down on purchase in particular because that is a newly declared durable growth lever for the future of our company. And so over the past 2 years, we've been very consistent around our message around transforming our company, to make purchase something that is durable for the long term. And when you think about Mr. Cooper and Redfin joining Rocket, we obviously expect that progress to accelerate. And we have basically three very simple building blocks around how we're going to win and purchase. I think the first one is, you have to have a strong top of the funnel as we talked about earlier. And that's really what Redfin represents. 50 million monthly homebuyers, thousands of local agents. And what's great about Redfin is just the quality of the traffic. Many of those consumers are higher intent, more serious home buyers that use the app every single day. Redfin has the highest weekly to monthly app engagement ratio in that space. And so that represents not just the lead flow. But as Brian shared earlier, it's a pipeline of clients that you can nurture over days, weeks and months, which is the nature of purchase. And then the second building block is the actual funnel itself. And that's where artificial intelligence and automation are so significant to us because we can nurture leads in a low-cost manner. We can improve conversion. We can automate every single part of the experience to make it more efficient, more personalized. We can have better underwriting, better pipeline management, and we could just make the whole experience faster and more accurate. And as a result, we can pass on that savings and value to the client in the form of lower rates, lower fees, and faster turn times. And then the third building block, which we're really excited about is the power of our servicing portfolio. And that is something that is a big unlock for us. With Mr. Cooper, when you have 10 million clients in your servicing portfolio, that is effectively a prebuilt pipeline of high intent buyers that trust Rocket. And the best part of this is when you consider the macro environment, these are the types of clients that are most likely to participate in a purchase, especially in today's housing climate, because they're either a move-up buyer or they're going through a life change. And so we expect a lot of that pipeline and client base to be where these purchase transactions happen, and we have an advantage because we have a relationship with those clients. So these three building blocks are critical to our purchase, but they're also very unique to Rocket and Rocket only. And so when you put them together, we're pretty confident that it's a growth engine for purchase market share. And then coming back, not just for purchase but also for refinance because as rates inevitably change, we can harvest that same lead funnel to drive automated personalized refinance activity as well. So we feel very confident. We're on track to achieve our goals. And these acquisitions and the client distribution they represent, just give us more leverage points to achieve this. And I think the best part is that is agnostic of any potential market tailwinds in like potential rate relief. And so if you add those dynamics and those tailwinds, it just boosts our confidence in achieving and exceeding our market share goals. Bose George: Okay. Great. And just to clarify, so will the Cooper share be sort of incremental to the numbers that you provided earlier? Brian Brown: Yes. Thanks, Bose. We're going to come back out in the coming quarters and talk a little bit about the revision around the market share goals after the acquisitions. But right now, our focus is integration, achieving synergy numbers, and we'll have more to report there later. Operator: Your next question comes from the line of Terry Ma from Barclays. Terry Ma: Do you guys have any more color on the 20% servicing cap from the FHFA and what that pertains to? And if it is on total servicing, can you maybe just talk about how that changes, how you think about the overall business? Brian Brown: Yes. Thanks, Terry. I'll take that one. So I think, first of all, for the group, it's important to understand that caps are not unusual in our industry, particularly when they result from acquisitions, and they can change over time. The regulators want to see a couple of things. They are very focused on the integration and making sure you take care of the consumer. And then, of course, capital and liquidity levels are king. So they want to see that you maintain the appropriate capital and liquidity levels. And the agreements between the GSEs and the counterparties or firms like us are confidential. But what I can tell you is that since the deal was announced in March, we've had really productive conversations with the GSEs and FHFA. And our capital and liquidity levels are well beyond the required standards. So we believe that the current agreement gives us sufficient room to grow and achieve and even exceed our synergy target. So in summary, I'd just say it's not something we're worried about. Operator: Your next question comes from the line of Ryan McKeveny from Zelman. Ryan McKeveny: Congrats on the results and on closing the Cooper deal. On the technology and AI initiatives, encouraging to hear the updates on the three AI agent -- examples you gave and the benefits of those. I think each of those were origination related. I guess now that Cooper has closed and the size of the servicing book has meaningfully expanded, can you talk about the technology and AI strategy more broadly? How that can play into the servicing side of the business as well to provide productivity, efficiency, cost savings? Obviously, you've given a lot of updates on the origination benefits, but hoping you could maybe speak to the servicing side as well. Varun Krishna: Yes. Thanks for the question, Ryan. This is an area that we are incredibly excited about. And I would go as far as to say the future of servicing is Agentic AI. And when you think about the use cases in servicing, a lot of it has to do with helping clients solve meaningful problems but also handling simple tasks and automation that drive day-to-day efficiency. So when you think about things like managing your payments, handling things like forbearance, property taxes, dealing with issues, escalations, those are all things that we have significant opportunities to automate, personalize and add value with AI. And one of the things that I think is particularly exciting is that there's just a lot of technology evolution in the space. One of the things that we have recently done is we partnered with a company called Sierra. And Sierra is an AI-first company that builds native, fully automated digital assistance. And this is an opportunity for us to really drive massive innovation in the servicing space, not just an agent that can handle those day-to-day tasks and issues, the one that can anticipate things that may come down the line, one that can give advice to clients to help them manage their future, one that's available 24/7. And so the great thing about this is, we think that the space is going through a pretty dramatic evolution. We're betting very big on technology here. And the thing that's important for us is that we care very deeply about owning and building our own technology. And so our servicing technology is proprietary. We have deep vertical integrations. They're built around data, and we're going to continue to evolve that with the expanded client base that we get with Mr. Cooper. And then when we partner, we're very selective with who we partner, and we picked an example like Sierra because they are born of the kind of the AI world. And so lots of opportunity here, I think, for us to really transform the way servicing works from the ground up, and this is a big area of focus for us. Operator: And your final question comes from the line of Mark DeVries from Deutsche Bank. Mark DeVries: Sticking with AI theme, I was hoping you could drill down on some of the benefits you got from the investments you made in responding to the big surge in demand you saw in September and on a go-forward basis, how you're thinking about the real benefits you'll drive, whether it's just faster return times, higher efficiencies and anything else? Brian Brown: Yes, Mark, I can start on that one. I think particularly during that September window, like I said, it was a really nice case study because the thing I think people don't think about is you think about, hey, you have to have capacity to underwrite process and close loans. And there's no question that some of the AI initiatives have made a big impact to us there. But on the loan office or the mortgage banker side, I would say equal, if not bigger impact because when you have those rate surges, you get an influx of clients coming into the pipeline. And so being able to interact with those clients through digital chat experiences where the relationship is not one to one, like a client on the phone really increases your capacity. Also leveraging AI to collect documents and follow-up items that traditionally loan officers and mortgage bankers would be doing in the time where they really should be understanding the client situation and helping them understand how they can save money on a rate and term refinance could be a distraction from the actual revenue generation opportunities. So I think when I look at traditional mortgage companies and they have inbound leads coming, the only way they can do them is pick up the phone and work longer hours. When I think about how Rocket can handle them with the digital experiences, particularly on chat, interacting through our website in messenger, and then when we actually are making phone contact with the client, knowing that, that client is high intent, knowing that, that client, in some cases, has already provided some information so we can let the loan officers do what they do best. Those are the things that not only increase the capacity of the business, but in a meaningful way, also increases the efficiency of the business. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Varun Krishna for some final closing remarks. Varun Krishna: Well, thank you, everyone, for listening to the call today, and we look forward to seeing you in the New Year. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Jens Montanana: Good morning, and welcome to our FY '26 interim first half results. As per our usual format, I'll be providing a summary followed by the CFO's presentation on the financial results and then followed by my operational review of the divisions and finally, the concluding slides. Our results summary. Slide 4. We had an exceptionally strong H1 performance. All the group's divisions delivered strong year-over-year increases with higher profits, better margins and good working capital management. These results translated into a staircase of improvement down the P&L with strong operational leverage. Gross sales grew by 9%, gross profit close to 12%, adjusted EBITDA by 22% and underlying earnings per share jumped by 43%. The strong profit improvement and enhanced dividend payout ratio from last year led to a significant increase in our interim dividend, up from USD 0.043 to USD 0.10, an increase of 133%. As seen with the reporting of many tech companies, an AI-led generational upgrade to more advanced computing is beginning. It is hard to predict how long this will take or what impact it will have. But if is like previous technology cycles, it will be evolutionary and take time to mature. The ubiquity of AI will eventually augment all uses of technology and will drive faster networking, distributed data centers, more local computing and increased cyber threats. If we can continue to adapt and operate in the right areas of our industry, then the future is very bright for all our businesses. The profitable progress across our divisions is well anchored and the fundamentals are strong and sustainable. A remarkable transformation in our business mix. Not so many years ago, the vast majority of what we sold was mainly hardware with attached services driving just over 10% of the total sales. Today, that ratio has completely turned around with over 70% of our total sales or gross invoice income derived from software and services, while the vast majority of that is also recurring. As the businesses grow in a predictable way, so do the margins and profits as the leverage rises. We believe we are very well placed to continue to ride the core technology trends that we have long been associated with. I will hand over now to Ivan to go through the financial section. Ivan Dittrich: Thank you, Jens, and good morning, everyone. We are very happy to present another set of excellent results with continued strong operational execution. As we indicated in our trading update issued earlier this month, with effect from this financial year, we have changed the definition of underlying earnings per share to further align to our adjusted EBITDA definition and to also align with peer reporting. Underlying earnings per share now exclude IFRS 2 or share-based payment charges. The comparatives have accordingly been recalculated. Slide 8, the P&L. Revenues continue to be impacted by an increasing portion of software and services being accounted for on a net basis, including as a result of the accounting policy change in Westcon in the prior year. Revenue from sales arrangements where the company acts as an agent is accounted for on a net basis and the commission or gross profit earned on the transaction is recognized as revenue. Where the company acts as a principal in the transaction, the revenue is recognized on a gross basis. To get a sense of the real growth in the business, we therefore now show gross invoiced income or gross sales, which is not an IFRS term. Gross invoiced income grew by 9.4%, but more importantly, absolute gross profit grew by 11.7%. We had strong operating leverage with adjusted EBITDA growing by 22%. Reported EBITDA grew by 36% and included $15 million of settled tax litigation credits in Westcon, which are excluded from adjusted EBITDA. Finance costs were significantly lower than the prior year due to lower rates and efficient working capital management. Our quality of earnings down the P&L continued to improve. Our PBT or profit before tax increased by 92% with an increase of 43% in underlying earnings per share and HEPS more than doubled. Slide 9 shows the segmental income statement. This shows very pleasing improvements in gross profit to EBITDA conversion ratios in both the Logicalis businesses with a steady state in Westcon. All 3 divisions had solid operational execution during the period. Slide 10. The geographic mix of our businesses has remained relatively stable year-on-year with Europe representing about half of the group. We have once again seen an increased contribution from Asia Pacific. Fundamentally, our business involves selling U.S. technology complemented by local services. Over 90% of our business is outside the U.S. Slide 11. Software and services continued to grow, driven by growth in annuity business. This analysis is presented on a gross invoiced income basis. Slide 12, the group balance sheet. The balance sheet remains strong. Net debt reduced significantly from the first half last year, driven by tight working capital management with large reductions, especially in the 2 Logicalis businesses. Equity reduced due to a $73 million debit cash flow hedge reserve in Westcon. This resulted from Westcon's hedge accounting program and is due to the much weaker U.S. dollar prevailing during the first half. Slide 13 shows the divisional balance sheet and all the divisions have healthy balance sheets with strong liquidity. Slide 14, the cash flow statement. Despite the high growth during the period and resulting increased working capital requirements, especially in Westcon, operating cash generation improved over the prior year. Cash interest payments reduced, and we saw an increase in cash and cash equivalents compared to the prior year's first half. We have declared an interim dividend of USD 0.10 in line with our dividend policy. I will now hand over to Jens to cover the remainder of the presentation. Jens Montanana: Thank you, Ivan. Starting with the Westcon International division, Slide 17. All regions had robust sales growth. Demand for cybersecurity continues to climb in a continually increasing threat landscape environment. The strong financial performance and working capital management is delivering good cash upstreaming to the parent. Operational execution remains excellent, and the levels of service to customers and employee satisfaction are very high. The company has been certified in 27 countries by the Great Place to Work organization. Gross invoiced income or total sales grew by close to 10%. This healthy improvement came with continuing faster growth from recurring revenues, which grew by over 17%. The trend of growing recurring sales continues as hardware as a percentage of the total sales is now below 30%. Illustrating this point is the greater proportion of software in the mix. This shows that while gross invoiced income continues to rise, so does the element of net accounting. There was healthy volume growth in all regions reflected by growth invoiced income, while reported revenues remained similar. Asia Pacific and the Middle East and Africa had the highest growth rates. Gross invoiced income analysis. Both business units grew. The C store Cisco segment grew by 2%, while other technology sales from mainly cybersecurity vendors represented by the Westcon brand grew by 14%. The main customer base of SMB value-added resellers remains the majority of the business and has been very constant. There was an increase in sales to large global major telco service providers. All technology categories grew in absolute terms, but cybersecurity continues to grow the fastest and now drives more than half of the total sales. The cybersecurity category grew by 16% year-over-year. Software and services now represents over 60% of the mix and hardware less than 30%. This is a significant change to the segment sales mix and a complete reversal from a few years ago. Gross profit. Gross profit grew by 14%, significantly more than the increase in gross invoice income. This was almost entirely due to the release of various tax claim provisions that had been held previously. Adjusted EBITDA, this represents the true underlying trading picture and grew by 7.3%. In the early part of H1, there was a fairly abrupt weakening of the dollar. On a translated basis, this raised the U.S. dollar stated fixed cost base, especially in Europe, where all the costs are in euros and pounds. The impact of this was offset by good EBITDA growth in Asia Pacific and the Middle East. Europe continues to drive the majority of the total EBITDA. Reported EBITDA was boosted by the unwinding of previously accumulated tax provisions. The company has always taken a conservative approach in this regard and creates a buffer for potential tax claims, if likely. EBITDA increased by $20 million or almost 30% overall to $90 million. Working capital management. Overall, net working capital days fell slightly since year-end, but more significantly compared to the prior half year. Payables outstanding and payables days rose, driven by the strong top line growth and longer managed creditors arrangements. This flexibility helps drive business opportunities and reduces the working capital. Debt cycle. The working capital movements are represented graphically in this monthly chart, which shows the last 3 years of debt cycles. Debt falls at the end of financial quarters and especially at the half and full year-end, but then rises in between these periods with January being the peak. The plotted average of this over the past 3 years has been net debt of approximately $260 million. The environment remains robust with the business locked on to multiple positive themes across all its markets. Many technology areas are being fueled by accelerated AI demand. Cybersecurity remains one of the fastest-growing segments, while a new generation of networks is evolving to provide connectivity to vast hyperscaler communities. While there may be challenges to global trade from tariff imbalances and supply chain lead times, this appears to be a little consequence to technology demand, which remains very vibrant. Moving on to the Logicalis segment. And firstly, Logicalis International, Slide 30. Good top line and revenue growth. There was a strong order book with good momentum with multiyear contracts. Growth in higher-margin recurring sales and much better profitability, cash conversion and reducing debt. Overall, the leverage in the business model is coming through. Gross invoiced income. There was strong growth in gross invoiced income as total sales grew by over $100 million or 11%. As a percentage of the total sales value, the recurring element is now over 60% of the total. The increases in gross invoiced income and reported revenues were spread across all regions. Europe and the U.S. are similar in size. However, the U.S. has a greater net accounted software and vendor resold maintenance proportion. This explains the delta to reported revenue. Cloud-delivered and hybrid solutions requiring managed services were the fastest-growing segments. The segmental analysis at the top line shows all service types combined are now over 70% of the mix and annuity managed services forms approximately half of that. Managed services grew by 17% to become 35% of the total mix and cloud-derived sales grew 17% to represent close to 1/4 of the gross invoice income. Gross profit. The gross profit percentage increase was slightly higher than the rise in gross invoiced income, resulting in another uptick in gross margins to close to 30%. These best-in-class margins reflect the multiyear transition from what was mainly a product supply business to now a technology and managed services provider. Adjusted EBITDA. The expanding margin dynamic, coupled with controlled operating expenses drove a big jump in adjusted EBITDA of 36%. We are approaching the high end of the EBITDA margin zone targets we set out a few years ago, and we are now targeting gross profit to adjusted EBITDA conversion of over 30% from the 29% today. Reported EBITDA mirrored adjusted EBITDA rising 37%. All regions had strong growth with the U.S. driving the largest contribution of around 50% of the EBITDA mix. EBITDA margins still have the potential to go higher as previous loss-making or low-profit countries such as the U.K. and South Africa are performing better now and with much improved profit trajectories. Inventory is structurally lower, driven mainly by less hardware and more software in the mix. Strong sales growth in the period increased accounts payable. Good collections on the debtor side kept accounts receivable at a constant level. The overall cash generation was strong, leading to a big drop in net debt to $24.9 million. Cybersecurity is becoming an increasingly important area of focus and growth opportunity. The path of networking is increasingly interwoven with cybersecurity, for example, Cisco's recent purchase of Splunk and Palo Alto's acquisition of CyberArk just illustrate how these major technology areas are overlapping. AI will fuel more of this and is also driving a resurgence in enterprise computing with many more hybrid cloud solutions being adopted. All of this is driving more software and services. Lastly, Logicalis Latin America, Slide 40. Finally, a positive pivot for the business after a few years of poor performance and necessary reorganization. Areas of concern remain such as Mexico. Overall, the region has done better with Brazil, the largest market leading the way and with recent improvements also in Argentina and Chile. Better gross margins, lower operating expenses and improved cash generation resulted in a much better quality of EBITDA and profits. Gross invoiced income. Gross invoiced income was flat year-over-year. However, within that, the recurring element grew by 20% and is approaching half of the total sales value. This shift has occurred with a growing and more diverse customer base and with an increase in multiyear managed services contracts. The region of NOLA, Northern Latin America was poor, mainly dragged down by Mexico and Colombia. Tariff uncertainties and execution issues have been more impactful in that region. Brazil and Southern Latin America, SOLA performed much better and combined were almost 90% of the total revenue. The growth in reported revenues came from the increased annuity managed services contracts, which are gross reported. Managed annuity services have risen faster than anything else and are a reflection of more longer duration contracts. Overall, hardware and software sales remains pretty similar. There was good growth in the small but growing cloud segment. Gross profit. The quality of gross profit improved mainly from Brazil to $51 million in total. The gross margin percentage ticked up slightly from 22% to 23%. Adjusted EBITDA, a very pleasing result down the P&L. Adjusted EBITDA doubled to $12 million, a meaningful bounce back from the past 2 years' poor performance. The combination of better gross margins and lower operating expenses provided the leverage. Reported EBITDA. At a reported level, EBITDA also rose to $12 million. The prior year's base was slightly higher due to the inclusion of positive tax items. Working capital management. The more diversified business model has grown the number of enterprise customers and is less reliant on large telco clients. The result is a better balance of diversified receivables with less lumpy revenue streams. The working capital management was excellent and led to a modest positive net cash position at the half year-end close. Overall, a very pleasing set of results. Many things are getting better, but a lot still has to be done. The focus on diversifying the business is starting to work with better margins, longer-term contracts and improving cash flows. Mexico needs to recover and attention is being focused there. We have confidence that the overall execution will continue to improve. Additions to the executive team are having a positive impact. And finally, just moving on to some closing remarks. To summarize, we expect the robustness of the first half to contribute well to the full year. We seasonally have a stronger performance in the second half. The AI momentum underpinning the rebuild and upgrades for technology infrastructure is no longer just focused on hyperscalers, but increasingly moving to enterprises and most businesses. We remain focused on maximizing the value to shareholders and for the benefit of all our stakeholders. Thank you very much, and I'll hand over now to any questions. Sharne Prozesky: We've got our first question from Katherine Thompson from Edison. You mentioned better GP to EBITDA conversion in Logicalis International. Could you summarize the target for each division or group for this metric? Jens Montanana: Yes. Okay, I can take that. I mean, obviously, we operate in a universe of other publicly traded comparables. So this is not necessarily just a benchmarking for our AM driven from our own extrapolations. And we think to get to the right balance between growth, EBITDA conversion and absolute EBITDA dollars that these ratios should be in the low 30s, in the low to mid-30s. They're slightly higher in the distribution business, where the operations are less people intensive and in Logicalis and the broader IT services universe, best-in-class competitors are generally around 30% or mid-30s. And by the way, on that point, the gross profit to EBITDA conversion, it's become -- it's always been an area of focus, but it's something we report on because obviously, the changing top line with the way that we IFRS revenue... Ivan Dittrich: And the way that we report revenue and with sort of more revenues being net account and net accounted, your EBITDA margin becomes less and less relevant, and it's more sort of the absolute gross profit that you generate, i.e., the dollars you bring in the door and then how much of that converts into EBITDA, which demonstrates the operating leverage. Sharne Prozesky: We have next -- another follow-up question from Katherine Thompson. Could you give a bit more detail on the Logicalis International multiyear contracts, verticals, geo and type of business? Jens Montanana: The -- well, we have managed service contracts. There's no -- they're not geographic. They're spread -- this trend towards more managed services in Logicalis is not country specific. So it's most probably similar in most regions. There is a slight difference in the amount of software that's sold in some regions versus other regions. And in the U.S., for example, there's a higher mix of vendor resell maintenance. So you see the difference between gross invoice income or, let's call it, top line sales and reported revenues, that difference is greater in the U.S. than in other markets. But other than that, there's not -- there are not any particular sectorial or geo reasons for managed services growth. It's really more. The driving factor is customers are increasingly looking towards their IT provider to provide them with both infrastructure and the service of that infrastructure on an ongoing basis of OpEx versus CapEx. That's the big driver. Sharne Prozesky: Next question from Ruan Koch, Coronation Fund Managers. Do you expect further improvements in the working capital cycle across any of the segments as mix changes? What impact will that have on your free cash flow generation? Ivan Dittrich: Yes. So Ruan, I think the sort of the most important thing here is sort of with the move towards more software, you will have less inventory, less physical inventory. So that clearly sort of has some working capital benefits, especially in the Westcon business, which is our most working capital-intensive business. That said, as a distribution business and a channel intermediary, Westcon is still a major credit provider in that supply chain. And typically, with the distribution business, when the business grows strongly, you typically have sort of large cash outflows as you invest in your working capital. But I would say, in general, the quality of our working capital management has improved significantly compared to previous years. It's a lot more efficient. And you can also see that from looking at the operating cash flows that we had during the 6 months period that we're reporting on now because despite the very strong growth, we still had a very decent operating cash performance. In the Logicalis businesses, which are generally less working capital intensive, one would expect that the bulk of your operating cash would essentially -- so the bulk of your operating profits would essentially convert into cash. Sharne Prozesky: Okay. Next question from Mike Steere. Do you expect the increased share of software and services to continue? Or do we eventually see a hardware refresh cycle? Jens Montanana: Yes, good question. Look, there is a hardware refresh. There's 2 sides to this. There's going to continue to be a relentless rise of more software and services in the reported mix. But the reality of the hardware that's being shipped when measured in hardware processing capacity or other physical metric is going up as well. What's changing is the value that's apportioned to the hardware is going down and the value that's apportioned to the software or the intellectual property is going up. So that's changing our invoice value mix, the hardware. And we're seeing -- to be honest, we're seeing a bit of a resurgence in hardware in the numbers that we're reporting, and this is what you hear about all the time in terms of the AI infrastructure boom and so on. That's ongoing, and we think that's going to be a multiyear play from here on in or here on out. Sharne Prozesky: Next question is from Katherine Thompson again. Should we expect your M&A strategy to continue to be focused on small bolt-ons rather than anything more transformative? Jens Montanana: Yes. We haven't done much M&A in any of our main divisions in the last in almost the last 10 years actually. And where we do, do M&A, we look to basically augment our fairly -- our mature businesses normally through skills acquisition or there's an area or domain, the technology domain where we think we can advance faster through M&A versus doing it organically. I must also point out that since our results in good results in May and continuing, we continue to be inundated with bankers and would be investors with inbound inquiries, selling, buying. So it can tell you -- it just tells you the environment at the moment has bounced back quite a bit in terms of M&A activity. And of course, we think that will most probably continue to fuel things going forward. Sharne Prozesky: There are currently no other questions. Jens Montanana: Great. Okay. Well, thank you very much for everyone for attending online here, and we look forward to seeing you or talking to you rather, sorry, at the full year results in May. Thank you very much.
Øyvind Paaske: Good afternoon, and welcome to the presentation of Akastor's third quarter results. My name is Oyvind Paaske, CFO, and I'm joined today by our CEO, Mr. Karl Erik Kjelstad. We are also pleased to have HMH with us from Houston, represented today by Eirik Bergsvik, CEO; and David Bratton, SVP Finance. As usual, Karl will begin with some key highlights, followed by Eirik and team, who will present the HMH update. I will then take you through Akastor's consolidated financials before handing it back to Karl. Toward the end, we'll open for questions through the web-based Q&A solution where you can post questions at any time. With that, I'll turn it over to Karl. Karl Kjelstad: Thank you, Oyvind, and good afternoon and good morning to our U.S. participants, and thank you so much for joining us for this earnings call. Let us start on Slide 2 with the key highlights for the third quarter. Akastor continued to be in a solid financial state. We have a positive net cash position and no draw on our corporate RCF. With this, we are very pleased to announce another cash distribution to our shareholders, this time, NOK 0.4 per share, supported by the realization of our holding in Odfjell Drilling. This is aligned with our strategy to return excess capital to shareholders while maintaining a sound capital structure. Turning to HMH. The company continues to deliver robust financial performance and demonstrate resilience even in a challenging offshore drilling market. Despite headwinds affecting service activity and spare part sales, HMH achieved adjusted EBITDA of USD 42 million, a solid quarter with a margin of 19%. Importantly, the company also delivered a strong cash flow, underscoring the quality of its operation and its ability to generate value also in a demanding environment. The value of our shareholding in HMH now represents 77% of our total net capital employed with a book value of NOK 3.4 billion at the end of this quarter -- of the third quarter or NOK 12.5 per Akastor share, somewhat higher than last quarter due to positive earnings in the period. Then AKOFS Offshore. AKOFS Santos vessel was formally awarded the 4-year MPSV contract in the quarter, expected to commence in January 2027, safeguarding long-term earnings for AKOFS. AKOFS' earnings for the quarter were impacted by the planned 45-day yard stay required to complete the 5-year classing of the AKOFS Seafarer vessel. Except for this scheduled yard stay, all vessels, including Seafarer, delivered strong operational performance. It's again worth noting that our current book value of AKOFS, where the value related to our equity holding in the third quarter was reduced in nil, reflects a conservative measure driven by historic cost and the company's negative earnings to date. This does not, in any way, fully capture the underlying asset value of AKOFS. We continue to see significant upside potential and remain focused on ensuring this value is increasingly recognized and understood. DDW Offshore, all vessels recorded 100% revenue utilization through the quarter, delivering an EBITDA of NOK 43 million. The book value of our investment in DDW Offshore stood at NOK 1.2 per Akastor share based on an average book value per vessel of $11 million. Finally, the third quarter, we completed the sale of our remaining shares in Odfjell Drilling in line with Akastor strategy of realizing assets to enable capital distribution to shareholders. This transaction generated proceeds of NOK 118 million in September bringing the total proceeds from the sale of Odfjell shares during 2025 to NOK 222 million. Slide 2. I would like to have a few more comments on the Odfjell investment. Back in 2018, we in Akastor made initial investment of USD 75 million in Odfjell Drilling through a preference shares and warrant agreement structure, supporting the acquisition of Stena MidMax that today is called Deepsea Nordkapp. In November 2022, we sold the preference shares back to Odfjell Drilling for $95 million, while we retained the warrants. In May 2024, we exercised these warrants and received just over 3 million ordinary shares and during the second and third quarter '25, we realized these shares generating, as mentioned, NOK 222 million. All in all, these investments have delivered a total return of about NOK 750 million, corresponding to 2.2x multiple or an IRR of about 19% in Norwegian kroner terms. Needless to say, we are pleased with the outcome of this investment and also a bit sad to sell the shares as we see -- as we have great belief in Odfjell Drilling going forward, but we are pleased to be have been able to yet another distribution to our shareholders following the realization. With that, I'm pleased to introduce HMH's CEO, Eirik Bergsvik, that will take us through HMH's third quarter results. So Eirik, the word is yours. Eirik Bergsvik: Thank you, Karl Erik. Good day, everyone, and thank you for joining us on the call. I'll begin by sharing a summary of our third quarter highlights and then provide some perspective on our current market conditions. After that, David will take us through the financials in greater detail. Starting with our results for the third quarter. We reported revenue of $217 million, which is up 3% year-on-year. Our EBITDA for the quarter came in at $42 million, representing a decrease of 8% compared to the same period last year, but up 16% versus prior quarter. This resulted in an EBITDA margin of 19.3%. Our performance this quarter on cash was strong. We generated $35 million in unlevered free cash flow this quarter, primarily driven by improvements in working capital management and the collection of project milestone payments. Order intake for the quarter totaled $171 million, down versus last year as expected as offshore activity works through the current white space. I want to take a moment to thank the global HMH team. Our team continues to work hard to advance our strategic initiatives focused on strengthening margins and driving operational efficiency. This is positioning us well for the continued growth in the future. Now turning to current market conditions. We are seeing continued signs of stabilization and improvement in broader contracting and utilization trends with deepwater offshore markets, benefiting both our customers and HMH. Speaking with our customers, despite the pipeline for early 2026 jobs still being limited, they are seeing significant opportunities for contract activity in mid-2026 and early 2027. Provided oil prices remain reasonably stable, our customers are anticipating a gradual move toward a tighter market with improved backlog as we approach the inflection point sometime in 2026. With that, I'll hand it over to David to walk through the financials in more detail. David Bratton: Thanks, Eirik. I'll begin with the total company results and then move into the segment details. Revenue for the quarter was $217 million, up 3% year-on-year and up 7% quarter-on-quarter, primarily due to aftermarket services, partly offset by a decrease in projects and products. Adjusted EBITDA in the quarter was $42 million, down 8% year-on-year, primarily due to spares and product volume, partly offset by an increase in contract services and increased 16% quarter-on-quarter, driven by contract services and a rebound in spares from prior quarter, partially offset by a decrease in projects. The adjusted EBITDA rate was 19.3% in the quarter. Orders for the quarter were $171 million, down 12% year-on-year and down 1% quarter-on-quarter, driven by a reduction in projects and spare parts due to the continued white space in the offshore market. This was partially offset by an increase in service orders. Finally, on cash flow, unlevered free cash flow in the quarter was positive $35 million in the quarter, driven by project milestone collections and strong working capital management. We ended the quarter with $57 million in cash and cash equivalents on hand. Next, I'll walk you through the product line results in more detail. In aftermarket services, revenue was $105 million in the quarter, up 26% year-on-year and up 14% quarter-on-quarter, driven by contract services. Aftermarket service order intake was $99 million in the quarter, up 42% year-on-year, mainly driven by contract services, partially offset by lower field service and repair activity. Quarter-on-quarter order intake increased 25%, supported by digital technology orders and contract services with some offset from field service and repair activity. Spares revenue was $58 million in the quarter, down 6% year-on-year, driven by softer global offshore activity, but up 12% quarter-on-quarter due to higher output of our topside spares volume compared with the prior quarter. Spares order intake was $56 million, down 18% year-on-year and down 13% quarter-on-quarter, driven again by the lower offshore spares order volume partially offset by an increase in international land spares activity. In Projects, Product and Other, revenue in the quarter was $54 million, down 16% year-on-year, driven by lower product volume and down 8% quarter-on-quarter, driven by a decrease in projects, partially offset by increased product volume. Lastly, moving to net interest-bearing debt. We ended the quarter with $57 million in cash and cash equivalents and a net debt of $144 million. Overall, as Erik said, we're proud of the team's performance this quarter and continue to advance strategic initiatives to strengthen our margins and improve operational efficiency. And with that, I'll turn the call back over to the team in Oslo. Øyvind Paaske: Thank you, David. I will then take you through the Akastor's financials, starting on this Slide 10 with our net capital employed. The carrying value of HMH, where Akastor's net capital employed corresponds then to 50% of the book equity value in the company increased by NOK 54 million compared to Q2, driven by positive net profit in the period. The net capital employed related to NES remained stable, while [ DDW ] declined somewhat in the period, driven by lower net working capital, which was turned to cash in the period. The net capital employed of AKOFS was reduced to 0 in Q3, as Karl mentioned, down from NOK 79 million in Q2, reflecting our share of the net loss for the third quarter. As Karl noted, continued losses have gradually reduced our book value, which by the end of Q3 then stood at 0. This means we now carry no value of our equity holding in AKOFS in our books. Again, we emphasize that this outcome is driven by accounting principles based on our historical cost and does not reflect the underlying asset values. We do carry the shareholder loans provided to AKOFS Offshore totaling NOK 418 million at the end of the period. These loans are included in our reported net interest-bearing debt. The value of our listed holdings, which per end of Q3 included ABL and Maha Capital decreased by a total of NOK 134 million in the period related then to the sale of Odfjell Drilling, partly mitigated by increased share price in Maha. The negative value of other, which includes smaller financial investments, pension accruals and other provisions was reduced by NOK 20 million in the quarter, and the balance here mainly relates to pension obligations. In total, our net capital employed decreased by NOK 209 million in Q3, primarily driven by the sale of Odfjell as well as the net losses in AKOFS Offshore. Then over to our net cash position and an overview of development in the period. In Q3, our total net cash increased by NOK 134 million, reaching NOK 279 million at the end of the period. This improvement was primarily driven by the divestment of Odfjell Drilling shares and positive operational cash flow in DDW, partly offset by the dividend of NOK 0.35 per share, which we paid out in July. The Q3 net cash position includes a net debt position of NOK 169 million in DDW Offshore, improved from NOK 228 million last quarter due to positive cash flow during the period. Total net interest-bearing debt at quarter end stood at a net cash position of NOK 970 million, which includes interest-bearing positions towards AKOFS Offshore and HMH as well as the remaining seller credit to Mitsui of NOK 39 million, which are to be settled in Q4. Looking ahead, the cash balance in Q4 will be impacted by the seller credit payment as well as the approved dividend payment totaling about NOK 110 million scheduled for payment in November. Our external financing facilities remained largely unchanged from last quarter, except for a cancellation of an undrawn NOK 70 million share financing facility following the divestment of Odfjell Drilling. The DDW term loan was reduced to approximately $24 million after scheduled installment during the period. We are in discussion to refinance this term loan and expect completion of this in Q4. Our corporate RCF remained fully available and undrawn at the end of Q3, and we have agreed with our banks to extend this facility to June 2027 with only final documentations remaining. At quarter end, total available liquidity was NOK 816 million, including NOK 69 million of cash held through DDW. That then includes the undrawn RCF with NOK 300 million. Then our consolidated P&L. As a reminder, most of our holdings are not consolidated in our group financials. Therefore, the consolidated revenue and EBITDA represent a small portion of our total investments. DDW Offshore delivered revenues of NOK 128 million for the quarter with all vessels on contract throughout the period. EBITDA was NOK 43 million, up year-on-year and quarter-on-quarter, driven by higher fleet utilization. EBITDA was, however, impacted by some FX effects and certain nonrecurring vessel costs. Other revenues were NOK 2 million, while other EBITDA was negative NOK 16 million. As a result, consolidated revenue and EBITDA for the quarter ended at NOK 130 million and NOK 27 million, respectively. Our net financials contributed positively by NOK 54 million, driven by value increases across most holding, including the Odfjell Drilling and Maha Capital. FX accounting effects were negative NOK 23 million, reflecting a smaller weakening of the U.S. dollar versus the Norwegian kroner. Net interest and other financial income added NOK 4 million, bringing total net financial items to a positive NOK 38 million for the quarter. Share of net profit from equity accounted investments was neutral overall with AKOFS contributing negatively by NOK 81 million, while HMH contributed positively by the same amount. And with that, I'll pass the word back to Karl for the last section. Karl Kjelstad: Thanks, Oyvind. Let me round off this presentation with some ownership agenda reflections. Firstly, on Slide 16, our investment portfolio was in the quarter reduced from 9 investments to 8 following the mentioned exit from Odfjell Drilling. Let us then move to Slide 17, covering HMH, been already covered by Eirik to some extent, but let me anyhow add some few reflections as HMH owner. First of all, our ownership agenda for HMH remains firm. It is to expand the business through organic growth and also do value-adding acquisitions. It is to maintain a leading market position and also continue to target to make HMH investment liquid at some point in time. We remain somewhat cautious regarding the short-term outlook for the drilling market. That said, and also, as Eirik stated, we do see encouraging signs when looking further ahead. 2026, 2027 show signs of becoming a start of a new offshore rigs up cycle, driven by the deepwater offshore development. Regarding the listing process, there is no concrete news at this point, but HMH is steadily keeping its S-1 registration filing updated and is as such, continuing to prepare for a listing. Timing of possible public offering is subject to a variety of factors and difficult to comment at this time. Let us move to Slide 18 and covering NES Fircroft. NES Fircroft continues to deliver solid results with both revenue and EBITDA increasing by 5% compared to the third fiscal quarter of 2024, despite a continued somewhat challenging environment for recruitment. As mentioned earlier, the company is exit ready. And together with the main owner, AEA Investors, we have, for some time, been exploring several alternatives for an exit. There is nothing specific to report at this stage, and we will revert with an update when there is more clarity on this. In addition to our focus on making this investment liquid, a key priority is to continue growing the company, both organically and also through M&A to enhance value for all shareholders. Slide 19, covering AKOFS Offshore. As mentioned, all AKOFS vessels remain on contract through the quarter. Aker Wayfarer achieved a revenue utilization of 97%, while AKOFS Santos delivered 94% revenue utilization in the quarter. As noted last quarter, AKOFS Seafarer earnings was impacted by its scheduled 5-year class renewal survey, resulting in a 45 days off hire. We are pleased to see that the survey was completed in line with budget and on planned time, but it led to a revenue utilization of 49% for the period due to this. The total revenues for AKOFS [indiscernible] were USD 28 million with an EBITDA of USD 3 million. Looking ahead, Seafarer will transition to a new contract terms late in the fourth quarter. This will increase the running rate earnings. We were also pleased to see that AKOFS formally awarded the new 4-year MPSV contract with Petrobras commencing in January 2027. And this contract value, as previously disclosed, will further strengthen AKOFS' earnings and cash flow once it commenced. During the third quarter, we also reached an agreement with our co-owner MOL to restructure Santos financing, addressing historical, what I would call, misalignment from the shareholder loan structure and fully aligning ownership interest. As a part of this, Santos senior debt will be extended by 1 year to first quarter 2027 with commitments in place. Then DDW Offshore. All 3 vessels remain on contract in Australia throughout the third quarter, delivering 100% revenue utilization. EBITDA for the quarter was NOK 43 million, impacted by certain nonrecurring vessel costs. Scandi Emerald's contract with Petrofac ended in late October and the vessel has since demobilized to Singapore, where it's currently on a short-term contract before entering to the spot market ahead of its scheduled classing -- 5-year classing early next year. Looking ahead, our focus remains on maximizing fleet utilization, supported by solid contract backlog that provides operational and financial visibility. Our ultimate target is unchanged, and we continue to actively assess secondhand market opportunities for potential sale of all 3 vessels. Then finally, let's look at Slide 21 regarding some key priorities for Akastor going forward. Our strategy remains firm in place. Our core objective is to develop the companies in our portfolio and when timing and values are right to execute value-enhancing exits. With a strong net cash position and no drawn on corporate facilities, we are well positioned to maximize values when opportunities arise at the right time. Today, we are pleased to announce our second ever dividend of NOK 0.40 per share, marking another important milestone in our commitment to return value to our shareholders. So I believe that concludes the formal part of this presentation, and we will move over to a Q&A session and take a brief pause to allow you to submit questions. There are already some questions on the screen here. So Oyvind, can you please facilitate that session. Øyvind Paaske: Yes. Thank you, Karl. I guess we can go right to the questions. So first, a question for you, Karl. With the current liquidity position of Akastor, would you be able to pay a Q4 dividend from existing resources? Or do you attempt to maintain the policy of distributing proceeds from asset realizations only? I'll hand that over to you. Karl Kjelstad: Yes. Thank you. No, as I said, we are committed to distribute the value to shareholders, but the future distributions will be when we do transactions when we -- because we also want to maintain a solid financial state with flexibility to act in the most optimal way when it comes to realize our assets. Øyvind Paaske: Thank you. Then we have a few questions on the same topic. So I'll take one of them regarding HMH, so I'll pass that over to Eirik. So Eirik, this is a question from the audience. Do you see potential for increased revenues related to reactivations of some of the rigs that are now experiencing white space? And it's commented that you might have the BOP for a few of the Noble and Valaris rigs currently idle with contracts commencing in late 2026. So I'll pass that question to you, Eirik. Eirik Bergsvik: Yes, thanks. Well, limited what I can say about that. But if you look at what we've been hearing from our clients, from the drillers, what we've been seeing and have been presenting on the various events this autumn, it looks very clear that we could expect some reactivations because of utilization becoming as high as, I would say, never been before, according to what the driller says. So yes, we look positive on that -- those possibilities. And yes, that I think is what I can say about that right now. Øyvind Paaske: Thank you, Eirik. Then I guess lastly, there's also a few questions on the same topic, but I'll pass that to you, Karl, even though you commented on it briefly. But given the appetite for IPOs, do you see an opportunity to list NES Fircroft? And is the company ready for an IPO? Karl Kjelstad: The company is ready for an IPO. So that's, of course, an option to make the investment liquid or any other alternative is to do a trade sale of the company. So all options are on the table is what I can say. Øyvind Paaske: Thank you. And with that, I think we are actually through the questions. And we'll just then like to thank you all for your attention and welcome you back for our presentation of the fourth quarter results on February 12 next year. Thank you very much.
Operator: Greetings, and welcome to the Adtalem Global Education First Quarter 2026 Earnings. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Spitzer, VP of Investor Relations. Thank you, Jay. You may begin. Jonathan Spitzer: Good afternoon, and welcome to our earnings call for the first quarter fiscal year 2026 results. On the call with me today are Stephen Beard, Chairman and Chief Executive Officer of Adtalem Global Education; and Bob Phelan, Chief Financial Officer. Before I hand you over to Steve, I will, as usual, take you through the legal safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute as forward-looking statements that are based on current market, competitive and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. We undertake no obligation to update publicly any forward-looking statement after this presentation whether a result of new information, future events, changes in assumptions or otherwise. Please see our latest Form 10-K, Form 10-Q for a discussion of risk factors that relate to forward-looking statements. In today's presentation, we use certain non-GAAP financial measures. We refer you to the appendix in the presentation material available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. You will find a link to the webcast on our Investor Relations website at investors.adtalem.com. After this call, the presentation will be webcasted and archived on the website for 30 days. I will now hand you over to Steve. Stephen Beard: Thanks, Jay, and good afternoon, everyone. Thanks for joining us today. We delivered an outstanding start to fiscal year 2026. This marks our ninth consecutive quarter of enrollment growth. Total enrollment is up 8% year-over-year to 97,000 students. Revenue grew nearly 11% to $462 million, and we expanded our adjusted EBITDA margins by 100 basis points while delivering adjusted earnings per share of $1.75. That's growth of nearly 36% year-over-year. This performance demonstrates the power of our growth of purpose strategy and the operational excellence we've embedded across the enterprise. Walden grew enrollment for the ninth straight quarter and achieved record total enrollment. Our Medical and Veterinary segment posted its third consecutive enrollment cycle of growth. Chamberlain grew enrollment for the 11th straight quarter, and we're continuing to generate strong free cash flow while maintaining attractively low net leverage. Before I dive into the quarter, let me place our performance in the context of what's happening in health care. The health care workforce crisis continues to intensify. It's being driven by our aging population and accelerating retirements among practicing clinicians. This challenge is particularly acute in rural settings where nursing shortages alone are projected to triple by 2027 according to the National Center for Health Workforce Analysis. The shortage spans the entire health care workforce from physicians to technicians and represents a defining characteristic of health care for the foreseeable future. The industry is working to accelerate modernization through AI to augment practitioner efficiency, but these innovations don't solve the structural workforce challenge, and that's precisely where our opportunity lies. As the largest provider of health care-focused education in the country, we're well positioned to play a vital role as essential talent infrastructure. That opportunity has never been clearer or more compelling. Now, let me address Chamberlain's performance in the quarter directly. Chamberlain grew total enrollment by just over 2% in the first quarter to nearly 40,000 students, but that growth fell short of our standards. The primary driver was execution failures within our marketing and enrollment operations. We've completed a rigorous diagnostic, so let me be specific about what we found. First, we underperformed in local marketing effectiveness during our critical September intake cycle. Our local market campaigns didn't resonate as effectively as they could have in key metropolitan areas. And we failed to optimize our marketing mix quickly enough when we saw early warning signs. Second, we failed to convert inquiry volume at historical rates. Our enrollment funnel conversion rates fell below our benchmarks, which means we generated strong interest, but didn't close enrollments efficiently. That's an operational issue, and it's fixable. To be clear, this quarter's variance is driven by execution. The fundamentals of our Chamberlain platform remain attractively robust. Nursing demand has never been stronger. Chamberlain has a powerful brand that resonates with students and employers, significant capacity, a full breadth of nursing programs across multiple modalities. We have everything we need to serve this market effectively. We simply need to execute better at converting that demand into enrollment. Put another way, we're execution constrained, but not capacity constrained. So we've taken decisive action to strengthen performance. First, we've made operational improvements to our marketing mix with enhanced local market focus. We're reallocating resources to the channels and geography that drive the highest quality enrollments, and we're moving faster to optimize underperforming campaigns. Second, we streamlined our enrollment processes to reduce friction in the student journey. Every unnecessary step in our enrollment funnel is an opportunity to lose a student. So we're eliminating those barriers. Third, we've made key leadership changes at Chamberlain. Following the recently announced retirement of our current President, we're conducting a national search for Chamberlain's next leader. We've also restructured the senior leadership team to accelerate decision-making and sharpen accountability. These changes reflect our commitment to accountability. When we don't execute to our standards, we address it decisively. Looking ahead, we anticipate continued softness in post-licensure enrollment through the second and third quarters as we implement these changes. That's a realistic assessment based on enrollment cycle dynamics and the time required for our operational improvements to gain traction. However, we expect to return to stronger new enrollment in the back half of the year. We're already seeing early positive signals from our adjusted marketing approach and our restructured leadership team is moving with urgency and precision. To be clear, we believe this is fixable. We're leaning in to correct it with speed and discipline. And most importantly, this doesn't change our conviction in Chamberlain's long-term trajectory, its strength as a brand or our full year guidance as an enterprise. I also don't want to focus on this quarter's challenge to obscure Chamberlain's fundamental strengths and strategic progress. Our pre-licensure BSN programs continue robust enrollment. In just its fourth year, our online offering added nearly 750 students sequentially, now serving over 4,000 students in aggregate. Our second Atlanta campus in Stockbridge, which opened just 2 years ago, now has 600 students and our 24th location in Kansas City is now enrolling its first cohort starting this January. Taken together, that's all a testament to how quickly we can meet the market's demand for flexible, high-quality nursing education. We recently expanded our practice-ready specialty focused model through a partnership with the American Association of Post-acute Care Nursing. This addresses the critical shortage of post-acute care nurses. This new specialization joins existing tracks in critical care, emergency care, home health care, nephrology, oncology and perioperative nursing. Taken together, it further positions Chamberlain to meet the evolving needs of the health care workforce. Again, our fundamentals are strong, the market opportunity is massive, and we're addressing the execution gaps with rigor and accountability. Turning to Walden University. We delivered our ninth consecutive quarter of enrollment growth at nearly 14%, achieving record total enrollment of over 52,000 students. Walden's digital learning platform and flexible offerings continue to demonstrate strength as we innovate and deliver an increasingly seamless experience for working adult learners. We're optimizing our marketing mix, curating content for large language model recognition and building upon Walden's strong brand recognition. Our investments in program enhancements, the Believe & Achieve Scholarship offering and AI-enabled technology are translating directly into enrollment growth. We recently streamlined our professional doctoral programs, creating a more intuitive student experience with a simplified tuition structure, integrated scholarship support and a redesigned capstone process that enables students to build toward degree completion throughout their studies. Technology is enabling our faculty and advisers to spend less time on administrative tasks and more time on student-facing support. Walden's value proposition is clear and it is reflected in total enrollment growth across all degree levels and very, very strong persistence rates. In our Medical and Veterinary segment, we're showing consistent progress. Total enrollment grew 2.4% to approximately 5,300 students and key leading indicators across our medical schools are pointing to sustainable long-term growth. Notably, Ross Med had its largest September new student start in the last 5 years. And Ross Vet continues to operate near capacity, maintaining its position as a leader in veterinary education with a one-of-a-kind experiential learning model. Our partnership philosophy extends across all of our institutions as we create innovative ways to enhance educational access and remove learning barriers. AUC's partnership with the University of Lancashire in the U.K. remains our international hub. And we've established a new direct admittance partnership with the University of Wolverhampton, creating an additional pipeline for prospective students. We're expanding our global reach through a partnership with Sage in India, offering a pathway for Indian students to attend Ross Med upon completion of an advanced medical preparation program. And here in the States, we announced a partnership with ScribeAmerica, creating the MedPath program designed specifically for existing frontline health care workers to advance into medical school. This is an excellent pathway for experienced U.S. health care professionals to step up and help fill the physician gap. These partnerships aren't opportunistic. They're strategic investments in expanding access to in-demand health care education while strengthening our long-term enrollment pipelines. I also want to highlight our continued leadership in preparing students for technology-enabled careers. We recently launched a strategic partnership with Google Cloud to prepare health care workers for an AI-enabled future. This is the first partnership of its scale designed specifically for health care students and practicing clinicians, and it's fully complementary to our partnership with Hippocratic AI. We'll codevelop customized AI credentials for our students, including a foundational AI fluency course for every Adtalem student, plus specialized courses tailored for each career pathway, including nursing, physicians assistance, counseling and other disciplines. This partnership directly addresses one of health care's most pressing challenges while differentiating our institutions for prospective students and practicing clinicians. It's exactly the kind of forward-thinking investment that positions us as the leader in health care education. Our financial position remains exceptionally strong, giving us significant flexibility to execute our strategy and return value to shareholders. We're generating trailing 12-month free cash flow of $319 million. We have cash and equivalents of $265 million as of September 30. We increased our revolving credit facility by $100 million to $500 million, and we extended the maturity to August 2030. In addition, we repaid over $50 million of outstanding Term Loan B balance on October 29. We repurchased $8 million of shares in the first quarter with $142 million remaining on our $150 million Board-authorized share repurchase program through May of 2028. We're executing our capital allocation philosophy with discipline, investing first in student growth and then in strategic initiatives. We're maintaining financial strength and flexibility. We're returning excess cash to shareholders, and we're thoughtfully pursuing strategic M&A where we can find attractively valued assets that extend our capabilities or expand our presence in in-demand health care education markets. This brings me to our upcoming Investor Day on Tuesday, February 24, 2026. We're going to use that forum to provide much deeper visibility into our strategic road map, our capacity expansion plans, our long-term value creation framework and our capital allocation philosophy. You'll hear directly from our institutional leaders about how we're executing at the operational level. You'll see the operational discipline that allows us to invest in growth while expanding margins, and you'll gain a comprehensive understanding of how we're positioned to serve as the essential talent infrastructure for America's health care workforce. I encourage you all to join us either in person or virtually. Let me close with 3 clear statements. First, we're maintaining our full year fiscal 2026 guidance. That's revenue of $1.9 billion to $1.94 billion and adjusted earnings per share of $7.60 to $7.90. Second, our strategic opportunity has never been greater. The structural health care workforce shortage isn't going away. It's actually intensifying. We have the scale, the brand strength, the program breadth, the technology leadership and the financial resources to serve as the essential talent infrastructure for America's health care system. Third, we're going to continue to allocate capital with discipline, return value to shareholders and hold ourselves accountable to the highest standards of execution. That's our commitment to you, and we'll deliver on it. As I've said before, my objective above all else is creating category-leading long-term value for shareholders through operational excellence and strategic discipline. This quarter demonstrates that commitment. Our strong enterprise results show the power of operational discipline. We started the year with momentum. We're addressing challenges with clarity, speed and accountability. We're positioned to deliver on our commitments, and we're building a health care education platform that will create sustainable long-term shareholder value. I look forward to discussing all of this with you in greater detail at our Investor Day in February. And with that, I'll turn it over to Bob to walk through the financials in more detail. Robert Phelan: Thank you, Steve, and hello, everyone. We started the fiscal year with financial strength in line with our expectations as we continue to sustain our momentum. We are generating significant cash flow and have taken proactive actions to strengthen our balance sheet while also increasing our financial flexibility. We are well positioned to continue to execute our growth with purpose strategy and we will continue to be disciplined capital allocators. We are deploying capital to high ROI growth opportunities, focusing on maximizing our existing capacity. Further, our robust financials uniquely provide us with the ability to optimally invest in additional growth opportunities, bringing new capacity to market and providing innovative student-facing technology while continuing to increase our level of profitability. I'll now review our financial results and key drivers for our first quarter performance. Later in my remarks, I'll discuss our expectations and assumptions for the remainder of fiscal year 2026. Starting with the top line. Revenue in the first quarter increased by 10.8% to $462.3 million, driven by all 3 segments, in particular at Walden. Consolidated adjusted EBITDA came in at $112 million, up 15.8% compared to the prior year. This growth was led by Walden with Med/Vet contributing, partially offset by Chamberlain. Adjusted EBITDA margin of 24.2% expanded 100 basis points from last year. Adjusted operating income was $90.3 million, up 19% compared to the prior year as revenue growth and efficiencies generated operational leverage, which was partially offset by investments in our strategic growth initiatives. We continue to balance our strategic growth investments with our more efficient, integrated and scaled operational foundation. Our margin can fluctuate quarter-to-quarter as we remain flexible on how we deploy capital to generate the highest long-term return. Adjusted net income for the quarter was $64.9 million, up 28.5% compared to last year, attributed to adjusted operating income growth and lower interest expense resulting from our actions to reduce outstanding debt and our borrowing costs, partially offset by a higher provision for income taxes. Adjusted earnings per share was $1.75 or a 35.7% increase compared with the prior year. We repurchased 57,000 shares of our common stock at an average price of $134 within the quarter, resulting in first quarter diluted shares outstanding of 37.1 million or $2.1 million lower than last year. Next, I'll discuss the first quarter financial highlights by segment. Chamberlain reported first quarter revenue of $179.2 million, an increase of 6.7% compared with the prior year, driven primarily by growth in enrollments and pricing optimization. Total student enrollment during the quarter increased 2.2%, the 11th consecutive quarter of growth and our investments to grow our pre-licensure BSN online offering are yielding returns. Total enrollment growth in pre-licensure programs, along with high continued persistence rates was partially offset by post-licensure programs. Adjusted EBITDA decreased by 5.1% to $35.1 million for the quarter. Adjusted EBITDA margin of 19.6% was 240 basis points lower compared to the prior year as we reinvested revenue growth, focusing on bringing new capacity to market and continuing to invest in our students to support enrollment growth and academic outcomes. Turning to Walden. First quarter revenue of $190 million, an increase of 17.6% versus the prior year was driven primarily by strong growth in enrollments. Total student enrollment was up 13.6% compared to the prior year, the ninth consecutive quarter of growth from robust enrollment growth across all degree levels, particularly in master’s and undergraduate and continued high persistence rates. Growth in our health care programs was led by social and behavioral health and nursing. Our non-health care programs also grew in the quarter. Adjusted EBITDA increased by 29.5% to $61.9 million. Adjusted EBITDA margin expanded by 300 basis points versus the prior year to 32.6% as our operational excellence generated efficiencies and leverage that outpaced increased brand, student-facing digital investments and additional student support commensurate with the high level of new enrollment. For the Medical and Veterinary segment, first quarter revenue was $93.1 million, an increase of 5.9% versus prior year. Total student enrollment was up 2.4% as a result of our execution against our long-term strategic growth initiatives at our medical schools, and vet continues to operate near capacity. Adjusted EBITDA increased by 11.6% versus the prior year to $21.4 million. Adjusted EBITDA margin increased 120 basis points versus the prior year to 23% as we remain focused on operating our institutions efficiently while making long-term growth investments, leveraging our existing capacity and delivering academic outcomes. We started the third year of our growth with purpose strategy with strong results. Our operational excellence continues to fuel increased investments in future growth off of record levels of enrollment. We are sustaining momentum and in turn, we are maintaining our fiscal year 2026 guidance as we continue to execute our strategic and financial goals. Revenue in the range of $1.9 billion to $1.94 billion, approximately 6% to 8.5% growth year-over-year, with adjusted earnings per share in the range of $7.60 to $7.90, approximately 14% to 18.5% growth year-over-year. Looking forward to the remainder of the year, we continue to anticipate revenue growth to be higher in the first half of the year than in the second half. As Steve mentioned in his prepared comments, our maintained guidance contemplates softness in Chamberlain's top line in the second and third quarters. And as a reminder, for Walden, one academic week shifts from the third quarter into the second quarter this fiscal year. Our top priority remains to reinvest into our institutions and deliver positive student outcomes through our financial strength and dynamic capital allocation approach. And while we plan to make targeted investments during the second quarter, we remain committed to expanding our fiscal year 2026 adjusted EBITDA margin by approximately 100 basis points. Included within our guidance are the recent capital allocation actions as well as our continued strong cash flow generation. Finally, we continue to anticipate an effective tax rate to be higher than fiscal year 2025. We started the fiscal year with strength in line with our expectations. We will continue to execute on expanding access and delivering positive student outcomes, deploying capital to meet the health care education market's growing demand, maximizing long-term value and ultimately generating high returns for all stakeholders. And with that, I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Jack Slevin with Jefferies. Jack Slevin: Nice work on the quarter guys. I want to start the commentary on Chamberlain and all the color you gave. But maybe just to get a little bit more granular there. I just want to understand sort of the range of outcomes that you're thinking about moving forward here given the really strong ramp you've had the last 2 years in enrollment. And sort of are we thinking this is something where we might see sequential declines in enrollment as you sort of get new starts back online? Or I'd just love to think through sort of the range of outcomes that you're thinking about in that second and third quarter guidance as you look at the Chamberlain volumes. Stephen Beard: Yes. So I'd encourage you to put the deceleration in post-licensure nursing into a discrete box. We don't believe this represents a go-forward trend in that part of the Chamberlain portfolio. We believe that our market position in post-licensure nursing remains strong. We've historically taken share in RN to BSN and expect to continue to do that. This is really, I think, a misstep on our part in relation to how we thought about marketing in advance of the September enrollment cycle. And so we've taken a hard look at where we went wrong, what we can do to remedy that. And we expect that while we'll see a tail on that deceleration flow through the balance of the year, we will recover, and we will continue to defend our position in post-licensure nursing at the same time, growing really, really attractively what we're doing in pre-licensure nursing, particularly with our BSN online program. So again, this is not a trend that has legs in our view. This is a onetime dislocation that's a result of our execution miss. But because it's within our control, we feel very confident about what that means for purposes of the out periods in post-licensure nursing, and that's why we're confident enough to maintain our guide for the full year. Jack Slevin: Okay. Got it. Super helpful. One follow-up on that front. So just to maybe look at the margin in the quarter pulls back a little bit in Chamberlain. Should I think about that as a reaction to some of the trends you were seeing intra-quarter? Or can you sort of spell out what you think about sort of that trajectory going forward on the cost side? Stephen Beard: Yes. Look, I think as we begin to recover the top line at Chamberlain to something consistent with what we would expect ordinarily, you'll see the margin expansion over the course of a full year period. So that, too, is a reflection of the temporary pressure on the top line from the performance miss in September. We expect to recover that as we approach the end of the fiscal year. Jack Slevin: Got it. Okay. Super helpful. Last one for me and more just sort of out of an abundance of caution given your stock traded off 5% yesterday. Just want to sort of clarify that you feel comfortable with where your systems, backbone and platforms from a technology standpoint are across your business, but probably in Walden would be the most relevant one. Stephen Beard: Just want to clarify the question. Just our technology infrastructure generally. Jack Slevin: Yes. I guess you had a peer yesterday or someone in the peer set that had sort of large issues around -- yes, do you get the question now? Stephen Beard: Yes, perfect. Thank you for the clarification. No, we feel great about the tech stack that we use to support the operations, both on the front end of the funnel as well as everything we deploy in support of the student journey. And in fact, we are really excited about some of the innovations that we're rolling out to both enhance and differentiate that student journey. So certainly sympathetic with what happened with one of our peers, but no analogous dynamic in our model to be concerned about. Operator: Our next question comes from the line of Jeff Silber with BMO Capital Markets. Jeffrey Silber: Sorry to go back to the Chamberlain issue. How do you know that this is not a competitive issue where you're losing share? Stephen Beard: Because as recently as 2 quarters ago, we were taking share in RN to BSN. We know -- you know and we know that's not a growth area in the way that it was many years ago, but we believe we still have one of the most attractive brands in RN to BSN. We believe that employers, in particular, are keen to see their RNs make the leap to BSN through Chamberlain's program. So there's nothing we're seeing in the competitive landscape that gives us any concern that we've lost our positioning relative to the alternatives. I just think as we've looked to move from an historical national-based marketing campaign to one that's more market specific, we had a misstep along the way. I think we've diagnosed that well. And I think you'll see the product of that correction over the course of the fiscal year. We intend to defend our position to RN to BSN given our legendary strength there, even as we grow our pre-licensure presence through BSN Online. So I don't believe we are suffering from any adverse competitive dynamics in post-licensure nursing. Jeffrey Silber: Okay. That's really helpful. Last quarter, you announced a partnership with Sallie Mae, and I was just wondering if we can get an update on how that's progressing and when we may see some announcement in terms of the specifics. Stephen Beard: Yes. We're working to finalize definitive documentation with Sallie Mae. My hope is that we'll be able to close that relatively soon, and I expect we'll be able to announce that. We're really encouraged by what that means for all the students we have across the portfolio and Sallie Mae's willingness to step up and support the broad program mix we have. But that work continues to be in flight, and we're certain we'll get it locked down soon. Operator: Our next question comes from the line of Alex Paris with Barrington Research. Alexander Paris: Add my congrats on the strong quarter. I have a couple of questions that are more industry-oriented. Earlier this year, the Department of Education announced increased verification efforts to root out fraud across all of higher education. I've talked with a couple of other companies in this space, one notably that had some issues with friction because of the fraudsters crowding out well-intentioned students, and that had an impact on new student enrollment. I'm wondering what your thoughts are there and maybe just some additional color about what you have to do now that you didn't have to do before? And are you seeing a spike in increased fraudulent activity in the enrollment process? Stephen Beard: Yes. So I'll answer the second part of the question first. We're not seeing any spike in go students or fraudulent enrollments or anything like that. We obviously are subject to the same administrative burdens associated with the department's focus on that as everyone else. But as we sit here today, we don't have any concerns that that's an issue across our program set. But obviously, we continue to monitor it closely. Alexander Paris: Yes, I was wondering if that might have been a contributing factor with the new student enrollment challenges at Chamberlain, but [indiscernible]. Stephen Beard: No. Really, at Chamberlain, 2 issues. One, the marketing mix we deployed in advance of the September cycle wasn't effective as hoped and wasn't executed as well as hoped. And then also at the conversion level, even where we were seeing strong demand with a number of missteps at the conversion level, which resulted in the diminished enrollment growth for that cycle. But I don't believe the verification issue had anything to do with the deceleration in enrollment at Chamberlain. Alexander Paris: Okay. Good. And then kind of shifting gears a little bit. I got 2 more. The Google Cloud partnership and these AI credentials that you're talking about for health care professionals, this would be both existing students as well as noncurrent students at Chamberlain and the other brands within the portfolio. Are these 4 credit courses? And as such, are they Title IV eligible given the increased coverage proposed in the Big Beautiful Bill for shorter-term credentials? Stephen Beard: Yes. As an initial matter, these are programs that will run alongside our existing degree programs. We're ways away from thinking about how to embed them comprehensively in our programs. Obviously, there are accreditation issues that come with that, but we think that's an opportunity down the road. We view this as a way both to provide a differentiated student experience by creating baseline fluency and AI tools across our student populations and to create stackable credentials that have real currency in the clinical marketplace. So Google has been in the certification and stackable credentials business for a while. It's really exciting to be able to partner with them in a way that brings what we do best together with what they do best. So not wholesale modifications to existing degree programs, but ancillary complementary certificate programs that run alongside our degree programs. Alexander Paris: Got you. Is there an additional cost for existing students? And likewise, is there a cost for non-existing students? Stephen Beard: No incremental additional cost for students. Alexander Paris: Got you. Okay. And then my last question is, again, industry-related. Given one of your competitors made an announcement about the impact of military, active duty, tuition assistance, I'm wondering what your institutional, your enterprise exposure is to military. And I suspect that's primarily GI Bill and VA. Stephen Beard: Yes. So active duty military exposure is pretty low, very low actually. Obviously, the platform you're referring to, that's a very large part of their model. So we've not really seen any problems with student disbursements, whether that's veterans benefits or traditional Title IV benefits. Obviously, it's something we continue to monitor as the shutdown drags on. But for the moment, that has not been an issue for our programs. Alexander Paris: Yes. That was my related question, government shutdown related. And then last question, kind of just a silly one. The February Investor Day, is that going to be held at your Chicago headquarters or elsewhere? Stephen Beard: It won't be in Chicago, TBD. I suspect it will be out East, but we'll have details for you pretty soon here. Stay tuned. Operator: Our next question comes from the line of Steven Pawlak with Baird. Steven Pawlak: On the marketing missteps at Chamberlain, I guess just kind of maybe piggyback off an earlier question, what gives the confidence that the marketing mix or marketing message in your other programs is appropriate that there isn't -- or that this is sort of contained and now addressed problem? Stephen Beard: Yes. So we deploy a central marketing center of excellence that then localizes our marketing programs for each of our institutions. So even though our institutions are like in the sense that they're all postsecondary, the unique marketing strategies across the portfolio do vary quite a bit. So we have every reason to believe that the root causes of the misstep in September with Chamberlain are Chamberlain-specific. And no reason to believe that they present any issue for any of the 4 institutions, and that's obviously borne out by what you see in the enrollment trends across those institutions. So it's a Chamberlain-specific issue. We have a tremendous amount of confidence in the steps we've taken to address it, and we're confident that, that will flow through results of operations over the course of the fiscal year. Steven Pawlak: Okay. And then on the sort of conversion challenges, is there a particular part of the funnel that students were sort of falling out of? Or was it maybe more the number of steps and sort of the increased friction points that you referenced? Stephen Beard: Yes. So any time there's a handoff of a student from one part of the enrollment journey to another, that's an opportunity for leakage. And at Chamberlain, we determined that there are opportunities to simplify and reduce the number of handoffs in a way that diminishes the risk of that kind of leakage. When our students are considering our programs, they're also considering other programs and our ability to stay in front of them to ensure they're getting the information they need to make an informed decision about enrollment. It is critical to preserve the kind of high conversion rates that make all the difference in our model. That just didn't happen in September, but we believe we know what needs to happen for the upcoming enrollment cycles at Chamberlain to change that outcome starting with January. Operator: There are no further questions at this time. I'd like to pass the call back over to Steve Beard for any closing remarks. Stephen Beard: I just want to thank the team across the Adtalem family for a really strong and robust start to the fiscal year. This is year 3 of growth with purpose for us. We've been incredibly pleased with the strategy, and we look forward to a strong third year of that strategy, but that is entirely down to the folks that support our students across our 5 institutions. So a sincere thanks to our teams. Operator: That concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to Roku's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Conrad Grodd, Vice President of Investor Relations. Please go ahead. Conrad Grodd: Good afternoon. Welcome to Roku's Third Quarter 2025 Earnings Call. Joining us on today's call are Anthony Wood, Roku's Founder and CEO; Dan Jedda, our CFO and COO; Charlie Collier, President Roku Media; and Mustafa Ozgen, President, Devices. On this call, we'll make forward-looking statements, which are subject to risks and uncertainties. Please refer to our shareholder letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward-looking statements. We'll also present GAAP and non-GAAP financial measures. Reconciliations of non-GAAP measures to the most comparable GAAP financial measures are provided in our shareholder letter. Unless otherwise stated, all comparisons will be against the results for the comparable 2024 period. With that, operator, our first question, please. Operator: Our first question comes from Cory Carpenter with JPMorgan. Cory Carpenter: Anthony, hoping you could expand on the trends you saw this quarter in the platform business and how you're thinking about the growth drivers in 4Q in 2026? And Dan, maybe a question for you. You bought back 50 million shares this quarter. So I thought it would be helpful to hear your latest thoughts on capital allocation priorities given your cash balance. Anthony Wood: And I would say very good outlook. We feel good about our outlook and also feeling good about next year. And so what's driving our platform revenue growth, in 2024, we outlined our key monetization initiatives, the general buckets of areas we're focused on to grow our platform revenue. And that strategy is working. You can see it in the results, and I think we'll continue to see it for quite a while. And the results and the success of our strategy just gives us a lot of confidence that we're going to maintain double-digit platform revenue growth, while increasing profitability in 2026 and beyond. So just to recap, the 3 areas that we're focused on to grow our platform revenue. 1 is making better use of our home screen, which is a key strategic asset for us. Another one is growing ad demand and the third is growing our subscription revenue. So in terms of our home screen, like I said, it's a key asset for us. Every Roku customer, which is half of broadband households in the United States, they turn on their TV and they start their viewing experience with their home screen. It's how they discover what -- and decide what to watch and we're always actually working on improving our home screen. We're always testing changes. And when those changes result in a better viewer experience or better monetization. We roll those changes out and that's ongoing. For example, we added the recommendation row to the top of our home screen recently and that's working well for us. But we have -- as we've mentioned before, we are working on a larger update to our home screen. That's in testing. It hasn't rolled out yet. But the testing has gone really well, getting a lot of positive feedback we're being very thoughtful about that. It affects a lot of viewers. So we want to make sure that it's both a big improvement for all of our viewers as well as an improvement to engagement and monetization. But I think we'll see that based on the testing results we're seeing so far. I think that's going to roll out in 2026. So home screen, continuous home screen improvements and UI improvements are one of the ways we grow our platform revenue. Another is we're focused on growing our ad business and our ad demand. Our goal is to -- our strategy there is to work with all the major platforms, including all the major DSPs. We announced the relationship with Amazon recently deeper support with the Amazon DSP. That's just turned on. So it's a little early to say. But so far, it's looking good. And I'm still very excited that's going to be a contributor to our business, but it hasn't really ramped up yet. It's just starting to ramp up. Also on the ad side, we're focused on improving measurement. We announced, for example, this quarter integration with AppsFlyer. Another area we're focused on is Ads Manager, which is our self-serve platform for small- and medium-sized businesses, but also really focused on performance marketing. It's a business that's growing fast. It opens up a big new area of advertisers, a big new category of advertisers, a different class of advertisers as well as performance marketers. So that's a big area that we're focused on. We're putting more resources behind that. So -- and I think overall, we believe we can be the most performing connected TV platform. We have a lot of data. We have the highest engagement by far in the United States and it's an area we're investing in improving the performance of our ad platform. And then subscriptions are doing well for us. Premium subscriptions, particularly doing well. And in Q3, we continue to improve the premium subscription experience. We also added new services, we're always adding new premium subscriptions, but we can add more services in the quarter and we'll be launching more Tier 1 subscription services and premium subscriptions in 2026. And then, of course, there's Howdy, which is our latest owned and operated service, which is $3 a month with no ads, an SVOD service, and it really taps into a large underserved market, a scenario of the market that's not really targeted with a particular SVOD service. And I think it's a very large opportunity for us. So that's also still early. But just like we grew the Roku Channel into a large business over time using our platform, I believe we're going to do that with Howdy as well. So that's an area that I'm excited about, but it's still early as well. And then in terms of capital allocation, let me turn it over to Dan. Dan Jedda: Thanks, Anthony, and thanks for the question, Cory. Let me just start by saying a few things about our financial position and capital allocation. We have $2.3 billion of cash and short-term investments on our balance sheet, a very strong position. We achieved a positive operating income in Q3. That's the first time since fiscal 2021. Our outlook for Q4 on adjusted EBITDA at $145 million is our highest ever for adjusted EBITDA. For the full year, our EBITDA margins are expected to be a 200 basis point improvement year-over-year to approximately 8.4%, and we expect similar improvement next year. And I think, I've said several times, we are and we'll continue to be CapEx light and we're growing our free cash flow faster than our EBITDA. And all of this has resulted in a trailing 12-month free cash flow of over $440 million. So we're very strong in terms of free cash flow generation, and we're going to clearly grow from there. Also, in early 2024, we initiated our net share settlement program offsetting about 40% of gross dilution. And last quarter, as you mentioned, we repurchased $500 million of our stock under our $400 million share repurchase program. So -- and total dilution for Q3 was 130 basis points. That's the lowest dilution we've had in any quarter. So all this is a way of saying, we're very focused on dilution, share buyback, free cash flow. We have a goal of offsetting 100% share dilution over time, and I certainly see line of sight to that. So we'll continue to look at opportunities to expand our business and maximize shareholder value through disciplined capital allocation. And we're investing in all the platform revenue initiatives that Anthony just addressed and talked about, but we're doing so mostly through reallocation of capital. And we'll continue to look at maximizing our ROI as we continue to generate this positive free cash flow. Operator: Our next question comes from Brent Navon with Bank of America. Brent Navon: Just want to look -- in your shareholder letter, you cited progress from third-party DSPs and Roku Ad Manager for advertising. Any way to frame how big each of those businesses are and what their underlying growth rates are? And then just to circle back to the opportunity in '26 for you guys. It seems like you guys are growing 20% organic ex political, ex-ASC 606 and 3Q. Your guide implies somewhat similar to 4Q. It seems like there's a lot of irons in the fire that you just mentioned. Are there offsets that we should also be contemplating or tough comps because it seems like you have momentum in Ad Manager. You have the Amazon DSP ramp, a political year, potential improvements in M&E. So I just want to make sure we're thinking through all the pieces correctly? Anthony Wood: Brent, I think Charlie will answer that question. Charlie Collier: Sure. Why don't I take the DSP portion and Ad Manager portion of the question, then I'll turn it over to Dan. Brent, stepping back, our strategy remains that we want to be open and interoperable and be deeply integrated with all DSPs, so that we can meet clients anywhere they want to transact. So it was totally natural that we would do what you said, which is deepen our integrations across the board. And of course, we announced the Amazon integration as well. And to put it in context, we've added dozens of ad tech partners over the last few years from the Yahoo! DSP or AppLovin Wurl to Magnite on the SSP side. And last year, we really continue to deepen our relationships with each of them. At the heart of your question on third-party DSPs, I think the best comparison is last year, we discussed on these calls quite a bit about our UID integration with -- the Trade Desk and the deepening of our existing relationship with Amazon is very similar to that, that we talked about last year with Trade Desk. So our goal with all these partnerships, Brent, is to drive greater efficiency and performance, and we are very bullish about our position as the open and interoperable partner in a marketplace with so many walled gardens. In terms of ads manager, in the macro, the shift to proof of performance or performance marketing to CTV is a tailwind we love. And we like what we're seeing, but I should say, it's early days. So generally speaking, there's a market push towards automation and more sophisticated proof of performance and Ads Manager, which is our self-service platform. And that and many of the performance innovations we're building to prove that Roku is the most performance CTV platform. All those are providing tailwinds. But it is very early days. We do like what we see. We see new advertisers coming. We see them staying because their Roku campaigns are performing. And in third quarter, approximately 90% of advertisers on Ads Manager were new to Roku, which we very much like as well. Dan, do you want to take the back half of that? Dan Jedda: Yes. Thanks, Charlie, and thanks for the question, Brent. So to answer your question on thoughts on 2026? And are there any offsets, but let me just address Q3 and Q4 for a minute, so -- in Q3, we came in at a very strong 17%, actually, slightly over 17% growth rate. And our guide is at 15% growth rate, inclusive of political and friendly. And if you back out political and friendly for Q3, that number is 19% year-over-year. And if you back out political and friendly for Q4, it's actually a slight step-up from the 19%. So we feel really good on how we're going to finish this year. We're going to finish this year very strong. To your question on 2026, obviously, we'll provide further guidance on 2026 after next quarter. But Anthony just went over, many initiatives. Charlie just touched on many initiatives. You're right. We have a lot of irons in the fire, many of them are launched and working. Some of them are yet to be launched. Anthony talked about the home screen, which we're very excited about and the entire UI, which we're very excited about. We have Ads Manager. We have a lot of new ad products that that are performing well. We have premium subscriptions in our overall subscription business performing very well. And so I would just say, I feel very good about entering 2026. I'm very excited for the year. Operator: Our next question comes from Justin Patterson with KeyBanc. Justin Patterson: Great. Could you expand a little bit more on what this new home screen means for the business? How should we think of it influencing engagement and monetization versus the existing home screen. And then stepping back just around the deeper DSP integrations. There have been a lot of investor questions around just what comes after the DSP integration. So would love to hear about just what other ad product innovation you have going forward? And how you can -- how you think that will help sustain platform revenue growth? Anthony Wood: Justin, this is Anthony. In terms of the new home screen, I would say, first of all, we have a very iconic home screen. It looks different. It feels different. It feels simpler. It is simpler to use than our competitors. We're very proud of that. And it's also a fun, a lot of delight built into our home screen. So an important goal for us is to maintain and improve that. We want to keep it iconic. We want to keep it differentiated. We want to make it more delightful. But we also want to make it more useful. Our current home screen -- I mean, customers love it. It's very useful, but we can make it even more useful. So that's a big goal. So we want to increase customer satisfaction with our home screen, but we also want it to drive more monetization. So there's lots of things that we're testing that testing does show it drives more engagement, increases monetization, whether it's helping get viewers to sign up for more subscriptions or to watch more ad-supported content, those are all important goals or whether it's more promotion. So those are the 2 goals for the business, higher viewer satisfaction, more engagement, more monetization. And testing -- our testing has shown that we're achieving both of those. So we're still testing optimizing. And like I said, we'll hope to roll that out in 2026. And then in terms of DSP integrations, what comes next, I mean, I'll just say, like, we're not done with DSPs like we do integrate with most -- with all the major DSPs. But I still think there's lots of room to continue to deepen those integrations to increase our business, create stronger business relationships with those partners. So we're -- we continue to work on that. And then in terms of ad products, there's a whole suite of ad products under development. I mean, I would say kind of high-level categories. 1 is we're very focused on performance, delivering on -- we already have a platform that is very performant, very measurable focus on performance and targeting. But we're doing things like integrating next-generation generative AI into our ad system to make it even more performance-oriented. So just the overall being by a wide margin, the most performant Connected TV platform, a lot of our ad work is going into that. And then our traditional ad business is brand advertisers, agencies, that's a big and important business for us. But looking at small- and medium-sized businesses, businesses that traditionally advertise on social media are more digital-first type advertisers. Those are big markets, and we're building products to address those markets as well. So I don't -- I think I covered it, but I don't know, Charlie, if you have anything? Charlie Collier: You nailed it. I'll say, Justin, this is Charlie. Really you asked what comes next. I'll tell you what comes before it is equally important, too. If you think about -- Anthony mentioned we're in half the broadband households in the country. Authentication leads everything. I mean, literally all else follows. So if you start to think about the fact that Roku has high fidelity signals, we have an ability to drive results for marketers in authenticated premium content. That's where it starts. And then everything Anthony talked about is exactly right. We're going to continue to refine our integrations with each of these partners. And I think what the best thing is, is we'll drive outcomes for our marketers and be able to actually continue to refine to meet their needs. Dan, I don't know? Dan Jedda: No, I don't have anything except to say that the question was around sustainable revenue on ad product. And I think Charlie and Anthony answer that. We also have a subscription business, which is driving a lot of revenue growth and is, in fact growing faster premium subscriptions is doing exceptionally well. We had a Tier 1 launch last quarter, we'll have more Tier 1 launches in the coming months that we feel very good about. So we have a whole other business in subscriptions that is also growing exceptionally fast and we fully expect that to continue. In addition, to the ad revenue that Charlie and Anthony just discussed. Operator: Our next question comes from Laura Martin with Needham. Laura Martin: My 1 for Anthony is on data. So I understand that all these new revenue streams you're working on used Roku's best-in-class data. Do you have any updated feeling about licensing your best-in-class data to the LLM, which you're spending at Meta $72 billion this year and Gemini at $85 billion this year, and they're running out of data, these LLM, -- so you guys have, I think, revenue stream that is really valuable that you're not utilizing at all? And then for Charlie or Dan. Lots and lots of -- so there's auction density that you're working on. There is subscription revenue you're working on, and you didn't mention shoppable. Is that sort of the order you see in terms of driving upside from these, let's call them, ancillary or newer revenue streams over the 1 to 2 years? First would be getting the sellout rate higher? Second would be the subscription. And then third would be Shopping? Anthony Wood: Laura, thanks for the question. Great to hear from you. On data, I'll just say that, yes, that's right. I mean our first-party data is an extremely important asset. We use it in a lot of ways, we use it. It's what powers our ad -- targeted advertising, it powers our AI behind all our performance marketing. It's how we personalize our home screen, recommend, make recommendations to users. So the primary way we use it is we use it to sell more ads, sell more subscriptions, deliver a better experience for our viewers. But we are -- we do -- we are, I'll just say, always looking for ways to get better monetization out of our data. And I mean, working with LLM is certainly something that we've thought of and are considering, but it's not something that we're doing today, but it's certainly something that we're investigating, I will say. And then there's other -- I mean there's other opportunities to monetize our data as well that we're also looking at. So Charlie, Dan, do you want to take that question? Charlie Collier: Laura, it's Charlie. In terms of the order, I think they're all important. I'll address your shoppable question. We're bullish on Shoppable, and it's one of those opportunities that I think is early but working from some original programming where we've integrated product and made the products in the show Shoppable to the far larger opportunity, which is to teach America how to shop on TV. I think Roku will be the best place to do that simply because of our scale. But in terms of behavior, I think it is slightly early days. We do see, obviously, great performance metrics across our platform and certainly with some of our ads, including our Shoppable ads, but it wasn't mentioned because it's early days not because we don't have great interest in pursuing it. And we have lots of partners, who are working with us on that. Operator: Our next question comes from Michael Nathanson with MoffettNathanson. Michael Nathanson: I have 2, Charlie, Dan. Charlie, as more and more sports content moves to streaming, it feels like you guys have a major opportunity here with sports experiences. Can you talk a bit about what you're seeing to date? Is it driving revenue growth? And then longer term, do you envision at a time, when I can actually watch all my sports in 1 experience zone, right? So instead of going to different apps, can I just have 1 centralized aggregation place to watch my sports, that's for you. And then for Dan, I just want to confirm, you said distribution revenues are growing faster than advertising and you had 1 new launch. But I think we had both Fox and ESPN launched in the quarter. So is there a timing issue because those are the 2 major launches? Just want to confirm that. Charlie Collier: Michael, it's Charlie. Good to hear from you. Look, the fact that every NFL game is now available in streaming is nothing but a tailwind for Roku, which again represents half the broadband households in the country. We have tremendous opportunities with sports for a number of reasons. #1, if you think about it, and we talk a lot about being the lead into television. And when the last Olympics came, we took great pride in being the fact that we were the front door to everything you wanted to experience and we help drive that with NBC as our partners, and we'll do the same for the World Cup that's coming and other opportunities because, frankly, in -- Anthony talked about simplicity of the home screen, the simplicity and delight of us getting people to what they want to watch, especially their favorite sporting experiences through our destinations like the sports zone, I think we're really just scratching the surface of what that can be. And as a sports fan myself, you see in Major League Baseball, how your team travels from site to site and we -- or excuse me, from app to app throughout the very same week. And of course, the sports experiences we create, make that really simple. So it's a long-term vision of having a time where you can watch them all in 1 place. I think -- that is a vision every sports fan would like. You know well the reality of these rights fees and how they are ending up behind paywalls. But I will say, regardless of how it settles out, the best experience for watching sports will be on Roku, and we're really refining the way to help sports fans operate in a confusing landscape. Dan, do you want to take the back half? Dan Jedda: Yes. Thanks, Charlie. The short answer to your question is no, it's not a timing issue with revenue associated with FOX and ESPN. We would have -- you back out any partner launch, you back out M&E we're still growing incredibly fast, faster than the market. It's not a timing issue. Michael Nathanson: Faster than advertising. Dan Jedda: Yes. Anthony Wood: This is Anthony. I'll just add. Look, on the sports thing, I mean, Charlie answered that, but just to be super clear, it's a big opportunity for us, the fact that sports is and will continue to be fragmented across a lot of apps is a big opportunity for us with products like our sports zone to create a simplified experience that allows viewers to find the sports they want to watch. So it's an area that we're focused on. It's also an opportunity for marketing and promotions and advertising and sponsorships as well. Operator: Our next question comes from Vasily Karasyov with Cannonball Research. Vasily Karasyov: Dan, I have a question for you. Now that we have had a few quarters in a row of very steady growth in platform revenue. And you just outlined -- you and Anthony and Charlie outlined the growth drivers for the years ahead. Can you help us think in terms of ARPU growth, given where your user base is growing and the platform revenue growth is that -- if I were to think sort of in the ballpark terms, would ARPU grow at double the rate of the platform revenue growth in the midterm, just if you could help us dimensionalize that trajectory would be really great. Dan Jedda: Thanks for the question, Vasily. It's a good question. And I would say several years ago, I know we had an ARPU when we actually had that KOM is roughly flat. And we talked a lot of mix. I will say that -- in the U.S. and globally, platform revenue continues to grow. That's -- we've talked about the overall platform revenue growth of 17%. The guide is at 15%, we are growing our streaming households as well. We've grown them well internationally. We've grown them in the U.S. They continue to grow in the U.S., but overall ARPU is growing I expect that to continue. I think I mentioned in a prior call at some point, like I truly believe our ARPU can get a significantly higher with all of our monetization initiatives. And while we will grow streaming households, like I strongly believe we'll hit 100 million streaming households and in 2026, our ARPU is going to grow faster because our platform revenue initiatives are simply going to grow faster. So it is a good story on both U.S. and international ARPU. Vasily Karasyov: I'm sorry, you said faster, faster than the active accounts growth or then the platform revenue growth? Dan Jedda: It's going to depend on the country. I will say that -- the U.S. is -- we're growing both the numerator and the denominator of the -- of that equation. But because of the platform revenue growth -- because of our constant -- as we said, we're going to continue to grow double digits and again, 17% growth in Q3 is very steady. I do believe ARPU will grow. And I think the more important point is I think our ARPU can go up significantly higher from where it is per account or per streaming household today. Again, we're going to continue to grow streaming households, but ARPU is going to grow fast. Operator: Our next question comes from James Heaney with Jefferies. James Heaney: I know, it's been under pressure for a while now, but is there anything you can say about M&E vertical this quarter and in Q4? And separately, how do you think about the consolidation in the media industry and how that potentially can influence your position as a distribution partner for streamers? And then I had a follow-up. Anthony Wood: James, this is Anthony. I'll take the second question on consolidation first and then turn it over to Charlie for -- to discuss M&E. I guess I would just say that as we said many times in the U.S., more than half of broadband households use a Roku to watch television. That means half of all streaming -- TV streaming happens on our platform. And that, of course, means that we're an essential partner to every content owner and streaming service. And I don't -- however, whatever consolidation happens in the industry, that's not going to change. I mean, we're going to remain an essential partner. The streaming sector is robust. It's growing. It continues to grow nicely. And I think that, that's just creating a lot of opportunities for us to continue to grow our business. And then on M&E, Charlie. Charlie Collier: Sure. Yes, I think that's right. It is easy to see, obviously, that the M&E industry is still figuring itself out as a whole, I'd say how many companies are still focused on profitability. And as such, there remains some general challenges in CTV. Our advertising business is doing remarkably well despite some of those headwinds. We got some benefit from the new launches this quarter, but the industry remains pressured. So inside M&E for us, there is quite a bit of good news. The theatrical side of M&E as a category is really starting to perform. And we're seeing those advertisers invest in the benefits of some of our unique units like our custom home screen takeovers and the video in our marquee unit, which has been very popular. I'll say, James, we have been focused on both diversifying and growing our platform business. And today, we're less reliant on any 1 vertical than we've ever been, including M&E and because we're so big, we're in half the U.S. broadband households, we do remain the best place to spend on M&E to attract and engage and retain subscribers and to measure ROI. So while we're not relying on M&E to drive our growth improvement in the industry at any time will represent upside for us. And when -- and if the segment really rebounds, it will be a tailwind for us because we're really good at building the M&E business, and we -- I believe we're the best place for an M&E advertiser to invest their dollars. James Heaney: Great. And then maybe just a quick follow-up on just overall macro environment in the quarter and so far in Q4, like anything stand out that's been particularly strong or weak anything on the call out there, maybe for Dan. Dan Jedda: I think -- well, maybe Charlie wants to take the top of the macro environment as it relates to ads and then I can talk a little bit after Charlie. Charlie, do you want to take that one. Charlie Collier: Sure. Thanks, Dan. James, I like what we're seeing trend-wise. I really do. And Roku has some unique attributes that allow us to take advantage of today's ad trends. I think that's equally important. One of them is you got to remember that as a platform, Roku, and I said it earlier, is the lead into all of television, and that comes with some real advantages in this market. Also, we've been diversifying demand across our platform and our streaming service, and we built programmatic excellence and numerous third-party relationships that allow us to meet our clients as I say, wherever they wish to transact. So Roku's seen the benefit of the market as a platform and as a publisher. If you think about it, I want to say publisher, I mean an owner and operator of the Roku Channel, which -- you look at the Nielsen Gauge, we're a top 5 streaming service and on our own platform, we're #2 in terms of engagement in the U.S. So as a platform, the value of our home screen engagement has allowed us to benefit from our ad product evolution, among other things. An example of this is, like I said, our marquee ad unit, which is now very popular and it's now a video unit. That's been great. And in terms of diversifying demand and the programmatic excellence I just mentioned, we're seeing positive impact of both heading into fourth quarter and moving forward. Actually, Dan mentioned, our platform revenue grew 17% year-on-year that's due in part to strong performance in video advertising. And of course, that means we're growing faster than the U.S. OTT and digital ad marketplaces. And then if you look at that ex-political and ex-friendly third quarter platform revenue grew 19% year-on-year. So to answer your question, James, the trends are positive, and Roku is really uniquely positioned as both the platform and a leading streaming service to compound the value of these market trends. Dan, did you want to... Dan Jedda: The only thing I would add, I think on upfront pricing, Charlie. Like I think I'll just say that the 1 trend going into Q4 is we're pretty happy with our upfront in terms of pricing. Maybe you want to touch base on that as a trend because I think that is a change. Charlie Collier: Yes. So you're right, with October comes to the new upfront schedule starting to run, not only do we have a really powerful upfront, but we saw pricing stability. And I -- if you want me to go deeper on pricing, it's really interesting how pricing affects different services in different ways. And the headline, I suppose I'd leave with, Dan, is that we have multiple levers to pull, and that's consistent with what I just said. And on pricing, we don't have a supply issue so we can price up and down a demand curve and use that to our advantage. So we're doing really well, both in volume and I think our pricing approach really is distinct in this market. Dan Jedda: Yes, exactly. So pricing is positive for us in Q4, at least as part of our upfront, which is different than last upfront. So that's a good positive trend for us. In terms of other trends, like our guidance that we provided, which was roughly 15% per platform, and again, backing out political and friendly, it's above the Q3 growth rate of 19%. It actually implies 20% growth on an ex-political ex-friendly basis. Just would imply that a lot of the trends that we're seeing in Q3, we expect to continue. And again, it is advertising, for sure, on everything Charlie just said, but it's also our subscriptions business, which is performing incredibly strong, including our premium subscription business, which is growing very well. Operator: Our next question comes from Ross Walthall with Cleveland Research Company. Ross Walthall: I just wanted to ask a little more detail on the Amazon DSP partnership. I know it's early days, but can you talk to you what the rollout looks like from here? Any customer feedback and whether this could be a material driver going into either Q4 of '26? Anthony Wood: Ross, this is Anthony. I'll start. I don't know if Charlie will have anything to add. But I'll just say that, as you said, it's still early on the Amazon. I mean it's live now, but it's just basically gone live recently. So I would say there's strong interest from customers. I mean there's a lot of customers that are very interested in using the Amazon DSP. And we're obviously a key partner for them in that. There's a lot of customers, obviously, that want to use Trade Desk, but also these days, also Amazon. So I'd say there's strong -- there is strong customer interest. The signs we're seeing so far are good, but it's just a little early to say. I don't know beyond that, Charlie, did you -- is there anything else or... Charlie Collier: I think you did -- you mentioned Trade Desk. You saw in the Trade Desk integration last year, it takes some time to roll out. But I like what we're seeing so far. We're seeing clients ask us the right questions about how to use it. We know there's a general push towards outcome-based buying and measurement of performance and our strategy to be everywhere, including now Amazon at depth has us in a good position. And I do think it will ramp well into '26. Anthony Wood: And then I don't know, Dan, do you want to same thing on Q4 '26? Dan Jedda: No. I guess I would just say that I'm going to reiterate both Anthony and Charlie's point is we just turned it on the first of this month here. We're in very, very early days. We like what we see. It is contemplated in our Q4 guide. And we're going to have a lot more visibility as we exit the year and go into 2026, and we'll update you at that point in time. Ross Walthall: That's great. One other question on the self-serve business. Do you think you have the right tech and partnerships in place to really scale this, like are all the pieces in place? Or are there like additional capabilities or partnerships that you need to add? And just ultimately, like where can this business go long term? Anthony Wood: So this is Anthony. I'll start and then see if Charlie has anything to add. I mean I think that -- I mean it's -- so the short answer is, yes. We have everything we need. We've got the partnerships we need, but it's also early in the evolution of this business. So we'll be -- we're still investing in R&D. We're still building more partnerships. I mean we have our own self-serve platform called Ad Manager but there are other businesses that are doing something similar and we're working with those companies as well. We're not wedded to our -- just using our own platform for this -- to serve this market. I mean it's a big market. And it's a large market. It's a market that's multibillion dollars, it's as large as -- it's almost as large as the traditional brand advertising business. So it's a big business. And I mean, the other thing we're really focused on is integrating generative AI into our platform to do an even better job on targeting and performance-based marketing. So I think that there's nothing that we're missing, but there's a lot more evolution and growth to come. But Charlie, I don't know, if you want to add? Charlie Collier: Yes. That's right. We have everything we need, and we're going deeper. I mean, it's so funny. We talk about deepening these integrations. We continue to do the same with our own products and look for ways to refine and improve more and more performance. One thing that's unique about our product, obviously, is that these small and medium-sized businesses will now have access to authenticated premium content. And so, when they see that they're able to, we said in the early days, democratize television and access our platform, I think we have a really compelling and differentiated offering. And of course, because we have the scale that we do we're going to perform really well. And what's great about these platforms, which is different than our traditional business is that when we improve ROI, people will leave it on as long as there's a positive return. So I like these advertisers. I like how many new advertisers are coming to the platform, and I think there's a lot of opportunity ahead that we're poised for. Anthony Wood: Yes. And I'll just add. I mean, I think it's kind of -- it's probably evident self-evident, but -- this is a large business that exists in -- like it's what caused the growth of social media platforms in terms of their advertising business. What's unlocked for platforms like for Roku is basically generative AI that allows a business to create a video ad for free basically with a single click of a button, producing a very high quality, high production value professional-looking video ad. And so that now makes video platform like Roku as easy to use as a social media platform for performance marketing. Operator: Our next question comes from Robert Coolbrith with Evercore ISI. Robert Coolbrith: 2 questions, please. First, on performance, I wanted to ask maybe about some of the advantages that you may have to sort of deliver on that, the platform player, your ability to provide feedback loops or certain types of consumer interactions with ads on your platform. And then also I wanted to ask sort of related to that as well, your ability or your interest level in perhaps launching new pricing models like cost per action or something along those lines? And then second, I just wanted to quickly touch on the streaming hours. It looks like you had a bit of a deceleration there. I wanted to just ask, if there were any comp factors or anything else to be aware of on that? Anthony Wood: Okay. So just on performance, let me start and maybe Dan will have something to say. So I think the advantages of our platform include extremely large scale, a lot of first-party data on a very advanced technology platform, including a lot of AI. So like these are the things, these are the key -- a user experience that has a lot of places to promote and place ads as well as video ads. So I mean these are the things that are sort of the base capabilities that we build our performance on top of. So -- and I think we're unique in our scale and the amount of data that we have and we have a world-class, I would say, probably the best TV engineering team in the world. So we have all the pieces and we're putting them together. In terms of our interest in new pricing models, I don't know, Charlie, do you want to take that one? Charlie Collier: Well, the answer is you were asking about CPA. I think that performance is in the eye of the beholder, right? And you have some large packaged goods company, who just want to see incremental reach. And then you've got some other businesses who have a very specific KPI, and we can help them reach all of them. It's interesting. When I step back I think about the use cases we can meet and there are many. But ultimately, they all sort of fit into 1 of 3 buckets, which is planning or activation or measurement and we've got tools and we have Roku Data Cloud and all sorts of other ways to help people maximize the efficacy of their media across the largest streaming platform in America. And so the answer to your question is directionally, absolutely, we will meet people not just where they want to transact, but we'll start to prove ROI in deeper and deeper ways. And then our platform in terms of the ads manager platform will really make it easy for them to do so and continue to see a return on their investment. In terms of streaming hours do you? Dan Jedda: Yes, I'll take that one. On streaming hours, it was a slight decel from prior quarters, but really, there's nothing there from a monetization standpoint. What you're just seeing is -- these numbers are just getting very large. And so we still are growing well into the double digits in streaming hours. I think it's also really important to note that here see streaming hours and monetizable hours, which is something I look at across the platform is actually growing very well, and we're actually gaining traction not in terms of acceleration of percentage hours, but any -- the TRC continues to be the #2 app on our platform by streaming hours. And it's actually -- it's gaining ground from other apps in that perspective. So -- nothing on streaming hours is concerning in any way. It's just very, very large numbers, hundreds of billions of hours that are being streamed here. So the decel from quarter-on-quarter is nothing that is of any concern and in fact, like I said, monetizable hours, especially with our premium subscription growth and our TRC growth as it continues to do very well and it's very strong. Charlie Collier: Yes. As a head of ad monetization, it is a nonissue. I -- this is Charlie. I think it's actually -- we have what we need to come to market, and we're maximizing that inventory opportunity. Operator: Our next question comes from Alan Gould with Loop Capital. Alan Gould: I've got 2, please. First, on the Amazon, just 1 quick follow-up. What are the key features and functionality that Amazon provides at the other DSPs in addition to diversification is the key issue there, the frequency capping. And then for Dan, when I look at 3Q and 4Q platform, growth and you back out friendly and political. If you were to also back out ASC 606, would the numbers be north of 20% and would 4Q still be growing quicker than 3Q? Anthony Wood: Alan, Charlie will take your first question and then Dan will take your second. Charlie Collier: Great. Thanks, Alan, for the question. Look, the easiest way to talk about it probably is that we're powering audience addressability, frequency management and closed-loop measurement. As I said, we actually, again, tend not to advise a client on which DSP to use. We actually are everywhere they want to be, and we -- we're very proud of this Amazon deal. But at the highest level, that's what we're working on with that DSP integration. Dan, you want... Dan Jedda: To your question. Sorry, I'll take the second part of your question. You're right, it would be slightly north of 20%. Actually, it's slightly north of 20% just ex-ASC 606 -- ex-political and friendly for Q4, it would be closer to 21% on an ex-ASC 606 basis. And yes, you would still see that slight step-up on ASC 606 basis. And again, that's ASC 606, just to be clear, that ASC 606 from 2024 we have not booked any ASC 606 in 2025, nor do I expect to. Operator: That concludes today's question-and-answer session. I'd like to turn the call back to Anthony Wood for closing remarks. Anthony Wood: All right. Well, I want to say thank you to our employees, customers, advertisers and content partners, and thank you for listening. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Riot Platforms Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please also be advised that today's call is being recorded. I would now like to hand the conference call over to Josh Kane, Vice President of Investor Relations at Riot Platforms. Please go ahead. Joshua Kane: Thank you, operator. Good afternoon, and welcome to Riot Platforms Third Quarter Earnings Conference Call. My name is Josh Kane, Vice President of Investor Relations. And joining me on today's call from Riot are Jason Les, CEO; Benjamin Yee, Executive Chairman; Colin Yee, CFO; and Jason Chung, EVP and Head of Corporate Development and Strategy. On the Riot Investor Relations website, you can find our third quarter earnings press release and accompanying earnings presentation, which are intended to supplement today's prepared remarks and which include a discussion of certain non-GAAP items. Non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP and are included as additional clarifying items to aid investors in further understanding the company's third quarter performance. During today's call, we will be making forward-looking statements regarding potential future events. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties. Actual results could materially differ due to factors discussed in today's earnings press release, in comments and responses made during today's call and in the Risk Factors section of our Form 10-K and Forms 10-Q, including for the 3 months ended September 30, 2025, which will be filed later today as well as other filings with the Securities and Exchange Commission. With that, I will turn the call over to Jason Les, CEO of Riot Platforms. Jason Les: Thank you, Josh. Riot is in the process of transforming into one of the most meaningful data center developers and operators in the market today. The demand for data center capacity is insatiable and growing, and our unmatched portfolio of large-scale land and power assets positions us to significantly capitalize on this opportunity. I am incredibly excited to announce the completion of several key milestones and additional ongoing strategic initiatives, which we are currently undertaking as part of the development of our data center business and more broadly as part of the ongoing transformation of Riot. In particular, I am proud to announce today that we are initiating the Core & Shell development of the first 2 buildings at our Corsicana data center campus, representing a combined 112 megawatts of critical IT data center capacity. We have already been securing long lead equipment and plan to mobilize construction of these 2 buildings beginning in Q1 2026. This announcement has been enabled by 4 key achievements this quarter. During the quarter, Riot acquired an additional 67 acres of land directly adjacent to our original Corsicana site, greatly simplifying the development of our full 1 gigawatt of approved power capacity and enabling the completion of our campus design at Corsicana, completed the campus design for Corsicana with a plan to transform the entire site into a 1 gigawatt utility load data center campus, completed the basis of design for our standard data center build, which has deepened our technical engagement with hyperscaler, neocloud and enterprise customers and continue to build out our in-house data center expertise with veteran data center sales, design, engineering and construction talent. These achievements further advance the ongoing process of transforming Riot into a large-scale, multifaceted data center enterprise. We are investing in building out our data center business in order to enhance our conversations with prospective tenants and leverage competitive tension in our leasing process, all with a view towards maximizing the value generated from our portfolio of land and power assets. We are announcing this development of 112 megawatts of critical IT capacity as just an initial milestone in our development pipeline, which consists of nearly 2 gigawatts of secured utility load power, and we will continue to announce further development plans as we progress on our strategy and advance further on customer discussions. Riot is transforming into one of the most meaningful data center companies at the center of the Fourth Industrial Revolution. We have a significant portfolio of readily available power, an incredibly strong balance sheet and the world-class talent necessary to deliver on our plans. The demand for data center capacity has never been more robust. And on behalf of all of our shareholders, we are incredibly excited to be executing on the enormous value creation opportunity in front of us. Riot has a tremendous advantage today in our unmatched portfolio of fully approved power and land located within highly desirable data center markets. We have made significant progress in establishing our data center business, which serves as the foundation not only for maximizing the value of our power portfolio today, but from which we will also continue to scale and capitalize on new opportunities. Over the course of this year, we have completed third-party expert assessments of our 2 primary sites, Corsicana and Rockdale. Added data center and real estate development experience to our Board of Directors and engaged financial advisers to assist on discussions with strategic and financial partners and on the broader leasing negotiation process. Most recently, I am pleased to announce we have completed the basis of design for our data centers. Completion of this basis of design has enabled us to deepen our engagement in technical and engineering level outreach with potential tenants, begin procurement of necessary long lead time equipment and begin construction on our first 2 buildings. We will provide additional information on our basis of design later on today's call. We have also further progressed on the ongoing infrastructure development at Corsicana, including the 600-megawatt substation expansion, where the first 400-megawatt auto transformer of this expansion development is now on site being installed and remains on track for energization in Q1 next year and the Core & Shell development of the first 2 buildings of our Phase 1 development plan, which will allow us to deliver full build-to-suit data centers in 2027. On the hiring front, the build-out of our data center team has continued at an aggressive pace. We have in place key leadership across product development, construction, engineering, sales and marketing, which has allowed us to complete the basis of design and rapidly move towards initiating construction. We will continue to build on this momentum by adding additional positions that underpin our data center business and support future leasing, operational and growth targets. We have made substantial progress on our design program, which will support Corsicana and other sites and have completed a standardized data center basis of design that meets Tier 3 resiliency and efficiency expectations for prospective tenants in the market. Advancing our basis of design is critical as we engage prospective tenants on specifications and customization. Our design philosophy emphasizes flexibility to address the needs of a range of potential customers and use cases. That flexibility includes multiple building formats, including single, 2- and 3-story configurations in order to maximize campus capacity. In addition, our design is centered around a 7 module or 7 mod format. With this format, we are standardizing around a 7 plus 1 component design, 7 components plus 1 additional component of redundancy. Our basis of design can easily be adapted to the requirements of any tenant. Each 7 mod is a data hall representing 14 megawatts of critical IT load capacity, and there are two 7 mods per floor totaling 28 IT megawatts per floor. Therefore, a 2-story building will have four 7 mod data halls, 2 per floor, representing 56 IT megawatts and a 3-story building will have six 7 mod data halls representing 84 IT megawatts. We are confident that this sits within the range of tenants desired topography and allows us to easily adapt to each of the requirements. If a tenant wants more redundancy, we can easily build that in and vice versa. Riot's basis of design establishes the foundation for our data center development and has been designed in a manner that is intentionally replicable beyond Corsicana, enabling faster, more efficient equipment procurement and delivery on future development in order to quickly seize upon any market opportunities going forward. One of the most important differentiators we are developing at Riot is the assembly of an industry-leading in-house data center team with expertise across design, engineering, sales, procurement, construction, operations, marketing and administration. As highlighted here, our growing team brings deep, directly relevant experience in building and delivering mission-critical data centers. We have in place the team to deliver on our first phase of construction and development with collective experience completing over 200 data center projects, totaling nearly 5 gigawatts of capacity. Data center development talent is in high demand, and we are incredibly proud of the depth of capabilities and experience that we have already been able to attract to Riot. The quality of the data center team we already have in place today is a critical advantage in ensuring that potential tenants and partners are confident in our ability to deliver at scale. These internal data center team capabilities are further reinforced by our engineering business, comprised of ESS Metron and E4A Solutions, which provides integrated manufacturing, commissioning and maintenance expertise. These complementary units create meaningful synergies and strengthen our ability to rapidly execute on an expanding data center development program. In September, we successfully acquired a collection of parcels that total 67 acres contiguous with our original Corsicana site for total consideration of $40 million. Early on, Riot identified this plot of land as the most ideal site for immediate development of our data centers, and I am excited to share an update on what this acquisition has enabled for us. The new parcels proximity to our Corsicana site enables rapid development as it is immediately adjacent to our existing site and therefore, will not require additional easements or transmission construction, which could potentially have extended delivery time lines. The ideal condition, gradient and location of this new parcel will allow us to quickly begin development and strengthen confidence in our delivery time lines. Most importantly, the additional acreage we now own next to our existing Corsicana site ensures the ability to completely utilize our 1 gigawatt of fully approved power on Riot owned land for data center use, all in a connected campus layout. Together with the previous land acquisitions announced last quarter, Riot now owns 925 acres surrounding the Corsicana area, securing long-term development flexibility and fully completes all necessary land acquisitions for potential build-outs. Our now expanded footprint at Corsicana has allowed us to complete our campus design for the entire site, which we envision taking place across 2 development phases. Development of Phase 1 will encompass 504 megawatts of critical IT load, consisting of six 56-megawatt buildings and two 84-megawatt buildings spread across both the excess developable acreage on our original Corsicana site as well as on our newly acquired immediately adjacent parcel. As previously announced, Core & Shell development on buildings 1 and 2 has already been initiated, and we anticipate the first building to be completed in Q1 2027. The overall pace of development in Phase 1 will be driven by tenant commitments and leasing progress, and we are sequencing capital expenditures to maximize power to value conversion. Phase 2 will be comprised of three 56-megawatt buildings, representing 168 megawatts of critical IT load and over time, will eventually supplant our existing Bitcoin mining data centers. The completion of our data center designs has enabled us to take the next steps on delivering full build-to-suit Tier 3 data centers. With our initiation of the development phase of our first two 56-megawatt buildings at our Corsicana site, we will begin construction in Q1 2026 on the Core & Shell of the first 2 buildings. The Core & Shell construction will consist of a build-out and enclosure of the main structure of the data center, generator buildings and completed power yards, an open interior with operational elevators, docks, logistics areas, lighting, fire protection and security. It will also include the first steps on electrical, plumbing and HVAC infrastructure, which will support full data center build-out and tenant fit-out. Construction of Core & Shell buildings will be completed in phases with the first building expected to be completed in Q1 2027 and will be followed by full fit-out of the data hall with IT equipment, cooling and power delivery systems. The first phase of construction of the Core & Shell is the most time-intensive but capital-light portion of the build-out with total expected development cost of $214 million, representing approximately $1.9 million per IT megawatt for the first 2 buildings. Initiating construction on this time line, coupled with procurement of long lead time equipment allows us to provide certainty during leasing discussions of our forecasted energization in 2027. As we progress further in leasing discussions, we will provide cost estimates and time lines on the build-out and delivery of the complete and full build-to-suit of the first two 56-megawatt data centers. Riot has long focused on maintaining 3 strategic pillars in relation to our Bitcoin mining business, significant scale of operations, being a low-cost producer and maintaining a strong balance sheet. These strategic pillars formed the foundation of Riot's vertically integrated approach to Bitcoin mining and the development of a unique portfolio of large-scale powered sites supported with significant cash and Bitcoin on hand. As our strategy has evolved, so has our approach to our Bitcoin mining business. We no longer see Bitcoin mining operations as the end goal, but instead as a means to an end, and that end is maximizing the value of our megawatts. Over time, this means transitioning the megawatts in our power portfolio for data center development. Ready-for-service power in the right locations is increasingly scarce and valuable, which in turn forms the basis for the enormous value creation opportunity ahead of us. Monetizing megawatts is how we translate that advantage directly into shareholder value. Bitcoin mining continues to be a very valuable tool to monetize Riot's large-scale portfolio of power, and our Bitcoin mining business continues to be highly profitable. We will continue to utilize the opportunity Bitcoin mining brings to secure power and drive strong cash flow that we will leverage to support the ongoing transformation of our overall business. We just discussed our Power First strategy, which underpins the evolution of our business. On Slide 15, we wanted to provide some context on the underlying significant size and scale of Riot's power portfolio. While many peers reference pipelines of prospective projects, Riot's portfolio totaling more than 1.8 gigawatts is fully approved and available today. This positions Riot as having one of the largest data center power portfolios in North America. It's also important to consider location. This slide presents total megawatts, but not all megawatts are the same. Approximately 1.7 gigawatts of our total capacity is located in the Dallas and Austin regions, 2 of the most attractive data center markets in the country, offering compelling proximity to existing hyperscaler and enterprise core architecture and tenant demand. On Slide 16, we show enterprise value per megawatt across selected peers in the Bitcoin mining space. We view this as a useful lens on how the market values power portfolios today. Some of the companies to the left of Riot have announced lease arrangements and have seen their valuation multiples rerate significantly. Riot currently trades at a meaningful discount to this peer set despite having one of the largest fully approved and readily available power portfolios in the industry. As we execute our data center strategy and convert megawatts into contracted data center leases, we anticipate the market will increasingly reevaluate the underlying value of our power portfolio from a data center lens, leading to a re-rating and multiple expansion on our valuation as well. More broadly, as the market matures, we expect investors will increasingly differentiate on the quality of power, meaning location, cost of power, schedule certainty and interconnection and on the credit quality and profitability of underlying projects and leases. Our plan is focused on delivering against these dimensions. I will now turn the call over to Colin Yee, CFO, to present our third quarter financial update. Colin Yee: Thank you, Jason. For the third quarter of 2025, Riot reported total revenue, which consists of Bitcoin mining and engineering revenue of $180.2 million as compared to $153 million for the previous quarter, an 18% increase quarter-over-quarter. Net income for the third quarter equaled $104.5 million or $0.26 per fully diluted share compared to net income of $219.5 million or $0.58 per fully diluted share for the prior quarter. Non-GAAP adjusted EBITDA for the third quarter was $197.2 million as compared to non-GAAP adjusted EBITDA of $495.3 million for the prior quarter. During the third quarter, Riot produced 1,406 Bitcoin as compared to 1,426 Bitcoin in the prior quarter. The slight decline in Bitcoin production quarter-over-quarter was driven by growth in the global hash rate of approximately 8%, which exceeded Riot's growth in hash rate deployed of approximately 3%, though partially offset by continued improvements in our operating efficiency and utilization rate, which reached 86% this quarter. This improvement in our utilization rate in the third quarter was achieved despite more active employment of our power strategy in the third quarter, during which we successfully generated $31 million in power credits, lowering our net cost of power to $0.032 per kilowatt hour and further solidifying our position as a low-cost leader in the sector. Riot ended the third quarter holding 19,287 Bitcoin with a market value at the end of the quarter equal to $2.2 billion. I will now turn the call over to Jason Chung, Riot's EVP of Corporate Development and Strategy. Jason Chung: Thank you, Colin. During the third quarter, the benefits of Riot's large-scale, efficient Bitcoin mining operations and our unique power strategy were all clearly demonstrated in the overall profitability profile of our Bitcoin mining business. The highlighted column in green provides a step-by-step walk-through of the key profitability drivers of our operations in the third quarter of 2025. Top line revenue drivers for our Bitcoin mining business include the average global network hash rate, Riot's average operating hash rate, average network hash price and our total Bitcoin production for the quarter, which when taken together, resulted in a reported third quarter Bitcoin mining revenue of $160.8 million. Total direct cost per Bitcoin for the third quarter was $46,324 and when applied to the 1,406 Bitcoin we produced during the quarter, results in a reported Bitcoin mining gross profit of $95.7 million or 59% on a gross profit margin basis. Total Riot SG&A for the third quarter equaled $69.8 million, of which noncash stock-based compensation expense represented $32.9 million, resulting in total Riot cash SG&A of $37 million this quarter. Total Riot cash SG&A also included $7.5 million in temporary litigation-related costs and advisory fees as well as costs associated with our engineering business. By breaking out our total cash and noncash SG&A, our intention is to give investors as much insight as possible into the underlying value of our key operating segments. Our Bitcoin mining and engineering operations demonstrated incredibly strong profitability this quarter. And going forward, we will continue to leverage the significant cash flows being generated from our efficient scaled operations to support the ongoing rapid development of our data center platform. Our engineering business is a core asset that uniquely differentiates Riot as we scale into large-scale data center development. In an environment where long-lead electrical infrastructure represents a major constraint to development, owning the manufacturing set from end-to-end creates powerful strategic advantages for Riot. Built through the acquisitions of ESS Metron in December 2021 and E4A Solutions late last year, our engineering capabilities combine manufacturing, engineering design and servicing into a vertically integrated platform predominantly focused on data center-grade power systems. Delivery times in the market for key components have extended, but by directly owning and coordinating these capabilities within Riot, we benefit from direct control over the development of long lead critical items, deep supply chain visibility, longer equipment life cycles and resulting lower total cost of ownership and significant total CapEx savings for Riot. Wall Street analysts have cited low and medium voltage switchgear as among the most supply-constrained items for data center development, which our engineering business is a leading provider of. By internalizing these development capabilities, we are able to meaningfully derisk the most constrained elements of the development cycle. This not only lowers unit costs, but also protects time lines, ensures design quality and enables predictable on-time development. These synergies translate into directly measurable value and derisk the transition of our megawatts into value-creating data center development. Since our acquisition of ESS Metron, Riot has realized approximately $23 million in cumulative CapEx savings on equipment purchases to date, and we anticipate ongoing savings and logistical benefits to scale alongside growth in our data center operations. Riot's operating model continues to scale efficiently. And as the scale of our operations has grown, we are seeing the results of the work we have been putting in to proportionately reduce SG&A and realize a more durable cost structure as we transition to developing data centers. SG&A has remained relatively flat over the past 4 quarters, while our revenues have grown by more than 110% year-over-year, demonstrating the significant economies of scale that Riot now enjoys. This reduction in proportionate SG&A has been built on 3 key pillars, each implemented over the last several quarters and which are becoming increasingly visible in our financial results. Number one, Rhodium settlement and asset acquisition. In the prior quarter, we successfully settled this legacy hosting contract, which previously led to ongoing losses and litigation costs. The settlement of litigation and asset acquisition reduced legal costs and eliminate future drag on earnings. Number two, reduction in stock-based compensation. We have previously highlighted the accounting impact from the onetime special awards granted in 2024. Noncash charges associated with this onetime grant of approximately $25 million per quarter will drop to approximately $8 million in Q3 2026 and thereafter roll off entirely, significantly reducing noncash stock-based compensation expense. Number three, increasingly disciplined internal budget process. We have enhanced our accountability-based budgeting and tracking system throughout Riot. Teams now operate against more clear targets with monthly variance reviews, driving greater predictability in run rate SG&A, inter-department coordination and a continuous improvement cycle, which will be critical as we onboard new hires and systems in support of our data center business development. Together, the impact is visible in our Q3 results. Revenue increased to approximately $180 million, up 18% quarter-over-quarter, while total SG&A came down and also improved significantly on a proportionate basis. Importantly, we are pairing cost discipline with selective hiring in core areas where hiring is directly tied to expanding our data center development capabilities. We are simplifying our cost base, reducing nonrecurring drags on earnings and have dramatically improved run rate visibility. The result is a structurally leaner organization that can scale data center development with greater operating leverage and stronger earnings quality over time. I'll now turn it back over to Jason Les for closing remarks. Jason Les: Thank you, Jason Chung. Riot is in an incredibly advantageous position today because of our industry-wide unique combination of significant scale of readily available power capacity in key high-demand jurisdictions, experienced credible data center leadership and development capability, strong balance sheet underpinned by more than 19,000 Bitcoin and $400 million in cash on hand and significant access to the capital markets, large-scale, efficient Bitcoin mining operations, generating hundreds of millions of dollars in revenues and cash flows, which will support the growth of our data center business and battle-hardened and experienced management and operations teams. With this framework and these strengths in place, our mission is clear. Riot will maximize value across our entire power portfolio with a view to ensuring full utilization of our available power capacity and pipeline, leaving no stranded power capacity behind, progressively shift power capacity towards data centers, strategically expand our power assets, utilizing Bitcoin mining where advantageous and increase our shareholders' exposure to value-accreting assets. We are strategically positioned at the confluence of surging compute demand and constraints on availability of power, offering compelling potential for shareholder value creation. We will now open the call up for questions. Operator? Operator: [Operator Instructions]. Our first question comes from John Todaro with Needham. John Todaro: Congrats on all the progress, guys, especially at Corsicana. Great to see. Obviously, there's been a number of leases now signed in the space. Can you just give us an update, in particular, on the discussions you're having with potential tenants for those first few builds and what you need to do from here to get a finalized lease? And then I have a follow-up question. Jason Les: Sure. thank you for that question. Now what -- I can't comment specifically on any ongoing discussions. But what I will say is that we are incredibly encouraged by our current position in the market. Of course, it's no secret that there's this explosion in AI going on. And alongside with that, demand for power is insatiable, and it keeps growing amongst all players in the market, hyperscalers, enterprise customers, new clouds, all of these companies are incredibly power constrained. And just as recently as this week and in particular, earnings calls yesterday amongst hyperscale companies, we've heard additional commentary indicating, if anything, the bottleneck is growing for power. Data center infrastructure looks like it's likely to extend for years to come -- that they -- the demand is increasing for them, and they keep thinking they're going to catch up and they're not catching up. And -- they have historically tried to build on their own, and now they're looking for third parties to lease from in order to meet their data center commands. Meta commented that they keep thinking that they're being too aggressive or being very aggressive in overbuilding and they keep finding themselves on the short side instead. So a lot of positive commentary that I think validates the strategy that we have going on and validates the value of the assets that we have. What I would say also is we are very focused on high-quality credit -- high-quality potential tenants. And that's because we're very focused on building this data center business at Riot off on a strong foundation. And these types of tenants, they have enormous power requirements and CapEx budgets, but they're also very careful to commit to. The projects that they're looking for, they need a lot of certainty on delivery time lines and those ready for service dates and have very minimal risk on power approvals and permitting and that sort of thing. And that is why we have worked so hard and have taken the time to take these key steps that derisk our sites and ensure maximum credibility in order to deliver on the time lines that they're looking for. We've done that with the team we put in place, completing our basis of design and now advancing on technical and engineering discussions and now initiating the development of the Core & Shell buildings at Corsicana. So what I would say is the steps that we've taken all have been taken to position Riot in front of top-tier potential tenants and set us up to execute on leasing and then match our ability to deliver with the time lines that -- another thing I'll add is everything that you hear about how short on power the market is for at least the next few years and how frenzy demand is for anyone who can reliably deliver power within that time frame, that is absolutely real. We've consistently heard from the leading industry experts, from partners and potential [indiscernible] it has strong validity to the power available. So we continue to receive a significant interest in that site. So we feel very good with where we're at right now. We've completed the steps outlined earlier in the year that we believe were necessary to make Corsicana ready and as an attractive development as possible. And we feel like we are just in a great position to move forward. And that is the key driver behind today's announcement on initiating the Core & Shell builds at Corsicana and that is it. John Todaro: That's great. That's super helpful. And then just as a follow-up, because you did talk about the constrained power environment, which we're obviously seeing as well. But I guess within that, is there still some additional power out there that you guys could procure? Do you still feel comfortable? Is there additional capacity out there that maybe you could get to add to the pipeline? I don't know, call it, maybe power that's available before 2028. Just maybe frame up some of that too on the supply side and what maybe additional you could procure. Jason Les: Yes. We are very active on working on building out our power pipeline beyond just the 1.7 gigawatts that we have at Corsicana and Rockdale. But let me turn that question over to Jason Chung for some more color. Jason Chung: Thanks, Jason, and thanks, John, for the question. We remain very active in looking at opportunities to expand our power portfolio and a large number of opportunities that continue to come across our plate, and we do spend a lot of time as a team evaluating these opportunities. That being said, we've got a tremendous opportunity for value creation on our plate right now, and that's really the primary focus of the management team here. So we do look at opportunities, and we'll act when there's an opportunity that's compelling enough for us to do so, but with perhaps a bit of a higher threshold in terms of where we allocate our time and resources given what we have in terms of our power portfolio that needs to be developed today. Operator: Our next question comes from Paul Golding with Macquarie. Paul Golding: Congrats on all the progress with the site and the basis of design. I wanted to ask, so it sounds like the proactive construction or commencement of construction of this 112 megawatts of Core & Shell is not a change in approach given you're still looking at prospective hyperscale tenants. But I wanted to ask in terms of maybe, Jason Les, your comments around facilitating the most optimal negotiations and getting leverage in these negotiations. Could you give some color or unpack how having these shells being constructed earlier than signing that deal that may come in the future, how that is factoring into these discussions, where it's coming into play? Is it the lead time allows you to take more price? Is it maybe helping you attract higher investment-grade counterparties? And then a follow-up on the comments around ESS Metron and the Engineering segment. Just in seeing how much revenue has grown there and the backlog that's built up, how are you thinking about measuring out third-party engagements for that segment versus internal given the project you're undertaking at Corsicana? Jason Les: Thanks, Paul. So let me answer your question. Well, the first part of your question in 2 parts. The first thing I want to stress is, just to be clear, what we're announcing today with the Core & Shell development is not a shift in our strategy. What I want the market to understand is this is an unveiling of our strategy and how we know that we can best serve the market here. Our focus is owning and operating build-to-suit data centers and the team that we have in place at Riot has the full ability to deliver on that. So what we bring to the market, which is so important to all types of customers, but particularly hyperscale customers is a derisked project. And I think that comes through [indiscernible] our power approvals are in place. We have up to 1 gigawatt of utility power at Corsicana. That power is running today. We can demonstrate the validity of that power to customers. Two, we have a team in place that has deep experience building the type of data centers that we're talking about, build-to-suit Tier 3 data centers in the configurations that hyperscalers are looking for. We also have a balance sheet that's able to support development of this project. And with the announcement today, we're showing that construction of the Core & Shell is already underway for the data center. So all of these elements allow us to communicate the level of certainty to power and ready for service to date that hyperscaler tenants require. The other thing I want to say is what we announced today in the development in the Core & Shell is the first step in the eventual build-out of a full Tier 3 data center. And what [indiscernible] powered shell, it's $214 million or $1.9 million per IT megawatt, it's actually a little bit more than just a powered shell. Beyond just the water type building, we are also completing generator buildings, fully operational elevators, fully finished admin areas, security, access control systems and power distribution. So what we're actually built in a way that we are providing the components that we know every hyperscaler will require, and we're positioning these buildings so they can very quickly become Tier 3 data centers when those tenant specifications are finalized. And I'll also [indiscernible] our teams have deep experience and knowledge in building these types of data centers and understand how to make them usable by any potential tenants while providing the flexibility for the tenant to meet their specific specifications. What we're also doing is procuring equipment and locking in our delivery time lines now so the finished data center can be in line with the timing that hyperscale and -- the timing of hyperscale and enterprise customer buying habits. Now I know that was a lot, but let me just summarize by saying this. We are executing on a strategy to position us in front of the highest quality tenants and give us more certainty on how and when we will deliver on them and deliver on building build-to-suit data centers. This is all under the framework of maximizing the value of the assets that we have. And ultimately, I believe today's announcement is an indication of our confidence in our strategy and our team's ability to successfully develop the data center business along the time line that we envision. And then your engineering question. ESS Metron, E4A solutions comprising Riot's engineering business has a lot of strategic benefits. Primary reason that we acquire these companies is for controlling our supply chain and derisking that. We've also -- in our presentation, Jason Chung talked about the cost synergies that we're realizing there as well. Riot is actually a small portion of ESS Metron's overall business. 90% of ESS Metron's business are data center projects. In fact, some of the biggest data center projects in the country that I'm certain that you've heard of. So they have a growing business themselves, and they're able to balance the internal demand from Riot and the growing demand reflected in the growing backlog for all these data center projects all over the country. Operator: Our next question comes from Greg Lewis with BTIG. Gregory Lewis: Jason, I was hoping you could talk a little bit more about Phase 1 in terms of how you're thinking about the sequencing, the decision to go with 2 buildings, not 1 or 3? And just how should we think about the timing of the shells being built? And then is this something where the next phase is really going to just be customer dependent, and we're kind of waiting on the customer to see how we think about advancing the shells. Jason Les: Yes. Thanks for the question, Greg. So the quarters shell -- we've already started. I want to highlight that we're talking about building at Corsicana, which is already an active site. A substation is already active on that site, of course. We already have the pad ready for these first 2 buildings. So this is a development that's far along, and it's just these buildings themselves that construction will begin on in the first quarter of 2026. And then we expect the first Core & Shell to be completed in the first quarter of 2027. And because we're building a little beyond the Core & Shell, what we actually call Core & Shell Plus, we are in a position from that point to very quickly get those into build-to-suit turnkey data centers. This is just the beginning of what our development plans will be. Obviously, we have a total IT load campus capacity at Corsicana of at least 672 megawatts, and we're announcing just 112 megawatts today. The pace of future announcements will be, I think, guided by industry demand and the pace of customer conversations. But we felt it was very important to start development right away based on the demand that we are seeing, based on the types of discussions that we are having. And I think you can expect future developments to be announced as we progress on our strategy and we progress on conversations with potential counterparties. It is relatively simple for us to continue to add on additional buildings. So we're talking about these first 2 buildings here. And if we have a conversation with a customer who is then demanding significantly more capacity than that, then we are positioned to rapidly spin up additional developments to support their needs. So we're in a great position to be flexible and be aggressive with meeting time lines. Gregory Lewis: Okay. Super helpful. And I realize there's probably a lot more that needs to be discussed about Corsicana. But I was hoping to get maybe some thoughts on Rockdale. Just as we think about that, everyone -- obviously, Corsicana has been talked about as being one of the best data center sites in the U.S. given its scope, size, proximity to Dallas. But could you talk a little bit how you're thinking about Rockdale? Is that something where we need to really have Corsicana built out before we kind of pivot and start developing opportunities at Rockdale? Or is this something you think maybe we could do concurrently? Jason Les: Yes. Thank you for asking about Rockdale, Greg. Rockdale shares many of the same characteristics that make Corsicana a highly attractive site for data center development. Just like Corsicana, Rockdale has large-scale secured power, active and operating today, 700 megawatts fully approved, electrical infrastructure already in place. Now keep in mind, we already operate one of the world's largest Bitcoin mining data center campuses on that site. So it is an active operating site. And it also has ample land, water and fiber that can satisfy and is located in close proximity to Austin, which is a leading technology. So collectively, we think this makes Rockdale a very attractive site. Most importantly, having that power approved and in use today significantly derisked the development execution from a potential tenant's perspective, and that gives them greater confidence in the opportunity. Today, we are working to enhance the attractiveness of Rockdale for high creditworthy prospective tenants. And while we do so, we continue to focus on Corsicana as our near-term development opportunity. So today, Rockdale provides Riot with additional optionality for future development of our data center business. But in the meantime, our mining business there continues to generate strong cash flow and helps finance our growing data center business. So Corsicana is a near-term focus for data centers, but Rockdale is the next logical step in the process. So I'm emphasizing discount Rockdale from our development pipeline as we continue to work to make the site tenant ready in the meantime. And I feel confident about our ability to execute there. Operator: Our next question comes from Reggie Smith with JPMorgan. Reginald Smith: Congrats on all the progress. Two quick questions for me. I love that you guys are thinking about maximizing the electrons at your 2 sites. I was curious like what's your thinking today on neocloud? Maybe talk us through the pros and cons of becoming neocloud like iron or someone else and how you're thinking about that? And then I have one follow-up. Jason Les: Yes, Reggie, thanks for the question. We are always looking to maximize the value of our megawatts here. So that's something that we are thinking about and evaluating all the time. What we believe is the best first step for Riot to maximize value is to focus on this build-to-suit colocation model. Our sites are in very desirable locations. They have very desirable ready-for-service dates. So we believe the best way that we can unlock value today is by building data centers and getting these leased with high-quality tenants. And that's why we're focused on developments that can serve a wide variety of the market. We're focused on building data centers that can meet the needs of any hyperscalers that can service all types of enterprise customers and has the potential -- I'm sorry, and can serve neoclouds as well. And of course, that means it could potentially serve an internal neocloud business if we decide that we wanted to go that way. So it's something that we'll think about and evaluating, but build-to-suit is a priority today. Reginald Smith: Not closing the door on that, but right now, build-to-suit is where you're going. Perfect. And then I guess second question, we've seen quite a few deals struck in the space the last couple of months. I don't think any of them are as ideally located as you guys are in terms of being close to a major city. Are you talking to clients more? Or do you think you're getting a higher mix of kind of inference clients inquiries for your site? And should we expect better pricing when a deal is struck because of where you guys are located versus other sites? Or at least are you pushing for that? Like I would imagine that's a point of negotiation where you guys are thinking like, look, we've got great locations. And so what may have flown in a more remote location, we even expect more. Is that the right way to think about it? Jason Les: Yes. I think the location of our sites, but also the timing of being ready for service is what positions us to get the best possible deal here. We believe with what we have that we can command very strong economics. And for us, it's twofold. It's both the types of deal economics that we think we can secure with the assets that we have, but it's also the types of tenants that we believe that we can secure with the assets that we have. I would say that I think we're very confident today based on the level of interest that we've received that we could easily enter into a contract with the neocloud. But what we are focused on is building a platform that will be able to service a range of potential tenants, hyperscalers, enterprises and neoclouds. And so our priority is building our data center business on a strong foundation. And we think that means that with what we have, we can attract high-quality, which beyond just the name recognition and beyond just the economic terms we can get in the lease make benefits available to Riot in terms of value creation and access to attractive project financing terms. So it's twofold, Reggie. It's -- our assets, we believe both can command strong economics, but can also command because of the properties can command very high-quality tenants. Operator: Our next question comes from Brett Knoblauch with Cantor Fitzgerald. Brett Knoblauch: I think it was just as recently as June as you guys hired Jonathan kind of lead the data centers team. I'm curious where else on the maybe the hiring front, you guys have made hires and to what extent there's more hires that you need to go out and make? Or do you think that team is kind of fully in place at this point? Jason Les: Yes. Thanks for the question. One of our ongoing priorities is building out our team. And what we're doing is building this team in sequence with the steps that we're at in building the business. So you can kind of think of it as like a pendulum where [Technical Difficulty] starts with focus on engineering [indiscernible] and then as the development and engineering part advances, then it swings into the sales side and then eventually swings into the operations side. So we have made a number of key hires over the third quarter that position us to execute on the development side of the business. Of course, we're still adding talent there, but we have the talent that we need to proceed. And very recently, we have hired a sales position, our Senior Vice President of AI and Hyperscale Sales as now from the development side more into the sales side. So we have been, I'll say, very pleased with the level of talent that we have been able to attract to Riot. I think that's a testament to the quality of assets that we have, our power, our capital and all the other capabilities that we have at Riot. It made Riot a very attractive place for veteran data center talent to build their careers and have the opportunity to be a part of building something very big from the ground up. So I've been very pleased with the rapid pace that we've been able to add some incredible talent to our bench. And as that pendulum swings, you'll continue to see us bring in more of that talent to meet the cycle of the business that we're in. Brett Knoblauch: Awesome. And then maybe just as a follow-up, and I don't know if you guys said this or I might have missed it, the, call it, 400 megawatts being used for Bitcoin mining at Corsicana, is that maybe like the last source of power that you would draw as you kind of build up more on the AI side, like you'll keep mining Bitcoin until you need that power, I guess, is the question. Jason Les: Yes. So on Slide 11 on our earnings deck, we have a campus layout, and we're breaking it into 2 phases essentially. The first phase is building out on all the unused lands that we have at Corsicana. So that means we continue to benefit from the strong cash flow that comes from that site, which is one of the largest Bitcoin mining sites in the world right now. That site continues to be productive and generate meaningful cash flow for us while we are building out the other buildings on that site. Once the available land has been exhausted, and that would be on our plans, that would mean building out about 504 megawatts of critical IT load, then the Phase 2 option or part of the plan would be building over where those existing Bitcoin mining buildings are and adding the final three 56-megawatt build and all the critical IT capacity at the site. So that -- our plans call to eventually supplant that. And the pace of that will be driven by customer demand, driven by the dynamics that we're seeing in the marketplace and how our leasing is progressing. So it's all under the lens of maximizing the value of all of the megawatts that we have, trying to leave no unutilized power while we aggressively build out the data center business. And eventually, we aim to have the entire site be a 1 gigawatt utility load data center campus. Operator: Our next question comes from Mike Grondahl with Northland. Mike Grondahl: Just following up on the discussion you had on expanding the pipeline. Do you have any internal goals what you could expand that pipeline to by year-end 2026 or '27? And then secondly, just what are the key next steps you need to deliver in the next 90 to 120 days? Jason Les: We don't have any goals that we would be publicly disclosing at this point. But I would say is we recognize the value of power, and we also recognize our capabilities of securing power. Riot has a proven capability of securing power at scale, as demonstrated on one of the slides in our deck at a scale rivaling the biggest data center companies in the world. So -- when you have an advantage, you press it, and we are looking to press that advantage and utilize the tools at our disposal to add more power to our pipeline. So the story ultimately would not end at just Corsicana, Rockdale, but on additional sites that we bring into our pipeline. So not a specific I have for you outside of telling you that it is a strategic priority at Riot to build that pipeline. Key steps for the next 120 days, I think that will really center around the development progressing at the 2 Core & Shells that we're announcing today. We expect to break ground on construction in the first quarter of 2026 in order to meet the time lines that we've laid out here. I think internally that we will be continuing to be advancing on development and further detailed designs of our development. And what we will be doing internally is continuing the technical outreach that we've had, speaking with potential parties and potential tenants to ensure that we are progressing on a design that meets their specification. That isn't something externally looking in, you'd be able to see progress on. But internally, that is what we for the next 120 days. Mike Grondahl: And congrats on the progress towards HPC, guys. Operator: Our next question comes from Dillon Heslin with ROTH Capital Partners. Dillon Heslin: Congrats on the Corsicana progress. First, Jason, I know you mentioned that the design for Corsicana could be replicable beyond Corsicana. Does that mean you don't need a separate master site design for Rockdale? Or could you just sort of clarify what you mean by that? Jason Les: Thank you for that question. Yes. So our basis of design is a design that will ultimately work wherever we have a site where we have power. So we have the basis of design now and then the process of putting that on a site is what we call localizing that standard design to the specific site in question. The land profile wherever the site would be, that determines what the specific layout would be, but it's the same type of building that's being made. So the fact that we have a standard design means that we're able to be a lot more efficient in procuring equipment and scheduling with contractors and those contracting partners, development partners, construction partners knowing exactly what we're building. It's the same standard design that is tweaked at the endpoint for specific tenant specifications and then localized on whatever site that it's at. And then like I said, the campus layout where the buildings are actually placed will depend on the land profile of the site. But this is why this basis of design was so important to us. It's really the foundation of our whole development program at Riot for data centers. We're not just making a data center for Corsicana. We are making a design. We can continue to improve on and apply wherever we're able to get access to power. Dillon Heslin: Great. And as a follow-up, like when the first 2 power shell plus are done sometime in Q1 '27, like is that the next step that potential tenants need to see your progress on to advance sort of discussions on a lease? Or are you sort of talking with them throughout the process? Jason Les: We'd be talking with them throughout the process. I think that's the schedule. That's the time line of when those Core & Shells will be completed. But one of the purposes of initiating this Core & Shell development is it enables a more productive discussion with potential tenants. So we would expect to be further along in our sales and leasing process before those Core & Shells are even completed. Operator: And our final question comes from Nick Giles with B. Riley Securities. Nick Giles: My first question was you have $330 million on the balance sheet today and obviously, a lot of Bitcoin as well. $214 million for the Core & Shell. But my question is, are there any other major capital outlays we should think about in 2026, whether it be deposits for long lead time items or just any other moving pieces to keep in mind? I think you've pretty much wrapped up the land acquisitions you set out to make, but I appreciate any color there. Jason Les: We haven't released our full 2026 CapEx budget yet, but I think with the development plans that we announced today, the majority of it at this stage would be the $214 million for these first 2 Core & Shells. That doesn't mean though that we have -- we are not progressing all the long lead time equipment as well. Even without deposits, we have been able to secure most of that, that would be necessary for those first 2 buildings. And then, of course, we have our internal capabilities that we're using to secure supply chain as well. So we are being very capital efficient with how we secure this long lead time equipment and all around the strategy of [Technical Difficulty] our capital deployment and making sure that those 2 items are synced up closely. And with our development strategy, we are always positioned to rapidly move to the next step, depending on what the tenant is looking for. Nick Giles: I appreciate that, Jason. And one more, if I may. I think you mentioned that 672 megawatts of critical IT is kind of the minimum you could see at Corsicana. I think that implies a PUE just below 1.5. So my question is, is there any work ongoing today to improve that? Or what could be done to ultimately increase critical IT megawatts at Corsicana? Jason Les: Yes. So before we get the question, I just want to add one more thing to the previous question that you mentioned. In addition to the cash that we have on our balance sheet, we have -- including restricted cash, we have about $400 million today and our large Bitcoin balance. We also have a robust Bitcoin mining business that is generating strong cash flows, and that really is a very important and valuable tool to funding all the development that we have going on. And then your more recent question, -- on PUE, what we've laid out is like kind of our base case. That's the base case PUE of what we are setting out to achieve. Now of course, any improvement in PUE is improved economics for us. So approximately 1.49 is what our base case is. And now what we are setting out improved from that. And the better PUE we're able to achieve, the better ultimate economics we're getting from our projects. Operator: Thank you. I would now like to turn the call back over to Jason Les for any closing remarks. Jason Les: I want to thank everyone for listening in our earnings call today. We are incredibly excited about the progress we've made and the strategic milestones that we're announcing today. Look forward to sharing more progress as we accomplish it and getting together again with you all on our next earnings call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to AXT's Third Quarter 2025 Financial Conference Call. Leading the call today is Dr. Morris Young, Chief Executive Officer; and Gary Fischer, Chief Financial Officer. In addition, Tim Bettles, Vice President of Business Development, will be participating in the Q&A portion of the call. My name is Kelvin, and I will be your coordinator today. I would now like to turn the call over to Leslie Green, Investor Relations for AXT. Please go ahead. Leslie Green: Thank you, Kelvin, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions, including trade tariffs and import and export restrictions, ability to obtain China export permits, the timing of receipt of export permits, ability to increase orders in succeeding quarters to control costs and expenses, to improve manufacturing yields and efficiencies or to utilize our manufacturing capacity. We wish to caution you that such statements deal with future events are based on management's current expectations and are subject to risks and uncertainties that could cause actual events or results to differ materially. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies and increased environmental regulations in China. In addition to the factors just mentioned or that may be mentioned in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through October 30, 2026. I also want to note that shortly following the close of market today, we issued a press release reporting financial results for the third quarter of 2025. This information is available on the Investor Relations portion of our website at axt.com. I would now like to turn the call over to Gary Fischer for a review of our third quarter 2025 results. Gary? Gary Fischer: Thank you, Leslie, and good afternoon to everyone. Revenue for the third quarter of 2025 was $28.0 million compared with $18.0 million in the second quarter of 2025 and $23.6 million in the third quarter of 2024. To break down our Q3 '25 revenue for you by product category, indium phosphide was $13.1 million, primarily from data center and PON applications. Gallium arsenide was $7.5 million, germanium substrates were $640,000 and revenue from our consolidated raw material joint venture companies in Q3 was $6.7 million. In the third quarter of 2025, revenue from Asia Pacific was 87%, Europe was 12% and North America was 1%. The top 5 customers generated approximately 45.2% of total revenue and 2 customers were over the 10% level. Non-GAAP gross margin in the third quarter improved substantially to 22.4%, reflecting improved product mix and higher volume to absorb overhead. For comparison, we reported 8.2% gross margin in Q2 of 2025 and a 24.3% gross margin in Q3 of 2024 last year. For those who prefer to track results on a GAAP basis, gross margin in the third quarter was 22.3% compared with 8.0% in Q2 of 2025 and 24.0% in Q3 of last year. We continue to be highly focused on driving continued improvement, including further recovery in Q4. Moving to operating expenses. Given the difficult climate, we've been working hard to hold down OpEx. In addition, we had some favorable adjustments in R&D in Q3 that brought our OpEx down to a lower-than-normal level. These will not carry over into Q4. Therefore, our total non-GAAP operating expense in Q3 was $6.7 million compared with $7.6 million in Q2 and $8.3 million in Q3 of 2024. On a GAAP basis, total OpEx in Q3 was $7.3 million compared with $8.2 million in Q2 and $9.1 million in Q3 of 2024. Our non-GAAP operating loss for the third quarter of 2025 improved substantially to $384,000 compared with the non-GAAP operating loss in Q2 of 2025 of $6.1 million. and a non-GAAP operating loss of $2.6 million in Q3 of 2024. For reference, our GAAP operating line for the third quarter of 2025 was a loss of $1.1 million compared with an operating loss of $6.7 million in Q2 and an operating loss of $3.4 million last year in Q3. Nonoperating other income and expense and other items below the operating line for the third quarter of 2025 was a net loss of $46,000. The details can be seen in the P&L included in our press release today. For Q3 2025, we had a non-GAAP net loss of $1.2 million or $0.03 per share compared with a non-GAAP net loss of $6.4 million or $0.15 per share in the second quarter of 2025. Non-GAAP net loss in Q3 of 2024 was $2.1 million or $0.05 per share. On a GAAP basis, net loss in Q3 was $1.9 million or $0.04 per share. By comparison, net loss was $7.0 million or $0.16 per share in the second quarter of 2025. GAAP net loss in Q3 of 2024 was $2.9 million or $0.07 per share. The weighted average basic shares outstanding for Q3 2025 was 43.8 million shares. Cash and cash equivalents and investments decreased by $3.9 million to $31.2 million as of September 30. By comparison, at June 30, it was $35.1 million. Accounts receivable increased by $11 million, so the delta in cash is explained in working capital. Depreciation and amortization in the third quarter was $2.3 million. Total stock comp was $0.7 million. Net inventory was down by approximately $2.4 million in the third quarter to $77.7 million. This continues to be a focus, and we expect to bring it down further in quarters to come. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei in China on the STAR Market in Shanghai. We've continued to keep our IPO application current. Tongmei remains in process as a part of a much more selective and smaller group of prospective listings than a few years ago. Although the current geopolitical environment is dynamic, Tongmei is considered a Chinese company and continues to be regarded in China as a good IPO candidate. We will keep you informed of any updates. With that, I'll now turn it over to Dr. Morris Young for a review of our business and markets. Morris? Morris Young: Thank you, Gary. This has been a very eventful quarter for AXT as we are seeing a strong uptick in indium phosphide demand from data center applications globally and as our industry and our customers adapt a new normal within a rapidly changing environment. In Q3, our revenue grew 56% sequentially and 18% year-over-year. Within this, our indium phosphide revenue grew to our highest level since 2022 as we were successful in obtaining export permits for a number of significant indium phosphide orders throughout the quarter. I'm very proud of the diligence our team and grateful for the partnership of our customers in working through the export control permitting process. Our current experience is that our indium phosphide permits are taking approximately 60 business days or approximately 3 months to be processed by China's Ministry of Commerce. This is a bit longer than our initial expectations, but customers are adapting to the requirements and are adjusting their ordering patterns to give us more visibility and longer lead times. I should also note that the Golden Week holiday at the beginning of October in China will likely increase the average permit processing time by a week or so in Q4. The tremendous growth in demand for indium phosphide-based lasers and detectors for high-speed optical connectivity, coupled with our successful obtaining export permits on behalf of our customers are driving a strong increase in our indium phosphide order backlog, which as of today is more than $49 million and growing. Our established customers are planning for longer lead times by placing longer-term orders and giving us more visibility into their expected demand. We are also seeing active engagement with several Tier 1 -- new Tier 1 customers to qualify our material into their supply chains for the first time in many years. This include leading optical transceiver module makers, both in China and around the globe. As many of you know, the supply chain for optical transceiver is quite complex and highly globalized. We believe this geographic interdependence is providing both opportunities and incentives for the ecosystem to work together in new ways to solve global supply chain shortages. For a geographic demand perspective, the massive AI infrastructure build-out and the planned CapEx spending by cloud services and AI platform providers in the United States is the primary driver for EML and silicon photonics-based optical transceivers. We believe that today, our materials are being used in multiple U.S. hyperscalers, and we expect that end customers' use will continue to broaden. In China, the data center build-out is early in its ramp, but there is a strong desire for domestic suppliers at every level of the supply chain, and we believe over the next 12 to 18 months, we will see healthy growth in the China data center market. Data center expansion in China is quickly overtaking PON as the leading application in China for our indium phosphide substrates. Given the strong demand environment it is important to note that AXT is well positioned to handle increased demand. We have ample manufacturing capacity in place today, and we can also significantly increase our output by current level, and we can also add capacity quickly as needed. We also have a demonstrated ability to supply very low EPD wafers in volume that meet the vigorous requirements of next-generation EML and silicon photonics-based devices. Now turning to gallium arsenide. Our revenue grew more than 20% from the prior quarter. The biggest driver was semi-insulating wafers for wireless RF devices, which remains a focused application for us. Industrial laser applications were about flat from Q2, and we saw an uptick in semiconductor wafers for data center laser applications. However, VCSEL lasers don't typically require a lot of gallium arsenide material, so they don't move the needle much as a growth driver. But they do require high-quality material, which we are well positioned to supply. In germanium substrates, our sales declined by about $1 million in Q3. The germanium substrate market was very poor gross margin potential today. And while our material performed well in the solar cell applications as we supply, gross margin constraint dis-incentivize us to pursue many opportunities. In addition, certain customers prefer to source substrates outside of China. As such, we do not expect growth in germanium substrates in Q4. Finally, our raw material business in Q3 was consistent with the prior quarter and it was solidly profitable within a stable pricing market. We expect the same for Q4. Globally, there continues to be a greater awareness of the importance of earth materials, and we are ahead of the curve in developing this unique integrated supply chain. In closing, this is a highly active time for our business. The receipt of indium phosphide and gallium arsenide export permits remains the single most significant gating factor for our growth. As such, we are highly focused on ensuring that we are proactive, organized and disciplined about managing the process on behalf of our customers. We also know that we must be laser-focused on running our business with the greatest efficiency. This includes our continued effort to drive gross margin improvement, OpEx discipline and inventory reduction. With strong ongoing market trends fueling the data center upgrade cycles, we believe we have tremendous opportunity in 2026 to drive meaningful growth in our business and a return to profitability. We look forward to reporting to you on our growth, on our progress. With that, I will turn the call back to Gary for our fourth quarter guidance. Gary? Gary Fischer: Thank you, Morris. To reiterate a couple of key points from Morris's commentary, we are seeing a strong increase in our indium phosphide wafer demand related to AI and the ongoing data center upgrade cycle. Given the geopolitical complexities surrounding this market trend, customer behaviors in our space are changing to allow for longer substrate lead times. our customers are placing longer-term orders and providing greater visibility into their needs. As such, our indium phosphide backlog has grown to $49 million and is the largest we've ever had in our history. Further, we are actively engaging with new customers today that we have not had business with an opportunity for some time. With all of these positive market and AXT-specific growth drivers, the most significant gating factor in our growth in Q4 and beyond is the success and timing of getting export permits. Therefore, guiding for the future is somewhat tricky for us right now as we cannot predict future timing of permits or our success in obtaining them for any customer or individual order. But drawing on what we know and what we've experienced thus far in the export permitting process, we can offer the following insight into our expectations for Q4. As of today, we have approximately $20 million in revenue that can be realized in Q4 across our substrate product lines and raw materials for which we either already have a permit to ship or for which an export permit is not required because it ships within China. We have a high degree of confidence in recognizing this revenue in Q4. In addition, we believe there's an incremental $7 million to $10 million in indium phosphide and gallium arsenide backlog, which is currently in our manufacturing process for which we believe we may be able to ship in Q4 if we are awarded permits. Of course, timing of permits is not within our control, but we believe we are in a similar or slightly better position in terms of customer order backlog and permit submissions than we were at the same point in the prior quarter. As such, with that as a background, we believe we have the capability to achieve revenue in the range of $27 million to $30 million in Q4, subject to the caveats I just mentioned. This takes into consideration approximately flat sequential revenue contribution from germanium substrates and raw materials with incremental growth in Q4 likely coming from indium phosphide and gallium arsenide substrates. As Morris mentioned, we continue to focus strongly on gross margin, we made significant gains in Q3 and continue to work on our manufacturing efficiency. Further improvement in Q4 depends on a number of factors, including total revenue as it relates to the absorption of fixed costs, revenue mix by product and our ability to continue to drive better manufacturing efficiency. With regards to OpEx, we expect that it will increase to approximately $9 million as a result of some incremental end of the year adjustments and a return to a more normalized level. With these factors in mind, we believe our non-GAAP net loss will be in the range of $0.01 to $0.03, and our GAAP net loss will be in the range of $0.03 to $0.05. This represents substantial year-over-year progress towards our return to profitability. We estimate the share count for Q4 will be approximately 43.8 million shares. And okay, this concludes our prepared comments. We'll be glad to answer your questions now. Operator, Kelvin? Operator: [Operator Instructions] your first question comes from the line of Charles Shi of Needham & Co. Yu Shi: Maurice, Gary, congrats on receiving the licenses, the permits shipping $8 million additional revenue in the quarter, and congrats again on the $49 million backlog. That was an exciting number to hear. I really want to get back to this point on the customer behavior change, like are they placing longer-term orders. But I think if I hear you correctly, some of those customers may not necessarily have the permits at this point and still proceeded to place the orders with you, a pretty significant amount of orders with you. Can you kind of talk through what exactly is driving that behavior? And what do you think the export permits, currently -- the current ones you already have, are there time limits to that? Are there like the volume limits to that? And what could be your best prediction going forward from here, the customer behavior can continue to evolve? Timothy Bettles: Yes. Thank you, Charles. So we have, as you say, $49 million backlog. That includes customers that have previously received permits and customers that are still in the permit phase for the first permit as we go through. Everybody that has previously received a permit has typically received subsequent permits from there. So there's a lot of confidence in getting further permits as we move forward through this. So people are placing orders into that backlog with the understanding that the confidence levels of receiving permits are high, especially for indium phosphide. So as we look forward and as we look at that backlog, all of the orders that we've received and put into backlog have permit applications in place so far. And we manage that backlog and those permit applications, and we manage the manufacturing process so that we can combine the expected permit approval time with the finishing of the product. So our lead time to ship the product after receiving the permit is very low. Morris Young: Yes. So maybe I can add another point. I hear Charles is asking why? Is there any relationship with customers giving us a lot more order, a longer order lead time? Is it because we have a permit process? I think that is true. People realizing instead of just in time, they want to give us a long lead time to submit the permit application so that we can ship this product to them in time. Is that a part of the question, Charles? Yu Shi: Yes. I think maybe a better way to help us understand what the permit to the size of the orders, how much long term the orders is going to be? Maybe you can shed some light on, let's say, the order currently on average cover is it like 1-year demand, 2-year demand, 3-year demand? What do you see there? Like how long does the order you have in the backlog covers what customers demand? Timothy Bettles: Right. Okay. Understood. Thanks, Charles. So the permit, we apply for a permit and it can be for multiple shipments, number of shipments up to 12. This is the important part. The permit only lasts 6 months. So everything has to be shipped within 6 months of receiving the permit. Morris Young: Yes. And the other point is this, our customers are telling us, we give you this order, if you get the permit and if you can manufacture it, you can ship it tomorrow. Gary Fischer: So when Tim mentioned up to 12, that means 12 line items. Every PO needs a separate permit. So if you put each line item on a separate PO, then we need 12 permits. It's complicated as they say in the show business. Yu Shi: It is, it is. So maybe I ask another question on profitability. So when you were at this revenue level in the high 20s, going back a few years, you probably have a gross margin somewhere in the high 20s or even low 30s percent and you would have a non-GAAP EPS in the positive territory. But I think, Gary, if I hear you right, I think you're still expecting some gap -- some non-GAAP loss in the coming quarter. And wonder if there's anything in your cost structure that's a little bit different now versus back then? And how do we get back to like the similar profitability level at the similar revenue run rate back in the, let's say, go back -- only go back 2 or 3 years, yes. Gary Fischer: Yes. We expect it to be asked that question to us. So -- and this is something that we talk about internally. So as I like to say to ourselves and to analysts and investors, in our business model, it's never one single dial. It's not like one thing we can focus on, and we have to focus on 2 to 4 things to sort of move the needle in the right direction. In this regard, one of the things we need to get improvement on is gross margin. And that's primarily a result of mix, which is going in our favor right now and also efficiencies on the line. So we have -- I'm actually encouraged to be able to say this because it's pretty much in our control. And we've done better than we're doing right now. But this is -- it is common in manufacturing businesses to have some cycles. And so I think we can work on that and focus on it and get improvement. That's probably the biggest one. I think we could get a bit more help from our joint venture companies. I expect that to improve in the coming quarters as well. But those are the two things that come to mind. Morris Young: So Charles, maybe I can answer part of the other question. I think the deadliest thing in manufacture, I think analysts should ask is, is your ASP dropping, okay? I think we can say except with the low end on the 2-inch indium phosphide, most of our ASPs are holding very firm. In fact, some of the ASP for our high-end low EPD indium phosphide substrate, the ASP is increasing. okay? So I think we can surely stop that worry. I mean we have some other efficiency issues such as loading factors, germanium is perhaps not making a whole lot of money for us because the pricing pressure is very strong. But the main focus on indium phosphide, the pricing is firm and the demand is high. Yu Shi: I think maybe one last question before I jump back into the queue would be the indium phosphide demand you are seeing today, how much of that is from the overseas customers that would need a permit versus domestic Chinese customers? And if I recall correctly, I remember that the indium phosphide was primarily shipped to outside of China previously. How much of the domestic development today maybe has led to a little bit more of a domestic shipment of the indium phosphide. If you can kind of paint a little bit of picture to us of how things have been evolving, that would be great. Morris Young: Well, actually, indium phosphide business is very globally connected. A lot of our substrates are shipped to, let's say, Taiwan to put EPON and ship back to United States to make a device and ship back to China to make a transceiver and then ship back to U.S. data centers. So I think -- but our direct customer in China is roughly, I would say, 40%. But the great AI opportunity definitely is the big increase is in the AI data center in the United States. Timothy Bettles: And I think I can add to that as well. If you look at our financials from Q2 versus Q3, you can see that the indium phosphide in Q2 was about $3.5 million, and that's increased to about $13 million in Q3. So that kind of gives you an idea of what the incremental is and all of that incremental has come from outside of China. Operator: Your next question comes from the line of Richard Shannon of Craig-Hallum. Richard Shannon: I'll offer congrats on a wonderful quarter. Great to see. So congrats to the entire team for making that happen here. Let's start with the first question here on the indium phosphide backlog. I just want to understand the dynamics here. Maybe if you can help us understand a few things here. What was the backlog a quarter ago? And then how far out are customers ordering here? I would imagine, given one of the prior answers you're talking about a permit allows you to ship for 6 months that they're probably going out 6 months here, but just want to get a sense of what this looks like and how it's changed. Timothy Bettles: Yes. So as Morris has previously said, those permits do last 6 months, but most of our customers are asking to ship as soon as we can. So that backlog -- once we have a permit, we can ship that backlog as quickly as we can manufacture, to be perfectly honest. So in terms of our backlog last quarter, we've got more than double the backlog in -- as we speak today than we had last quarter. So that continues to grow. And as we said in the conference call, we're seeing more and more new opportunities coming. So that backlog is growing daily as we speak. Morris Young: Maybe I can chime in a bit. I think as CEO, I take care a lot of this China development, engineering and manufacturing and also my duty is to push the IPO process in China. But recently, I got putting more and more to talk to customers of indium phosphide because they cannot get enough material, they call my sales guys and the sales guy says, well, you got to come and visit the customers to calm them down. How are we opening up the opportunity to supply indium phosphide customers. So I got a lot this very good warm receptions from our customers and sometimes the customers' customer and also the end user. So in other words, the epi growers, the device makers as well as the CPU, GPU makers. In fact, I got the message from our customers, especially globally, not especially, they all told us that we are a very important supplier of indium phosphide. Secondly, they all told me there's a great, great opportunity to increase the demand in the near future. Obviously, they are all anxious to know what are we going to do to ease the pain of getting the permits to export material. And lastly, quite a few customers told us they start to appreciate the better EPD or the better quality of indium phosphide material we supply. In fact, one customer told me that now every die count and using our substrates, they can make better die yield on their lasers or detectors. So I think that's a very warming information for me and also telling us that indium phosphide, the paradigm -- there's a paradigm shift because of the global increased demand for AI connectivity in optical transceivers. And what's the other words, CPOs? Timothy Bettles: CPOs. Morris Young: I'll start to learn that one. Richard Shannon: Okay. That is helpful. I'm going to explore a couple of different angles on the dynamic here. So I think one of the things that investors will be worried about or cognizant of here is customers understanding the geopolitical dynamics, as you referenced in your prepared remarks and worried about the door shutting here at any point, very well could be ordering well above what their normal rates of consumption would be and building some level of inventory. To what degree do you see that behavior anywhere here in the backlog build? And what are the limits to your shipping faster? Are you near full utilization in your indium phosphide today? Timothy Bettles: So let me start by answering the dynamic question. I think the fact of the matter is that people are building inventory levels so that they have inventory on hand. But I don't think this is a onetime build-out because they're concerned. This is a multiyear cycle. So the demand today that we're seeing is real, and you can see evidence of that all up and down the supply chain for optical transceivers, right? I want to really just look at some of the CapEx spending messaging that was given from U.S. hyperscalers on their earnings calls yesterday, right? So everybody is talking about CapEx moving faster and growth in dollars getting noticeably larger as we go through financial year '26. So there's definitely growth going on here at the hyperscale level, and we're seeing that come into here. We're also seeing longer-term discussions on indium phosphide for CPO, both on scale up and scale across now. So the demand is there. The demand is real. And of course, people are building backlog -- or sorry, people are building inventory levels, but those inventory levels will continue to grow. So we don't see this as a one-and-done shot. Morris Young: Yes. So let me add on to another point. Yesterday, Tim and I were in the valley visiting a few actually customers' customers. They are asking me what can they help in terms of financially, in terms of customer relationship to ensure that indium phosphide will be supplied. In other words, they are telling me there's a tsunami coming, okay? I just don't know how big the tsunami is because the normal rate, let's say, if it is one foot wave, then tsunami is only 10 feet. It's not that big. But if the normal wave is already 5 feet, then that's going to be very significant. So we're going to get that information soon. But I think the demand from what I hear is enormous. And don't forget, Richard, we are 40% of the indium phosphide supply chain, and we have the best quality material. Gary Fischer: By the way, tsunami was used by the customer that Morris and Tim were visiting. We're not making it up in our conference room. So I was struck to hear that word as a description of what's on the future. So... Richard Shannon: Okay. Now let me ask one -- another question here looking on the other side of this dynamic here, which is you mentioned a number of engagements with customers you've not worked with ever or for a very long time here. I think, Morris, you've been talking about the very good EPD specs on indium phosphide for a few years at least. And we haven't heard you talk about new customers really much, if at all. And I know I've asked on this conference call a few times in the last few years on this topic. Why is it there all of a sudden coming to you now? It seems like it's a unique or, I guess, a coincidental timing to see a number of customers coming to you at this particular time. What's going on here and what's driving that? Morris Young: Jeez, you're so smart. I mean you call me. But I tell you, I have a perfect answer to that. That is, first of all, I think with all these lasers getting bigger and bigger, the EPD is getting that much more because the larger the device, the chances of you hitting a EPD is higher. In fact, yesterday, I was told by one of the customers, how come you guys can make the EPD so low, right, Kim? Timothy Bettles: Right, right. And I think the market is maturing such as well. And the demands that our customers are being faced with, with increased demands, increased capacity, one of the customers said to us, every device is important. The yield of devices on a wafer has become so much more important today than it ever has been, both because of cost and capacity constraints within the fab. So people are turning to us because they get much higher device yields from our wafers. Morris Young: Yes. That's the customer told us straight in the face, they wouldn't tell us because we would have to ask higher price. Gary Fischer: Richard, a secondary factor subservient to what Morris and Tim just described is there is a concern among the customer base about capacity and capacity potential. They're sensing that there are shortages, and we are the best positioned currently with capacity and with the ability to respond quickly to add capacity. Richard Shannon: Well, Gary, that was a perfect setup for my next question here, which is on a full run rate basis, hand-to-mouth basis here, what is your kind of maximum indium phosphide revenues per quarter here? And how long would it take you to get a new capacity? And what kind of CapEx commitment to grow it by, I don't know, say, 25%? How does that look like? Morris Young: Well, we could double our capacity on indium phosphide in about 9 months' time. It would take us about my estimation is -- because this is not a greenfield. We got the clean room already. We got land already and all we need to do is add a few crystal balls. So my estimation is about $10 million to $15 million. But we need a signal, I'm getting it. Timothy Bettles: So let me answer the question on current capacity there, Richard. So it's a complex question because it depends on a number of factors relating to product mix and wafer size and inventory on hand and all that kind of stuff. But we estimate that current capacity is around about $20 million a quarter for indium phosphide with our current run rate and current capacity that we've got. You asked how quickly can we increase by 25%? Probably within about 3 months, we can increase by 25%. We do not need to build anything other than bring some more furnaces online. Morris Young: And to add for us to double that, then we need 9 months. That will be [indiscernible]. Operator: Your next question comes from the line of Tim Savageaux with Northland Capital Markets. Timothy Savageaux: Again, congrats on that backlog number. Believe it or not, I still have a few questions. And I guess the overall question is, guys, is doubling capacity, is that a tsunami? Or is that just good business? Morris Young: That's a good question, but I think I'll be happily retiring when the capacity is double with all the better gross margin. I'm joking. I think it's a lot more than that. I think -- but one step at a time, I think if we can double that, and I think we have all the ability to increase our capacity, well, the easiest way is in China. But I think beyond that, we may want to consider building something. Timothy Savageaux: Yes. U.S.-based capacity would make a lot of sense. And yes, I think just intuitively, a tsunami is like 5 to 10x. And I have heard numbers like that in the industry in terms of where demand is going to be. And it sounds like the tsunami referenced in particular, is that a specific kind of looking forward scale up, scale across comments, which is to say, I assume what you're seeing in terms of current demand is likely module-driven, might be some early CPO, you tell me. But in terms of the real big step function in capacity, is that discussion mostly CPO-based or scale-up type based? Timothy Bettles: Yes, that's absolutely right. So we are seeing growth right now. That is, we believe, in the pluggable market and probably will continue to be in the pluggable market for the next few years. But we are starting to have those discussions now about growth rates for CPO for scale up. And the tsunami, the 5, 10x that you talk about, that is a lot of that is coming from CPO for scale up. Morris Young: Yes. Timothy Savageaux: Sorry Morris, you were saying something. Morris Young: No, I'd say yes. Yes, I like... Timothy Savageaux: The question -- I'll add to the -- just trying to get a sense of this backlog. So you increased your backlog, you doubled it and shipped $13 million in material, which I think gives you a book-to-bill that's approaching 3, so that's not bad. But where would that kind of normally be? I guess -- and so maybe as opposed to go back to last quarter, let's go back to last year or just historically without export permits required, what kind of backlog would you normally have in terms of quarters of revenue or just straight up, where was that indium phosphide backlog Q3 '24. Gary Fischer: Well, because we could be responsive to customer orders, we had a lot of turns business every quarter. So to be honest, we don't really -- in terms of me and Morris and Tim, we don't manage the company by looking at a book-to-bill. Well I have in other companies, but it's not very meaningful in this case. But -- so it's hard to say what it was because I don't have a piece of paper in front of me with that list because there's no such list. Timothy Savageaux: Got it. Well, it sounds like it should be some fraction, maybe half or 1/3 of whatever your indium phosphide revenue was a year ago. Your backlog is tsunami. It's up 10x, right? Gary Fischer: Yes. And again, tsunami was not -- I agree with you, tsunami is 5 to 10x. And I'll say again, that was not our words. That was the words from an end customer. So... Timothy Savageaux: Yes. Okay. Last one for me. You mentioned two 10% customers in the quarter. And Morris, you talked about kind of industry structure, epi Tier 1 back to the U.S. But any color on whether you've got an integrated device maker in there? Is this just really focused on epiwafer suppliers or whether you might have a new 10% customer in there? Morris Young: Tim? Timothy Bettles: Yes. We've -- so the 10% customers that we've got, we've been dealing with for a while. The new customers that we've got are integrators as well. We're dealing more and more with integrators and hardware customers. Morris Young: Including GPU and CPU makers. Timothy Bettles: Exactly right. So we're dealing with -- directly with GPU, CPU hardware makers. We're dealing with pluggable makers. So we're having -- that's where really the visibility is coming from. Gary Fischer: Yes. I would say in the past, we haven't had access to those people. But now they're calling us. They want to see us. So that's why we had better visibility. Operator: Your next question comes from the line of Matt Bryson of Wedbush Securities. Matthew Bryson: This is going to sound a little bit like a complaint, but it's not a complaint. Just curious, so there's clearly a whole lot of demand out there. Your Japanese competitor has announced 2 capacity increases in the last, I think, 4 months, 3 months. Just curious, if you have all this backlog and your customers want more product faster, why wouldn't you be building and shipping to capacity next quarter or this quarter? Timothy Bettles: Well, all of our shipments, all of our ability to ship is based on permitting. So we -- as we've talked about plenty of times, we've got a large backlog now, and we can ship as -- we've been told by customers, we can ship as quickly as we possibly can. But we have to go through the permitting process. Now that permitting process, it takes 60 business days, which is approximately 3 months. And there is some opaqueness to that permitting process. So if we had a bunch of permits today, I'm sure we could ship an awful lot more of that backlog today. We've guided at $27 million to $30 million. If we got permits, could we ship more than that? Yes, we could. But we're basically running trend analysis on how long it takes to get permits and a probability analysis of what permits we're going to get, and that's where the guidance comes in. Morris Young: By the way, we're not standing still on those orders that we are applying for permits, we are putting that into WIP. In other words, we are making it, and we're packaging it and waiting for the permits to be issued and then we can deliver right away. Matthew Bryson: Got it. Understood. So I mean, it comes down to the permits of the gating factor, but as hopefully, permit approvals continue to get across the line and lift, there's a path to achieving the levels of shipments that you were at a few years back during COVID? And then I guess, what's -- in terms of gross margins, obviously, when you're running back at close to full capacity back then, you had substantially higher gross margins. I guess what's key to getting gross margins back up? Is it predominantly utilization? Or were you benefiting back then from higher pricing? Can you just talk to kind of the dynamics around gross margins, where they can go to from here if you can get indium phosphide back up to full utilization? Gary Fischer: Yes. Pricing is not really a big factor. I think the big factor is volume because it does carry more of the fixed assets in a proper way. And -- and then it's -- I'm confident we can return -- we're going to be over 30% because there's -- we can control that. So we need to improve the efficiencies on the line, but I already commented on that. So I see it going in that direction. Morris Young: I think the most important factor is we got more -- we can utilize our indium phosphide line. I think that's the greatest opportunity we're facing now. Operator: [Operator Instructions] there are no further questions at this time. And with that, I will turn the call back to Leslie Green for closing remarks. Please go ahead. Leslie Green: Thank you, everyone, for participating in our conference call. We will be participating in the Northland Virtual Conference in December and the Needham Growth Conference in January, and we hope to see many of you there. As always, feel free to reach out to any one of us if you would like to set up a call, and we look forward to speaking with you in the near future. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.