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Operator: Good afternoon, and welcome to the MediaAlpha Inc. Third Quarter 2025 Earnings Call. I am France, and I'll be the operator assisting you today. [Operator Instructions] I would now like to turn the call over to Alex Liloia, Investor Relations. Please go ahead. Alex Liloia: Thanks, France. Good afternoon, and thank you for joining us. With me are Co-Founder and CEO, Steve Yi; and CFO, Pat Thompson. On today's call, we'll make forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the fourth quarter of 2025. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q, for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. All the forward-looking statements we make on this call reflect our assumptions and beliefs as of today, and we disclaim any obligation to update such statements, except as required by law. Today's discussion will include non-GAAP financial measures, which are not a substitute for GAAP results. Reconciliations of these non-GAAP financial measures to the corresponding GAAP measures can be found in our press release and shareholder letter issued today, which are available on the Investor Relations section of our website. I'll now turn the call over to Steve. Steven Yi: Thanks, Alex. Hi, everyone. Thank you for joining us. I'm pleased to report that we delivered record third quarter results, driven by continued momentum in our P&C insurance vertical. Growth in the quarter was fueled by increased marketing investments from leading auto insurance carriers who continue to lean into customer acquisition in what remains a highly favorable operating environment. With underwriting margins at unusually high levels, carriers are in a strong position to pursue policy growth. Importantly, peak underwriting profitability does not mean that carrier advertising spending has peaked. To the contrary, we're seeing an increasing number of carriers turn their focus in earnest to capturing market share, and our marketplace continues to be the most efficient and scaled platform for them to acquire new customers. These dynamics give us significant runway for continued growth in the quarters ahead. In our health insurance vertical, our results were impacted by our recent reset in under-65, which was in line with expectations. Our partnerships with leading Medicare Advantage carriers continue to perform well, and we expect digital advertising to capture a larger share of health insurance distribution spend over time. As these secular tailwinds play out, we believe we're well positioned to restart growth from this new baseline. As we look ahead, we're encouraged by the strength of our P&C business, the long-term potential of our Medicare vertical and the expanding opportunities we see across digital insurance distribution. In our P&C vertical, we believe we're in the early stages of a multiyear soft market, characterized by strong carrier profitability and robust market share competition, which we expect to sustain healthy marketing spend for years to come. The combination of strong industry fundamentals, deep partnerships and the efficiency of our platform gives us conviction in our ability to deliver sustainable growth. We'll continue to balance investment in innovation with disciplined capital deployment, ensuring that we build enduring value for our partners and shareholders. In addition to favorable industry fundamentals, powerful technology shifts, particularly those related to AI, are likely to reshape how consumers discover, evaluate and purchase insurance. In the near to midterm, it's foreseeable that AI may disrupt traffic patterns and monetization models for some of our publishers while also creating entirely new supply side opportunities. Because our marketplace spans hundreds of publishers across multiple formats and media channels, we expect our ecosystem as a whole to adapt well to these changes, preserving a resilient and diversified supply base. With materially greater scale than our competitors and growing network effects, we expect to remain the partner of choice for both publishers and advertisers and to continue gaining share as AI adoption accelerates. We're also highly focused on leveraging AI to enhance the productivity of our organization and better serve our partners. We believe we're just scratching the surface here and look forward to keeping you updated in the coming quarters. With that, I'll hand it over to Pat. Patrick Thompson: Thanks, Steve. I'll start by walking through the key drivers of our Q3 results. Transaction value was $589 million, up 30% year-over-year, driven by 41% year-over-year growth in our P&C vertical. In our health vertical, transaction value declined 40% year-over-year, consistent with our expectations. Adjusted EBITDA for the quarter was $29.1 million, an increase of 11% year-over-year. Our efficient operating model and disciplined expense management allowed us to convert 64% of contribution to adjusted EBITDA, up from 63% in the prior year. Excluding under-65 Health, our core business performance was very strong with year-over-year transaction value and adjusted EBITDA growth of 38% and 31%, respectively. Our take rate, defined as contribution divided by transaction value, decreased year-over-year as expected for 3 main reasons. First, our under-65 subvertical, which was historically at high take rates, has declined. Second, our largest P&C carrier partners have continued to represent an outsized share of spend in our marketplace. These carriers were among the first to restore underwriting profitability, which has given them a head start, but we are confident that other carriers will enter the race in a more meaningful way. Lastly, our take rate was impacted by large-scale new supply partner wins. These factors together have increased the percentage of transaction value from private marketplace transactions, which carry lower take rates. Importantly, our open marketplace take rates have remained relatively stable. The pressure we're seeing is primarily a function of mix shift. Looking ahead, we expect our Q4 take rate to be approximately 7%, with private marketplace transactions representing approximately 54% of total transaction value. As we plan for 2026, our current base case assumes we will start the year with a take rate roughly consistent with Q4 levels before the broadening of carrier demand has a meaningful impact on our take rate. Given the strong momentum we are seeing in carrier spend and our usual OpEx discipline, we believe we are well positioned to deliver adjusted EBITDA growth and maintain strong free cash flow generation next year. Longer term, we expect an uplift in take rates as more of our carrier partners ramp up their marketing spend to compete for policy growth, resulting in an increasing percentage of spend being transacted on our open marketplace. We expect record fourth quarter transaction value as we benefit from continued strong demand from the largest carriers in our marketplace. Accordingly, we expect P&C transaction value to grow approximately 45% year-over-year. In our Health vertical, which includes both Medicare and under-65 Health, we expect transaction value to decline approximately 45% year-over-year, driven primarily by under-65, which is stabilizing at a lower baseline. On a year-over-year basis, we expect fourth quarter transaction value and contribution from under-65 Health to decline by $34 million to $38 million or 61% to 68% and $8 million to $9 million or 80% to 90%, respectively. To provide additional insight into the new baseline for our Health vertical, similar to last quarter, we've included in this quarter's shareholder letter, both transaction value and contribution for our under-65 business. As a reminder, we expect 2025 under-65 transaction value of $95 million to $100 million and contribution of about $10 million to $11 million, with around $1 million to $2 million of that contribution coming in the fourth quarter. Looking ahead, we expect that under-65 will generate annual contribution dollars in the mid-single-digit millions, reflecting the reset in both scale and profitability for this subvertical. Moving to our consolidated financial guidance. We expect Q4 transaction value to be between $620 million and $645 million, representing a year-over-year increase of 27% at the midpoint. We expect revenue to be between $280 million and $300 million, representing a year-over-year decrease of 4% at the midpoint. We expect revenue as a percentage of transaction value to decrease meaningfully year-over-year as private marketplace transactions, which are recognized on a net basis, are expected to represent around 54% of transaction value, up from 41% in Q4 of last year. Adjusted EBITDA is expected to be between $27.5 million and $29.5 million, representing a year-over-year decrease of 22% at the midpoint, including $8 million to $9 million of impact from an expected year-over-year decline in under-65 contribution. Excluding under-65 Health, we expect adjusted EBITDA to be roughly flat year-over-year. Finally, we expect overhead to be roughly flat to Q3 levels. Turning to the balance sheet. We generated $23.6 million of free cash flow in the third quarter. We ended the quarter with a net debt to adjusted EBITDA ratio below 1x and cash of $39 million plus restricted cash of $33.5 million. Earlier this month, the restricted cash was used to make the initial FTC settlement payment and the remaining $11.5 million is payable in Q1 of 2026. Excluding these settlement payments, we expect to convert a substantial portion of adjusted EBITDA into free cash flow, providing us with continued financial flexibility to support our strategic priorities. Given our confidence in our strategy and long-term growth opportunities, we think our stock is an attractive investment and share buybacks are an accretive use of excess cash, particularly at current levels. During the quarter, we repurchased approximately 5% of our outstanding shares at a discount to market for $32.9 million. In addition, earlier today, we announced a new share repurchase authorization of up to $50 million, consistent with our disciplined approach to capital allocation and focus on maximizing shareholder value. With that, operator, we are ready to take the first question. Operator: [Operator Instructions] And your first question comes from the line of [ Nelia Wickes ] from Canaccord. Maria Ripps: This is Maria Ripps. It seems like a lot of investors are focused on carrier profitability sort of peak margins currently. And as you know, one of the largest carriers recently recorded a sizable credit expense to reflect excess profits. Can you maybe talk about sort of your view on how sustainable current profitability levels are and what that might mean for customer acquisition spend overall? Steven Yi: Maria, I appreciate that question. Yes, as you're alluding to, I mean, we've been getting that question a lot as well. And so it's good to be able to clear things up with what people are doing with regards to like inflating peak profitability for carriers with either peak of the soft market cycle or peak of advertising spend. And so the short answer to that is conflating those things, they couldn't be further from the truth because -- and to understand this, I think you really need to take a step back and like think about hard markets and soft markets and how they work. And so we just emerged from, what, a 2.5-, 3-year hard market cycle. Hard markets are -- get kicked off when there is reduced profitability because higher-than-expected loss ratios. And so what ends up happening is carriers start to get tighter underwriting restrictions. As they raise rates, they pull back on marketing spend. And so what happens during a hard market is actually you have a baseline where you start from low margins and then you see margin expansion as the hard market progresses. Now it starts to tip over into a soft market. And when those margins sort of start to peak and get to adequate levels, carriers then start to get more competitive. They get looser with their underwriting guidelines, start to reduce pricing and then invest in customer acquisition. And so all of that has the impact of actually compressing margins during the course of a soft market cycle. So when we hear things about carriers being at peak profitability, in a lot of ways, what that tells us is that we're just kicking off the meat of -- or the heart of the soft market cycle. And what you can see from our marketplace is that demand remains very, very top heavy. On one hand, we have 13 carriers who spend more than $1 million a month this quarter. That's the greatest number that we've had in history. And so we're seeing a lot of nascent broadening of demand. But again, we're as top heavy as ever with some of the leading carriers who are early to take rate, stepping on the gas in terms of marketing spend that continue to dominate our marketplace. And so with rates starting to come down, right, with profitability starting to come down as well, I think what you're going to start to see are a lot more carriers really stepping on the gas in 2026 and beyond, right, as we really enter into the meat of the soft market cycle and a broadening of demand that I think will continue and be a tailwind for us for the years to come. I do think it's worth pointing out that soft market cycles tend to last a lot longer than hard market cycles. Hard market cycles tend to be in about 2- to 3-year increments, and soft market cycles historically have been 2 to 3x that, so about 5 to 7 years on average. And so what we're expecting is several years of tailwind in terms of carrier advertising spend growth. We also expect to see the next level of growth in advertising spend really being from a broader set of top carriers in the top 25 with a lot of that spend, as Pat mentioned, coming through the open exchange, again, as demand broadens out. And so I hope that explains sort of our position and what we're hearing in the marketplace about peak carrier profitability. Certainly, that doesn't concern us at all. And if anything, that gets us excited that really the heart of the soft market is just beginning. Patrick Thompson: And Maria, this is Pat. I'll just add kind of one thing to what Steve said there, which is that we've got -- we're kind of 2 years into kind of an improving operating environment, and our guidance for Q4 envisions 45% year-over-year transaction value growth for us in P&C. So we feel like we've got the wind at our back right now, and we've got pretty nice operating momentum going into 2026. Maria Ripps: Yes. That's great, that's very helpful. And then can you maybe share a little bit more color on the transition within your Health vertical? Is that largely complete at this point? And I guess, how are you thinking about the long-term opportunity within that vertical sort of outside of under-65? Steven Yi: Yes. I'll take the second part first, I think Pat can address the first part of your question, which is -- I mean, what we're looking with in the health insurance vertical is really focused on Medicare Advantage. We think that's a very strategic vertical. Again, I'll reiterate that it's a $0.5 trillion industry, really new to direct-to-consumer advertising. So we see a ton of opportunities there over the long term. It's a challenging market environment right now with medical loss ratios being elevated because of high utilization rates. And so what you're seeing is a lot of plan redesigns and carriers pulling out of certain markets. And so we have our own version within the Medicare Advantage space of a hard market that we saw in the P&C space. And so I think most people are expecting that, the market to recover, I think, starting next enrollment period. And certainly, we anticipate carriers starting to reinvest in growth during that time. But really for us, it's about the long-term opportunity that Medicare Advantage offers just because of the market size and really where the carriers are in terms of their adoption cycle of direct-to-consumer advertising and direct-to-consumer platforms. And we see a lot of opportunities for integrated solutions to really help that space navigate the transition to direct-to-consumer distribution model. Patrick Thompson: And Maria, I'll tackle the shorter-term portion of that question and kind of the near-term financial outlook. So I think in under-65, we've taken a number of actions to kind of rebaseline that business. We think Q4 is kind of approximating that new baseline for us. And so for the quarter, we're expecting plus or minus 65% year-over-year decline in transaction value with contribution down 80% to 90%. And so it's a business that should make us $1 million or $2 million in Q4, and we believe it will be kind of a mid-single-digit million dollar contribution business for us next year. And kind of from a compliance standpoint, we've already implemented effectively all of the necessary changes. There hasn't been a whole lot of cost that we've had to layer on to do that. And actually, we've embedded some AI technologies into that framework, which has allowed us to automate a lot of the monitoring that historically would have been labor intensive. So we feel like we're in a spot where kind of towards the middle of next year, the comps for the health vertical will start to normalize. Operator: And your next question comes from Cory Carpenter from JPMorgan. Cory Carpenter: I was hoping you could drill down a bit more into what you're seeing in the discussions you're having with carriers. I think, Steve, last time we talked, carriers kind of hit the pause button a little bit just given the tariff uncertainty started to ramp in 3Q, and now you're guiding to accelerating growth in 4Q. So maybe just talk about some of the dynamics you saw intra-quarter? And then also, how much visibility do you have into year-end budgets at this point in the cycle? Steven Yi: Sure, Cory. Yes, so I think that when carriers hit pause, it was related to the uncertainties around tariffs. I think that paused -- I guess that pause was relatively short-lived. And I think the carriers who were spending aggressively prior to Q3, I think, resumed their levels of spend. And we're continuing to see them grow their spend right now, as you can see from our estimates and our forecast. I think in terms of visibility into Q4, I mean, obviously, we're sharing that with the guidance that we have. We -- there has been a tendency in these types of markets for there to be excess budget being kind of made available to us as the quarter starts to wind down. And again, because we're a very efficient source and very tractable source, that excess budget does tend to accrue to us. But it's not something that we're planning on right now. And so our Q4 estimates really have our best estimate to what the carrier budgets are going to be for the remainder of the year. We are starting to have some early discussions about 2026 budget. And those discussions have been highly encouraging. And again, they really support the narrative that up to this point, really the recovery of the ad spend market coming out of the hard market has been very narrow and robustly driven by a narrow set of carriers. Really, what we're doing is having discussions with everyone else and starting to see that there really will be a meaningful broadening of demand in 2026. The timing of that, I think, is going to be hard to gauge. Certainly, those carriers that we're talking about who have an early lead have taken a sizable lead. So it will take a bit of time and a few quarters for the expansion or the broadening of demand to really start to have a positive impact on our take rates. But certainly, we've been very encouraged by the early discussions that we've had with a lot of the major carriers, again, outside the top couple. And really do anticipate that '26 is going to be a year where we see meaningful broadening of demand within our P&C marketplace. Cory Carpenter: You answered my second question, which was any early thoughts in '26 so I'll turn it back over. Operator: And your next question comes from Tommy McJoynt from KBW. Thomas Mcjoynt-Griffith: A couple of questions on your comments around the take rate. Can you remind us, is there seasonality in 4Q? And then I just want to confirm that you're expecting both those quarters, the fourth quarter and then the start of 2026 to be 7% take rate. And then just your expectation about increasing the take rate over time, is that a function of a broader array of demand partners or supply partners or both? Patrick Thompson: Perfect. And Tommy, I can get started on that question, and then Steve and I can potentially tag team the last one. So on seasonality, historically, we had a good bit of seasonality in our business on take rate. And that was when P&C was a smaller percentage of the total mix and our Health vertical was significantly larger. Now we're in a spot in Q4 with under-65 having stepped down pretty meaningfully, where there is a lot less take rate seasonality in the business because the Medicare portion of that looks pretty similar to P&C overall. And to tackle the second part of the question, yes, our guidance for Q4 is for around a 7% take rate. As a reminder, for us, take rate is contribution divided by transaction value. And our view is that, that 7% plus or minus is kind of the right benchmark for the next couple of quarters. And kind of moving to the over time and the opportunity to drive take rate from -- to drive take rate over time, a broadening of demand would be kind of the primary driver of that happening. Obviously, broadening supply could help as well, but we believe that the demand side is the bigger opportunity. As a reminder, the largest advertisers with us tend to be relatively more private, smaller advertisers tend to be either fully open or very, very heavily open. And so as we see more people come into the marketplace and more people start to spend 7 figures a month, we would expect to see the business start to shift more to open over time. Steven Yi: Yes. And what I'll add is that as the demand starts to broaden out, which will be the key driver of take rate improvement on our end, one of the reasons that, that will primarily flow through the open marketplace is that the next set of carriers, right, who are underrepresented in our marketplace need a lot of help from us, right? So they leverage our managed services and our machine learning algorithms to optimize their campaigns on their behalf. They leverage our platform solutions and integrated platform solutions in order to help host and optimize certain parts of the conversion experience. And so we're putting a lot of effort behind those services that will better support and accelerate a lot of these carriers' journeys to really like embracing direct-to-consumer and embracing our channel and being successful in our channel. And again, all of those services are available really only through the open marketplace. And so that's why as demand starts to broaden now and we see other carriers within the top 25 really start to punch their weight in terms of allocation of advertising dollars to us, the way we make them successful is through these integrated solutions and managed services. And again, most of that spend is going to flow through the open exchange, which will have, over time, a very positive impact on our take rate. Thomas Mcjoynt-Griffith: Got it. And then switching over to some of our expectations for the overhead expenses. Do you guys have any plans to either add or account managers or technology headcount or make any other major new technology investments that we should be thinking about as we enter 2026 and think about the fixed expense leverage in the business next year? Patrick Thompson: Yes. And Tommy, thanks for the question. I would say we -- over the last couple of years, we've been consistently investing in the business, but doing so in a thoughtful and measured way. And we are a business that we've always run lean. We've got about 150 employees today. We're a bootstrap business. Efficiency is in our DNA. We will continue to invest to support the growth in our business, but we would expect to be a business where we would see leverage on those overhead items over time. And when I say leverage, I mean the mapping from contribution to adjusted EBITDA being flat to increasing over time. Operator: And your next question comes from Andrew Kligerman from TD Cowen. Andrew Kligerman: First question is around open versus private. And as private becomes a bigger proportion, I think first 9 months, it's now 48%. Steve and Pat, how do you see that kind of playing out long term, maybe 3 years out, 5 years out? Like where does that mix kind of settle down if it ever settles down? Steven Yi: Yes. I think it's a good question. I think we're at unusually high levels favoring the private marketplace right now. And again, I think that's really a nature of how the market has recovered on the heels of this generationally difficult hard market cycle. What we had was a couple of leading carriers who are early to take rate, right, step on the gas a full 1.5 years or so ahead of everyone else. And these are carriers who are very sophisticated in direct-to-consumer advertising, very sophisticated and well experienced in our marketplace. And the private marketplace product was designed to support advertisers like this and their relationships with some of our biggest publishers. And so I think the way that the market has recovered has really lent itself to us being over-indexed on the private side. And I think as the long term plays out, again, as the industry and the recovery and the demand starts to broaden out, not just because carriers who are later to take rate and get to rate adequacy start to spend in advertising and growth again, but because the whole secular trend towards direct-to-consumer advertising, which means online advertising and greater budgets allocated to measurable sources like us, as that's starting to really take foot again, right, or take hold again, what we expect are just more and more of the top 25 carriers allocating a greater percentage of their overall customer acquisition spend and converting in effect, right, a lot of commissions that they're paying to agents into advertising dollars that they spend with us as they prioritize their direct channels. And again, this growth based on the support that they'll need, right, and being relatively new to this channel, the services and the platform support that they're going to require to be successful in our channel, we believe that is predominantly going to flow through the open exchange. And so I think what you're going to see over time is the shift back to the open exchange. And again, we don't have any views as to exactly what that level should be. But certainly, I think internally, what we think is that the private open mix is kind of at a high watermark because of the unusual nature of the heaviness of demand right now, which is really a byproduct of how this market recovered after the most recent hard market cycle. Andrew Kligerman: I see. So maybe even next year, it could start to inflect more toward open again? Steven Yi: I think that's our anticipation. And again, I think what we're expecting is that for the next few quarters, the take rates will stay about where they are, right? But we do anticipate that next year, the demand will start to broaden out. And so you're going to see carriers 10 and 11 and 12 and 15 and 20 really start to spend more in our marketplace. And again, that's going to flow through the open exchange. And over time, that's really going to start to skew that mix back towards open from, I think, what we internally see as a high watermark right now. Andrew Kligerman: Got it, Steve. And then in your shareholder letter, you talked about how most carriers were investing well below their full potential. And there's this kind of analysis where you say that the investing was below 2019 levels last year, 2024, even though premium was up 44%. So I'm kind of -- here we are a year later, premium has kind of leveled out year-over-year, I think. What -- where are we versus 2019 in where carriers are investing? I'm kind of curious as to where we are now as opposed to the '24 number. Steven Yi: Sure. And let me try to answer the question and tell me if I'm not answering the question that you're asking. But I think where we are versus 2019, I think we've highlighted that stat just to show that even though the overall volume has gone up within our marketplace, with a couple of leading carriers really investing heavily in growth in '24 and '25, that the vast majority of other carriers, again, top 25 carriers, really weren't back to the pre-hard market levels of 2019 and 2020. And that's one of the reasons that we're still -- we're top heavier now than we were in 2020. Now if you're asking where the carriers are right now versus 2019, what I'll tell you is that I'll point back to the FEHB of having 13 carriers spending more than $1 million a month. That's an all-time high for us. I know that sounds a bit paradoxical with what I just said. But what that means is that, a, our marketplace has scaled tremendously as everyone knows. But b, we do see more carriers now than 2019 and 2020 who are really ready to adopt this channel. We have more integrations with more carriers than before to enable them to be successful in this channel. And so we see the nascent broadening of demand. We see a lot of encouraging signs from the discussions that we're having with these carriers. And so we see more carriers than ever before really poised to be able to grow in this channel and to advertise and punch their weight in this channel than we have ever seen and certainly a lot more than what we saw in 2019 or 2020. Now Andrew, did that answer your question? Andrew Kligerman: Yes, it did. It feels like directionally, there's still a lot of momentum there. Is that kind of the right take on what you're saying [indiscernible]... Steven Yi: 100%. That's absolutely right. I mean I think because of what happened with the pandemic-related hard market cycle and not transitioning to a soft market cycle, what, in some ways, gotten lost in a lot of that is just the secular shift that the whole industry is undergoing, right? And so really, at the heart of it is really that people are shopping for insurance online. The best way to connect with these consumers and sell policies to consumers is through advertising online and enabling policy sales online, yet still 2/3 of policies are still sold offline where the main expense -- distribution expense is commissions paid to agents. And so what you would expect to see are the advertising budgets continue to go up right, over time because what you're essentially doing is converting commissions that are paid to agents, which are in the neighborhood of -- for U.S. personal auto, like $17 billion, $18 billion a year, you would expect to see more of that being converted into advertising dollars as more and more carriers really adopt direct-to-consumer marketing as a necessary part of their distribution strategy. And so it's that secular story that I think got lost in the cyclical story that we've had over the past few years, and we're seeing that play out. And again, we're seeing that play out in the form of having 13, 15, 20 carriers at this point, who I think are really well poised to start to grow in our channel over the next several years during the upcoming soft market cycle. Andrew Kligerman: Super helpful. And if I could just sneak one last one in. Do you -- with all the turbulence in Medicare Med Advantage over the last 3 to 4 years, and it's been brutal, do you ever see that business getting back to -- because I think a lot has shifted to Med Supplement now. Do you ever see that business getting back to what it looked like in 2021 or 2020 or 2019? I forget what year, but it's been a rough number of years. Steven Yi: Yes. I mean I think that's a great question. I think that -- I think people in the industry don't expect a return to, I think, the frothiness that you saw in those markets when, quite honestly, the Medicare Advantage payers or the carriers in this case were probably making a little bit too much from Medicare Advantage policies. And again, there's been a resetting of payment rates, right, a resetting a lot of the plan. And the fact remains that it's a $0.5 trillion industry, right? Medicare Advantage policies are still profitable and big profit centers for these major carriers like UHC and Humana just because in the past, it used to be 2 to 3x as profitable to sell a Medicare Advantage policy as another policy. The fact that it's probably going to come down and to be maybe nearly as profitable as other health insurance policies they see, I mean, certainly, I think the frothiness will go away. But I do think that as that market matures, you're going to start to see it evolve more like the auto insurance industry where a lot of the carriers, depending on how they're feeling about their plan design, start to get aggressive about advertising and taking market share away from other carriers. And so we do see the market starting to settling down over time. And again, one that's going to look a lot more like the auto insurance industry than it does today. But certainly, I think a lot of the frothiness that you saw in the early period, I think, probably will be gone for a while. Patrick Thompson: Yes. And Steve, and this is Pat. I'll probably just add 1 or 2 things to what Steve said on that, which is I think the consumer penetration of Medicare Advantage plans continues to tick up a point or 2 every year. I think this year -- for this plan year, 54% of the enrollees chose it, and the estimates show that number going up to about 64% by 2034. And the other nice tailwind we think we have in the Medicare market for a number of years to come is online shopping. And so as you get 65-year-olds aging into Medicare, they are much more Internet savvy than the average Medicare consumer. And so we think that trend is going to be continuing every year, and we're going to have more and more Internet-native seniors coming into the market, which should be very, very good for our business over time. Operator: [Operator Instructions] And your next question comes from Ben Hendrix from RBC Capital Markets. Michael Murray: This is Michael Murray on for Ben. Congrats on the strong results. It looks like normalizing for the under-65 segment, adjusted EBITDA grew 31%. But then looking at your guidance, you expect EBITDA to be flat on transaction value growth of 38%, excluding the under-65 segment. So is there a level of conservatism baked in there? Any color on the puts and takes would be helpful. Patrick Thompson: Yes. And Michael, this is Pat. I would say that our philosophy from a guidance standpoint is we guide to kind of based on what we know as of today and what we have a high degree of confidence in. And I think the -- our track record against guidance has been pretty good over time, and we're guiding based on 28 days of actuals we've seen in this quarter and our view on how things are going to play out. So I think our goal is always to deliver the best numbers that we can, and we're going to be looking to do that this quarter. And I think we'll have more to report when we come out with earnings in February, but we try to be realistic and put out numbers that we believe we can achieve. Michael Murray: Okay. And just shifting gears. So a large MA payer recently indicated that they would be suspending their relationship with a large telebroker, which had high complaints to Medicare and also the least engaged members. Do you see any opportunity to gain share here just given payers' increased focus on quality leads? Steven Yi: Yes, I do. The way I see it is that is that I think there is a growing trend with payers to actually start to acquire customers directly and rely less on brokers and telebrokers. And so again, it's unfortunate that these types of things happen, right? Certainly, I think one of the reliance on telebrokers of this industry is that a lot of the carriers within the Medicare space are relatively new direct-to-consumer and certainly new to online customer acquisition. So I think as that industry gets more well versed in that area, I think there will be a shift from reliance almost entirely on brokers and telebrokers and e-brokers to sell policies and, again, a greater shift to carriers selling policies directly. And that's something that you saw in the auto insurance industry in the early days, and we expect that trend to take hold within the Medicare Advantage space over time. Operator: Okay. There are no further questions at this time. And that's all for now. Ladies and gentlemen, thank you all for joining. And that concludes today's conference call. All participants may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Hello. My name is Dustin and I will be your conference operator today. At this time, I would like to welcome you to the third quarter of NiSource Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Durgesh Chopra, Vice President of Investor Relations. Please go ahead, sir. Durgesh Chopra: All right. Thanks, Dustin. Good morning and welcome to NiSource's Third Quarter 2025 Investor Call. Joining me today are President and Chief Executive Officer, Lloyd Yates, Executive Vice President and Chief Financial Officer, Shawn Anderson, Executive Vice President of Technology, Customer and Chief Commercial Officer, Michael Luhrs; and Executive Vice President and Group President of NiSource Utilities, Melody Birmingham. Today, we'll review NiSource's financial performance for the third quarter and share updates on operations, strategy and growth drivers. We'll open the call for your questions after our prepared remarks. Slides for today's call are available in the Investor Relations section of our website. Some statements made during this presentation will be forward-looking. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. Information concerning such risks and uncertainties is included in the Risk Factors and MD&A sections of our periodic SEC filings. Additionally, some statements made on this call relate to non-GAAP earnings measures. Please refer to the supplemental slides, segment information and full financial schedules for information on the most directly comparable GAAP measure and a reconciliation of these measures. With that, I'll turn the call over to Lloyd. Lloyd Yates: Thank you, Durgesh, And good morning, everyone. Let's begin on Slide 3. At NiSource, our mission remains clear and consistent, deliver safe, reliable energy that drives value to our customers. The NiSource team has been focused on executing our premier business plan. We have advanced the work to develop data centers in Indiana and we refreshed the long-term outlook for our business. As a result of this, we've strengthened our financial commitments, demonstrated a disciplined and well-defined base business plan and have capitalized on emerging data center opportunities. Through approximately $7 billion of GenCo investments, generating approximately $1 billion in savings to be flowed back to our existing customers. This business model serves as a scalable platform for growth. These commitments are backed by our efficient capital deployment and safe and reliable operations within our robust regulatory framework. The refresh of our strategic plan outlook enables updated financial guidance while reaffirming our confidence in delivering sustainable value and extends the company's growth targets. This supports a 6% to 8% annual adjusted EPS growth rate in the base business through 2030. We are now introducing an 8% to 9% adjusted EPS compound annual growth rate for the consolidated business through 2033. This transparent approach drives predictability and aligns our financial plan with long-term stakeholder value. Turning to our key priorities on Slide 4. This quarter, we secured approval of the GenCo model in Indiana and full ownership of the Templeton Wind asset, reinforcing the strength of our constructive regulatory foundation. Our ongoing focus to refine our operations through AI efficiency and continuous improvement initiatives supports our steadfast commitment to customer affordability, ensuring that our investments and operational decisions are made to support our goal of keeping energy costs reasonable and predictable for the communities we serve. Today, we reported third quarter adjusted EPS of $0.19, bringing our year-to-date total to $1.38. We are reaffirming the upper half of our 2025 adjusted EPS guidance of $1.85 to $1.89. We're also announcing 2026 consolidated EPS guidance of $2.02 to $2.07. Despite these strong financial commitments, significant upside remains as we continue to invest in regulated infrastructure to better serve our communities. Developing projects supporting data center growth, onshoring of manufacturing and economic development across our territories remains robust across the outlook of our plan. Some of that robust pipeline has been realized through the recently executed contract with a large investment-grade data center customer. Let's move to Slide 5. Our AI and digital strategy is measurably driving efficiency scalability and better experiences for employees and customers. Our AI work management intelligence continues to deliver sustained field productivity uplifts of over 20%, as measured through work hours achieved, less idle time and less rework. Building on this success, we are expanding AI into additional high-value areas, including a new supply chain program to reinforce our focus on customer affordability. We are also piloting AI for system reliability and faster storm response, including average prediction and resource staging. Across the enterprise, we're employing AI through secure, role-based tools and strong governance. These initiatives are outcome-driven, along with our regulatory commitments and designed to capture sustainable O&M efficiencies while improving service quality. We're making deliberate investments in the people and capabilities required to meet the growing needs of our data center customers. Our ability to execute large-scale construction projects stems from a proven track record of project management, deep technical experience and a culture of accountability. These efforts align directly with our commitment to operational excellence, ensuring we're not only prepared to deliver but positioned to lead this next phase of growth. On Slide 6, we continue to make strong progress on our regulatory agenda. We're advancing our tracker programs in Ohio and Indiana and our Pennsylvania rate case remains on track with a final order expected by year-end. We're also advancing initiatives that promote economic development. These efforts expand the customer base, which leads to more efficient distribution of fixed costs. Columbia Gas of Virginia's partnership in delivering natural gas to Eli Lilly and Company's newly announced $5 billion manufacturing facility near Richmond, exemplifies a proactive approach to economic transition and infrastructure development. This state-of-the-art facility is projected to create 650 permanent jobs and 1,800 construction jobs, showcasing how strategic investments can drive both immediate and long-term economic benefits for local communities. Columbia Gas of Virginia's collaboration with state and local agencies underscore the commitment to attracting high-impact investments and building foundational energy infrastructure that supports ongoing economic growth. In parallel with these economic initiatives, NiSource remains focused on its energy transition strategy by advancing coal plant retirements, including Schahfer at the end of 2025 and Michigan City in 2028. The company continues to closely monitor executive orders and regulatory developments and is working with federal and state officials and MISO to ensure these transitions are managed responsibly. The goal is to provide the best outcomes for customers and communities, ensuring reliability and affordability. These efforts, together with investments in new facilities and infrastructure, reinforces NiSource's commitment to supporting both community prosperity and a sustainable energy future. The IURC's approval of GenCo unlocks a unique business model designed to protect existing customers, serve new customers with speed and flexibility and maintain the financial integrity of NIPSCO. The GenCo strategy goes beyond simply providing power and establishes a framework that strengthens our system, supports local communities and drives long-term sustainable growth for all stakeholders. Last month, we executed a data center contract with a large investment-grade customer to support significant gas and battery storage build-out in Northern Indiana, representing approximately $6 billion to $7 billion in capital investment. This project fully aligns with our strategic priorities, enabling affordability for customers, supporting economic development in the communities we serve, enhancing shareholder value for a strengthened financial profile and prudent risk management. I want to emphasize that customer affordability remains central to our strategy. The special contract ensures that growth enhances value for our existing customers, going well beyond cost neutrality. The counterparty's use of the NIPSCO's infrastructure will generate significant bill savings for our retail customers, while investments in grid modernization will enhance reliability and reduce long-term operational expenses. This project also delivers meaningful economic development benefits, including job creation, workforce development and increased tax revenues that support public services and infrastructure across Indiana. Lastly, this agreement enhances our existing financial commitments and will diversify and strengthen NiSource's earnings, cash flow and growth profile, as Shawn will touch on later. But first, I'll turn it over to Michael to walk us through the agreement in more detail. Michael Luhrs: Thanks, Lloyd. I'll begin on Slide 8. I'm happy to share this breakthrough infrastructure agreement driving significant energy development in Indiana. Due to confidentiality agreements and ongoing discussions with other parties, we are limited in the details we can share at this time but we are excited to share these developments. Under this agreement, GenCo will construct 2 combined-cycle gas turbine power plants, each with a nominal output of 1,300 megawatts and 400 megawatts of battery storage capacity. Drawing on our expertise in the energy sector, these technology solutions were designed to ensure cost effectiveness, long-term value and meet system reliability standards. Our approach delivers benefits across the board, providing customer benefits, state-level energy planning and regulatory compliance, community economic development, shareholder benefits and aligns with MISO's capacity requirements. This collaborative model ensures that all stakeholders, customers, the state, community, investors and MISO are positioned for success. These assets will support transmission and substation infrastructure, representing a total capital investment of approximately $6 billion to $7 billion. The agreement outlines a multiphase development plan with a clear demand-aligned ramp for efficient and scalable employment of resources. We plan to submit this special contract agreement to the IURC for a review before year-end and expect approval in the first half of 2026. The agreement is structured with a 15-year initial term providing long-term stability. Our returns will be generated under a fixed rate contract structure with consistent capacity payments and pass-through treatment of certain cost. Termination protections also help mitigate early exit risk and further safeguard financial integrity. Furthermore, we have entered into an engineering, procurement and construction agreement with a joint venture between Quanta Infrastructure Solutions Group and Zachry Industrial for development of the 2 GE Verona -- Vernova state-of-the-art CCGT stations. Additionally, we have signed a separate EPC contract with Quanta to lead the construction of our advanced battery storage facilities, reinforcing our commitment and capability to deliver effective, reliable and sustainable energy solutions for Indiana. We're confident in our ability to execute this project effectively, safely and with minimal disruption to our existing operations. As Lloyd noted and as highlighted on Slide 9, affordability is central to our strategy, particularly in an inflationary environment where energy costs can pose significant challenges. This project has been carefully structured to uphold NiSource's commitment to customer affordability so that growth does not come at the expense of existing customers. NiSource has a prioritized customer affordability by structuring a special contract that ensures NIPSCO retail customers are not financially responsible for the infrastructure costs associated with serving this large load customer. These protections apply both during the contract term and at its conclusion. This arrangement will allow for approximately $1 billion to be passed back to our existing NIPSCO electric customers, creating bill savings over the contract life. Through the construction and development of new assets, we are building a more resilient future-ready grid. Moving to Slide 10. This project drives meaningful economic development in Indiana, creating more than 2,000 jobs, spanning a range of skill levels and industries and contributes to long-term employment opportunities. The boost to local and state tax revenues from an investment of this magnitude is tremendous, enhancing the overall value and sustainability of the community by supporting public services and infrastructure. Beyond direct financial contributions, the initiative promotes workforce development in our communities while also attracting top talent, energizing Indiana's economic -- economy and positioning the region for the sustainable economic growth. We continue to see strong momentum from large load customers. Combined with the recent commission approval of the GenCo structure, we are unlocking a differentiated business model, one that protects these benefits and provides benefits to existing customers, while enabling us to serve new large load customers with speed and flexibility. These developments give us a high confidence in the pipeline, which Lloyd will speak to later. I'll now turn things over to Shawn. Shawn Anderson: Thanks, Michael. Good morning, folks. I'll start on Slide 11. As Lloyd and Michael have both highlighted, GenCo investments we plan to develop will enhance the value proposition our business delivers to its customers in Indiana and will enhance long-term shareholder value. This partnership represents an investment in inventory of approximately $7 billion, incremental to our refreshed $21 billion base plan capital expenditures forecast. Consistent with rate designs from our base business, GenCo's capital investments are designed to drive revenue and earnings growth immediately and will track the rate of deployed CapEx, which will bolster NiSource's financial profile. This partnership is projected to be accretive for NiSource shareholders in 2 key areas. First, over the initial term of the contract, the returns generated are forecasted to achieve a rate of return greater than NIPSCO's regulated rate of return. Second, the project is accretive to NiSource's earnings per share forecast in all years of the plan. Strong cash flow returns are forecasted from this project, which will provide a broad range of financing solutions to achieve 2 primary goals: one, maintain our commitment to credit quality and achieve a 14% to 16% FFO to debt in all years of our plan; and two, maximize the long-term value creation to shareholders by minimizing financing costs. GenCo investments are expected to strengthen NiSource's financial position by diversifying and increasing its earnings and cash flow potential while also establishing a new platform for long-term growth and development. Turning to Slide 12. We recognize the tremendous growth potential ahead and have carefully and diligently built comprehensive risk management protections into our plans to protect the long-term stability of our enterprise operations. Importantly, the contract provides for a fixed rate structure, which mitigates exposure to dispatch, fuel and merchant power risks, providing stable, predictable earnings and enhances long-term planning confidence. To further safeguard value creation, the termination payment mechanisms will mitigate early exit risk and uphold financial integrity throughout the life of the contract. The contract includes certain cost-sharing arrangements designed to mitigate construction execution risk. The rate design is developed to allow for recovery of our currently projected construction costs over the agreement's term. We are confident that the provisions we've incorporated into this contract will enhance our financial flexibility and positions NiSource for continued success. Looking ahead on Slide 13, we have a clearly defined path towards successful execution of this initiative, supported by key milestones. As announced last month, this data center contract is a strategic step forward in our long-term vision and approval of the GenCo model supports the speed to market customers need to ramp their services. The additional financial disclosures provided today extend our long-term business and financial plan and build upon a premium base business. Our future trajectory is enhanced through this project's multiyear development cycle and achieves full growth potential by 2032. Shifting gears, Slides 14 and 15 detail our third quarter adjusted EPS of $0.19 per share compared to $0.20 per share for the same period last year. Earnings benefited from constructive regulatory outcomes at NIPSCO Electric and Columbia operations. These gains were offset by depreciation from new assets placed in service, the impact of higher balances, long-term debt and increased operating expenses. On Slide 16, we refreshed our 5-year capital expenditure plan outlook, starting with a base capital plan of $21 billion, which supports our 6-state traditional utility footprint. The refresh in our base capital plan is $1.6 billion larger than our prior base plan. CapEx increases are driven by several projects moving from our upside plan, including MISO long-range transmission Tranche 1, PHMSA compliance in Ohio and customer transformation initiatives supporting the enterprise. In addition to the base plan investment, we are now introducing approximately $7 billion of data center investment at GenCo for a consolidated total of $28 billion of capital expenditures over the next 5 years. The magnitude of this new capital plan is substantial, signaling one of the largest investment cycles in NiSource's history. This significant increase, nearly 45% higher than the previous 5-year outlook demonstrates the company's proactive response to evolving market demands and invests in safe and reliable energy systems to support our communities, especially as the sector approaches a generational opportunity, driven by digital transformation across industries. Beyond the refresh in the base capital plan, we have also updated the upside capital portfolio of projects supporting our traditional utility operations. These projects now estimate at $2 billion of CapEx and reflect MISO D-LOL compliance projects, electric transmission investments and system modernization and enhancement. These projects remain outside our current guidance. And once they reach our threshold to be included in our base plan, we will flow these through the full plan. As we assess market and system requirements, new long-term investments arise beyond our base and upside plans. These are highlighted on Slide 17. All of these projects require further development and we are actively pursuing their commercialization. Consistent financial execution has strengthened our balance sheet, allowing NiSource to be flexible in capital allocation and be opportunistic to invest more in our system to enhance safety and reliability when necessary. Our updated long-term financial commitments are shared on Slide 18, which reflect the increased investment opportunity we are now positioned to access. There is no change to our current year projection. We are reaffirming 2025 adjusted EPS guidance of $1.85 to $1.89, expecting to achieve results in the upper half of this range. As Lloyd highlighted earlier, we have bifurcated the cash flow returns associated with our existing utility operations and are defining those through our base plan guidance. We are introducing new disclosure for the cash flow profile of the GenCo business model, now that it has been approved by the IURC. This new investment thesis will combine with the base plan guidance to produce consolidated financial returns and guidance range. We expect our base plan adjusted EPS to grow annually [Technical Difficulty] from 2026 through 2030, incorporating the refreshed financials in our plan. This provides the foundation for our 2026 guidance range, which we are initiating, consolidated adjusted EPS of $2.02 to $2.07 per share. Included in this range is $0.01 to $0.02 per share coming from the development of GenCo-related assets. Beyond 2026, we expect our base plan to continue to grow annually at 6% to 8%, which is fueled by a continuation of the 8% to 10% rate base growth planned across the next 5 years to support safe and reliable operations across our 6-state utility portfolio. Similar to 2026, we are now incorporating returns associated with new data center investments, which now produce a forecasted consolidated rate base growth of 9% to 11% over the same 5-year horizon. The returns associated with these investments provide for a consolidated adjusted EPS CAGR of 8% to 9% through 2033. Importantly, we will continue to rebase our annual base plan adjusted EPS growth guidance off of actual results, allowing for outperformance to compound across the plan horizon. We are committed to minimizing the financial impact that our safety, reliability and compliance investments have on our customers. The GenCo structure enables an increase in capital investment without those expenditures flowing to existing customers. In addition, the customer flowback mechanism from this contract refunds system costs to customers while eliminating risk associated with fuel costs for large load generation assets. And finally, operational excellence and innovation in our operations project flat O&M over the life of the plan, all of which help support annual bill increases of less than 5% across NiSource. Additionally, we remain committed to 14% to 16% FFO to debt in all years of the plan. Slide 19 details our financing plan. Our credit metrics have continued to improve and strong operational cash flow continues to support capital investments. Long term, GenCo will further strengthen our balance sheet while we maintain financing flexibility to meet our strategic goals. We're excited to expand our partnership with Blackstone Infrastructure Partners through GenCo. As minority interest holders, Blackstone will contribute 19.9% of all investments, supporting both current initiatives and future growth opportunities. Blackstone has committed $1.5 billion in equity, which reinforces our capital structure and positions GenCo for long-term success in meeting the evolving energy demands of data centers. Efficient financing plans help to avoid financing drag and minimize public equity dilution to our shareholders, thereby maximizing overall return. We continue to favor utilization of our ATM structure. As of September 30, we have settled all forward agreements under the ATM, with approximately $50 million of remaining capacity in the program. We expect to issue $300 million to $500 million of maintenance ATM equity annually across the 5-year plan to support our consolidated capital expenditures. Turning to Slide 20. The company's adjusted EPS trajectory reflects strong and consistent execution with adjusted EPS increasing from $1.37 in 2021 to a projected adjusted EPS of $1.88 this year based on our guided midpoint, representing an impressive 8.2% CAGR over the 5-year period. This performance underscores the resilience of our base plan, which has historically outperformed expectations and is projected to sustain 6% to 8% annual adjusted EPS growth through 2030. With that in mind, I'll point out the midpoint of our 2026 consolidated adjusted EPS guidance range of $2.02 to $2.07, represents an 8.8% growth from our 2025 midpoint. Building on this proven foundation, the introduction of GenCo adds a meaningful layer of growth, contributing an incremental $0.10 to $0.15 per share in 2030, growing to $0.25 to $0.45 per share through the horizon for a consolidated adjusted EPS CAGR of 8% to 9%. The GenCo EPS contribution range incorporates the recently announced data center agreement and contemplates multiple customers at the top end. Our strategic negotiation pipeline of 1 to 3 gigawatts, which Lloyd will touch on momentarily, offers us the opportunity to exceed the top end of the range. We have consistently demonstrated strong execution and growth as reflected on Slide 21. Our dedication to customers, investors, employees and all stakeholders remains at the core of what we do. Strong execution of our base plan, including operations, financing, regulatory and prudent investment strategies position us favorably as we step into 2026 and beyond. The value proposition NiSource continues to offer investors is diversified and regulated utility assets with the opportunity to invest in both programmatic gas infrastructure and the long-term energy transition story of a fully integrated electric business. These elements have been core to our story and the emerging opportunity to support economic development, onshoring and data center development truly differentiate our value proposition relative to many alternatives in the market today. And with that, I'll turn things back over to Lloyd. Lloyd Yates: Thank you, Shawn. We are proud to have secured a data center contract with a creditworthy commercial partner, positioning us to deliver on all of our key strategic objectives as outlined on Slide 22. Our teams engaged across an array of stakeholders to protect our retail customer base while expanding shareholder investment opportunities, diversify our earnings profile with stable, predictable contracted earnings and cash flow, capitalize on load growth and data center opportunities, which validates our growth thesis in Northern Indiana and establish a customer-centric business model that supports our communities. This partnership strengthens our competitive position as we continue negotiations with additional prospective customers and advance our strategy to deliver long-term value to Northern Indiana and our stakeholders. Finally, moving to Slide 23. Our GenCo strategy is underpinned by a robust and growing pipeline that positions us for long-term success in the data center market. This commercial partnership represents the proof set of the generation capacity opportunity we've highlighted for the past year. We have secured data center load that will be backed by 3 gigawatts of generation capacity with negotiations progressing on an additional 1 to 3 gigawatts of projects from new and existing customers, creating a clear path to scale. Looking ahead, developing opportunities could expand this pipeline even further by an additional 3 gigawatts, reinforcing our ability to deliver sustained growth. This opportunity showcases the strength of our team and the precision of our strategy. I'm incredibly proud of the discipline and focus that has brought us to this point. Our team's operational excellence, customer focus and accountability continues to set NiSource apart. And I'm confident it will be the driving force behind the successful execution of this initiative. With that, we'll open up the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Shah Pourreza from Wells Fargo. Shahriar Pourreza: So just without going into specific names, can you just maybe speak to the quality of the customer kind of behind the agreement? So is it a true hyperscaler, counterparty or colocator? And kind of now that you've secured this initial deal, how are you sort of thinking about the broader pipeline as we think about that 1 to 3 gigs in negotiations? So the broader counterparty quality and what it could mean to the CAGR? Lloyd Yates: So what I will say is this is a very large investment-grade data center customer that [indiscernible] that will be served in front-of-the-meter via the NIPSCO transmission network. As mentioned in the -- as mentioned earlier, we're going to build 3,000 gigawatts, it will be 2.4 gigawatts of load. I think as we think about our pipeline, I think we -- it was mentioned earlier, I think what we've unlocked is a new business model. We've got -- I think September '24, we got the GenCo [ declination ]. And I think you've seen through this transaction is really a blueprint of what we're going to execute on the go forward. So as we look at negotiating with subsequent counterparties, we've shown you a blueprint of all the things that we're going to put in place before we announce this to the market. And I think the team knows that we've aligned the organization to focus on these things and we have a path towards execution on all of these subsequent customers and we're excited about it. Shahriar Pourreza: Perfect. Appreciate that. And then just maybe quick one for Shawn. I know, obviously, just on credit, you talked about sort of the targets but focusing a little bit more on sort of the downgrade thresholds, especially as you become more integrated, any kind of sense on how they could think about the thresholds as you become more and more integrated? I mean it's obviously -- you guys have highlighted, it's a new business model for them. Quantitatively, it seems to make a lot of sense. But just more on the qualitative aspects. Shawn Anderson: Yes, sure. Thanks, Shar. Appreciate the question. So we've been actively engaged with our rating agencies while we've been developing the strategy. And candidly, we think that the thoughtful risk management provisions in the contract really provide for protection that's pretty similar to our existing base business. And we don't believe a change in thresholds is warranted or will occur. Our current guidance is 14% to 16% in all years of our plan and our downgrade threshold is 13%. So there's already adequate cushion baked in and we think strengthening in the business, the cash flow profile of the business should continue that trend. Operator: Our next question comes from the line of Nicholas Campanella from Barclays. Nicholas Campanella: I just wanted to ask, maybe you can just kind of talk a little bit about the $0.25 versus the $0.45 range and what puts you at the high end or low end of that contribution? And I just wanted to confirm that the 3 gigawatts in strategic negotiations is incremental to this figure. Lloyd Yates: Shawn, do you want to take that one? Shawn Anderson: Yes, sure. So to retain our competitive advantage, we can't disclose the individual customer contributions. However, the GenCo structure adds a meaningful layer of growth that we've highlighted here. The $0.25 to $0.45 through 2033 contemplates multiple customers at the top end. But our full strategic negotiation pipeline, 1 to 3 gigawatts would outperform the top end of that range. Now depending on customer preferences, choice of technology, time line for that development to occur, customer ramp rate, it can move around a fair amount, which is why we've got a bit of a broader range. But the squaring of this is $0.25 to $0.45, that range. The customer that we announced in September fits within that range. And then the top end of that range would include some portion of the advanced negotiations with the ability to outperform the range in total if all of that were to be unlocked. Nicholas Campanella: Okay. I appreciate that. Appreciate the clarification. You mentioned there's a $1.5 billion commitment, I think, to GenCo for minority interest holders. Just what is the contribution then from the NiSource side from an equity perspective? Is it just 50% of that remaining $5 billion? How should we kind of think about that in terms of funding GenCo and the capital structure? Shawn Anderson: Yes. All of the guidance -- the earnings guidance that we provided today is projected reflecting the total cost of financing, including all equity, all debt, all noncontrolling interest associated with minority interest investors. So all of that's already reflected in the earnings per share contribution. The $300 million to $500 million equity is the total amount of equity in our guidance range for NiSource. That supports the full $28 billion of capital expenditures that we've announced today. All of that is reflected in that range of $300 million to $500 million annually of ATM equity from NiSource. Operator: Our next question comes from the line of Julien Dumoulin-Smith from Jefferies. Julien Dumoulin-Smith: Excellent update. Nice, done, guys. In fact, if I can push a little bit further. Look -- [indiscernible] just with respect to the $0.25 to $0.45 here, can you elaborate a little bit of what's reflected here? I mean, is it just the CapEx, the first $7 billion here through the first 5 years? How should we think about like the totality of CapEx to get you there? And then related in tandem, right, you have this 1 to 3 gigawatts of upside here. Can you talk about what's included in what that earnings profile would look like? Is it as simple as taking the $0.25 to $0.45 and I don't know, say, doubling that for the argument's sake? How would you help frame out the sensitivity on that front, too? Lloyd Yates: Answer the same question, Shawn. Shawn Anderson: So the CapEx that we projected in our 5-year plan ranges from $6 billion to $7 billion. That supports GenCo development. That includes all of the capital necessary to support the customer that we announced in September. It also reflects some capital allocation that allows us to competitively compete for these large load opportunities and position us to access the strategic negotiations that Lloyd and Michael highlighted earlier. We've got no incremental disclosure in guiding within the range of $0.25 to $0.45. That $0.25 to $0.45 of earnings power is reflective of the customer we announced in September and on the higher end would reflect additional strategic negotiations flowing into it but is not required for us to reach that range. Julien Dumoulin-Smith: Got it. All right. Lloyd, I can try asking you again, right? Let me put it this way. Lloyd Yates: Take another shot at it. Julien Dumoulin-Smith: Let me put it this way. If you got the full amount of that 3 gigawatt and again, I'd love to hear your confidence on being able to pursue this full 3 gigawatt. Is that -- how would you characterize the sensitivity around that, if there's any other way to get at it? Again, I get that you don't want to be too overly specific here but if you can a little bit -- and obviously, the timing on that 3 gigawatt? Michael Luhrs: So the part I'm going to talk to -- this is Michael. I'm going to talk to the 3 gigawatt and the opportunity in the pipeline. And then I'm going to let Shawn highlight a little bit more how that 3 gigawatts would reflect into the earnings range on that. But Lloyd hit a little bit of this already. I think one of the key points of this, when you look at that 3 gigawatts and the executability of it, the fact that we have the ability to move quickly on the regulatory model, that we have the flow back to customers, that we have the engineering, procurement and construction partnership lined up, that we have long lead time equipment secured and that we have the ability to be able to execute that and pull that through from a construction environment, that gives us a speed to market and execution that gives us high confidence in the ability to execute on other opportunities as we would -- as we move those forward and we move those into commitments. So we feel very good about that 3 gigawatts from the aspect of that we can execute it, we can pursue it. But we will do that as we have here in a disciplined, methodical manner that supports our balance sheet, supports our customers and lends to the overall accretion. Shawn? Shawn Anderson: Yes. Then maybe 2 other points. As we think about other future customers, the choice of technology, the construction time line will matter and how it squares within the range. Some assets are more quick to construct such as battery that could accelerate itself into the construction time line versus something that might take multiple years, such as some gas technologies. So that would be important to be able to answer your question, Julie, so that -- Julien, so that customer preference does matter into how it would flow into the guidance range. That said, we do see an opportunity to accelerate customer demand ahead of even 2033. So as we think about that CAGR, that $0.25 to $0.45 CAGR, we do see potential upside in our current forecast even with the existing customer we announced in September, should we have the ability to accelerate customer demand and/or construction time lines, we could see that pull closer in our forecast. Julien Dumoulin-Smith: Yes. Understood. Okay. Fair enough. Lloyd, quick, squeezing this in. Thoughts on the state of Indiana, your relationship. I'm sure you've talked with the governor's office, et cetera. Any two cents you'd offer here quickly? I'd love to get your candid assessment here. Lloyd Yates: Yes. I think that Indiana is open for business. I think that, if you talk to the governor's office and when we have conversations with the governor in his office, they like these economic development opportunities. They continue to be focused on affordability. So the idea that this transaction flows back a little over $1 billion to customers over the contract period, I think that the relationship is positive. I think that more -- I think that they're interested in more of these opportunities. But I think affordability is going to be on the forefront and we're very focused on that and developing this GenCo model helps with that in a great way. Operator: Our next question comes from the line of Eli Jossen from JPMorgan. Elias Jossen: Just wanted to start on kind of the learnings and business expertise gained in the first data center contracting announcement. I know that GenCo probably plays a big role here. But just thinking about the keys to getting this project done and then how you guys can build on that and go ahead and execute additional contracting announcements going forward. Lloyd Yates: Michael, why don't you handle this one? Michael Luhrs: So what I would say is that we feel like this really creates a strategic platform for growth for us. If you reflect on the comments that Lloyd mentioned earlier, we have a 2,400-megawatt system now. This will double that system in load. We're building 3,000 megawatts of generation to support this. So when you think about the business learnings, we have created a foundation and a platform. And as was mentioned earlier, through that regulatory, through the EPC, through the long lead time equipment, through the ability of execution, it only heightens our ability to be able to execute on future opportunities. So overall, we feel like there's plenty of learnings and we will continue to evolve, it really helps set us up in a strategic way to be able to develop the rest of that pipeline. Elias Jossen: Awesome. And maybe just to expand on that a little bit. I think you talked a bit about kind of some of the downside and risk protections you have in the initial contracting. And I recognize you just touched on that a bit. But just can you expand a little bit about that, just what types of protections are in these contracts and how you can kind of -- and what those do for overall execution on these projects? Michael Luhrs: Yes. So one of the things I'll say to that is we started out with the fundamental pillar of that in this GenCo structure, we want to maintain NIPSCO's financial integrity. And we've given very thoughtful consideration to the risk profile of new investments. We have built protections into the various contracts to address these risks associated with either -- with multiple factors. And we've included features such as cost-sharing provisions as well. Operator: Our next question comes from the line of Bill Appicelli from UBS. William Appicelli: Just a question on -- if you could speak a little bit to maybe what the return profile or capital structure assumptions are within the GenCo. Lloyd Yates: Shawn? Shawn Anderson: Yes. Thanks, Bill. Appreciate the question there. So we can't disclose the exact ROE as it's confidential with the customer. And we've not disclosed the targeted return for GenCo, only that we expect it to achieve an overall return realized greater than NIPSCO's regulated rate of return. That helps us support the development, construction and the ownership over the life of the investments. And then in terms of the cap structure itself, we sought for and were approved by the IURC, some level of flexibility in the capital structure for GenCo. Given the construction development cycles to support the speed to market for new customers, we'll strive to capitalize GenCo in a manner to do 3 things: #1, support our existing financial commitments, including the 14% to 16% FFO to debt that we expect in all years of our plan; two, obviously, safely and reliably support the cash flows for construction and the development of these assets for our customers. And then finally, maximize the long-term value to our shareholders, minimizing dilution and financing friction is the key. That helps us realize the greatest return possible over the life of the assets. William Appicelli: Okay. And then just a question around the timing. You talked about some opportunities for upside here and pulling forward or accelerating maybe the ramp. So I mean, it looks like most of the capital based on the CapEx slide you have, I think about $6.4 billion of the gross CapEx for GenCo is spent through by the end of '30 but we're talking about sort of full ramp on 2033. So maybe you can speak to that sort of timing differential of when most of the capital appears to have been invested versus the realization of the earnings. Shawn Anderson: Yes, Bill. The majority of the CapEx then, Bill, occurs between 2025 and 2030. So there's additional work to complete the project that occurs outside of our 5-year plan horizon that we've guided to today. That's critical because that helps us get to the final energization steps necessary for the customer to conclude their ramp, which as we stated previously, finalizes in 2032. So it's slightly outside our plan horizon from a capital expenditure standpoint. When we think about the contract, it provides for a fixed rate structure. It functions like a straight fixed variable rate design. So as additional capital expenditures are developed, the recovery follows those investments. Thus, you need to step through the completion of the construction cycle before you see the fixed rate contracts step up to a full rate and full return. So the structure provides for stable, predictable earnings. It enhances our long-term planning confidence. But it's key to link both the conclusion of the construction time line to energize our customers at the highest possible ramp that they can then utilize. If that all can accelerate, that's the pull forward that you could see and could frame as greater upside, both to the 2033 guidance range, the CAGR as well as the intermediate periods that we guided to ahead of that. William Appicelli: Okay. And then just to clarify, I mean, as far as the upside from the negotiations ongoing, I mean, that can be realized within the same time period. I mean, obviously, I know it depends on how it plays out. But I mean, is it practical from just a planning perspective to assume that some of this could be stood up within this window of through '33 in terms of the additional [indiscernible] Lloyd Yates: Yes, it is very practical. William Appicelli: Okay. And that could drive higher EPS upside. Lloyd Yates: That's correct. Operator: Our next question comes from the line of Steve Fleishman from Wolfe Research. Steven Fleishman: Congrats. So just maybe this is a question kind of more on both the kind of earnings and cash flow profile of GenCo. So like if I take the incremental investment net to NiSource and just did a normal equity and return and such, it would be, I think, maybe more than $0.10 to $0.15 by 2030. But you're also issuing like a lot less equity than normal and such. And then you've got this ramp-up in later years. So can you just give kind of -- feel like that the contract has been structured in a way that kind of balances those 2 in some way. Could you just talk to that and help us better understand how much more then is needed to get to this 2033 in terms of capital investment, if anything, Shawn? Lloyd Yates: Shawn? Shawn Anderson: Yes, sure. So Steve, the $7 billion guided CapEx total to support GenCo is the total amount of capital necessary for us to develop through 2032 and would be enough capital for us to afford that full range of $0.25 to $0.45 through that horizon. Through 2033. To the extent that can accelerate, meaning the capital could be consumed and the construction could occur faster, that could create upside for us as well as the customer as the customer then would be able to ramp faster than what the original time line for the construction was contemplated to be. Incremental to that would be the upside portfolio that Lloyd just answered the question to that Bill asked the question about. None of that CapEx is necessarily in the 5-year capital guidance. All that CapEx then would be incremental CapEx and thus potentially incremental financing, which would be necessary for us to realize greater returns over the 5-year horizon or as we look through 2033, greater returns outside the range of $0.25 to $0.45 per share. Steven Fleishman: Okay. So just the $0.25 to $0.45 because that includes both the current deal plus the strategic negotiations, you don't need more capital to get to that range beyond what you said? Shawn Anderson: Just to clarify, Steve, the current customer and the current guidance range, the $0.25 to $0.45 is inclusive of just the customer that we've announced in September. There is the potential that additional customers could push up to that -- push us to the higher end of that range and that would require incremental capital. Steven Fleishman: Okay. And then the developing opportunity is a whole other bucket. Shawn Anderson: That you got it. That's exactly right. Steven Fleishman: Okay. And then the -- in terms of the core customer, we're capturing most, if not all, the capital in the $7 billion. Shawn Anderson: In the $7 billion, yes. Inside the 5-year horizon, just due to the time line of the construction, you just don't see the 2031 and 2032 capital being allocated on the annual slide but it's reflective in the [indiscernible] bucket that we guided to. Steven Fleishman: And then the cash flow portion of this, relative to $7 billion, when you look at the incremental equity for your plan, it's relatively modest. So I assume there's stuff structured here that -- that's been able to help minimize equity need. Shawn Anderson: Yes, it strengthens as we go. So you do see the increased cash flow profile start to strengthen once the customer begins ramping in 2027 and then grow more significantly around 2030. The plan horizon itself doesn't give you annual guidance beyond 2030 but you'll see strengthening cash flows coming in that time period as the customer begins to ramp. Operator: Our next question comes from the line of Nick Amicucci from Evercore. Nicholas Amicucci: Yes. Sorry, Shawn, I'm going to pile on here, if I can. So just to think of it a little bit more simplistically, if we were to look at kind of the gigawatt addition and then kind of the EPS accretion, is, I guess, roughly $0.08 per gigawatt, a good rule of thumb as we think about this? I know it's probably overly simplistic but it's just for our sake. Shawn Anderson: We have no incremental guidance on earnings per share per gig because the customer technology choice, the construction time lines will all have an implication there, Nick. Nicholas Amicucci: Fair. Shooters got to shoot. So -- and then as we think about kind of the procurement and the EPC contract associated with it, when we're thinking of the Quanta contract, is that strictly for the first 3 gigs? Or is that -- does that kind of -- do you have the ability to kind of upsize that given the opportunity you have? Michael Luhrs: Yes. We've set up the structure and the partnership so that we intend to be able to upsize as we grow. We want to be able to have a very deployable and scalable platform, which is what we have. But the initial agreements cover the 2 CCGTs and the 400 megawatts of batteries and associated infrastructure. Lloyd Yates: I think let me add a little bit to that, Michael, in that we set this partnership with Quanta, Zachry so that we can execute subsequent projects a lot faster as opposed to going out doing [ deep RFPs ] and doing things that take a long period of time. I think the collective idea here is to be able to execute on what the customers need in a way that's agile and flexible. And I think this partnership allows us to do that. Nicholas Amicucci: Perfect. And then if I could just squeeze one more in just really quickly. So when we think of the affordability theme, as we kind of size it up, should we expect -- is it kind of -- is the pitch, I guess, to the government [indiscernible] incremental savings that as you kind of -- as you grow this, you could provide incremental savings to kind of the end consumers? Lloyd Yates: That is our objective. That's our objective. As we add new customers and they utilize the transmission grid because they're using the grid that was really paid for by our current retail base, we should flow back -- continue to flow back savings to our retail customers, which will help with the affordability. Operator: Our next question comes from the line of Travis Miller, Morningstar. Travis Miller: I'm just going to go back -- I'm going to go back to the cash flow profile one more time here. In the contract, is there any cash inflow from the customer before they start ramping? And then related to that, could the financing be more short term in nature to get you those kind of 3 to 4 years of high cash outflow for the CapEx and then ultimately get paid back once the customer started paying? Is that the way to think about cash flow profile? Lloyd Yates: You want to take that, Shawn? Shawn Anderson: Yes, sure. The contract has been structured to prioritize cash flow to aid in the construction time lines. And the total financing, net of all of that, the contract design as well as the debt equity and minority interest forecast that we've projected today is reflected in the $300 million to $500 million range of equity. In terms of where we place debt or how much debt and when that flows, we'll continue to evaluate those options. We've got a range of different opportunities on how we could do that and we'll strive for obviously the lowest cost that we can on a long-term basis. Travis Miller: Okay. So there would be some cash flow coming in before the customer ramps. Is that the way to interpret it? Shawn Anderson: Yes, before the customer fully ramps up. Travis Miller: Okay. Okay. And then one high-level question. Why battery? Why would you add a battery on to this? Lloyd Yates: When we look at the system reliability, there's multiple facets to it. Batteries provide the capability for capacity and quick response, which when we look at the overall system, it requires a diversity of assets, everything from renewables to batteries to gas assets and more. And so we will continue to develop our system in a way that highlights that reliability and grid strength. And so when we pick these solution sets, that was part of the answer. Operator: Our next question comes from the line of Paul Fremont from Ladenburg. Paul Fremont: It sounds like part of the $7 billion is either transmission or distribution. Is that all going to be spent at the GenCo or is some of that going to be spent at NIPSCO? Shawn Anderson: Yes. For guidance purposes, we're going to segment things into the GenCo segment, Paul. Paul Fremont: Right. But technically, in other words, is -- I get the guidance but is the actual spending by the -- taking place some of that at the utility and some of that at the GenCo. That's really my question. Shawn Anderson: Yes. That is correct, Paul. Paul Fremont: And then can you give us a sense of how much of the $7 billion then would be pure generation spend? Is it -- I assume it's the majority but... Shawn Anderson: It is the majority. But we're not in a position to guide within that range, Paul. Paul Fremont: Okay. And you can't -- can you give us a sense of like the cost per kW of the CCGTs or of the battery? Lloyd Yates: That's competitive information also. Paul Fremont: Great. And then just to clarify, the 8% to 9%, is that essentially inclusive then of the $7 billion and the lower 6% to 8% is excluding that $7 billion. Is that essentially the way to look at that? Shawn Anderson: Yes. Our base plan guidance reflects the 6% to 8% annual adjusted earnings per share growth rate that our base plan, our traditional utility plan has achieved in the past and which is expected to grow annually off of our actual results through the plan horizon of 2030. For the consolidated CAGR, that reflects the $7 billion of CapEx that you highlighted as well as the returns associated with this customer. And that's what provides the range of $0.25 to $0.45 inside that 8% to 9% CAGR. Paul Fremont: Great. So -- and then the last question that I have is -- can you provide sort of the load that goes with each of the EPS data points that you're identifying for the GenCo. So I guess it would be [ 26, 30 and 32 ] for this new customer? Shawn Anderson: Unfortunately, we are -- we cannot provide that information. Paul Fremont: Okay. And then maybe last question. In the GenCo proceeding, some of the interveners were looking to share returns above sort of NIPSCO's allowed return on equity. Is there a similar sharing mechanism that was ultimately contemplated as part of the GenCo approval? Or is that yet to be determined as you go through the individual contracts? Lloyd Yates: So we'll submit the contract for this customer by the end of the year. And in that contract, there's a flowback mechanism, as I mentioned, of over the term of the contract to a little over $1 billion going back to our retail customers. There's no sharing of returns. Operator: The next question comes from the line of Christopher Jeffrey from Mizuho. Christopher Jeffrey: Just regarding the decision to keep on Blackstone as a 20% stakeholder in GenCo. Just kind of curious how much of a consideration there was to retaining 100% of the business and those earnings against insulating some of that financing risk? Shawn Anderson: Thanks, Chris. Appreciate it. Well, we believe Blackstone is really the strongest long-term partner for GenCo. It's a large-scale strategic investor, provides a robust platform for future investment. They've got familiarity and support for the state of Indiana. They've been unwavering on how they support the growth and expansion in our communities. They've been a great partner to date. The transaction itself helped, reduces our overall financing needs. It reinforces our strong balance sheet. It lowers our cost of capital. It provides diversification from traditional capital markets. The commitment of not only the $1.5 billion of equity but really to grow these projects beyond is equal to 19.9% of the ultimate GenCo pipeline. So it gives us a long surety and visibility to pricing certainty to grow -- to fund a growing business, all while construction is ongoing as well. So it gives us an immense amount of flexibility that we think drives greater value for our shareholders. Christopher Jeffrey: Great. And then maybe to ask one non-GenCo. Just as far as the base capital plan update, I just kind of noticed that it seems to be -- there seems to be a lot in 2029. I was just wondering if that's any like specific bespoke projects or just kind of more clarity into that year? Shawn Anderson: Yes. Across the plan horizon, about 50% of the CapEx portfolio is natural gas investment. 25%-ish is related to NIPSCO traditional electric operations and about 25% ends up being GenCo support on the generation build-out predominantly. So that's kind of the overarching profile of it. 2029 is where we start to approach some D-LOL compliance requirements that are necessary for us to invest in generation. So you see some larger investments in 2029 associated with that. We also start to see PHMSA compliance requirements at Columbia Gas of Ohio in '27 and '28. MISO long-range transmission also starts to pick up really actually in '29. So it's in that same year as well. Operator: There are no further questions. I will now turn the call back over to NiSource team for closing remarks. Lloyd Yates: Thank you for your interest in NiSource. We're excited about this period of time of growth in our company and appreciate your questions and investments. Thank you. Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. My name is Jale, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal First Quarter 2026 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Vibhuti Nayar, Head of Investor Relations. Please go ahead. Vibhuti Nayar: Thank you, Jale. Good afternoon, everyone. And welcome to Viavi Solutions Fiscal First Quarter of 2026 Earnings Call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. With me on today's call is Oleg Khaykin, our President and CEO; and Ilan Daskal, our CFO. Please note this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements including the guidance that we provide during this call and our expectations regarding the acquired business are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results discussed on this call, except revenue, are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release as well as our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Lastly, we are recording today's call and will make the recording available on our website by 4:30 p.m. Pacific Time this evening. With that, I would now like to turn the call over to Ilan. Ilan Daskal: Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the first quarter of fiscal year 2026. Net revenue for the quarter was $299.1 million which is above the high end of our guidance range of $290 million and $298 million. Revenue was up 3% sequentially and on a year-over-year basis was up 25.6%. Operating margin for the first fiscal quarter was 15.7%, above the high end of our guidance range of 14.6% to 15.4%. Operating margin increased 130 basis points from the prior quarter and on a year-over-year basis was up 570 basis points. EPS at $0.15 was also above the high end of our guidance range of $0.13 to $0.14, and was up $0.02 sequentially. On a year-over-year basis, EPS was up $0.09. Moving on to our Q1 results by business segment. NSE revenue for the first fiscal quarter came in at $216 million, which is above the high end of our guidance range of $208 million to $214 million. On a year-over-year basis, NSE revenue was up 35.5% as a result of strong demand for lab and production as well as field products and was mainly driven by data center ecosystem as well as the acquisition of Inertial Labs. NSE gross margin for the quarter was 63%, which is 210 basis points higher on a year-over-year basis and primarily driven by higher volume and favorable product mix. NSE's operating margin for the quarter was 7.5% compared to negative 4.6% during the same quarter last year. NSE operating margin was above the high end of our guidance range of 5.4% to 6.2% primarily driven by higher fall-through. OSP revenue for the first fiscal quarter came in at $83.1 million, which is in line of our guidance range of $82 million to $84 million, and was up 5.5% on a year-over-year basis. The increase in revenue for the quarter was primarily a result of strength in Anti-Counterfeiting and Other products. OSP gross margin was 52.3%, down 300 basis points from the same period last year and was mainly due to unfavorable product mix. OSP's operating margin was 37.1%, which is below our guidance range of 38.1% to 38.5% due to product mix and higher manufacturing costs. The operating margin decreased 250 basis points on a year-over-year basis. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q1 were $549.1 million compared to $429 million in the fourth quarter of fiscal 2025. Cash flow from operating activities for the quarter was $31 million versus $13.5 million in the same period last year. CapEx for the quarter was $8.5 million versus $7.3 million in the same period last year. During the quarter, we successfully refinanced our $250 million, 1.625%, 3-year convertible notes due in March 2026 with $250 million, 0.625% 5.5 years convertible notes due in March 2031. As part of this transaction, existing convert holders exchanged about $100 million for the new convert and the remaining $150 million raised will serve to pay off the balance of the March 2026 convert. This remaining $150 million is included in the cash balance of $549 million at the end of the first fiscal quarter of 2026. In conjunction with this transaction, we purchased approximately 2.7 million shares of our stock for about $30 million. We have almost $170 million remaining under our current authorized share repurchase program. The fully diluted share count for the quarter was 227.9 million shares up from 224 million shares in the prior quarter and versus 228.6 million shares in our guidance for the first fiscal quarter. Moving on to our guidance for the second quarter of fiscal 2026. In mid-October, we successfully closed the acquisition of Spirent's High-Speed Ethernet, network security and channel emulation business lines from Keysight. The acquisition of these business lines is expected to add about $200 million of annual revenue run rate, which is above our prior estimate of around $188 million. We also concurrently closed the previously announced $600 million Term Loan B, which was used to fund the transaction at close as well as general corporate purposes. In addition to the acquisition of Spirent's business lines, we expect the second fiscal quarter revenue for Viavi to reflect continued strength in many of our end markets. Our guidance includes financial performance of Spirent's business line for approximately 10 weeks. For NSE, we expect continued strong demand for lab and production as well as field products driven by the data center ecosystem. For OSP, we expect quarter-over-quarter revenue to be lower, in line with seasonality of lower demand for both anti-counterfeiting and 3D sensing. For the second fiscal quarter of 2026, we expect Viavi revenue in the range of $360 million and $370 million. We expect total NSE revenue between $283 million and $293 million, including revenue from Spirent between $45 million and $55 million. OSP revenue is expected to be approximately $77 million. Operating margin for Viavi is expected to be 17.9%, plus or minus 60 basis points. Total NSE operating margin is expected to be 13.6%, plus or minus 70 basis points. This includes Spirent's contribution, which is expected to be slightly accretive to existing NSE margin for this quarter. OSP operating margin is expected to be 34%, plus or minus 50 basis points. EPS is expected to be between $0.18 and $0.20. Viavi stand-alone EPS is expected to be about $0.18 and we estimate Spirent contribution to EPS is in the range of $0.00 to $0.02 after allocating pro rata interest on debt. Historically, Spirent's agency revenue has been stronger in the second half of the calendar year. This strength in revenue is reflected in the guidance for the fiscal second quarter. We currently plan to leverage the complementary product portfolio and capabilities and record NSE as one business segment going forward. Our tax expense for the second quarter are expected to be around $10 million, plus or minus $500,000 as a result of jurisdictional mix. We expect other and other income and expense to reflect a net expense of approximately $12.2 million, which increased mainly due to the interest on the TLB, and the share count is expected to be around 228.7 million shares. With that, I will turn the call over to Oleg. Oleg? Oleg Khaykin: Thank you, Ilan. The first quarter of fiscal '26 saw the continuation of strong momentum from the fourth quarter of fiscal '25 coming in above the high end of our guidance. It was also significantly up year-on-year and countercyclically up quarter-on-quarter. NSE revenue in Q1 grew approximately 35% year-on-year, primarily driven by strong demand from the data center ecosystem in aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules and NAMs drove strong demand for lab and production products in support of the AI data center build-out. We saw strong demand across all optical networking product lines, the 800-gig and 1.6 terabit Ethernet test, chip-to-chip interconnect and protocol test and a broad range of production test equipment. In addition, we are now also seeing a growing demand for our traditional field instruments by hyperscalers as they build out and operate their new AI data centers. We expect this strong momentum to continue well into fiscal 2026. Lastly, with the recent acquisition of the highly complementary Spirent's High-Speed Ethernet product line, we have further strengthened our position in the data center ecosystem, significantly increasing our business footprint there. Our Aerospace and Defense business also saw another strong quarter of growth, driven by continued high-end demand for our positioning, navigation and timing products. We expect the strong demand to continue throughout fiscal 2026. The service provider business was generally stable during the quarter. The gradual recovery in fiber was mostly offset by the continued soft demand for wireless products. We expect this trend to continue in the medium term. Looking ahead, we expect strong quarter-on-quarter growth in NSE driven by both the continued strong demand from the data center ecosystem and aerospace and defense customers for Viavi classic products and the incremental revenue from the recently acquired Spirent product lines. Now turning to OSP. OSP saw strong year-on-year revenue growth, driven mostly by recovery in anti-counterfeiting in other products. The 3D sensing demand was in line with seasonal expectations. We expect fiscal Q2 to be down quarter-on-quarter, in line with the seasonally lower demand for both anti-counterfeiting and 3D sensing products. In summary, we expect the strong start in Q1 to continue throughout fiscal '26, supported by the stabilization and recovery of our mature end markets, including the service providers, anti-counterfeiting pigments and 3D sensing. And the continued strong demand by the data center ecosystem and aerospace and defense customers. In conclusion, I would like to welcome our new employees to Viavi and thank the Viavi team for its continued strong innovation and execution. Lastly, I would also like to thank our customers and shareholders for their continued support. With that, I will now turn it back to the operator for the Q&A. Operator: [Operator Instructions] Your first question comes from the line of Ruben Roy of Stifel. Ruben Roy: Great to see the progress and congrats on the closing of the Spirent business. I guess the first question, like would be as you continue down the road of diversifying your revenue. Maybe you can give us an update of what the mix is. If you think about your kind of core telecom service provider revenue in NSE versus some of the new products that you're selling into hyperscale. And then obviously, you've been talking a lot about aerospace and defense doing very well with expectations of continued growth. So maybe if you could just give us the mix as the first question. Oleg Khaykin: Sure. Thanks. So I would say if we look at our exit of the fiscal year, we did about 50-30-20, so 50% service provider, 30% data center ecosystem and 20% aerospace and defense. And as we close the Spirent business, it's about, what, 45%, about 40% and then the remainder. So 45% is service provider, 40% data center and 15% aerospace and defense, purely as you average it out. So we are now getting to the point where the data center revenue is almost approaching the traditional service provider, which significantly derisks the volatility of the service provider spend and the aerospace and defense continues to grow as well. So I think as we look forward, we are going to probably, I would say, exiting this year when we see data center ecosystem so fast a service provider and service provider will still grow, but it's growing at a much lower rate than data center and our aerospace defense will also continue to grow. So we'll have a much more balanced portfolio and less, I would say, dependent on the neurotic service provider spend. Ruben Roy: Great. And if I take Spirent out of the guidance, it looks like my math is right, you're still growing around 10% sequentially on that core NSE business, almost 20% year-over-year. And I was wondering if you could maybe break out given that service providers still sort of mix with wireless still having some headwinds, et cetera. If you think about that growth on the core business, can you break it out between sort of what you're seeing in data center versus the aerospace and defense business? Oleg Khaykin: Sure. So I think the -- when we look at data center, we look at everything that pulls into data centers. So we're going to see a very strong demand, believe it or not for our field instruments, but it's a field instrument by the data center ecosystem. It's these specialist fiber companies that are doing now interconnect. I mean, you probably saw some very interesting dynamics with NVIDIA investing in the Nokia, I can elaborate on that. But what we are seeing is, initially, it was all about building our data center, then they realized the fiber interconnect between data center is c***. So they said, okay, we cannot accept the traditional fiber network providers. So there's been a significant investment and emergence of the specialist fiber interconnect companies that are now spending quite a bit of money really improving the reliability and performance of the fiber networks. And we're actually seeing that is driving also the revenue of our traditional, what we call field instrument business. Then, of course, the classical data center, the 1.6 terabit, 800-gig, the production -- optical production test equipment continues to grow very nicely into the December quarter. And there's going to be an additional momentum building as far further into the March quarter. And aerospace defense will continue to gradually grow on a continued basis that he has been doing. And the only, I would say, kind of the cylinder in our engine that is still fairly weak is the wireless business due to the wireless spend dynamics by the major wireless carriers. But you saw a very interesting thing. Just as we said about 2 years ago that eventually somebody will wake up that the fiber is awful, and they'll start investing in fiber, and that's already happening now. So this whole thing is trickling down from data center into fiber networks. Well the next bottleneck that is not ready for the whole AI ecosystem is the wireless RAN. And that's why, actually, we were not surprised at all that NVIDIA put in $1 billion into AI-RAN in Nokia, and we do hope -- I mean, we are seeing -- that's really accelerating the 5G advanced and 6G development, we will likely pull this in closer. And we know the others are seeing it and they're also going to be start scaling their investments. So we do think our wireless business probably would be kind of the last cylinder in the engine to turn on into the next calendar year. So that's kind of hopefully gives you a good color on all the elements of the NSE business. Ruben Roy: Yes, absolutely. If I could sneak one in for Ilan. Great to see the operating margin guidance for NSE, obviously, Spirent's starting to contribute there. But can you give us maybe how you're thinking about operating margins as you sort of run rate the business to full quarter, kind of exiting fiscal '26 and into fiscal '27? Ilan Daskal: Sure. Thanks for the question, Ruben. So currently, including Spirent, we are towards kind of the $160 million a quarter. I believe that, obviously, we are still working on or just starting to work on integration, et cetera. So probably for the early part of 2026 calendar it can reach maybe $5 million higher or so at around the $165 million range. Operator: Your next question comes from the line of Mehdi Hosseini of SIG. Mehdi Hosseini: Two from my end. Oleg, let's assume wireless doesn't come back. It was kind of a worst-case scenario. Given the Spirent and the baseline assumption that it would be $0.08 accretive and the strength in fiber and perhaps a slightly higher growth rate for smartphone next year. It seems to me that you should be exiting calendar year '26 at close to like $1 annualized EPS. And if wireless were to come back, there will be growth above that target. And I'm not asking for a guide, but given the scenario you laid out, wireless could come back and just be extra and help you with a higher earning power. Any thoughts here would be great. Oleg Khaykin: Well, so I mean, as you can see, we -- just as our business started thinking from the cutback in service providers in 2022, I mean, we had a significant operating deleverage. Well, now that we're going in the other direction, we're getting significant operating leverage where every incremental dollar just drops right to the big chunk of it drops to the bottom line. So I mean you're right. I mean getting up to -- if things continue as they are, I mean, it's entirely possible we'll be running around close to $1 a share next year. I mean your words in [ god ears ]. And you're right, wireless is a significant incremental catalyst once it gets going because it's really been one of the segments that's kind of been left behind in this whole recovery. And I mean clearly, as it starts turning around, it will be a major contributor to the bottom line. Mehdi Hosseini: Okay. Great. And just double clicking on the OSP and given the upcoming changes to the form factor for a smartphone application, should I assume that some of the past pricing pressure is going to abate and go away? And at least you should have some operating leverage there without contemplating what the real smartphone unit growth would be? Oleg Khaykin: Sure. I think you're right. I mean it's a more maturing segment. I mean, the volumes, I mean, we're fairly saturated in that market. So the only incremental growth comes from the unit growth and maybe greater adoption of the world-facing 3D cameras. But we are seeing actually also incremental upticking of the facial recognition technologies with the Android players in Asia. Not the big ones like Samsung, but it's mostly the Chinese. So we do think it will provide some additional growth. And there, we sell wafers to module integrators. And so it provides a bit more leverage there. But also the automotive market with LiDAR and Asia is becoming a big consumer of the 3D sensing filters. Now we got to put it in perspective. It's kind of hard to compete with 300-plus million units. I mean, automotive is like maybe 10 million. But let's say, it's a nice welcome growth in the unit volume. And in terms of the ASP erosion, I think it's fairly stabilized at this point. And I'd say the volume is the only thing that matters right now in terms of growing the revenue in that segment. Operator: Your next question comes from the line of Ryan Koontz of Needham & Company. Ryan Koontz: If we could double-click on the data center opportunity. I think that's been a little bit of a quiet market for you in terms of, I think, investors understanding your exposure there. Great to hear your working that up. Look, do you feel like your execution in that customer segment is where it needs to be today? Do you invest more in go-to-market and do those customers have different product requirements that you might need to re-spin new products for data center? Or is it largely the same products as your traditional OSP's. Oleg Khaykin: Well, it's a great question. We've been investing in this business for the last 3 years. And the term that I've borrowed from distribution business is turns and earns, and let me just clarify what I mean. So what we're seeing today, as we shifted from telecom service providers driving the road map to the data center driving our road map, you're going from anywhere 6 to 8 years between the generations of products to about 2 to 3 years, see a very much faster turnover of the technologies. It means you got to deliver your products now every 2 to 3 years but also because it is driven by engineering labs and new product development, it comes in at a much higher margin. So you are turning the product portfolio much faster, which means you don't have this like a long value of waiting for the next generation, and you're earning higher percentage gross profits because it's a first to market always wins big. So in that respect, we really like it because it's increasingly the size of the market for us and it's accelerating the revenue velocity for us, and we get paid for the value we deliver by being always the leader in this market. So today, I mean, the reason I use word the data center ecosystem is because our products don't just address a particular segment to address everything along the entire value chain. It's your processor companies. You all know who they are. It's your physical layer, communication companies like SerDes and the module integrators. It's your system companies, optical gear, like Ciena [indiscernible] Cisco and so on and so forth. And it's actually ultimately the actual hyperscaler who have extensive internal R&D, developing anything from optical modules to MEMS switches to full-blown data center equipment. So I mean, this is like the best thing you can have and you're dealing with engineering budgets and the intense competition where everybody is trying to be first to market with a better technology. So I mean, this is like truly living inside of tornado and our team loves it because that's actually plays very well to our traditional strength to be at the bleeding edge of bringing leading-edge technology to the optical networking. Ryan Koontz: That's super helpful. Would you say like you had... Oleg Khaykin: And actually, I would add one more thing... Ryan Koontz: Sure. Oleg Khaykin: I would add one more thing. We talk always about speeds of 400, 800, 1.6, 3.2, that's a network speed. What you also have in parallel is chip-to-chip interconnect. You go from PCIe 3.0, 4.0, 5.0 today is 6.0 and then will be next year 7.0. So every time you move to a higher speed, you need a corresponding PCI Express next tender as well. So your -- it's a TikTok. You deliver your network speed, which immediately needs wholesale replacement of all the chip-to-chip interconnect. So that's a force multiplier on the whole data center growth. Ryan Koontz: Yes. That's really great. And would you say you have a similar set of competitors and similar share in the data center relative to your legacy customer base? Oleg Khaykin: Well, I would actually say, where we play at a purely the Layer 0 Layer 1, we have a significantly greater share because that's traditional strength of JDS UniPhase, Viavi, we are very strong in it. With acquisition of Spirent, we have now added Layer 2 to Layer 7 capability as well. And there it's a -- there's 2 major competitors in that space. I mean, clearly, one was Spirent and the other one is Keysight through their acquisition of Ixia. So I would say, today, it's Viavi and Keysight, there are big players in that space. And there's about maybe 4 or 5 additional smaller players playing in individual layers kind of all over the world. But it's very much, I would say, a major players because the level of intensity and speed with which you have to bring out the products. It's not a low-budget game. It drives quite a significant R&D spend. So I would say, in that particular space, I'd say it's Keysight and Viavi. Ryan Koontz: Great. And maybe just a follow-up, if I could, on the aerospace and defense area. Can you kind of characterize those products are those P&T like modules you're selling in typically? Or what's the fulfillment model look like? You're selling to drone companies and the like or defense companies? Oleg Khaykin: Yes. So it goes into everything. So we have a smorgasbord. We can sell you inertial measurement unit. It looks like a chip in a specialized package then we can sell you a module that has multiple of these chips with our controller and logic that does the inertial navigation system or we can sell you a full-blown inertial navigation system with sensor fusion receiving sensor data from cameras, the satellite antennas and everything else. So we have a full solution and depending which customer we engage and what their relative capabilities are, we'll sell them individual components, we sell them the modules or we sell them the complete solution. So if you're looking at the -- some of these drone companies, I would say, in Central and Eastern Europe. I mean, you may -- they may buy the entire solution. If you're dealing with a more sophisticated U.S. companies, I mean, they may be buying modules or individual components that go into their critical systems. But it's all about autonomous vehicles, payers, ground, sea or undersea. I mean, you name it, that's what we are servicing. And the nice thing about it, it's the same platform that can address all these different markets, including the mining, agricultural and surveillance drones and all these things that you need. If you think about the fully GPS independent autonomous kind of robotic vehicles. Operator: [Operator Instructions] Your next question comes from the line of Michael Genovese of Rosenblatt Securities. Michael Genovese: Look, I think my phone broke up because I think you gave a new annual revenue number for the HSE acquisition, but I just didn't hear what it was. Oleg Khaykin: Yes. So Ilan, go ahead. Ilan Daskal: So basically, currently, once we close the transaction, we got a little bit more insight. Currently on an annual run rate, we believe it's about $200 million, including the emulation piece, the channel emulation. And prior to that, we thought more about $188 million. So yes, it is higher right now. Michael Genovese: Okay. So I guess my question is... Oleg Khaykin: Spirent business, right? Michael Genovese: Yes, yes, yes. And so my question has to do with, does that change on higher revenue or any other reason kind of bring an accretion date sooner than 12 months? Or are we still thinking 12 months before it becomes accretive? Ilan Daskal: So it depends also on seasonality. Remember that there are stronger half fees on the second calendar half. So that's the reason that this quarter, we see some positive EPS, most likely in the first calendar half, it's a little bit softer. But when you think about it from a full calendar year, yes, it's slightly higher, but when you compare it to our fiscal year, the dynamic changes a little bit. Oleg Khaykin: Yes. But net-net, clearly higher revenue makes the accretion sooner rather than later. Michael Genovese: And then I think most of my questions were asked, but I just want to ask specifically on large service provider like AT&T, Verizon or the cable companies. If we look at the wireline part of the network. We heard weak wireless from you on that. But and then it sounds like a lot of the optical activity is being done by optical specialists. But is there anything to say about the Tier 1 large cable and telcos on the wireline side? Is there any trend there that you can call. Oleg Khaykin: I would say gradual recovery. I mean fiber is growing. But we do know there's going to be some big RFPs coming out from major cable operators and the service providers. And it's more -- now when I look at the fiber, we are now starting to segment them into professional grade fiber operators and kind of consumer grade. So AT&T is more of consumer grade. So they just continue like -- they keep talking about adding a lot of fiber customers. And that ultimately is great news to us, and I just want to hear -- when I see the money, I'll believe it. I mean they did make some pretty bullish announcements. And we do think next year, there will be accelerating some buying. So it all plays very well. But then there is also this whole category of what I call professional grade fiber operators, emerging companies like [ Lumen ] similar companies in Europe who all they focus on is interconnecting all these data centers. And I'd say the next one will be, how do you connect them all to the wireless baseband -- I mean, base stations to the towers because you now need to bring a reliable 10-gig, 100-gig traffic to the -- all the towers. So we do expect the combination between the traditional and the professional grade fiber operators continue to grow nicely into next year. But even -- I'd say, take the base, the base business, the traditional service providers it's all goodness because it's a high tide that raises all the boats. So we cannot call it as a base business and all these other companies who call them speedboats. So it's your profession grade fiber operators the semis, modules, NEMs, these are all kind of speedboats that are growing much faster than the overall market. But I mean, it is encouraging to see even the -- your base service providers starting to spend more money. Operator: Your next question comes from the line of Andrew Spinola of UBS. Andrew Spinola: Just one for me. Wondering if you could provide a little bit more color on the business -- the Spirent business that you acquired. With the margin profile on that business consistent with the overall business, was it better or worse? And when I'm thinking about modeling that post the 12 months when it turns accretive, do you think you can drive the margin in that acquired business in line with maybe your targeted 20% for NSE? Or do you think you can do better? How should I think about that? Oleg Khaykin: Well, so I think this -- that business is both higher gross margin than the average NSE and it's higher operating profit than average NSE. So it's net-net accretive and I do believe that through integration and greater efficiency, we can actually expand their margins further. And I think we do have -- I think, on cost of goods, we should be doing a lot better because we have now greater scale in the parts procurement and greater leverage of engineering and sales resources. Ilan Daskal: And Andrew just specifically on the gross margin, we see it from the mid- to high 60s, which is, as Oleg mentioned, definitely above our corporate average. So it's a nice contribution there. Andrew Spinola: Got it. And is that business seeing the same acceleration that you're seeing in the rest of your data center business? Oleg Khaykin: Yes. Well, I mean, probably not the same percentage because it's a much bigger -- from a much bigger base. But absolutely, they have a very exciting product called -- there's a traditional HSE high-speed Ethernet test that you sell to chip companies, the modules and systems and enterprise data centers. And then there's a whole different flavor called AI, HSE, which just generates AI workloads so you can test your network on how good it is to run the AI traffic and AI data. So that piece is growing even faster. Andrew Spinola: I see. And I wanted to ask one last question actually on the data center business. I'm trying to think about that business in terms of units versus what other growth drivers you might have. So how much of that business is -- so if the number of switches being produced doubling, tripling, what have you, how does that translate to benefits for you? Are you seeing most of your growth because of the growth in units in these products? Or is it that there's just a lot more investment in R&D, new SKUs, new players in the space? How should I think of that? Oleg Khaykin: It's a combination. So when we talk about sales to the lab, i.e., to the R&D equipment, it's a number of companies, number of projects, number of chips. And remember, I also said the very fast product turn cycle, right? Like every 2, 3 years, next generation. So that drives the more like the lab sales are driven by projects, right? So it's a number of companies, number of projects and how quickly one generation transitions to the next. And when we talk about production, that is driven purely by units. So the more units you're producing, the more you're shipping, the more you need to buy to set up more production lines. So this is more like if you think about contract manufacturers, the more lines they add, the more equipment they need to buy. Andrew Spinola: What's the split in your business between unit-driven business versus project-driven business on the data center side, roughly? Oleg Khaykin: We don't really split it. That's dicing it every thing because it's effectively the same product, the same technology packaged into different box. Operator: Your next question comes from the line of Tim Savageaux of Northland Capital. Timothy Savageaux: Congrats on the results and the guide. And I want to focus in on there, in particular. First, on Spirent, you mentioned a larger base interested in what context you meant that. But it sounds like given what you're guiding to, and I don't know if you're 50-30-20 going to 45, 40 15, I'll just assume that's fiscal '25 versus fiscal '26. But it seems like Spirent's going to be well above 50% exposed to data center. Is that fair to say -- go ahead. Oleg Khaykin: Yes. So I mean the percentage just gave you, that's exiting this calendar year. It's like exiting December, the mix, including now the new Spirent business. Now in terms of their exposure, I would say, if I define the data center ecosystem, I'm in line's share of their business is data center ecosystem. But they also have enterprise and enterprise data center. So I mean -- when I say data center ecosystem, it's chips, modules, systems and hyperscalers. They also have the enterprise, like, say, financial insurance and other companies we their own -- we test their own firewalls and things like that. So that's -- I would say probably it's an 80-20 split probably. Timothy Savageaux: Okay. That makes sense. And looking at the organic guide, which is still pretty impressive, I guess, [ $310 million to $320 million ] and understanding you're getting a healthier Spirent contribution despite the shortened time period and you explained that. But as you look at that, and kind of asked this a little bit before, but we've seen some pretty good numbers in terms of what some of the big U.S. carriers are looking to spend in Q4. I might have looked at that organic number and thought an old-fashioned budget flush. Apparently not, it doesn't look like you're building much in there. Am I right, for the traditional Tier 1 telecom providers, are you looking at that to be flat [indiscernible] Q3 to Q4? Oleg Khaykin: No, there is some incremental traditional. Sorry. So for the traditional. Sorry, guys, for traditional, there is some incremental growth, but I mean, I won't say budget flash, I mean the incremental demand is coming from what I call the professional grade kind of Tier 2, Tier 3 focused players. I mean you can call it budget flash, you can call it. But I think their stuff is driven by projects that they and contracts that they signed with hyperscalers. And what we are seeing now increasingly I mean what we used to call -- you have field instruments where we would sell 90-plus percent to service providers, we are now seeing like a 1/4 up to 1/3 of revenue is going into the whole data center-driven service provider ecosystem. Timothy Savageaux: Okay. So you look at that organic growth going September to December. Oleg Khaykin: Yes. So we've all seen the Verizon, AT&T saying that next year, they're going to expand. Hey, if that happens, that will be just like a further tide that will raise all the boats. Timothy Savageaux: Got it. So it looks like anything... Ilan Daskal: Tim also for -- we're not guiding for March, but it's not that we see anything materially different going into March. Oleg Khaykin: So I mean the one the only thing I'd say about Tier 1s, every 0.25% drop in interest rate, for example, for a lot of cash for them to do things, and there's a lot of pent-up demand. I mean basically, it's like they've been sweating the assets for the last 3 to 4 years. And these things like anything else, it wears out, it needs to be updated. And so I do think as they're getting a little bit -- they're feeling better and more comfortable with the debt load, the interest load. And I mean, they've all been sending all the right signals. So that's actually quite encouraging, and that's a positive thing for us. It will be further, I would say, accelerator or a boost to the overall demand. Operator: That concludes our Q&A session. I will now turn the conference back over to Vibhuti for closing remarks. Vibhuti Nayar: Thank you, Jale. This concludes our earnings call for today. Thank you for joining. Have a good evening. Operator: This concludes today's conference call. You may now disconnect.
Operator: Greetings, and welcome to the Bausch Health Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Garen Sarafian, Vice President, Investor Relations. Garen, please go ahead. Garen Sarafian: Good afternoon, and welcome to Bausch Health's Third Quarter 2025 Earnings Conference Call. Participating in today's call are Thomas Appio, Chief Executive Officer of Bausch Health; and JJ Charhon, Chief Financial Officer. Before we begin, I would like to remind you that our presentation today contains forward-looking information. We ask you to take a moment to read the forward-looking statements disclaimer at the beginning of the pages that accompany this presentation as it contains important information. Our actual results may vary materially from those expressed or implied in our forward-looking statements, and you should not place undue reliance on any forward-looking statements. Please refer to our SEC filings and our filings with the Canadian Securities Administrators for a list of some of the risk factors that could cause our actual results to differ materially from our expectations. Those documents, including the full cautionary statements are also available on Bausch Health's Investor Relations website. We use non-GAAP financial measures to help investors understand our operating performance. Non-GAAP financial measures may not be comparable to similarly titled measures used by other companies and should be considered along with but not as an alternative to, measures calculated in accordance with GAAP. You will find reconciliations of our historic non-GAAP measures in the appendix of the pages that accompany this presentation, which are available on Bausch Health's Investor Relations website. Finally, the financial guidance in this presentation is effective as of today only. We do not undertake any obligation to update guidance. Our discussion today, Wednesday, October 29, will focus on Bausch Health excluding Bausch + Lomb. However, we will briefly comment on Bausch + Lomb's results announced this morning. We will refer to year-over-year comparisons with the same period last year, unless otherwise noted. With that, I would like to turn the call over to our CEO, Tom Appio. Tom? Thomas Appio: Thank you, Garen, and welcome to everyone joining our earnings call today. In the third quarter, Bausch Health, excluding Bausch + Lomb, delivered our 10th consecutive quarter of revenue and adjusted EBITDA growth, consistent with our strong performance this year. Our teams continue to execute with discipline and focus, driving operational and financial momentum across the business. I will start by providing some highlights from our third quarter results. In the third quarter, Bausch Health, excluding Bausch + Lomb delivered year-over-year revenue growth of 7% on a reported basis and 5% on an organic basis. We achieved 7% adjusted EBITDA growth for Bausch Health, excluding Bausch + Lomb, which included an $81 million charge to acquire R&D. Excluding this charge, our adjusted EBITDA grew 18%. We reduced our debt by approximately $600 million using cash on hand and as a result of our strong performance in the first 9 months of the year, we are raising full year guidance for revenue, adjusted EBITDA and adjusted cash flow from operations for Bausch Health, excluding Bausch + Lomb. I am pleased with how our teams have navigated through a dynamic macro backdrop embodying the culture of accountability, urgency that defines Bausch Health. Across our global platform, we saw traction in many areas. Consolidated Bausch Health as well as Bausch Health, excluding Bausch + Lomb, both achieved year-over-year revenue growth of 7% on a reported basis and 5% on an organic basis during the quarter, showcasing the consistent strong performance across the enterprise. Focusing on Bausch Health, excluding Bausch + Lomb at a segment level, we saw excellent double-digit growth in our Solta and Salix businesses. Solta saw a 25% growth on a reported basis and 24% on an organic basis while Salix delivered 12% growth on a reported basis and 11% growth on an organic basis, 2 key growth areas that continue to deliver outstanding results. At the product level, we continue to see healthy performance across our diverse portfolio with notable results in our hepatology, dermatology and neurology offerings. We saw triple-digit growth for Cabtreo and Ryaltris as well as double-digit growth for Xifaxan and Thermage. Overall, we continue to demonstrate strong operational performance in the third quarter, and we are well positioned to execute on our strategic priorities as we close out this year and move forward to 2026. With that, I will pass it over to JJ to discuss our financial results in more detail before I conclude our call with BHC's progress against our key strategic priorities. JJ? Jean-Jacques Charhon: Thank you, Tom. Let's first turn to our consolidated performance, starting with our non-GAAP financial results for the third quarter, which you will find starting on Page 9. Revenue was $2.681 billion, up 7% on a reported basis and 5% on an organic basis compared to the same period a year ago. Adjusted gross margin was 72.7%, 40 basis points lower year-over-year. Adjusted operating expenses were $1.024 billion, an increase of $41 million compared to the same period last year. Adjusted EBITDA was $986 million, an increase of $77 million or 8% year-over-year. Finally, adjusted operating cash flow was $508 million. Moving now to the performance of Bausch Health, excluding Bausch + Lomb for the third quarter starting on Page 11. The third quarter marked another period of strong performance. As Tom mentioned, Bausch Health, excluding Bausch + Lomb, achieved its 10th quarter of consecutive year-over-year revenue and adjusted EBITDA growth. Revenue was $1.4 billion, up 7% on a reported basis and 5% on an organic basis when compared to the third quarter of 2024. Adjusted EBITDA was $773 million, up 7% versus the prior year and included a charge of in-process R&D of $81 million related to our acquisition of DURECT. Excluding that, our adjusted EBITDA increased operationally 18% year-over-year, which was outstanding. Finally, adjusted operating cash flow of $347 million was only 1% up versus the third quarter of 2024 due to timing in working capital. Moving now to our third quarter performance by segment, starting with Salix on Page 12. Revenues were $716 million, an increase of $74 million, up 12% on a reported basis and 11% on an organic basis compared to the same period last year. Salix strong performance in Q3 was primarily driven by 2 factors. First, our continued Xifaxan volume growth. And second, some onetime net pricing favorability associated with our Medicaid and 340B channel exits. More specifically, Xifaxan revenue grew 16% in the third quarter, with volume up 9%. The AI-driven customer insights engine has been a significant contributor to the overall and new patient script growth, which were, respectively, 9% and 11%, a remarkable accomplishment for a drug, which has been on the market for its OHE indication for the last 15 years. Separately, Trulance volume grew 5% in Q3, which was more than offset by unfavorable net pricing headwinds in the quarter. Finally, Relistor continues to face a challenging payer coverage environment, yet we remain optimistic that the brand will soon return to growth. Now moving to the International segment. Revenues were $286 million, a decrease of 2% on a reported basis and 4% on an organic basis compared to the third quarter of last year. Performance by geography was mixed. EMEA led the segment with a 12% increase on a reported basis. Canada and Lat Am, on the other hand, contracted respectively 8% and 17%. In Canada, the performance of our promoted portfolio grew 21%, which was more than offset by the reduction of our LOE portfolio, which benefited in Q3 of 2024 from the nonrecurrence of Wellbutrin orders due to generic stock outs. Lat Am's performance, on the other hand, was primarily due to continued market softness in Mexico. Now moving to Page 14 for a review of our Solta Medical segments. Revenues were $140 million, an increase of 25% on a reported basis and 24% on an organic basis compared to the same period last year. Solta's performance was primarily driven by the Asia Pacific region, which continues to contribute approximately 80% of global Solta revenue. Within the APAC region, South Korea, again outperformed all other markets with an impressive 96% growth year-over-year. China, on the other hand, grew only 3% in Q3. This was primarily attributable to aesthetics consumers adopting a cautious behavior given the uncertainty surrounding the macroeconomic environment. Outside of Asia, on another positive note, we are encouraged by our double-digit growth in the U.S., EMEA and Canada following our commercial investments in these geographies. Turning now to our diversified segments, which you will find on Page 15. Revenues were $258 million, a decrease of 4% on a reported basis and 6% on an organic basis compared to the same period a year ago. The diversified segment's performance was largely driven by our neurology business. This quarter, year-over-year growth in neurology was impacted by the expected nonrecurrence of prior year orders from temporary generic supplier shortages for Cardizem in Q3 of last year. Separately, the performance of our dermatology segment was driven by Cabtreo and Jublia, which grew revenue, respectively, 186% and 11%. Finally, Bausch + Lomb revenues were $1.3 billion, up 7% on a reported basis and 6% on an organic basis compared to the same period last year. Before wrapping up with our financial priorities, let's review our full year guidance, which you will find on Page 19. Our outstanding performance for the first 9 months with revenue and adjusted EBITDA, excluding acquired IP R&D growing respectively, 6% and 14% and has put us in a position where we will raise guidance across all our 3 metrics: revenue, adjusted EBITDA and adjusted operating cash flow. The new guidance for the full year is now as follows: Revenue is now expected to be between $5 billion and $5.1 billion. The midpoint of that range has been increased by $25 million and translate to a 4% increase year-over-year. Our adjusted EBITDA outlook is now expected to be between $2.7 billion and $2.75 billion, excluding the impact of a core IP R&D. The midpoint of that range is now increased by $50 million and represents a 7% increase versus 2024. Adjusted operating cash flow is now expected to be between $975 million and $1.025 billion bringing up the midpoint of that range by $150 million. Before I turn it over to Tom for his wrap up, let me review our financial priorities, which remain unchanged. First, increasing the value of Bausch Health operational assets, whether it is our acquisition of DURECT or the operational performance during the first months of the year, continuing to execute our innovation and profitable growth agenda remains top of mind for all leaders of Bausch Health. Second, evaluating all options for unlocking value for all stakeholders. The $7.9 billion refinancing transaction we closed earlier this year has provided us with expanded optionalities for maximizing the value of our Bausch Health and Bausch + Lomb assets. We're now assessing all initiatives for driving shareholder value creation. And third, continuing to optimize our capital structure. As we indicated earlier, we retired over $600 million in senior unsecured notes and have eliminated in October our high-cost accounts receivables facility. Moving forward, we will continue to look at all options to improve our maturity profile, provided, of course, it is in the best long-term interest of the company. In short, we are proud of the progress we have made in the last 9 months and look forward to close out 2025 on a strong note, as evidenced by our improved full year guidance. I will now hand it back to Tom. Thomas Appio: Thank you, JJ. We made progress in the third quarter on multiple fronts in support of our 5 strategic priorities: people, growth, efficiency, innovation and unlocking value. These remain central to our culture, lay the foundation for our strategy and guide our vision for the future. Additionally, we are growing the business with the discipline required to achieve our financial targets, taking all capital allocation priorities into account, including deleveraging. With that in mind, I'd like to take a few minutes to highlight the progress we are seeing against these priorities. Xifaxan growth continued to accelerate through 2025. In Q3, the growth was broad-based, driven by both volume and price and across all indications. Our largest indication for Xifaxan, overt hepatic encephalopathy, OHA had an 8.2% increase in total prescription volume in Q3 over prior years. IBS-D increased 15.4% over prior year. This growth was driven by innovation in marketing and operational excellence that is core within our U.S. pharmaceutical commercial engine. Starting with marketing. In Q3, we doubled our media investment in high-return addressable and connected TV launching a new I Wish I Knew campaign for OHA. Providing important educational information directly to patients and caregivers on the impact that cirrhosis can have on the brain, which is an important driver of patient action often resulting in prescription given that Xifaxan is the only product approved to reduce the recurrence of OHA and prevent rehospitalization. Direct-to-consumer advertising combined with continuous improvement and enhanced capabilities in our AI customer insight engine enabled us to directly target and activate patients, caregivers and health care professionals in Q3. Our laser focus on driving new patient starts resulted in 71,000 new patients being started on Xifaxan in Q3, an increase of 14% in Q3 over the prior year. Year-to-date, 196,000 new patients have been prescribed Xifaxan. This quarter marks the seventh consecutive quarter of top line organic revenue growth in our Salix business, and we will continue to maximize its growth. Turning to our dermatology business. In January 2024, we launched Cabtreo, the first and only triple combination in 1 topical application for acne. The launch has progressed well. Earlier this year, Cabtreo became the #1 prescribed topical branded acne product in new brand patient starts. 10,000 HCPs have prescribed Cabtreo from launch to date with 105,000 new patients prescribed Cabtreo year-to-date, up 69% over the prior year. Turning to our aesthetics business. Solta, we have made excellent progress driving new opportunities for growth in this business. Solta is a global leader in medical aesthetics that operates a portfolio of trusted brands with a leading presence in South Korea and China. While each market is unique, we see significant white space across the region and expect to further strengthen our reach across our footprint. During the third quarter, Solta delivered exceptional results with another quarter of double-digit growth in our leading aesthetics portfolio. Revenue grew by 25% on a reported basis across multiple regions, led by South Korea, which nearly doubled year-over-year. This growth was supported by a robust domestic demand complemented by high levels of medical aesthetics related tourism to the region in recent years. Beyond the strength in the Asia Pacific region, we achieved double-digit growth in the U.S. and European markets. We remain optimistic about Solta's premium positioning as a driver of future growth and are encouraged by another quarter of solid growth outside the Asia Pacific region. Building on this momentum, earlier this year, we received medical device licensing clearance for Thermage in Canada as the fourth generation of radio frequency technology. The Thermage platform has been relied upon for over 20 years by providers and patients. We also reached a key milestone. Our Thermage nonsurgical treatment technology has now been used to perform more than 5 million skin tightening and smoothing treatments worldwide. Additionally, in Korea, Thermage has now surpassed the 1,000 unit installed base milestone, which is a significant achievement. These successes underscore our belief in Solta's growth potential and may position us to capitalize on the opportunities ahead. We launched Fraxel FTX this past April, beginning the rollout of our leading skin rejuvenation treatment for dermatologists, plastic surgeons and other licensed aesthetics professionals across the United States with global expansion planned in the pipeline. While it is still early days, we are pleased with Fraxel momentum in the U.S. This expands our Solta portfolio and presence in key growth geographies and that we anticipate will contribute to the strength and breadth of our aesthetics business. In summary, Solta had a terrific quarter, and we continue to invest in our clinical programs and R&D innovation to deliver long-term growth. Underscoring our commitment to innovation, we closed our acquisition of DURECT Corporation on September 11, 2025, and the addition of DURECT complements our existing portfolio enhances our R&D pipeline and is consistent with Bausch's efforts to focus on areas of strength for innovation to drive future growth. Since then, we have been working seamlessly integrating DURECT into the Bausch team. Our portfolio now includes DURECT lead asset larsucosterol, a novel epigenetic modulator with FDA breakthrough therapy designation for treatment of alcohol-associated hepatitis or AH in Bausch Health hepatology pipeline. Currently, there are no approved therapies indicated to treat AH and patients must rely on supportive care such as corticosteroids which are often inadequate for long-term treatment and result in about 30% mortality within 90 days of hospitalization. Our registrational Phase III program is currently planned to evaluate the safety and efficacy of larsucosterol for the treatment of patients with severe AH. It is important to recognize that this is a global opportunity, and we are initially pursuing the U.S. market to replicate the region's success in Phase II. Our team is working diligently to finalize the Phase III protocol with a goal to initiate the study by early 2026. We are excited about the addition of larsucaosterol to our R&D portfolio and look forward to updating you through the development and commercialization process. DURECT is an important addition to our hepatology portfolio that supports our innovation and growth priorities while also leveraging Bausch Health's existing expertise in development and commercialization of assets. Now turning to RED-C which we believe could be a next-generation treatment to delay and prevent the occurrence of overt hepatic encephalopathy. We remain on track with our 2 global Phase III studies, and we expect to see initial data readouts by early 2026. Our hope is that RED-C may offer this patient population a therapy to slow disease progression and provide a meaningful clinical benefit addressing a significant unmet need and bringing a novel therapy to cirrhotic patients on a global scale. Bausch has a history treating liver disease and providing patients with innovative treatment solutions, which we hope to continue and expand upon with DURECT and RED-C. In summary, we had another standout quarter. I want to thank our teams around the world for their dedication and hard work in driving these results. Our focus on disciplined execution against our strategic priorities and operational excellence will enable us to continue to deliver tangible results and long-term value for shareholders. With that, we will now turn to questions. Operator, please open the line for Q&A. Operator: [Operator Instructions]. First question today is coming from Leszek Sulewski from Truist Securities. Leszek Sulewski: First one, it appears the revenue growth for Xifaxan is outpacing the script growth. So first, can you touch on the disconnect there? Is it backed by a greater focus on commercial plans and direct-to-consumer initiatives? And then second, can you talk to which channel is mostly driving the overall script growth? Is it the primary care side? And how durable is this growth profile as we kind of look out for the end of the life cycle management for the asset? And then I have a follow-up. Jean-Jacques Charhon: Les, this is JJ. I'm going to take up, first of all, your pricing question. As I indicated in my prepared remarks, Xifaxan benefit from a onetime benefit associated with the gross to net accrual that's typically whole on the balance sheet based on the inventory that is held by our distributors given our exit of 340B and Medicaid that gross to net weighted average, if you want, has changed. And so therefore, there was a benefit that really increase or inflated, if you want, what is referred to as pricing. Typically, pricing for Xifaxan year-over-year is in the mid-single digits. So that's what you should assume year-over-year. On the volume side, we have, I think, a fairly balanced growth across all channels. As you can see, the new patient starts have been -- continue to be very strong, which we're very happy about. And the AI-driven engine that allows us to optimize our call points really continues to drive benefits as we continue to develop scripts growth across the board. Thomas Appio: Yes. Les, let me just add to that in terms of when you take a look from the channel perspective. So the TRx -- total TRx growth was 9% in the quarter. Non-retail extended units was 20%. So when we take a look at it from a total extended unit perspective, it's 11%. On the new to brand, which is the one we're really looking at a lot is 14%. So there's a lot of new to brand on Xifaxan in the third quarter and which has been historically for this year, the focus is to drive new to brand, and that's where clearly, our investments in DTC, along with the artificial intelligence engine that we're having is focusing there. You had a follow-up? Leszek Sulewski: Yes. That is helpful. Okay. So as we're getting ready for CMS to disclose the final pricing from IRA price negotiations. Perhaps maybe give us a little bit of a sense of where Xifaxan land and the script trends for tied to Medicare Part D. And any sort of commentary that you could provide, how receptive has CMS been to your challenges, specifically given OHEs and orphan indication and the LOE component to the assets? Thomas Appio: Yes, Les. So what I'll say is that the negotiations, as I've said on previous calls were ongoing. The discussions have been fruitful and good exchange of information between the company and CMS. As I said on previous calls, we did not think that we should have been on the CMS list, but we were and the team, our market access team has worked really hard working with CMS. So negotiations have concluded. We are expecting that CMS will publish their agreed pricing on November 30, 2025. In terms of the overall impact, I'll pass that to JJ. Jean-Jacques Charhon: So as you -- as we mentioned during our previous call, the CMS impact was combined with a number of mitigation strategy across all of our portfolio to reduce the impact that this would have on our financials. And while the impact obviously on Xifaxan is significant, 30% of our volume goes through Medicare Part D. The only indication I would provide at this stage is we still are assessing the final impact on our business moving forward is that when you look at our business across all segments, including the CMS impact, it's probably fair to assume that the average EBITDA over the next 2 years will not be materially different than what we're providing in the outlook and the revised guidance. And I just want to clarify what I mean by that. If you take EBITDA in '26, '27, you take the average of those 2 numbers. You shouldn't have a materially different number than what we have for the outlook of '25. Operator: Your next question today is coming from Umer Raffat from Evercore ISI. Unknown Analyst: Congrats on the quarter. This is [ JP ] for Umer Raffat. First question, on MFN, are you guys planning or negotiating anything regarding manufacturing in the U.S.? What's your exposure there? Thomas Appio: Yes, I can take that question. As you know, we have our footprint around the world when it comes to manufacturing is regional based. So where we produce our products is where we sell in the U.S., of course, Xifaxan comes out of Canada. Right now, the way our manufacturing footprint plays out. There is no plan at this time. However, we are open to continuing to take a look at it as new products come into the portfolio. Jean-Jacques Charhon: Let me just add a couple of elements to that for Xifaxan specifically, it's a single active ingredient product. And so therefore, country of origin is considered to be Italy. For all the other products is typically in U.S. pharma coming mostly from Canada. Both EU trade agreements currently and obviously, the EUMCA excludes former products from those tariffs. So at this point in time, there is no material tariff that are imposed on our fund flow or the flow of our products. Obviously, that could change in the future, but that's where we are right now. Thomas Appio: Operator, any more questions? Operator: The next question is coming from Jason Gerberry from Bank of America. Chi Meng Fong: This is Chi on for Jason. I have a couple. Maybe the first one is on the revised guidance. So you saw strength across multiple pharma sets this quarter, but yet you're only taking up the lower bound of the top line guidance by 1% and 50 bps at the midpoint. Can you just talk about that? Are you seeing onetimers in 3Q that you want to expect to carry forward in 4Q. I know you've just talked about the gross to net dynamic with Xifaxan. But are you seeing onetime elsewhere? What about Jublia and some of the other legacy brands in neuro and dermatology? And I have a couple of follow-ups after that. Thomas Appio: Yes. So just to reiterate, we got some onetimers in Q3 in the form of an adjustment of our gross-to-net rebates associated with our inventory in the channel. And we had anticipated, I would say, a good proportion of that. And the fourth quarter is roughly in line with our prior expectations. I think on the size of our business is not a material change, but still reflects, I think, the positive trend that we're seeing across the portfolio. As you can see, our increase in guidance is greater for EBITDA and cash flow, which reflects really a change in assumption is how we're thinking about our free cash flow conversion. Chi Meng Fong: And my second question is on the P&L. The SG&A spend this quarter is below the [indiscernible] fun rate for the past 5 quarters. Is there any seasonality with the SG&A spend this quarter? How should we think about the SG&A run rate going forward? Should we look at 2Q balance or the 3Q balance as a better indicator for future run rate? Thomas Appio: Yes. 3Q is unusually low. There's been some changes to accruals that we process in the quarter that are nonrecurring. So I would certainly look at the first couple of quarters and a better indicator of our SG&A spending. Chi Meng Fong: And then just another one for me on the pipeline. You mentioned you're going to have Phase III results for RED-C early next year. Are you planning a concurrent readout for both Phase II and early 2026? And I think I heard the commentary framing that the data will be early initial. I just want to confirm this is the final Phase III top line that will have the final results in early 2026, and once you have the results, do you expect you need more data before you can go to regulate this potential filing should the study be positive? Thomas Appio: Yes, Chi, I can answer those for you. So as you know, we have 2 global Phase III studies. They're fully enrolled. We decided to have the readout of both trials together. As these were -- these 2 global trials as we look at the patient populations that are in each and the geographies we thought it best to combine them and read it out in the first quarter. And clearly, this will be our final readout of this very important program. Chi Meng Fong: Do you have any expectation or how would you frame what would be a successful outcome of the trial? Is it just needing the primary endpoint? Or is there more to it? Thomas Appio: When I look at RED-C, it's a prevention trial, as I've said on previous calls, there's a lot of important information there. The primary endpoints, there's also very important secondary endpoints as well. So too early to comment there. But as I've said in the past, this program and the amount of patients or U.S. adults with cirrhosis who've never had OHA is large. So the opportunity for us is -- could be very large. And as we wait for the data, we'll see what it looks like. Operator: Next question is coming from Dennis Ding from Jefferies. Liwen Wang: Congrats on the quarter. The I follow up with IRA that what would you think about the dynamics for the commercial spillover, and by the way, I'm Liwen Wang for Dennis Ding. Thomas Appio: Just could you be more specific of what your -- what the question is? Liwen Wang: The IRA. The Xifaxan, like the commercial spillover. Thomas Appio: Yes. The only thing I would say, Denise (sic) [ Liwen ] is that this impact really -- or this renegotiation really impacts only 2027. It really doesn't change the commercial dynamics per se just changes the discount that will be provided to the volume of drug going to CMS for the Medicare Part D program. Liwen Wang: Got you. And can I follow up with what do you think about the erosion curve with the generic for 2028 plus? Thomas Appio: Go ahead. What we have guided in the past is that you should assume a typical erosion curve for multiple generic entry in 2028. So nothing unusual, I would expect. But obviously, it's all speculate it at this stage. Operator: Next question today is coming from Mike Nedelcovych from TD Cowen. Michael Nedelcovych: I have a couple actually. The first one just a couple of points of clarification. In response to an earlier question, did I hear correctly that you suggested 2026 and 2027 EBITDA is expected to be flattish versus 2025? Thomas Appio: No. What I said is that if you combine '26 and '27 together, the average of those 2 years would be similar to 2025. Michael Nedelcovych: Okay. Okay. And that's across the business. That's not specific to the IRA impact? Thomas Appio: Correct. Michael Nedelcovych: Got it. Okay. And then my next question is on Xifaxan and it's a follow-on. Do you know what -- or maybe you've told this before, but roughly what proportion of prescribers of Xifaxan that use it to treat hepatic encephalopathy or hepatologists versus gastroenterologists? And how do you think that split might change for rifaximin SSD if RED-C is successful and that product is launched for AG prevention? Thomas Appio: Yes, Mike, I don't have the specific split. We look at in terms of gastroenterology together with hepatology. That's why we always say the franchise is gastroenterology. So I don't -- I can get you that after the call of what the actual split is. But when we take a look just -- in terms of the opportunity between -- of course, this is a different product in terms of the program we're running with RED-C. We call it SSD. If you just take a look at just the patient population and how it splits out, it's like 650,000 patients in the U.S. adults with cirrhosis with OHA and 1.9 million with cirrhosis who have never had OHA. So that's how it kind of splits out as we look at the opportunity that is in front of us. Michael Nedelcovych: Got it. And if I may, one more question on RED-C. When we get the initial top line data, what is the likelihood that we also see the all-cause mortality data? Would that be mature as well? Or might we at least expect an initial data cut? Thomas Appio: Yes. When we look at the initial data, as I said on the previous question, the primary endpoint and then there's a very important secondary endpoints. So we'll be looking once we get the data, providing it in totality, both from primary and secondary. Operator: Our next question today is coming from Doug Miehm from RBC Capital Markets. Douglas Miehm: Yes. Just with respect to those accruals, would you be able to expand on those that impacted this quarter? I know you indicated that we should use Q1 and Q2 is guideline for SG&A. But how did they specifically arise? Thomas Appio: It's just estimates of liability that we were thinking of incurring associated to prior fiscal that we had to adjust in the third quarter. They kind of roughly offset with the IP R&D that were recorded, obviously, as a result of the DURECT acquisition. So that's why I think Q1 and Q2 is a little bit cleaner from a run rate perspective. Douglas Miehm: Okay. And then with respect to capital allocation, as you think about the next couple of years, you've given helpful guidance with respect to, I believe, that the EBITDA, '26, '27, the average versus this year, et cetera, et cetera. But can you speak to cash flow in those 2 years as well and how that cash flow is going to be apportioned or used to pay down debt? And I'll leave it there. Thomas Appio: Yes, we'll provide some more specific guidance around cash flow associated with '26 when we report our fourth quarter results. We were trying to provide a little bit some directional view on how 2026 and 2027 taken together really is going to behave as a result of CMS and other dynamics in our portfolio. Our capital allocation remains the same, which is, first and foremost, to service our debt, including deleveraging the business. Second is reinvest in the business whenever -- obviously, it makes sense in light of our strategy. And then third and last, only if there is some excess potentially return capital to shareholders. But we obviously -- the focus is on #1 and #2. Operator: Next question is coming from Michael Freeman from Raymond James. Michael Freeman: JJ, I wonder if you could guess through the thought process that led to Bausch Health's decision to see participation in the 340B program in the Medicaid drug remake program. Jean-Jacques Charhon: Yes, Mike, I can take that question. So as we looked at it, we're continually evaluating ways to optimize our sales channel in all the markets we operate in, including the U.S. So when we did the evaluation, we determined that it was in the company's and the patient's best interest to exit Medicaid and the 340B channel for all products marketed in the U.S. as of October 1. What I would say is that as we looked at it, made the decision, the key was to enhance our patient assistance program to really make sure that the care was there and the patient assistance program was robust to be able to offer eligible Medicaid patients access to a broad range of Bausch Health medicines at no cost, consistent with the program terms. The patient benefit when we look at it compared to Medicaid, it's an enhanced PAP program with 0 out-of-pocket costs. And then the patient also is able to get 90 days treatment where if you're in Medicaid, it would only be 30 days for each script. So we -- as we looked at it, we thought we could really have an opportunity to enhance the patient experience and also have a good situation for the company. Michael Freeman: And just following on that. I wonder if you describe the patient benefits. Well, I wonder if you could describe benefits of the company and any benefits beyond that sort of onetime we saw with accruals. Thomas Appio: As I said, we're always looking at different sales channels and how to optimize them. And there are benefits as we've looked at. I'm not going to get into the specifics. It's early days since October 1 and how each of these benefits flow through and what it will look like. Michael Freeman: All right. I wonder maybe a question for JJ now. I wonder if you can give us the lay of the land on your debt refinancing programs and further steps you envision taking in the future 2D lever? Jean-Jacques Charhon: Well, the -- we've repeatedly said that there are really 2 main sources for deleveraging the company. The first one is free cash flow generated by operations that will continue certainly at a fairly similar level than what we've incurred for the next couple of years. until we lose exclusivity on Xifaxan. And that needs to be supplemented by one of 3 sources, either new equity raise, which obviously would be very dilutive at our current share price. So very unlikely that we would do that would be certainly a last resort option. The second possibility would be to capture some of that discount. As you know, our debt has traded back up and therefore, the discount that is left is fairly minimal. So the last source of extra funding would be proceeds from asset sales, either at BHC or B+L. The B+L equity stake is the more logical candidate given that it's the only one that is not associated with some EBITDA generation for BHC. So that becomes, I would say, the most probable outcome for completing the leveraging or the deleveraging solve for us between now and sometime in the future. Operator: We reached of our question-and-answer session and our earnings call. I'd like to turn the floor over back to our CEO, Tom Appio, for closing remarks. Thomas Appio: Okay. Well, thank you all for joining the call today. and for your continued interest and support of the company. We remain committed to executing against our strategic priorities and focus on unlocking value. We appreciate your ongoing engagement and look forward to sharing further updates with you on the progress to close the year. Thank you, and have a good evening. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Tony Sheehan: " Thomas Russell: " Tony Sheehan: [ Audio Gap ] Change, and I'm joined by Tom Russell, Executive Director. Similar to our usual webinar format, Tom and I will run through a presentation and then take Q&A at the end. If you have any questions, please submit them through the chat function on this webinar. Okay. So what do we do at Change Financial? Many of you would have already heard this overview, but for those of you who are new to the business, I'll run through this pretty quickly. We provide innovative and scalable payment solutions for over 150 clients across more than 40 countries. We're a B2B business with 2 core products. The first one is Vertexon, which is our Payments as a Service or PaaS offering, which provides card issuing, card management, and transaction processing. Vertexon supports prepaid, debit, and credit card issuing, and there are 2 main models under Vertexon. The first one is processing only. So under this model, Change provides the technology, which is a card management system, to clients to run their card program. So the client holds a necessary scheme, typically Visa or Mastercard, and regulatory licenses to issue cards. So, processing is only available globally and supports all major schemes. So we have clients using Vertexon in Southeast Asia and Latin America, including 2 of the largest banks in the Philippines, running over 40 million cards on the platform. The second model is processing and issuing. So this is only available in Australia and New Zealand. And under this model, clients utilize Vertexon for processing capabilities and leverage our regulatory and scheme licenses and issuing capabilities. So under this model, Change is the card issuer of record and provides treasury, fraud, and compliance services. So it's a far more comprehensive service when you're doing processing and issuing. Vertexon generated 85% of the group's revenue in Q1. Our other core product is PaySim, and that is software, which enables end-to-end testing of payment platforms, processes, and scheme rule compliance. The PaySim software is based on global messaging standards and can be sold globally. PaySim is the default testing standard for FPOS in Australia and has a blue-chip client base, including 5 of the top 10 global digital payments companies. PaySim contributed 15% of the group's revenue in Q1. Importantly, both Vertexon and PaySim are proprietary payment technology platforms, which are owned and developed in-house by Change. So this is important from a value and control perspective for the company. Okay. If we look at the key highlights, we've had a really strong financial performance in Q1, which is great for us to start FY'26. Another record quarterly revenue result of USD 4.6 million, which is up 25% on the prior year. 70% of revenue was derived from recurring sources. So this provides a very solid base of revenue for us to grow from. The one-off revenue, which is our licenses and professional services, is still a very important driver of overall financial performance, though. Underlying EBITDA for the quarter was USD 900,000. So to add some context around that, in FY '25, we delivered underlying EBITDA for the whole year of $200,000. So this really starts to show that operating leverage pull-through that we've been talking about, the combination of revenue growth and a stable fixed cost base, driving materially improved bottom-line performance. So, as a business, we've talked about this previously; we are scaling. We're not at scale. So we want to continue to drive that operating leverage in FY'26 and beyond. PaaS is a key driver of our growth, and we have seen strong growth in PaaS metrics across the board. And I'll talk more about that on the following slide. In terms of our PaaS metrics, we've got over 89,000 cards active in Australia and New Zealand. So the increase in cards was driven by growth in our existing client base, particularly one of our fintech clients, which added a significant number of new cards in late September. We will continue to drive revenue growth through new clients already signed. So we're currently onboarding 2 clients and further client wins. The Personal Wealth Management client we secured in Q2 FY'25, which can now be revealed as Sharesies, went live in early October. So we're super excited about the launch and to see the success of the program as it continues to roll out. There's a large backlog of registered interest in the Sharesies card. So great to see that really starting to hit its stride. We are very focused on growing the PaaS platform to drive the scale benefits. So we have the product and the team in place to add significantly more clients and volume without having to increase our fixed cost base. I won't go through the PaaS revenue sources in detail as we have covered this previously, but it is there for reference. Just looking at the PaaS timeline. So as you can see, steady cadence of new client wins and a significant shortening of time frames between signing clients and launching programs over time. So with the PaaS platform fully live and operational in New Zealand and Australia, we want to increase the number of client wins, particularly in Australia, and continue to shorten the onboarding time frames. You can see at the top right of the slide, Sharesies is launching in early Q2. So that will contribute monthly revenue from October onwards. We also have 2 more PaaS clients that I mentioned that are currently onboarding, and they will contribute monthly revenue once those programs launch. Thomas Russell: Thanks, Tony. So, turning to the financial metrics for the quarter. So we had another great revenue quarter, as Tony said, USD 4.6 million or AUD 7.1 million. So that was up 25% on Q1 FY'25 and a record by quite a way. That's now 7 record revenue quarters out of the last 8 for the company. PaaS revenues from our Australia and New Zealand clients are up 38% on the quarter 12 months ago. And as Tony mentioned, earlier this month, following the end of the quarter, Sharesies has gone live, so we'll start to see PaaS revenues from them in Q2. We are also currently onboarding an additional 2 new, already contracted PaaS clients. We'll start to see these clients adding to our PaaS revenues as they go live in the next couple of quarters. A question we have got this morning is why the a slight drop in quarterly PaaS revenue. This is just due to the weakness in the New Zealand dollar during the quarter. A reminder that most of our PaaS revenue is invoiced in USD, but there is a portion of our New Zealand clients invoiced in New Zealand dollars. As a reminder, PaaS, along with our support and maintenance, is our recurring revenue stream. Now, these do have some seasonality in them and can fluctuate, particularly PaaS, but because the underlying cardholders of our clients are buying groceries and paying for their streaming subscriptions, et cetera, using change cards, these revenues are quite predictable. We are also continuing to see the benefits of the recurring revenue base we have been building, our PaaS and support, and maintenance revenue. For the quarter, our recurring revenues totaled USD 3.2 million, AUD 4.9 million, which is approximately 70% of our revenue. In terms of the nonrecurring revenue, we continue to generate from professional services and licenses. During the quarter, we delivered USD 1.4 million in one-off revenue. Over the last couple of quarters, we have flagged our strong focus on one-off revenue and the significant late-stage pipeline. Again, this quarter, we are seeing the efforts and the work the sales team has been doing dropping through in terms of financial performance, but also a great job winning a number of new opportunities in Q1, which continues to build the pipeline of contracted work and future opportunities and revenue to unlock in future quarters. We have a large amount of contracted work to deliver, which helps us build confidence on top of our recurring revenue and being able to deliver on our guidance for FY'26. In terms of EBITDA, very pleasingly, after delivering a maiden EBITDA positive result of $200,000 for the full year in FY'25, we delivered more than 4x that in underlying EBITDA of USD 900,000 or AUD 1.4 million in Q1. Turning to the cash flow for a second. Cash receipts for the quarter of USD 4 million were up 16% on the prior corresponding period. Cash payments from operating activities were broadly in line with Q1 last year, up only 4% which was driven by an increase in COGS on increased revenue, which is obviously what we expect. As we have said before, we have all the key roles and staff in place to add significant revenue without a lot of new hires, and we continue to see evidence of that with staff costs actually down 10% due to our exit from U.S. operations during FY'25. CapEx has also remained steady and, as expected, is in line with FY'25. We have a healthy cash position of USD 3.7 million, just under AUD 6 million, and we hold an additional $900,000 in cash-backed security deposits. Tony Sheehan: Thanks, Tom. So we've gone through the market opportunity in the last few results updates. So I'm not going to go through that in detail. There are more slides in the appendix for those of you who wish to read around the addressable market opportunity. But we have a very large opportunity for Vertexon and PaySim. So what is our focus as a business to capitalize on these opportunities? Firstly, it identified target markets. So for Vertexon, this is New Zealand, Australia, and Southeast Asia. These are the regions where we are gaining traction and winning. For PaySim, it is global as the product can be sold without modification and does not require any licenses to be sold. Secondly, there's a pivot towards outbound sales hunting. So we appointed 2 new strategic BDMs in Q3 FY'25, and they are focused on outbound sales. So we'll continue to aggressively target outbound sales across the business. Thirdly, we want to grow and leverage the partner ecosystem. So we want to expand our partner ecosystem and work more closely with existing partners to drive mutual value. That partner ecosystem provides a one-to-many sales approach and can be very effective for both Vertexon and PaySim to scale quickly, particularly in offshore jurisdictions. Fourthly is around cross-sell and upsell. So we work with our existing Vertexon and PaySim clients to drive project work. And for Vertexon clients, the on-premises clients, continue that journey towards migrating to PaaS or the latest on-premises version, and also upsell modern functionality and features to our clients, which drives incremental revenue across both Vertexon and PaySim. In terms of our outlook, we provided guidance for FY'26 on the 10th of July. We've had a really strong start to FY'26. And whilst it's still early days, we are on track to deliver on guidance. Revenue has grown strongly, with Q1 revenue up 25% versus the prior year at USD 4.6 million. This revenue growth, coupled with a stable fixed cost base, is driving a strong increase in operating leverage that we've talked about in Q1, underlying EBITDA of USD 900,000. So that's a great result to start FY'26. Positive operating cash flow quarter. So typically, as Tom said, H2 is a stronger cash flow period, and we expect that to be the case in FY'26 as well. So overall, a great start to FY'26. We've delivered strong financial results. And operationally, we have continued to deliver on our operating plan. This start to the year has us really well placed to deliver on our targets for FY'26. That's it for the formal presentation from Tom and I. We do open it up now for Q&A. I think, Tom, we may have received some as well. Thomas Russell: Yes. So thanks, Tony. I'll read some of these out. And this first one is for you. How is the sales pipeline progressing? Tony Sheehan: Yes. So the sales pipeline is in a really great place at the moment. We are focused on those regions that I mentioned in the presentation as well. In terms of Vertexon Australia, New Zealand, and Southeast Asia, we are getting some really good traction as well, and interest is up in Southeast Asia. I think our presence, particularly with those 2 major banks up in the Philippines, is helping. We've talked about referenceability in Australia and New Zealand. That same applies to regions in Southeast Asia, like the Philippines as well. So big focus across the business to continue to build that pipeline and drop that through. And really, Australia for PaaS clients is a real focus for us as well to continue to focus on winning new clients in this region, so that we can add more volume to the PaaS platform. Thomas Russell: Okay. Next one here. Have you observed any potential hesitation on new card programs due to the ANZ regulatory uncertainty? Tony Sheehan: Yes, I'll take that, Tom. So not really. We haven't seen really any hesitation there. I think we operate in the debit and prepaid space predominantly. We are licensed to issue credit cards in Australia. Credit, particularly around the interchange regulations, that's one of the card types that's that's more impact. It's not an area we currently play in a lot. We are looking to play in that space. But at this stage, we are not seeing any sort of hesitation across Australia and New Zealand due to the regulatory environment. And remembering there's a lot of that regulatory impact is on the acquiring side. We are an issuer. So it is slightly different, understanding that interchange impacts on issuers, but not at this stage. Thomas Russell: Great. Thanks. I'll take this next one. Given your currency exposure, what actions do you take to hedge this? So we don't have any formal hedging arrangements in place. But what we do is our COGS, which are in USD, and we charge revenue in USD as well. So there's a natural hedge in terms of those COGS and that revenue. Our fixed cost base, so our staff and our offices and all those things, they're all sitting in Australia and New Zealand. So we hold all our cash in Australian and New Zealand dollars. So from a cost base perspective, we're hedged against movements in the currencies from a cost perspective. As we continue to grow, further hedging might be required. But at the moment, we've sort of got a strategy to deal with it and the small fluctuations, although we have seen, obviously, currency markets move a lot more volatile in recent months. Okay. When a client is looking for a card issuer, does Mastercard have a referral program at all that may help with ANZ customers? Tony, I'll let you answer that one. Tony Sheehan: Yes. Thanks, Tom. Good question there. So Mastercard does have a number of issuers in Australia and New Zealand, a small number, I should say, that are similar to Change Financial. There are opportunities that come through to Mastercard that we do receive similar, I am assuming, to other competitors to change as well in the market, but we have successfully worked with Mastercard on opportunities and converted them to live clients as well. So there is a referral program that works where Mastercard partners with an issuer like us to bring on new clients onto that Mastercard brand as well. So that does help us with new client wins in Australia and New Zealand. Thomas Russell: Okay. Great. I'll take this next one. Given that you achieved USD 900,000 in the first quarter for EBITDA and the top end of your guidance is $3.5 million, less than $900,000 per quarter. Is this suggesting EBITDA for future quarters should drop from here? No, it's not. It's very early in the financial year. You will note that the revenue and the EBITDA were driven by one-offs as well. I've said we've got a strong pipeline of that to keep delivering, but we've got to keep delivering that. We'll let a bit more time pass and see how the next quarter goes, and then we'll make any assessments if we need to. That's it for the current questions. Tony Sheehan: Okay. If there are no more questions, we might wrap that up there. Thank you for taking the time to join us for our Q1 FY'26 results. We're very pleased with the start to the financial year. Look forward to updating you in the coming months as well. Thanks a lot.
Operator: Greetings, and welcome to the Microsoft Fiscal Year 2026 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Neilson, Vice President of Investor Relations. Please go ahead. Jonathan Neilson: Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Keith Dolliver, Corporate Secretary and Deputy General Counsel. On the Microsoft Investor Relations website, we will provide our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks and provides the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website. On this call, we will discuss certain non-GAAP items. The 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. They are included as additional clarifying items to aid investors in further understanding the company's first quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. We will also provide growth rates in constant currency when available as a framework for assessing how our underlying business performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website. Today's call is being recorded. If you ask a question, it will be included in our live transmission, in the transcript and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call and in the Risk Factors section of our Form 10-K, Forms 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And with that, I'll turn the call over to Satya. Satya Nadella: Thank you, Jonathan. It was a very strong start to our fiscal year. Microsoft Cloud revenue surpassed $49 billion, up 26% year-over-year. And our commercial RPO increased over 50% to nearly $400 billion with a weighted average duration of only 2 years. We are seeing increasing demand and diffusion of our AI platform and family of Copilots, which is fueling our investments across both capital and talent. When it comes to infrastructure, we're building a planet scale cloud and an AI factory, maximizing tokens per dollar per watt while supporting the sovereignty needs of customers and countries. We are innovating rapidly across the family of Copilots spanning the high-value domains of information work, coding, security, science, health and consumer. And as you saw yesterday, we closed a new definitive agreement with OpenAI, marking the next chapter in what is one of the most successful partnerships and investments our industry has ever seen. This is a great milestone for both companies and we continue to benefit mutually from each other's growth across multiple dimensions. Already, we have roughly 10x-ed our investment. OpenAI has contracted an incremental $250 billion of Azure services, our rev share, exclusive IP rights and API exclusivity for Azure continue until AGI or through 2030. And we have extended the model and product IP rights through 2032. And we are also energized to innovate and pursue AI advancements with both talent and compute investments that have real-world impact. With that, let's turn to our momentum across our AI platform and Copilots as well as with agents. We have the most expansive data center fleet for the AI era, and we are adding capacity at an unprecedented scale. We will increase our total AI capacity by over 80% this year and roughly double our total data center footprint over the next 2 years, reflecting the demand signals we see. Just this quarter, we announced the world's most powerful AI data center, Fairwater in Wisconsin, which will go online next year and scale to 2 gigawatts alone. And we have deployed the world's first large-scale cluster of NVIDIA GB300s. We are building a fungible fleet that's been continuously modernized and spans all stages of the AI life cycle from pretraining to post training to synthetic data generation and inference. And it also goes beyond GenAI workloads to recommendation engines, databases and streaming. We're optimizing this fleet across silicon systems and software to maximize performance and efficiency. It's this combination of fungibility and continuous optimization that allows us to deliver the best ROI and TCO for us and our customers. For example, during the quarter, we increased the token throughput for GPT-4.1 and GPT-5, two of the most widely used models by over 30% per GPU. We also have the most comprehensive digital sovereignty platform. Azure customers in 33 countries are now developing their own cloud and AI capabilities within their borders to meet local data residency requirements. In Germany, for example, OpenAI and SAP will rely on Azure to deliver new AI solutions to the public sector. On top of this infrastructure, we are building Azure AI Foundry to help customers build their own AI apps and agents. We have 80,000 customers, including 80% of the Fortune 500. We offer developers and enterprise access to over 11,000 models more than any other vendor, including as of this quarter, OpenAI's GPT-5 as well as xAI's Grok 4. For example, Ralph Lauren used Foundry to build conversational shopping experience in its app, enabling customers to describe what they're looking for and get personalized recommendations. And OpenEvidence used Foundry to create its AI-powered clinical assistant which surfaces relevant medical information to physicians and help streamline charting. When it comes to our first-party models, we are excited by the performance of our new MAI models for text, voice and image generation, which debuted among the top in the industry leader boards. And we continue to make great progress with our Phi family of SLMs, which now have been downloaded over 60 million times, up 3x year-over-year. Beyond models in Foundry, we are providing everything developers need to design, customize and manage AI applications and agents at scale. Our new Microsoft Agent Framework helps developers orchestrate multi-agent systems with compliance, observability and deep integration out of the box. For example, KPMG used the framework to modernize the audit process, connecting agents to internal data with enterprise-grade governance and observability. These kinds of real production scale AI deployments are driving Azure's overall growth. And once again, this quarter, Azure took share. Now let's turn to applications and agents we ourselves are building on this platform. We now have 900 million monthly active users of our AI features across our products. And our first-party family of Copilots now has surpassed 150 million monthly active users across the information work, coding, security, science, health and consumer. When it comes to information work, we continue to innovate with Microsoft 365 Copilot. Copilot is becoming the UI for the agentic AI experience. We have integrated chat and agentic workflows into everyday tools like Outlook, Word, Excel, PowerPoint and Teams. Just 9 months since release, tens of millions of users across Microsoft 365 customer base are already using chat. Adoption is accelerating rapidly, growing 50% quarter-over-quarter, and we continue to see usage intensity increased. This quarter, we also introduced Agent Mode, which turns single prompts into export quality Word documents, Excel spreadsheets, PowerPoint presentation and then iterate to deliver the final product much like agent mode in coding tools today. We're thrilled by the early response, including third-party benchmarks that rank it best-in-class. Beyond individual productivity, Copilot is multiplayer, with Teams mode announced this week, you can now invite colleagues into a Copilot conversation. And our collaborative agents like Facilitator and Project Manager, prep meeting agendas, take notes, capture decision, kick off group tasks. We are seeing a growing Copilot agent ecosystem with top ISVs like Adobe, Asana, Jira, LexisNexis, SAP, ServiceNow, Snowflake and Workday, all building their own agents that connect to Copilot. And customers are also building agents for their mission-critical business processes and workflows using tools like Copilot Studio and integrating them into Copilot. The overall number of agent users doubled quarter-over-quarter. And just yesterday, we announced App Builder, a new Copilot agent that lets anyone create and deploy task-specific apps and agents in minutes grounded in Microsoft 365 context. All this innovation is driving our momentum. Customers continue to adopt Microsoft 365 Copilot at a faster rate than any other new Microsoft 365 suite, all up more than 90% of the Fortune 500 now use Microsoft 365 Copilot, Accenture, Bristol-Myers Squibb, EY Global and the U.K.'s Tax and Payments and Customs Authority all purchased over 15,000 seats this quarter. Lloyds Banking Group has deployed 30,000 seats, saving each employee an average of 46 minutes daily. And a large majority of our enterprise customers continue to come back to purchase more seats. Our partner, PwC, alone added 155,000 seats this quarter and now has over 200,000 deployed across its global operations. In just 6 months, PwC employees interacted with Microsoft 365 Copilot over 30 million times, and they credit this agentic transformation with saving millions of hours an employee productivity. When it comes to coding, GitHub Copilot is the most popular AI pair programmer now with over 26 million users. For example, tens of thousands of developers at AMD use GitHub Copilot, accepting hundreds of thousands of lines of code suggestions each month and crediting it with saving months of development time. All up, GitHub is now home to over 180 million developers and the platform is growing at the fastest rate in its history, adding a developer every second. 80% of new developers on GitHub start with Copilot within the first week. Overall, the rise of AI coding agents is driving record usage with over 500 million pull requests merged over the past year. And just yesterday, at GitHub Universe, we introduced Agent HQ. GitHub Copilot and Agent HQ is the organizing layer for all coding agent, extending GitHub privatives like PRs, issues, actions to coding agents from OpenAI, Anthropic, Google, Cognition, xAI as well as OSS and in-house models. GitHub now provides a single mission control to launch, manage and review these agents, each operating from its own branch with built-in controls, observability and governance. We are building a similar system in security with over 3 dozen agents in Copilot integrated across Entra, Defender, Purview and Intune. For example, with our Phishing Triage Agent in Defender, studies show that analysts can be up to 6.5x more efficient in detecting malicious mails. In health, Dragon Copilot helps providers automate critical workflows. This quarter alone, we helped document over 17 million patient encounters, up nearly 5x year-over-year. More than 650 health care organizations have purchased our ambient listening tech to date, including University of Michigan Health where over 1,000 physicians are actively using it. Finally, when it comes to AI consumer experiences, we are excited about all the progress Copilot is making, starting with Windows. Every Windows 11 PC now is an AI PC. Just 2 weeks ago, we introduced new ways to speak naturally to your computer, including a Copilot wake word. With vision, Copilot sees what you see on your screen and you can have a real-time conversation about it. And with action, it takes real action on your behalf, interacting with both web and desktop apps. In Edge, we are introducing first-of-its-kind AI features to automate multistep workflows within the browser and help you pick up right where you left off. Edge now has taken share for 18 consecutive quarters. In Bing, our overview pages now include embedded conversational capabilities, we took share again in search. And daily users of our Copilot consumer app increased nearly 50% quarter-over-quarter. Among many updates we made last week is groups, which turns Copilot for the first time into a shared experience. We also are creating a great consumer subscription offer with Microsoft 365 premium. It brings together our Office applications and advanced Copilot features with high usage limits, giving individuals the flexibility to bring their own AI to work in a secure way. Finally, in gaming, Copilot provides a voice-first immersive experience across PC, mobile and our new Xbox Ally. Beyond our family of Copilots and AI platform, we are seeing strong momentum across the portfolio. Cloud migrations are accelerating. In data and analytics, Fabric revenue grew 60%, which is faster than any other data and analytics platform in the industry. We now have 28,000 paid Fabric customers. In databases, SQL, DB, hyperscale revenue was up nearly 75%, 50% in Cosmos DB. In Business Applications, Dynamics 365 gained share. In security, our end-to-end stack is now informed by 100 trillion daily signals. 1 billion monthly active users of Entra, 16 billion Copilot interactions audited by Purview, up 72% quarter-over-quarter. 40,000 Sentinel customers, and we took share across all categories we serve in security. In LinkedIn, nearly 1.3 billion members. And finally, in gaming, we expanded our reach across every endpoint focused on our high-margin content and services. We launched critically acclaimed games like Keeper, Ninja Gaiden 4 and Outer Worlds 2, reaching 155 million monthly active users. Minecraft, an all-time high, and set new record for overall content and services revenue for the quarter. We also saw a great response to Xbox Ally launch 2 weeks ago and set new records for players on PC. In closing, our planet-scale Cloud and AI factory together with Copilots across high-value domains is driving broad diffusion and real-world impact. And we continue to increase our investments in AI across both capital and talent to meet the massive opportunity ahead. With that, let me turn it over to Amy to walk through our financial results and outlook, and I look forward to rejoining for your questions. Amy Hood: Thank you, Satya, and good afternoon, everyone. First, as you heard from Satya, we were pleased to announce the next phase of our partnership with OpenAI yesterday. They continue to choose Microsoft to power their workloads. And together, we remain committed to driving innovation that meets real-world needs. Our Q1 results were not impacted by the deal signed this week. Now on to the quarter, we delivered a strong start to our fiscal year, exceeding expectations across revenue, operating income and earnings per share. We also saw continued share gains across many of our businesses, demonstrating our leadership position in key markets. This quarter, revenue was $77.7 billion, up 18% and 17% in constant currency. Gross margin dollars increased 18% and 16% in constant currency, while operating income increased 24% and 22% in constant currency. And earnings per share was $4.13 and an increase of 23% and 21% in constant currency when adjusted for the impact of our investments in OpenAI. FX impact was roughly in line with guidance. Company gross margin percentage was 69%, down slightly year-over-year, driven by investments in AI, including the impact of scaling our AI infrastructure and the growing usage of our AI product features. This was partially offset by ongoing efficiency gains, particularly in Azure and M365 Commercial cloud. Operating expenses increased 5% and 4% in constant currency, driven by investments in Cloud and AI engineering, including compute capacity and AI talent to support product development across the portfolio. Operating margins increased year-over-year to 49% and were ahead of expectations with stronger-than-anticipated results and high-margin businesses this quarter. When adjusted for the impact from our investments in OpenAI, other income and expense was $401 million as interest income more than offset interest expense, which includes the interest of payments related to data center finance leases. Capital expenditures were $34.9 billion, driven by growing demand for our Cloud and AI offerings. This quarter, roughly half of our spend was on short-lived assets, primarily GPUs and CPUs, to support increasing Azure platform demand, growing first-party apps at AI solutions, accelerating R&D by our product teams as well as continued replacement for end-of-life server and networking equipment. The remaining spend was for long-lived assets that will support monetization for the next 15 years and beyond, including $11.1 billion of finance leases that are primarily for large data center sites. And cash paid for PP&E was $19.4 billion. As a reminder, the difference between total CapEx and cash paid for PP&E is primarily due to finance leases as well as the normal timing of goods received, but not yet paid. Cash flow from operations was $45.1 billion, up 32%, driven by strong Cloud billings and collections, partially offset by higher supplier payments. And free cash flow increased 33% to $25.7 billion with minimal impact from a sequential increase in CapEx, given the higher mix of finance leases. And finally, we returned $10.7 billion to shareholders through dividends and share repurchases. Now to our commercial results. Commercial bookings increased 112% and 111% in constant currency and were significantly ahead of expectations, driven by Azure commitments from OpenAI as well as continued growth in the number of $100 million-plus contracts for both Azure and M365. These results do not include any impact from the incremental $250 billion Azure commitments from OpenAI announced yesterday. Commercial remaining performance obligation increased to $392 billion and was up 51% year-over-year. The balance has nearly doubled over the past 2 years. And even with this growth, our weighted average duration has been relatively stable at approximately 2 years. Microsoft Cloud revenue was $49.1 billion, ahead of expectations and grew 26% and 25% in constant currency. Microsoft Cloud gross margin percentage was slightly better than expected at 68% and down year-over-year due to the investments in AI that were partially offset by ongoing efficiency gains as noted earlier. Now to segment results. Revenue from Productivity and Business Processes was $33 billion and grew 17% and 14% in constant currency. M365 Commercial Cloud revenue increased 17% and 15% in constant currency with 1 point of benefit from in-period revenue recognition. Year-over-year growth was driven by both ARPU and seats with ARPU growth again led by E5 and M365 Copilot. Paid M365 Commercial seats grew 6% year-over-year with installed base expansion across all customer segments though primarily in our small and medium businesses and frontline worker offerings. M365 Commercial Products revenue increased 17% and 14% in constant currency, ahead of expectations due to higher-than-expected Office 2024 transactional purchasing. M365 Consumer Cloud revenue increased 26% and 25% in constant currency, again driven by ARPU growth. M365 consumer subscriptions grew 7% to over 90 million. LinkedIn revenue increased 10% and 9% in constant currency driven by Marketing Solutions. The Talent Solutions business was impacted by continued weakness in the hiring market. Dynamics 365 revenue increased 18% and 16% in constant currency with continued growth across all workloads. Segment gross margin dollars increased 19% and 16% in constant currency, and gross margin percentage increased driven by efficiency gains in M365 Commercial Cloud that were partially offset by investments in AI including the impact of growing usage in M365 Copilot chat. Operating expenses increased 6% and 5% in constant currency, and operating income increased 24% and 20% in constant currency. Operating margins increased 3 points year-over-year to 62%, driven by the higher gross margin noted earlier as well as improved operating leverage. Next, the Intelligent Cloud segment. Revenue was $30.9 billion and grew 28% and 27% in constant currency. In Azure and other Cloud services, where we continue to see accelerating demand, revenue grew 40% and 39% in constant currency. Results were ahead of expectations, driven by better-than-expected growth in our core infrastructure business, primarily from our largest customers. Azure AI services revenue was generally in line with expectations, and this quarter, demand again exceeded supply across workloads, even as we brought more capacity online. In our on-premise server business, revenue increased 1% and was relatively unchanged in constant currency. Results were ahead of expectations, driven by transactional purchasing of Windows Server 2025. Segment gross margin dollars increased 20% and 19% in constant currency, and gross margin percentage decreased year-over-year, driven by investments in AI that were partially offset by efficiency gains in Azure. Operating expenses increased 4% and operating income grew 27%. Operating margins were 43%, down only slightly year-over-year as increased investments in AI were mostly offset by improved operating leverage. Now to More Personal Computing. Revenue was $13.8 billion and grew 4%. Windows OEM and Devices revenue increased 6% year-over-year, significantly ahead of expectations, driven by strong demand ahead of Windows 10 end of support as well as a benefit from inventory levels that remain elevated. Search and news advertising revenue ex TAC increased 16% and 15% in constant currency, driven by growth in volume as well as the continued benefit from third-party partnerships that was better than expected. And in gaming, revenue decreased 2% and 3% in constant currency against a strong prior year comparable. Xbox content and services revenue increased 1% and was relatively unchanged in constant currency, driven by better-than-expected performance from third-party content. Segment gross margin dollars increased 11% and 10% in constant currency, and gross margin percentage increased year-over-year driven by sales mix shift to higher-margin businesses. Operating expenses increased 4% and 3% in constant currency, and operating income increased 18% and 16% in constant currency. Operating margins increased 3 points year-over-year to 30% driven by the higher gross margin noted earlier. Now moving to our Q2 outlook, which unless specifically noted otherwise, is on a U.S. dollar basis. Based on current rates, we expect FX to increase total revenue growth by 2 points. Within the segments, we expect FX to increase revenue growth by 2 points in Productivity and Business Processes and Intelligent Cloud and 1 point in More Personal Computing. We expect FX to increase COGS and operating expense growth by 1 point. Starting with the total company, we expect revenue of USD 79.5 billion to USD 80.6 billion or growth of 14% to 16%. We expect COGS of USD 26.35 billion to USD 26.55 billion or growth of 21% to 22%. And operating expense of USD 17.3 billion to USD 17.4 billion, growth of 7% to 8%. Operating margins should be relatively flat year-over-year and down sequentially, aligned with historic seasonality. Now other income and expense. The combination of OpenAI's conversion to a public benefit corp and the ongoing nature of our partnership will result in increased volatility. Therefore, going forward, we'll provide our outlook, excluding any impact from our investments in OpenAI. On that basis, in Q2, other income and expense is estimated to be roughly $100 million as interest income will more than offset interest expense. And we expect our Q2 effective tax rate to be approximately 19%. Next, capital expenditures. With accelerating demand and a growing RPO balance, we're increasing our spend on GPUs and CPUs. Therefore, total spend will increase sequentially, and we now expect the FY '26 growth rate to be higher than FY '25. As a reminder, there can be quarterly spend variability from cloud infrastructure build-outs and the timing of delivery of finance leases. Next, our commercial business. In commercial bookings, we expect healthy growth in the core business on a low expiry base when adjusted for the OpenAI contracts in the prior year. And we expect commercial bookings will be positively impacted by the significant OpenAI commitments announced yesterday. As a reminder, larger long-term Azure contracts, which are more unpredictable in their timing, drive increased quarterly volatility in our bookings growth rate. Microsoft Cloud gross margin percentage should be roughly 66%, down year-over-year, driven by the continued investments in AI as well as the mix shift to Azure. Now to segment guidance. In Productivity and Business Processes, we expect revenue of USD 33.3 billion to USD 33.6 billion or growth of 13% to 14%. In M365 Commercial Cloud, we expect revenue growth to be between 13% and 14% in constant currency, with business trends that remain relatively stable quarter-over-quarter. ARPU growth will again be driven by E5 and M365 Copilot. M365 Commercial products revenue growth should be in the low to mid-single digits. As a reminder, M365 Commercial products includes components that can be variable due to the in-period revenue recognition dynamics. M365 Consumer cloud revenue growth should be in the mid-20s driven by growth in ARPU. For LinkedIn, we expect revenue growth of approximately 10%. And in Dynamics 365, we expect revenue growth to be in the mid- to high teens with continued growth across all workloads. For Intelligent Cloud, we expect revenue of USD 32.25 billion to USD 32.55 billion or growth of 26% to 27%. In Azure, we expect Q2 revenue growth of approximately 37% in constant currency as demand remains significantly ahead of the capacity we have available. And while we're accelerating the amount of capacity we're bringing online, we will continue to balance Azure revenue growth with the growing needs across our first-party apps and AI solutions, our own R&D efforts and the end-of-life server replacements. Therefore, we now expect to be capacity constrained through at least the end of our fiscal year. As a reminder, there can be quarterly variability in the year-on-year growth rates depending on the timing of capacity delivery and when it comes online as well as from in-period revenue recognition depending on the mix of contracts. In our on-premises server business, we expect revenue to decline in the low to mid-single digits with ongoing customer shift to cloud offerings. In More Personal Computing. We expect revenue to be in the USD 13.95 billion to USD 14.45 billion. Windows OEM and Devices revenue should decline in the mid-single digits. We expect continued momentum from Windows 10 end of support, although growth rates will be impacted by elevated inventory levels at the end of Q1 that we expect to come down through the quarter. Therefore, Windows OEM revenue should decline low to mid-single digits. The range of potential outcomes remains wider than normal. Devices revenue should decline year-over-year. Search and news advertising ex TAC revenue growth should be in the low double digits, down sequentially as growth rates normalize following the benefit from third-party partnerships noted earlier. Growth will continue to be driven by volume and revenue per search across Edge and Bing. And in Xbox content and services, we expect revenue to decline in the low to mid-single digits against the prior year comparable that benefited from strong first-party performance, partially offset by growth in subscriptions. And hardware revenue should decline year-over-year. And in closing, demand signals across bookings, RPO and product usage are accelerating faster than we expected. We're investing in infrastructure, AI talent and product innovation to capture that momentum and expand our leadership position. And we remain focused on delivering real value to our customers that results in durable revenue growth for the long term. With that, let's go to Q&A, Jonathan. Jonathan Neilson: Thanks, Amy. We'll now move over to Q&A. [Operator Instructions]. Operator, can you please repeat your instructions? Operator: [Operator Instructions] Our first question comes from the line of Keith Weiss with Morgan Stanley. Keith Weiss: Congratulations on another outstanding quarter. And if I'm looking at Microsoft, this is 2 quarters in a row, we're really seeing results that are well ahead of anybody's expectations when we were thinking about this company a year ago or 5 years ago, 111% in Commercial bookings growth was not on anybody's bingo card, if you will, yet the stock is underperforming in the broader market. And the question I have is kind of getting at the zeitgeist that I think is weighing on the stock. And is something about to change? And I think AGI is kind of a nomenclature or a shorthand for that. And it's something that still included in your guys' OpenAI agreement. So Satya, when we think about AGI or we think about how application and computing architectures are changing, is there anything that you see on the horizon, whether it's AGI or something else, that could potentially change what appears to be a really strong positioning for Microsoft in the marketplace today where that strength will perhaps weaken on a go-forward basis. Is there anything that you're worrying about in that evolution and particularly the evolution of these generative AI models. Satya Nadella: Thank you, Keith, for the question. So here's what I would say, I think there are 2 parts. We feel very, very good about even this, I'd say, the new agreement that we now have with OpenAI because I think even, it just creates more certainty to all of the IP relationship we have as it relates to even this definition of AGI. But beyond that, I think your question touches on something that's pretty important, which is how are these AI systems going to truly be deployed in the real world and make a real difference and make a return for both the customers who are deploying them and then obviously, the providers of these systems. And I think the best way to characterize the situation is that even as the intelligence capability increases, let's even say, exponentially like model version over model version, the problem is it's always going to still be jagged, right? I think the term people use is the jagged intelligence, even -- or spiky intelligence, right? So you may even have a capability that's fantastic at a particular task, but it may not uniformly grow. So what is required is in fact, these systems, whether it is GitHub Agent HQ or the M365 Copilot system. Don't think of this as a product. Think of it as a system that in some sense smooths out those jagged edges, and really helps the capability. I mean just to give you a flavor for it, right? So if I am in M365 Copilot, I can generate an Excel spreadsheet. The good news is now an Excel spreadsheet does understand Office JS, has the formulas in it. It feels like, wow, it is a great spreadsheet created by a good model. The more interesting thing is I can go into agent mode in Excel and iterate on that model. And yet, it will stay on rail. It won't go off rail, it will be able to do the iteration. Then I can even give it to the analyst agent, and then it will even make sense of it like a data analyst would of our Excel model. The reason I say all of that is because that's the type of construction that will be needed even when the model is magical, all powerful. I think we will be in this jagged intelligence phase for a long time. So one of the fundamental things that these -- whether it's GitHub, whether it's security, whether it's M365, the 3 main domains we're in, we feel very, very good about building these as organizing layers for agents to help customers. And by the way, that's the same thing that we want to put into Foundry for our third-party customers. So that's kind of how people will build these multi-agent systems. So I feel actually pretty good about both the progress in AI. I don't think AGI as defined at least by us in our contract is ever going to be achieved anytime soon. But I do believe we can drive a lot of value for customers with advances in AI models by building these systems. So it's kind of the real question that needs to be well understood. And I feel very, very confident about our ability to make progress. Operator: The next question comes from the line of Brent Thill with Jefferies. Brent Thill: Amy, on the bookings blowout. I guess many are somewhat concerned about concentration risk. And I think you noted a number of $100 million contracts, not to go into a lot of detail, but can you just give us a sense of what you're seeing in that 51% RPO and 110-plus percent bookings growth that gives you confidence about what you're seeing in terms of the breadth and extent of some of these deals on a global basis. Amy Hood: Thanks, Brent. A couple of things to maybe take a step back on RPO. With a nearly $400 billion balance, we've been trying to help people understand sort of how to think about really the breadth of that. It covers numerous products. It covers customers of all sizes. It -- that's been a balance that we've been growing obviously at a good clip. But what people need to realize is it sits across multiple products because of the things Satya is talking about around creating systems and where we're investing. And if you're going to have that type of balance and then more importantly, have the weighted average duration be 2 years, it means that most of that is being consumed in relatively short order. People are not consuming, and I say this broadly, unless there's value. And I think this is why we keep coming back to, are we creating real-world value in our AI platforms, in our AI solutions and apps and systems. And so I think the sort of the way to think about RPO is it's been building across a number of customers. We're thrilled to have OpenAI be a piece of that. We're learning a ton and building leading systems because of it that are being used at scale that benefits every other customer. And so it's why we've tried to give a little bit more color to that RPO balance because I do understand that there have been a lot of concerns or questions about is it long dated, is it coming over a long period of time. And hopefully, this is helpful for people to realize that these are contracts being signed by customers who intend to use it in relatively short order. And at that type of scale, I think that's a pretty remarkable execution. Operator: The next question comes from the line of Mark Moerdler with Bernstein Research. Mark Moerdler: Congratulations on the quarter. It's pretty amazing what you guys are doing. Satya and Amy, I'd like to ask you the #1 question I receive, whether from investors or at AI conferences I attend, how much confidence do you have that the software, even the consumer [indiscernible] business can monetize all the investments we're seeing globally? Or frankly, are we in a bubble? In fact, Amy, what would be the factors you'd be watching for to assure that you're not overbuilding for current demand and the demand will sustain. Amy Hood: Maybe I'll start, Satya and then you could add. Let me talk a little bit about maybe connecting a couple of the dots because with $400 billion of RPO, that's sort of short-dated as we talked about, our needs to continue to build out the infrastructure is very high. And that's for booked business today. That is not any new booked business we started trying to accomplish on October 1, right? And so the way to think about that, and you saw it this quarter in particular, and as we talked about '26, the remainder, number one, we're pivoting toward -- increasingly, we talked about this short-lived assets, both GPUs and CPUs, Again, we talk about all these workloads are burning both in terms of app building. Now when that happens, short-lived assets generally are done to match sort of the duration of the contracts or the duration of your expectation of those contracts. And so I sometimes think when people think about risk, they're not realizing that most of the lifetimes of these and the lifetime of the contracts are very similar. And so when you think about having revenue and the bookings and coming on the balance sheet, the depreciation of short-lived assets, they're actually quite matched, Mark. And as you know, we've spent the past few years not actually being short GPUs and CPUs per se, we were short the space or the power is the language we used to put them in. So we spent a lot of time building out that infrastructure. Now we're continuing to do that also using leases. Those are very long-lived assets, as we've talked about 15 to 20 years. And over that period of time, do I have confidence that we'll need to use all of that, it is very high. And so when I think about sort of balancing those things, seeing the pivot to GPU, CPU short-lived, seeing the pivot in terms of how those are being utilized, we are -- and I said this now, we've been short now for many quarters. I thought we were going to catch up, we are not. Demand is increasing. It is not increasing in just one place. It is increasing across many places. We're seeing usage increases in products. We are seeing new products launch that are getting increasing usage, and increasing usage very quickly. When people see real value, they actually commit real usage. And I sometimes think this is where this cycle needs to be thought through completely is that when you see these kind of demand signals and we know we're behind, we do need to spend. But we're spending with a different amount of confidence in usage patterns and in bookings, and I feel very good about that. I have said we are now likely to be short capacity to serve the most important things we need to do, which is Azure, our first-party applications. We need to invest in product R&D and we're doing end-of-life replacements in the fleet. So we're going to spend to make sure that happens. It's about modernization. It's about high quality. It's about service delivery, and it's about meeting demand. And so I feel good about doing that, and I feel good that we've been able to do it so efficiently and with a growing book of business behind it. Satya Nadella: Yes. The only thing I would add to what Amy captured was, if you sort of look out, there are 2 things that matter, I think, and that are critical in terms of how we think about our allocation of capital, also our R&D. One is how efficient is our planet-scale token factory, right? I mean that's at the end of the day, what you have to do. And in order to do that, you have to start with building out a very fungible fleet. It's not like we're building one data center in one region in the world that's mega scale. We are building it out across the globe for inference, for pre-training, for post-training, for RL, for data [indiscernible] or what have you. So therefore, that's the fungibility is super important. The second thing that we're also doing is continually modernizing the fleet. It's not like we buy one version of, say, NVIDIA and load up for all the gigawatts we have. Each year, you buy, you write the Moore's Law, you continuously modernize and depreciate it. And that means you also use software to grow efficiency. I talked about, I think, 30% improvement on both serving up GPT-4.1 and 5.0, right? That's software. That's sort of -- and by the way, it's helpful on A100s, it's helpful on GB200s, and it will be helpful on GB300s. That's the beauty of having the efficiency of the fleet. So keep improving utilization, keep improving the efficiency. So that's what you do in the token factory. The other aspect, which Amy spoke to is we have some of the best agent systems that matter in the high-value domains, right? It's in information work. That's the Copilot system. Coding, I mean, I should also say one of the things I like about Copilot is, I mean, Copilot ARPU is compared to M365 ARPUs, right? It's expansive. The same thing that happened between server and cloud like we used to always say, well, is it zero-sum, it turned out that the cloud was so much more expansive to the server market. The same thing is happening in AI because first, you could say, hey, our ARPUs are too low when it comes to M365 or you could say we have the opportunity with AI to be much more expansive. Same thing with tools, right? I mean, tooling -- the tools business was not like a leading business, whereas coding business is going to be one of the most expansive AI systems. And so we feel very good about being in that category. Same thing with security, same thing with health. So we have -- and in consumer, one of the things is it's not just about ads, it's ads plus subscriptions that also opens up opportunity for us. So when I look at the entirety of these high-value agent systems and when we look at the efficiency of and fungibility of our fleet, that's what gives us the confidence to invest, both the capital and the R&D talent to go after this opportunity. Operator: The next question comes from the line of Karl Keirstead with UBS. Karl Keirstead: Okay. This one is for Amy. Amy, I certainly don't want to take you down too complex an accounting path with this question, but the investment in OpenAI that sits in other income at $4.1 billion is so large that I think the audience could -- listening in could benefit from a little bit more color about what that is. It feels like it's so much larger than you were running through other income in prior quarters that it mustn't just be your share of the OpenAI losses. So could you just describe that? And what we can expect in subsequent quarters? And whether this signals any kind of accounting change? Amy Hood: The Q1 number was not impacted at all by the new agreement that was put in place. Let me first say that. Secondly, that increased loss was all due to our percentage of losses in OpenAI due to the equity method. So just to be very clear. So there is not anything there that is not the increased losses from OpenAI. Operator: The next question comes from the line of Mark Murphy with JPMorgan. Mark Murphy: So we seem to be entering into a new era where the contractual commitments from a small number of AI natives are just incredibly large, not only in absolute terms, but sometimes relative to the size of the companies themselves. For instance, contracts worth hundreds of billions of dollars that are 20x their current revenue scale. Philosophically, how do you evaluate the ability of those companies to follow through on these commitments? And how do you think about placing guardrails on customer concentration for any single entity? Satya Nadella: Yes. Maybe I'll start and then Amy, you can add. I mean it goes back a little bit, Mark, to what I said about building first, the asset itself such that it's most fungible. And then to recognize the strength of even sort of our portfolio, we have a third-party business, we have a first-party business, we have third-party also spread between enterprise, digital natives, I always felt that we need a balance there because it may start with digital natives. They're always going to be the early adopters. You always have the hit app of the generation. And then -- essentially then it spreads throughout. The enterprise adoption cycle is just starting and so therefore, having the -- over the arc of time, I think that third-party balance of customers will only increase. But it's great to have the hit first-party apps in the beginning because you can build scale that then if it's a fungible and that's where the key is. You don't want to build for a digital native in -- as if you're just doing hosting for them. You want to build. That's where -- I think some of the decision-making of ours is probably getting better understood. What do we say yes to, what do we say no to. I think there was a lot of confusion, hopefully by now, anyone who switched on would figure this out. And so that's, I think, one thing we're doing on the third party. But the 1 -- first party is probably where a lot of our leverage comes and it's not even about one hit app on our first-party even. Our portfolio of stuff which I just walked through in the earlier answer, gives us, again, the confidence that between that mix, we will be able to use our fleet to the maximum. And remember, these assets, especially the data centers and so on are long assets, right? There will be many refresh cycles for any one of these when it comes to the gear. So I feel that once you think about all those dimensions, the concentration risk gets mitigated by being thoughtful about how you really ensure the build is for the broad customer base. Amy Hood: And maybe just to help with another angle that I think, Satya helped a lot is that when you think about concentration risk or delivering to any customer, you have to remember that because we're talking about this very large flexible fleet that can be used for anyone and for any purpose, 1P, 3P, and including our commercial cloud, by the way, which I should be quite clear on, it is pretty flexible in every regard, you have to remember that the CPU and GPU and the storage gear, doesn't come into play until the contracts start happening. And so you're right, some of these large contracts have delivery dates over time. So you get a lot of lead time in being able to say, "Oh, what's the status?" And so I think we're pretty thoughtful around what's always gone in our RPO balance, and then considerate of that. There's always been that taken into account when we publish that bookings on brand, publish the RPO balance. Operator: The next question comes from the line of Brad Zelnick with Deutsche Bank. Brad Zelnick: And I'll echo my congrats on an amazing start to the year. Amy, is there any way to quantify or frame the revenue impact of Azure being short on capacity? And while I appreciate the constraints you face are broad across the industry, is there risk of workloads going elsewhere? And how do you mitigate that? Amy Hood: Yes, Brad, it's a great question. It's always hard to quantify precisely what would have been the revenue impact in quarter. But I would offer a way to think about it is Azure probably does bear most of the revenue impact. Because when you think about real priorities that you have to fill first, it's obviously the increasing usage and adoption and sales we've seen of M365 Copilot and the usage of Copilot chat, which we've seen very different patterns, which we're encouraged by. It's the adoption of security features. It's the GitHub momentum. And so when you're thinking about it, that is where and it is a priority for us to allocate resourcing there first. And so you are right to ask how do I think about that. We've worked very hard to try to mitigate it as best we can, but we have been short in Azure, and we've been clear on it. And I would say the other 2 priorities that I haven't mentioned maybe as much before is also just making sure our product teams and the AI talent that we've been able to hire into the company really over the past 1.5 years have access also to significant capacity because we're seeing it make the product better in a loop that is adding great benefit today into products people are using today for real-world work. And so we are making that a priority to make sure our research teams have that as well as our product engineering teams. And yes, it does impact Azure directly. That is the place where you see that prioritization. But I think it's probably hard for me to give an exact number, but it is safe to say that the number could be higher. Operator: The last question will come from the line of Kash Rangan with Goldman Sachs. Kasthuri Rangan: Amy, I just wanted to congratulate you, I think you said before that it is possible to accelerate Azure growth while getting efficient with margins and you've done it. Congrats on that. I have one for you, Satya. With respect to the elephant in the room, following just being a little more direct, following up on Keith Weiss' question. There's talk that another hyperscaler came in and took away the business that was rightfully Microsoft's. I'm sure that there is a different point of view here. I'm wondering if you could offer some perspective on your criteria to -- is it about a certain volume of business that you wish to execute on the Microsoft paper? Or is it something broader than that, that I don't think maybe people fully appreciate the terminal value that Microsoft will have on its balance sheet at the end of these contracts, which I think is probably being underestimated as you have a full stack and you've got the multiple vectors to monetize, be it databases, Foundry. And to your point that you are a platform company, not just a hyperscaler. Maybe that's what it is all about, or maybe there's another story about you letting the other hyperscaler company coming from nowhere and claiming a big piece of that 4- to 5-year puzzle. And congratulations. Satya Nadella: Well, thanks, Kash. I mean for us, again, just always goes back to, I think, the core principle, which is build a fleet that is fungible across the planet and works for third-party and first-party and research. So that's essentially what we have done. And so when some demand comes in shape, that don't fit that goal, where it's too concentrated, not just by customer, by location, by type of skewing, right? I think Amy mentioned some very key things. When you think about the margin profile of a hyperscaler, you've got to remember this, the AI accelerator piece, but there's compute, there's storage. And so if all of the demand just comes for just one [ meter ] that's really not a long-term business we want to be in. That's even from a third party. We have to balance it with all of our first-party stuff because that's after all a different margin stack for us. And then we have to fund our own R&D and model capability because in the long run, that's what's going to differentiate us. And so I look at all of those. We sort of use all of that to make sure we are saying yes to all the demand that we want, we say no to some of the demand that may be something that we could serve, but it's not in our long-term interest. And so that's sort of the decision-making we have done, and we feel very, very good about the decisions. In some sense, I feel even each time we say no to, the day after, I feel better. Amy Hood: And just Kash, I think this is our last call with you. And I just want to say thanks and congratulations. It's been a privilege to work with you and best of luck. Satya Nadella: Let me add to that, Best of luck, Kash. Jonathan Neilson: Thanks, Kash. That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Satya Nadella: Thank you all. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good afternoon. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Meta Third Quarter Earnings Conference Call. [Operator Instructions] This call will be recorded. Thank you very much. Kenneth Dorell, Meta's Director of Investor Relations. You may begin. Kenneth Dorell: Thank you. Good afternoon, and welcome to Meta's Third Quarter 2025 Earnings Conference Call. Joining me today are Mark Zuckerberg, CEO; and Susan Li, CFO. Our remarks today will include forward-looking statements, which are based on assumptions as of today. Actual results may differ materially as a result of various factors, including those set forth in today's earnings press release and in our quarterly report on Form 10-Q filed with the SEC. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our website at investor.atmeta.com. And now I'd like to turn the call over to Mark. Mark Zuckerberg: All right. Thanks, Ken. Thanks, everyone, for joining today. We had another strong quarter with 3.5 billion people using at least one of our apps every day. Instagram had a major milestone with 3 billion monthly actives, and we're seeing good momentum across our other apps as well, including Threads which recently passed 150 million daily actives and remains on track to become the leader in its category. I am very focused on establishing Meta as the leading frontier AI lab. Building personal superintelligence for everyone and delivering the app experiences and computing devices that will improve the lives of billions of people around the world. Our approach of advancing open source AI means that when Meta innovates, everyone benefits. Meta Superintelligence Labs is off to a strong start. I think that we've already built the lab with the highest talent density in the industry. We're heads down developing our next generation of models and products and I'm looking forward to sharing more on that front over the coming months. We're also building what we expect to be an industry-leading amount of compute. Now there's a range of time lines for when people think that we're going to get superintelligence. Some people think that we'll get there in a few years. Others think it will be 5, 7 years or longer. I think that it's the right strategy to aggressively frontload building capacity so that way we're prepared for the most optimistic cases. That way, if superintelligence arrives sooner, we will be ideally positioned for a generational paradigm shift in many large opportunities. If it takes longer, then we'll use the extra compute to accelerate our core business which continues to be able to profitably use much more compute than we've been able to throw at it. And we're seeing very high demand for additional compute, both internally and externally. And in the worst case, we were just slow building new infrastructure for some period while we grow into what we build. The upside is extremely high for both our existing apps and new products and businesses that are becoming possible to build. Across Facebook, Instagram and Threads, our AI recommendation systems are delivering higher quality and more relevant content, which led to 5% more time spent on Facebook in Q3 and 10% on Threads. Video is a particular bright spot with video time spent on Instagram up more than 30% since last year. And as video continues to grow across our apps, Reels now has an annual run rate of over $50 billion. Improvements in our recommendation systems will also become even more leveraged as the volume of AI-created content grows. Social media has gone through 2 eras so far. First was when all content was from friends, family and accounts that you followed directly. The second was when we added all of the creator content. Now as AI makes it easier to create and remix content, we're going to add yet another huge corpus of content on top of those. Recommendation systems that understand all this content more deeply and can show you the right content to help you achieve your goals are going to be increasingly valuable. Our ads business continues to perform very well, largely due to improvements in our AI ranking systems as well. This quarter, we saw meaningful advances from unifying different models into simpler, more general models, which drive both better performance and efficiency. And now the annual run rate going through our completely end-to-end AI-powered ad tools has passed $60 billion. And one way that I think about our company overall is that there are 3 giant transformers that run Facebook, Instagram and ads recommendations. We have a very strong pipeline of lots of ways to improve these models by incorporating new AI advances and capabilities. And at the same time, we are also working on combining these 3 major AI systems into a single unified AI system that will effectively run our family of apps and business using increasing intelligence to improve the trillions of recommendations that we'll make for people every day. I'm also very excited about the new products that we're going to be able to build. More than 1 billion monthly actives already use Meta AI and we see usage increase as we improve our underlying models. I'm very excited to get a frontier model into Meta AI and I think that the opportunity there is very large. The same goes for our business AI. Every day, people have more than 1 billion active threads with business accounts across our messaging platforms, ranging from product questions to customer support. Our business AIs will enable tens of millions of businesses to scale these conversations and improve their sales at low cost and the better our models get, the better this is going to work for all businesses. This quarter, we also launched Vibes which is the next generation of our AI creation tools and content experiences. Retention is looking good so far. And its usage keeps growing quickly week over week. I'm looking forward to ramping up the growth of Vibes over the coming months. More broadly, I think that Vibes is an example of a new content type enabled by AI, and I think that there are more opportunities to build many more novel types of content ahead as well. As our new models become ready, I'm looking forward to starting to show everyone some of the new kinds of products that we're working on. At Connect, we announced our 2025 line of AI glasses, and the response so far has been great. The new Ray-Ban Meta glasses and Oakley Meta Vanguards are both selling well. As people love the improved battery life, camera resolution, new AI capabilities and the great design. And there's our new Meta Ray-Ban display glasses, our first glasses with a high-resolution display and the metaneural band to interact with them. They sold out in almost every store within 48 hours with demo slots fully booked through the end of next month. So we're going to have to invest in increasing manufacturing and selling more of those. This is an area where we are clearly leading and have a huge opportunity ahead. Taking a step back, if we deliver even a fraction of the opportunity ahead for our existing apps and the new experiences that are possible, then I think that the next few years will be the most exciting period in our history. We've got a lot to do. But we're making real progress, delivering strong business results, building the talent density and infrastructure needed for the next era and leading the way on AI devices that will define the next computing platform. I am proud of how our teams are rising to the challenge, and I'm grateful for their dedication, hard work and creativity. As always, thank you all for being a part of this journey with us. And now here is Susan. Susan Li: Thanks, Mark, and good afternoon, everyone. Let's begin with our segment results. All comparisons are on a year-over-year basis, unless otherwise noted. Our community across the family of apps continues to grow, and we estimate more than 3.5 billion people used at least 1 of our family of apps on a daily basis in September. Q3 total family of apps revenue was $50.8 billion, up 26% year-over-year. Q3 family of apps ad revenue was $50.1 billion, up 26% or 25% on a constant currency basis. In Q3, the total number of ad impressions served across our services increased 14%. Impression growth was healthy across all regions driven by engagement and user growth, particularly on video services. The average price per ad increased 10% year-over-year, benefiting from increased advertiser demand, largely driven by improved ad performance. This was partially offset by impression growth, particularly from lower monetizing regions and services. Family of Apps other revenue was $690 million, up 59%, driven by WhatsApp paid messaging revenue growth as well as meta verified subscriptions. Within our Reality Labs segment, Q3 revenue was $470 million, up 74% year-over-year. The significant year-over-year growth in Q3 was partly due to retail partners stocking up on Quest headsets ahead of the holiday season. We did not have a similar benefit in the third quarter of last year since our Quest 3S headset launched in the fourth quarter of 2024. Aside from this, strong AI glasses revenue also contributed to revenue growth in Q3. Moving now to our consolidated results. Q3 total revenue was $51.2 billion, up 26% or 25% on a constant currency basis. Q3 total expenses were $30.7 billion, up 32% compared to last year. Year-over-year expense growth accelerated 20 percentage points from Q2 due primarily to 3 factors: First, legal-related expense growth was higher than in Q2 due to charges we recorded in the third quarter as well as us lapping a period of accrual reversals in the third quarter a year ago. Second, employee compensation growth accelerated, driven by technical hires, particularly AI talent. Finally, growth in infrastructure costs accelerated due to increased infrastructure operating costs associated with our expanded data center fleet, depreciation on our incremental CapEx spend and third-party cloud spend. We ended Q3 with over 78,400 employees, up 8% year-over-year, driven by hiring in priority areas of monetization, infrastructure, Reality Labs, Meta Superintelligence Labs as well as regulation and compliance. Third quarter operating income was $20.5 billion, representing a 40% operating margin. Q3 interest and other income was $1.1 billion driven primarily by unrealized gains on our marketable equity securities. Our tax rate for the quarter was 87%, which was unfavorably impacted by a onetime noncash reduction in deferred tax assets that we no longer anticipate using under new U.S. tax law. Our tax rate would have been 14%, excluding this charge. Although the transition to the new U.S. tax law resulted in an accounting charge in the third quarter, we continue to expect we will recognize significant cash tax savings for the remainder of the current year and future years under the new law, and this quarter's charge reflects the total expected impact from the transition to the new U.S. tax law. Net income was $2.7 billion or $1.05 per share. Excluding the onetime tax charge, our net income and EPS would have been $18.6 billion and $7.25 per share, respectively. Capital expenditures, including principal payments on finance leases were $19.4 billion, driven by investments in servers, data centers and network infrastructure. Free cash flow was $10.6 billion. We repurchased $3.2 billion of our Class A common stock and paid $1.3 billion in dividends to shareholders. We ended the quarter with $44.4 billion in cash and marketable securities and $28.8 billion in debt. Turning now to the business outlook. There are 2 primary factors that drive our revenue performance. Our ability to deliver engaging experiences for our community and our effectiveness at monetizing that engagement over time. On the first, daily actives continue to grow year-over-year across Facebook, Instagram and WhatsApp. We're continuing to see improvements to our products and recommendations drive incremental engagement with year-over-year growth in global time spent accelerating on both Facebook and Instagram in Q3. In the U.S., overall time spent on Facebook and Instagram grew double digits year-over-year, driven by continued video strength as well as healthy growth in non-video time on Facebook. The engagement gains continue to be driven by product work and ongoing improvements to our recommendation systems as we optimize our model architectures, implement advanced modeling techniques and integrate more signals about people's interests. We also continue to focus on increasing the freshness of recommended content. On Facebook, our systems are now surfacing twice as many Reels published that day than at the start of the year. Looking to 2026, we expect to advance our recommendation systems across several dimensions. On Instagram, one focus is evolving our systems to surface content across a broader set of topics that cater to the diverse interest of each person. This follows a similar approach we've implemented on Facebook that has driven good results. We also expect to make significant progress on our longer-term ranking innovations in 2026. We're seeing promising new results from our research efforts to create foundational ranking models and expect the new model innovations we're developing as part of this will enable us to significantly scale up the amount of data and compute we use to train our recommendation models in 2026, yielding more relevant recommendations. Another large focus next year is leveraging LLMs to improve content understanding. We expect this is going to enable our systems to more precisely label the keywords and topics within videos and posts, which will allow our systems to both develop deeper intuition about a person's interest and retrieve the content that matches them. Finally, we're making good progress with Meta AI and Threads. The number of people using Meta AI across our family of apps continues to grow, and we're increasingly leveraging first-party content into Meta AI results with the majority of Meta AI's responses to Facebook Deep Dive queries in the U.S. now showing related Reels. We're also seeing a lot of traction with media generation. People have created over 20 billion images using our products. And since launching Vibes within Meta AI in September, we have seen media generation in the app increased more than tenfold. On Threads, we see strong growth in both daily actives and the depth of engagement as we continue to improve recommendations. The ranking optimizations we made in Q3 alone drove a 10% increase in time spent on Threads. We also continue to ship new features, including launching direct messaging in Q3, so anyone on Threads can now message one another within the app. Now to the second driver of our revenue performance. increasing monetization efficiency. The first part of this work is optimizing the level of ads within organic engagement. We continue to refine ad supply across each of our major surfaces within Facebook and Instagram to better deliver ads at the time and place they are most relevant to people. Longer term, we have exciting ad supply opportunities on both Threads and WhatsApp status. Ads are now running globally and feed on Threads and we're following our typical monetization playbook of optimizing the ads formats and performance before we ramp supply. Within WhatsApp status, we're continuing to gradually introduce ads and expect to complete the rollout next year. The second part of increasing monetization efficiency is improving marketing performance. Advancing our ad systems remains a critical aspect of this work and we are driving performance gains through ongoing improvements in our larger scale ads ranking models. For example, we continue to broaden the adoption of Lattice, our unified model architecture. In Q3, we rolled out Lattice to app ads, which drove a nearly 3% gain in conversions for that objective. Since introducing Lattice back in 2023, along with other back-end improvements, we have now cut the number of ads ranking and recommendation models by approximately 100 as we consolidated smaller and more specialized models into larger ones that use the Lattice architecture to generalize learnings across surfaces and objectives. We continue to observe performance improvements as we combine models and expect to drive additional gains as we consolidate another 200 models over the coming years into a smaller number of highly capable models. In addition to advancing our foundational ads models, we're innovating on our run time models we use downstream of them for ads inference. For example, we began piloting a new run time ads ranking model in Q3 that leverages more compute and data than our prior models to select more relevant ads. In testing, we've seen this new model drive a more than 2% lift in conversions on Instagram. We also significantly improved performance of Andromeda in Q3 by combining models across retrieval and early-stage ranking into a single model, driving a 14% increase in ads quality on Facebook surfaces. Within our ads products, we're seeing continued momentum with Advantage+. In Q3, we completed the rollout of our streamlined campaign creation flow for Advantage+ lead campaigns. So now advertisers running sales app or lead campaigns have end-to-end automation turned on from the beginning, allowing our systems to look across our platform to optimize performance by automatically choosing criteria like who to show the ads to and where to show them. The annual run rate of revenue running through our end-to-end automated solutions has now reached $60 billion following the implementation of the new streamlined creation flow, as we continue to see more advertisers leverage the performance benefits of our solutions. Within our Advantage+ creative suite, the number of advertisers using at least 1 of our video generation features was up 20% versus the prior quarter as adoption of image animation and video expansion continues to scale. We've also added more generative AI features to make it easier for advertisers to optimize their ad creatives and drive increased performance. In Q3, we introduced AI generated music. So advertisers can have music generated for their ad that aligns with the tone and message of the creative. Finally, business messaging remains a significant opportunity for us. We're seeing strong growth across our portfolio of solutions, including with click-to-WhatsApp ads, which grew revenue 60% year-over-year in Q3. We're also making good progress on our business AI efforts, where we've been focused on building a turnkey AI that helps businesses generate leads and drive sales. We've been opening access in recent months to more businesses within our initial test markets, the Philippines and Mexico. And I've seen strong usage with millions of conversations between people and business AIs taking place since July. This month, we expanded availability within WhatsApp and Messenger to all eligible businesses in Mexico and the Philippines, respectively. In the U.S., we're also starting to roll out the ability for merchants to add their business AIs to their website so we can support the full sale funnel from ad to purchase. Next, I would like to discuss our approach to capital allocation. Our primary focus is deploying capital to support the company's highest order priorities including developing leading AI products models and business solutions. As we make significant investments in infrastructure to support this work, we are focused on preserving maximum long-term flexibility to ensure we can meet our future capacity needs while also being able to respond to how the market develops in the years ahead. We're doing so in several ways, including staging data center sites so we can spring up capacity quickly in future years as we need it as well as establishing strategic partnerships that give us option value for future compute needs. The strong financial position and cash generation of our business enable us to make these investments while also accessing additional pools of cost-efficient capital. Moving to our financial outlook. We expect fourth quarter 2025 total revenue to be in the range of $56 billion to $59 billion. Our guidance assumes foreign currency is an approximately 1% tailwind to year-over-year total revenue growth based on current exchange rates. Our outlook reflects an expectation for continued strong ad revenue growth partially offset by lower year-over-year Reality Labs revenue in Q4. The anticipated reduction in Reality Labs revenue is due to us lapping the introduction of Quest 3S in Q4 of last year. As well as retail partners procuring Quest headsets during Q3 of this year to prepare for the holiday season, which were recorded as revenue in the third quarter. Turning to the expense and CapEx outlooks. I'll first start with 2025 before providing some commentary on our planning for 2026. We expect full year 2025 total expenses to be in the range of $116 billion to $118 billion, updated from our prior outlook of $114 billion to $118 billion and reflecting a growth rate of 22% to 24% year-over-year. We currently expect 2025 capital expenditures, including principal payments on finance leases to be in the range of $70 billion to $72 billion, increased from our prior outlook of $66 billion to $72 billion. On to tax. Absent any changes to our tax landscape we expect our fourth quarter 2025 tax rate to be 12% to 15%. Turning now to 2026. We are at an exciting point for our company. where we have continued runway to improve our core services today as well as the opportunity to build new AI-powered experiences and services that will transform how people engage with our products in the future. We expect the set of investments we're making within our ads and organic engagement initiatives next year will enable us to continue to deliver strong revenue growth in 2026. While our progress on AI models and products will position us to capitalize on new revenue opportunities in the years to come. A central requirement to realizing these opportunities is infrastructure capacity. As we have begun to plan for next year, it's become clear that our compute needs have continued to expand meaningfully, including versus our own expectations last quarter. We are still working through our capacity plans for next year, but we expect to invest aggressively to meet these needs, both by building our own infrastructure and contracting with third-party cloud providers. We anticipate this will provide further upward pressure on our CapEx and expense plans next year. As a result, our current expectation is that CapEx dollar growth will be notably larger in 2026 than 2025. We also anticipate total expenses will grow at a significantly faster percentage rate a than 2025, with growth primarily driven by infrastructure costs, including incremental cloud expenses and depreciation. Employee compensation costs will be the second largest contributor to growth. As we recognize a full year of compensation for employees hired throughout 2025, particularly AI talent and add technical talent in priority areas. Finally, we continue to monitor active legal and regulatory matters, including the increasing headwinds in the EU and the U.S. that could significantly impact our business and financial results. For example, in the EU, we continue to engage constructively with the European Commission on our less personalized ads offering. However, we cannot rule out the commission imposing further changes to that offering that could have a significant negative impact on our European revenue as early as this quarter. In the U.S., a number of youth-related trials are scheduled for 2026 and may ultimately result in a material loss. In closing, this was another good quarter for our business. We have an exciting set of opportunities to continue improving our core business while delivering innovative new experiences and services for the people and businesses using our products in the years to come. With that, Christa, let's open up the call for questions. Operator: [Operator Instructions] And your first question comes from the line of Brian Nowak with Morgan Stanley. Brian Nowak: I have 2 for Susan. The first one, Susan. So the pipeline for core improvements to come in '26 with models and ad ranking models and more [ FPS ] of compute seems very exciting and the infrastructure build team sizable behind that. So can you help us a little to understand some of the early quantifiable signals you're seeing on AB tests from some of these improvements to come that sort of make you most excited and give you confidence you're going to get ROIC from all this CapEx? That's the first one. Second one is a little faster. How large is the Reality Labs revenue headwind in the 4Q guidance? Susan Li: Thanks, Brian, for the question. I think your first question had a couple of parts to it. So I'm going to try to disaggregate those parts, and let me know if this addresses what you're getting to. I will say that the growth in 2026 CapEx relative to 2025 comes from growth in each of the core areas, MSL, core AI as well as non-AI spend. So all of those areas are growing, but the MSL AI needs are growing the most. In terms of the core AI pipeline, I think, we talked about last year when we were going into the 2025 budget process, we had a road map of resource investments across both head count and compute that we thought would pay off in 2026. And it's really a very broad range of sort of different ads ranking and performance efforts. And we're continuing to see that those have paid off through the course of the year. There is a long list of specific efforts, but 1 of the measures that we look at to monitor this is how are we driving ad performance, how are conversions growing? Conversions is a complex metric for us because advertisers optimize for so many different conversions on different values. But when we control for that and look at value-weighted conversion rates, we're seeing very strong year-over-year growth and conversion -- weighted conversions continue to grow faster than impressions. We also talked about some of the new model architecture over the course of the year and the degree to which the new model architecture is enabling us also to take advantage of having more data and more compute to drive ads performance. So we expect that, that's going to be a continued story in 2026. We are, in fact, at the beginning of our 2026 budgeting process now, and we see a similar list of revenue investments that we're excited to be able to invest in. And so we think that, that's going to be a big part of our ability to continue to drive strong revenue performance throughout the year. On your second question, which is the Reality Labs revenue headwind. I don't think we have quantified the exact size of that. We expect that Q4 Reality Labs revenue will be lower than last year for a couple of reasons that I alluded to, the biggest factor is we're lapping the introduction of Quest 3S in Q4 of last year, and we don't have a new headset in the market this year. We also recorded all of our holiday-related Quest 3S sales in Q4 '24, since the headset was launched in October '24. This year, we're recognizing some of those Quest 3S sales in Q3 as retail partners have procured Quest headsets in advance of the holiday season. We're still expecting significant year-over-year growth in AI Glasses revenue in Q4 as we benefit from strong demand for the recent products that we've introduced, but that is more than offset by the headwinds to the Quest headsets. Operator: Your next question comes from the line of Doug Anmuth with JPMorgan. Douglas Anmuth: I appreciate the strategy to front-load capacity for superintelligence. Can you just talk about your thought process and kind of triangulating the CapEx dollar growth and the significantly faster expense growth next year with core growth in the business and then the impact on earnings and free cash flow? And do you have targets that we should be thinking about for cash on hand or net cash overall? Susan Li: Thanks, Doug. We're, right now, I would say, in the process of -- relatively early, actually still in the process of putting together our budget for 2026. And it is on the capacity side, a particularly dynamic process. We're certainly seeing that we wish we had more capacity today than we do. We would be able to put it towards good use certain not only with the MSL team appreciate having more capacity, but we'd be able to put it towards good and ROI-positive use in the core business as well. So we're really trying to plan ahead not only to ensure that we have the capacity we need in 2026, but also to give ourselves the sort of flexibility and option value to have the capacity that we think we could need in '27 and '28. So that said, there are lots of moving pieces in the budget. It's not baked yet. It's still sort of in the process of coming together. We don't have specific targets to share -- but we do feel like our strategic priority is really making sure that we have the compute that we need to be well positioned to succeed at AI, and that's sort of the foremost priority as we're putting together the budget. Mark Zuckerberg: Yes. I mean, I'll add a few thoughts on this, too, although I mean, as Susan said, we're still working through the actual budget, and I think we'll typically have more to share on that early next year. But to date, we keep on seeing this pattern where we build some amount of infrastructure to what we think is an aggressive assumption. And then we keep on having more demand to be able to use more compute, especially in the core business in ways that we think would be quite profitable, then we end up having compute for. So I think that suggests that being able to make a significantly larger investment here is very likely to be a profitable thing over some period because if the primary use of it is going to be to accelerate the AI research and the new AI work that we're doing and how that relates to both the core business and new products. But any compute that we don't need for that we feel pretty good that we're going to be able to absorb a very large amount of that to just convert into more intelligence and better recommendations in our family of apps and ads in a profitable way. Now I mean, it's, of course, possible to overshoot that, right? And if we do, I mean, this is what I mentioned in my comments, then we see that there's just a lot of demand for other new things that we build internally, externally, like almost every week, people come to us from outside the company asking us to stand up an API service or asking if we have different compute that they could get from us and we haven't done that yet. But obviously, if you got to a point where you ever built, you could have that as an option. And then the kind of the very worst case would be that we effectively have just prebuilt for a couple of years, in which case, of course, there would be some loss and depreciation, but we'd grow into that and use it over time. So my view on this is that rather than continuing to be constrained on CapEx and feeling in the core business like we have significant investments that we could make that we're not able to make that would be profitable. But the right thing to do is to try to accelerate this to make sure that we have the compute that we need, both for the AI research and new things that we're doing and to try to get to a different state on our compute stance on the core business. So that's kind of how I'm thinking about that overall. Of course, there's a lot of operational constraints too on what one can build, right? So we're basically trying to work through this all, and I think we'll have more to share in the coming months and over the course of next year. But I can think there's just a huge, huge amount of opportunities ahead here. Operator: Your next question comes from the line of Eric Sheridan with Goldman Sachs. Eric Sheridan: Mark, I wanted to reflect on some of your comments with respect to scaling towards superintelligence and bringing it back to consumer AI, maybe reflect a little bit on the signals you've gotten on the way consumers across family of apps interact with Meta AI today? And how you think about scaling and exiting models from the superintelligence effort might change the utility and behavior around Meta AI in the years ahead. Mark Zuckerberg: Yes. I mean a lot of people use Meta AI today. I mean, as I said in my comments upfront, there's more than 1 billion people who use it on a monthly basis. And what we see is that as we improve the quality of the model, primarily for post-training Llama 4 at this point. We are -- we continue to see improvements in usage. So our view is that when we get the new models that we're building in MSL in there and get like truly frontier models with novel capabilities that you don't have in other places, then I think that this is just a massive latent opportunity, right? We know -- I mean I would guess that Meta I think has the best track record of any company out there of taking a new product that people love and getting it to billions of people in terms of usage. So I think that the ability to plug in leading models is going to -- I would predict lead to a very large amount of use of these things over the coming years. So I'm very excited about that in terms of new products. It's not just Meta AI is an assistant. I think that there are going to be all kinds of new products around different content formats, and we're starting to see that with video and content creation, but I think there's going to be a lot more like that, that I'm quite excited about. And then there are the business versions of all these 2, like business AI. And then that's, of course, one part of the story is the new things that will be possible to build. And then the other part is how more intelligent models are just going to improve the core business. And improve the recommendations that we make across the family of apps and improve the recommendations and advertising. And I think there's just a -- as we've shown, there's sort of this very large amount of headroom and the opportunity there keeps growing as we as we are improving and optimizing the AI there. And I think that, that really shows no sign of being near the end. I think that there's quite a bit more to do there. And like I said in response to the last question, we are sort of perennially operating the family of apps and ads business in a compute starved state at this point, which is, on the one hand, sort of an odd thing to say, given the compute that we built up. But we really are taking a lot of the resources and using them to advance future things that we're doing, and we think that there's a lot more compute that we could put towards these that would just unlock a huge amount of opportunity in the core business as well. Operator: Your next question comes from the line of Mark Shmulik with Bernstein. Mark Shmulik: Susan, as you think about the visibility into kind of the runway next year of continued add performance and engagement improvements, how do you think about kind of the scale of those improvements versus kind of the progress we've seen over the last 2 years? And then, Mark, as you think about kind of the timing of some of these newer efforts coming out of Superintelligence Labs, is that anchoring to kind of an updated frontier model launch sometime next year like the right way for us to think about it? Or should we be looking at kind of progress from new products you're excited to see shift like Vibes? Susan Li: Thanks, Mark. So on the sort of adds improvement side, some of the innovations that we have been launching actually involve sort of improving our larger scale models. So we don't use our larger model architectures like GEM for inference because their size and complexity would make it too cost prohibitive. The way that we drive performance from those models is by using them to transfer knowledge to smaller lightweight models that are used at run time. And then in addition to the foundation model work, we are working on advancing our inference models by developing new techniques in architectures that then allow us to scale up compute and complexity in an ROI-positive way. So in general, we obviously, have a very large base of advertisers. There's a lot of demand liquidity in the system and even small-scale improvements that we are able to make in terms of driving basis point improvements in the performance of ads or single-digit increases in conversions relative to impressions in a given quarter off of a large base mean that we're really able to continue to grow the absolute dollars of revenue growth in a pretty meaningful way. Operator: Your next question comes from the line of Justin Post with Bank of America. Kenneth Dorell: Justin, just give us one second. I think there was a second Mark's question that we just want to get to on MSL. Mark Zuckerberg: Yes. I mean, I'll keep it quick. I mean I don't think we have any specific timing to announce certainly on the models or products, but I expect that you will see both. We expect to build novel models and novel products, and I'm excited to share more when we have it. Justin Post: So Mark, you mentioned the prior 2 content cycles, and obviously, you've been able to generate very attractive margins on them. As we get into the AI cycle, obviously, some concerns on the investment. But can you talk a little bit about how you're thinking about tools that could be coming out for users? I know there's some new competition. And then secondly, how do you think about margins in this content cycle? Any reason to think they would be different versus prior cycles. Mark Zuckerberg: I think it's too early to really understand what the margins are going to be for the new products that we build. I mean, I think certainly, every -- each product has somewhat different characteristics. And I think we'll kind of understand how that goes over time. I mean, my general goal is to build a business that maximizes value for the people who use our products and maximizes profitability, not margin. So I think we'll kind of just try to build the best things that we can and try to deliver the most value that we can for most people. Operator: Your next question comes from the line of Ross Sandler with Barclays. Ross Sandler: Great. And Mark, some of the goals for competing AI labs are around achieving AGI or these other milestones that are kind of like out there and a little esoteric. How are you setting up your new team in terms of achieving those types of goals versus products that can generate revenue for Meta kind of right out of the gate. And is the goal that you had articulated to us previously around giving billions of people kind of a personal AI to use. Is that still the direction of travel that you see? Or is there other things like kind of the Vibes or [ Sora ] angle that you think are potentially important. How should we think about like the overall direction. Mark Zuckerberg: Sure. So the way that I think about this is that the research is going to enable new technological capabilities to exist. And then those capabilities can get built into all kinds of different products. So the ability to reason more intelligently is, for example, very important across a large number of things. It would be useful for an assistant. It will also be useful in business AI. It will also be useful in the AI agent that we're building to help advertisers figure out what their campaigns are going to be. It will also have implications for eventually how we do ranking and recommendations of people's feeds and make different decisions there. That's just one example. I mean certainly, the capability to be able to produce very high-quality good video is going to be useful for giving people new creative tools. It will help increase the amount of content inventory that can be shown in Instagram and Facebook and therefore, should enable an increase in engagement there. It should help advertisers be able to create creative that will help us monetize better. So you can just go kind of down the list of capabilities that you'd expect. And I think each one will enable a bunch of different things. And I think the art of product development here is looking at the list of technology capabilities and figuring out what new products are going to be useful and prioritizing those. But fundamentally, I would sort of expect this exponential curve in new technology capabilities that are going to become available. And the other thing that I expect is that I think being the best in a given area will drive great returns rather than -- this is not like a check-the-box exercise of like, okay, we can generate some kind of content and someone else can. I think that like the company that is the best at each of these capabilities, I think, will get a large amount of the potential value for doing that. So there are lots of different capabilities to build. I'm not sure that any one company is going to be the best at all of them. I doubt that's going to be the case. But a lot of what we're trying to do is not like not kind of do some things that others have done. We're really trying to build novel capabilities. And I'm keeping this high level because I'm not -- I don't want to necessarily from a competitive or strategic perspective, get into what we're prioritizing. But that hopefully gives you a sense of how we're thinking about what we're doing. We want to be able to kind of build novel things, build them into a lot of our products and then have the compute to scale them to billions of people. And we think that that's going to both show up in terms of new products being possible in new businesses and very significant improvements to the current business, too. Operator: Your next question comes from the line of Mark Mahaney with Evercore ISI. Mark Stephen Mahaney: Just a question on Meta AI and both product and a monetization path. So when you look at it, what you've seen that's most encouraging to you in terms of the adoption and the use of Meta AI? And then when you think about -- I know you generally like to roll out and then deepen engagement and then later think about monetization. Like where do you think you are on that path now? Is it clear to you what the monetization options are for Meta AI. Mark Zuckerberg: I mean, I think the most promising thing that we're seeing is, one, that we were able to build something that a large number of people use, and I think that's valuable. And then secondly, that as we -- there is a clear correlation as we improve the models in ways that we think make them better, that people use them more. So that shows that we have a runway to basically be able to improve engagement and turn this into a product that's leading over time. In terms of where we are on this, and we basically just did this huge effort to boot up Meta Superintelligence Labs and build what I am very proud of is, I think, the highest talent density lab in the industry at this point. There are a lot of really great researchers and infrastructure folks and data folks who are now a part of this effort who are focused on training the next generation of work and doing some really novel work. And when that is ready, I think that we will be able to plug that into a number of the products that we're building, and I think that, that will be very exciting. But I think that's really the next thing that we're looking at. And then from there, I think that these models will also improve monetization in all of the different ways that we've talked about so far in terms of improving engagement, improving advertising, helping advertisers engage. I mean there's one opportunity that we just usually talk about on these calls, but hasn't come up as much here is just the ability to make it so that advertisers are increasingly just going to be able to give us a business objective and give us a credit card or bank account and like have the AI system basically figure out everything else that's necessary. Including generating video or different types of creative that might resonate with different people that are personalized in different ways, finding who the right customers are. All of these -- all of the capabilities that we're building, I think, go towards improving all of these different things. So I'm quite optimistic about that. Operator: Your next question comes from the line of Ronald Josey with Citi. Ronald Josey: And this maybe dovetails perfectly off Mark, what you just talked about. And we heard a lot about end-to-end automation here, I think, reaching a $60 billion ARR. I wanted to hear about -- if you can talk to us more just about adoption rates amongst the advertisers? And then maybe bigger picture, as you incorporate ranking recommendation changes like Andromeda, GEMS or Lattice, just talk to us how this automation is driving, call it, a higher ROI for advertisers overall, as we bring it all together. Susan Li: Yes. So we've been sort of laying the continued brick-by-brick build of Advantage+ and extending the set of objectives that it applies to over time. And so in Q3 we completed the global rollout of the streamlined campaign creation flow for Advantage+ lead campaigns. So now advertisers who are running sales apps or lead campaigns have end-to-end automation turned on from the beginning. And like the kind of application of the streamlined campaign creation flow for other objectives, this generally allows advertisers to optimize and automate several aspects of the campaign setup process at once. That includes things like audience selection where to show the ad, how the budget gets paced and distributed across ad sets to drive the most efficient outcomes. And we see that Advantage+ continues to drive performance gains, advertisers who run lead campaigns using Advantage+ are seeing a 14% lower cost per lead on average than those who are not. And I would say that we think there is still a lot of opportunity generally to grow adoption of Advantage+. A lot of advertisers only use our end-to-end automated solutions for a portion of their campaigns so we can grow share there. And to capture that opportunity, we're focused on driving continued performance improvements and addressing some of the key use cases that we still need in order to grow adoption. We're also working to broaden adoption among advertisers who use 1 of our single step automated solutions. For example, advertisers who might only use a piece of it like Advantage+ audiences by helping them understand the benefits of using more than one automated solution at the same time. So I would say Advantage+ is sort of an ongoing platform by which we both continue to expand the feature set that is available in Advantage+ and then expand the extensibility or the coverage of that feature set to sort of the broader set of advertisers. I think Mark mentioned that the annual revenue run rate now for advertisers who are using these automated options is $60 billion. And again, we see that there is room to continue growing that. Operator: Your next question comes from the line of Youssef Squali with Truist Securities. Youssef Squali: Great. Mark, on wearables, in particular, do you think you'll be able to sell enough hardware to recoup your investment? Or is that dependent on maybe creating new avenues for revenue from things like advertising services and commerce through that new computing platform? And if so, what are kind of the gating factors there? And then Susan, how do you see the on-balance sheet versus off-balance sheet financing of your AI initiatives? You've recently struck a deal with Blue Owl for the Louisiana data center. Is that part of the CapEx guide for '26? And if it's not, how significant will that way of funding for Meta going forward? And basically, would that slow down your CapEx growth past 2026. Mark Zuckerberg: I can talk about wearables, and then Susan can jump in on the other part. So I know there are a few pieces here. One is that the work on Ray-Ban Meta and the Oakley Meta product is going very well. I think, yes, I mean, at some point, if these continue going as well as it has been, then I think it will be a very profitable investment. I think that there's some revenue that we get from basically selling the devices and then some that will come from additional services from the AI on top of it. So I think that there's a big opportunity. Certainly, the investment here is not just to kind of build just the device. It's also to build these services on top. Right now, a lot of people get the devices for a range of things that don't even include the AI even though they like the AI. But I think over time, the AI is going to become the main thing that people are using them for and I think that that's going to end up having a big business opportunity by itself. But as products like the Ray-Ban Meta and Oakley Metas are growing, we're also going to keep on investing in things like the more full field of view, product form of the Orion prototype that we showed at Connect last year. So those things are obviously earlier in their curve towards getting to being a sustaining business. And our general view is that we want to build these out to reach many hundreds of millions or billions of people and that's the point at which we think that this is going to be just an extremely profitable business. Susan Li: Youssef, to your second question, so the JV that we announced with Blue Owl is sort of an example of finding a solution that enabled us to partner with external capital providers to codevelop data centers in a way that gives us long-term optionality in supporting our future capacity needs just given both the magnitude, but also uncertainty of what the capacity outlook in future years looks like. In terms of how that is recognized as CapEx, our prior CapEx reflected a portion of the data center build cost prior to the joint venture being established. Going forward, the construction cost of the data center will not be recorded in CapEx as the data center is constructed, we will contribute 20% of the remaining construction costs required, which is in line with our ownership stake, and those will be recorded as other investing cash flows. Operator: Your last question comes from the line of Ken Gawrelski with Wells Fargo. Kenneth Gawrelski: Just one for me, please. Mark, as you think about with the -- hopefully, a leading frontier model next year in hand, could you talk about where you think the value will accrue in this evolving ecosystem? Will it be with the platforms? Or do you think that this will be mostly -- the value will accrue to the scaled first-party applications. Mark Zuckerberg: I guess I'm not exactly sure what you mean by platform versus application in this context. But I mean I think that -- I mean, I think there's just a lot of value to create with AI overall. So I mean, clearly, you're seeing the people who are making the hardware. NVIDIA is doing an amazing job, right, I think, extremely well-deserved success. The cloud partners and companies are making -- are doing very well. I think that will likely continue. I think there's a huge opportunity there. And -- but if you look at it today, the companies that are building apps, I mean, a lot of the apps are still relatively small. And I think that's obviously going to be a huge opportunity. And I think what we've seen overall is basically people take like individual technology advances and build them into products that then build either communities or other kinds of network effects and then end up being very sustaining businesses. And I think what we haven't really seen as much in the history of the technology industry is the rate of new capabilities being introduced because around each of these capabilities, you can build many new products that I think each will turn into interesting businesses. So yes. I don't know. I mean I'm generally pretty optimistic about there being a very large opportunity. But in terms of new things to build, I think being able to build them and then scale them to billions of people is a huge muscle that Meta has developed, and I think we do very well. And I certainly think that, that's going to deliver a huge amount of value, both in the core business for all the ways that we talked about, how it's going to improve recommendations and the quality of the services as well as unifying the models together. And so that way, when these systems are deciding what to show they can just pull from a wider pool. And that we've -- these are things that we've just seen over the 20-plus years of running the company that they just deliver consistent wins. That we're going to keep on being able to make the systems more general and smarter and make better recommendations for people and have a larger pool of inventory. And that is all going to be great. And then there's going to be a lot of new things that I think we're going to be able to take and scale to billions of people over time and build new businesses, whether that's advertising or commerce supported or people paying for it or different kinds of things. So yes, it's -- I think it's pretty early, but I think we're seeing the returns in the core business. That's giving us a lot of confidence that we should be investing a lot more, and we want to make sure that we're not under-investing. Kenneth Dorell: Great. Thank you, everyone, for joining us today. We look forward to speaking with you again soon. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good afternoon. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to CPKC's Third Quarter 2025 Conference Call. The slides accompanying today's call are available at investor.cpkcr.com. [Operator Instructions] I would now like to introduce Chris de Bruyn, Vice President, Capital Markets, to begin the conference call. Chris de Bruyn: Thank you, David. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to remind you this presentation contains forward-looking information, and actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on Slide 2 in the press release and in the MD&A filed with Canadian and U.S. regulators. This presentation also contains non-GAAP measures outlined on Slide 3. With me here today is Keith Creel, our President and Chief Executive Officer; Nadeem Velani, our Executive Vice President and Chief Financial Officer; John Brooks, our Executive Vice President and Chief Marketing Officer; and Mark Redd, our Executive Vice President and Chief Operating Officer. The formal remarks will be followed by Q&A. In the interest of time, we appreciate if you limit your questions to one. It's now my pleasure to introduce our President and CEO, Mr. Keith Creel. Keith Creel: All right. Thanks, Chris, and good afternoon, everyone, for joining us here on the call to discuss our third quarter results. As I always do, I'm going to start by expressing a heartfelt gratitude and respect for the 20,000-strong family of railroaders across these 3 nations who delivered the results that we get the honor of sharing with you today. So speaking of the results, the team delivered strong volume growth in the quarter of 5%. Revenues were up $3.7 billion, up 3%, operating ratio of 60.7%, which was a 220 basis points improvement in earnings per share of $1.10, an increase of 11% versus a year ago. Most importantly, we saw a strong performance from a safety perspective with improvements in both our FRA personal injuries as well as our industry-leading train accident frequencies. Despite what has been consistent macro and trade policy headwinds, the team continues to generate a diverse profitable growth across a number of areas. We produced a continuing trend of differentiated performance in our automotive franchise with another record quarter, strength in our bulk franchise with strong growth both in grain and potash, another strong quarter in intermodal growth in domestic and international, which included an important milestone that we've spoken to before in the quarter with the opening of the new Americold facility here at our terminal in Kansas City. This is a first of several facilities that will be co-located on the CPKC. And again, it's a perfect example of our ability to be market makers with our unique industry network. Mark and the team delivered a very strong execution on the operating side with results with improvements across a number of our key metrics. The network overall is performing well. We have a lot of operating momentum heading into the end of the year to close out, and we remain on track and fully expect to deliver on our guidance of 10% to 14% earnings growth versus a year ago. That said, while there's certainly a lot of focus currently on potential industry consolidation, we remain focused on executing this unique growth opportunity that CPKC represents. A couple of comments on UP and NS as it pertains to the proposed merger, I think we've been very clear about our views. We strongly believe further consolidation is not necessary at this time and is not in the best interest of the industry, the shippers or the U.S. economy. As we said before, we remain and will be active participants throughout the regulatory process to ensure that the facts are known and understood about what a merger of this size and scale means. Just for reiterating the obvious, the proposed merger would result in one single line railroad handling about 40% of the freight rail traffic in the United States. This proposed merger in spite of what's been said, represents overlap in key markets such as Chicago, Memphis, St. Louis and New Orleans. This is not a simple end-to-end merger. The merger of this magnitude introduces unprecedented risk by heavily concentrating much of the decision-making for our national rail network with undeniable implications on the entire supply chain. That said, while this is certainly driving a lot of focus, we will remain seized even if this consolidation happens on maintaining our industry-leading position to continue delivering industry-leading results. A direct threat from the Transcon merger to CPKC is minimal. This is a proposed East-West merger. Our U.S. network is primarily North-South. By no means does the merger impair or change our unique growth prospects that our 3-country network has created for us for years to come. And I'm confident for the merger to meet the regulatory standard that will have to meet, the conditions will have to be meaningful. So while much is still to be determined, our story remains unchanged. We have a unique network, undeniably a proven team and a differentiated growth opportunity in front of us that will continue to set us apart in growth and execution for years to come. We're well positioned to finish the year strong to produce another year of double-digit earnings growth. This network, this team, this opportunity is unique, and we're going to continue to deliver value for all stakeholders. So with that said, I'm going to hand it over to Mark to speak to the operation. John is going to bring a little color on the markets and Nadeem with the numbers, and then we'll open it up for questions. Mark Redd: Okay. Thanks, Keith. Good afternoon. I'd like to start by thanking our employees for their dedication and hard work in producing these results. The strong operating performance is a testament to the team's effort and execution in the third quarter. Looking at the third quarter results, we saw improvements to several of the key operating metrics. We look at terminal dwell improved by 2%, velocity improved by 1%, train length and train weight improved by 2%. Following the technology cutover that we executed in the second quarter, we are now leveraging the integrated Canadian and U.S. operating systems to drive further efficiencies and operating discipline. In the quarter, we saw CP legacy network operate at a record productivity and car velocity levels, while the legacy KCS network achieved its highest ever throughput levels. We're carrying this momentum into the fourth quarter with solid improvements to the key operating metrics, including velocity, dwell, car miles per car day and on-time to purchase. The strong network performance continues to provide John and his team a product they can sell into. Our 100 Series Transcontinental Intermodal trains in Canada are delivering consistent performance, along with low dock dwell at Centerm at Vancouver South Shore. This is also supporting the growth within Gemini. Velocity across the bulk network is mid-single digits, driving efficient service for the strong grain harvest in Canada and the U.S., along with the rest of the bulk franchise. As we continue to drive efficiencies across the network, we expect to further improve in our industry-leading PSR service model, delivering efficient growth and strong customer service. Now turning to safety. While we strive for perfect perfection during the quarter, safety is a continuous journey. Despite a challenging drama that occurred in the quarter, I'm encouraged that we delivered another quarter with year-over-year improvements in safety. If I look at personal injuries, we landed at 0.95, which is a 3% improvement. Train accident frequency was 1.15, which is 20% for the quarter. Turning to planning. As we moved into the end of the quarter, our resources are well aligned with our growth outlook. We have now received 91 of the 100 Tier 4 scheduled for delivery this year, locomotives. As we deploy these locomotives, primarily on a 100 Series Transcontinental Intermodal service, we're delivering about a 30% reduction in service interruptions compared to a year ago. As we look into the future, we expect to see an additional 70-plus locomotives in 2026 with further support an industry-leading growth outlook. We'll also improve the efficiency and reliability of this fleet. In closing, the network is performing well. We are properly resourced to handle the strong grain harvest in Canada and the U.S. Investments in capital, capacity, safety, locomotives are driving strong network performance, and we are well positioned to execute strong this quarter. Now, I'll pass it over to John. John Brooks: All right. Thank you, Mark, and good afternoon, everyone. I'm pleased with our third quarter performance as this franchise is resilient, and our team is producing differentiated growth despite a challenging macro economy. We are laser-focused on the things we can control. Our operations, as Mark said, are delivering strong service that we can sell into, and we are pricing to the value of our capacity and our service. Now looking at our third quarter results. This quarter, we delivered freight revenue growth of 4% on 5% increase in RTMs, both a revenue and RTM all-time Q3 record. Cents per RTM was down 1%. Our pricing remains strong as the team continues to deliver renewal pricing above our long-term outlook of 3% to 4%. Pricing was offset by mix as we delivered strong growth in bulk and International Intermodal while continuing to leverage our full network and grow our longer length of haul traffic, all of which contributed to lower cents per RTM. Now taking a closer look at our third quarter revenue performance, I'll speak to the FX adjusted results, starting with bulk. Grain revenues were up 4% on 6% volume growth. U.S. grain was strong with volumes up 13% over prior year. We continue to see strong growth in Mexico and the U.S. South as our network unlocks new opportunities and we expand our share into these markets. Looking to the end of the year, the U.S. corn and soybean harvest is going strong. While our P&W export program is impacted by the tariffs on soybeans, our grain team is working with our customers across Canada, the U.S. and Mexico to identify alternative markets and incremental opportunities to backfill a portion of this market shortfall. Canadian grain volumes were down 2%, driven by lower carryout stocks from the 2024-'25 harvest, along with lower demand for canola exports. Our outlook though is positive for this new crop, and we expect this new crop to be in the range of 78 million to 80 million metric tons ahead of the 5-year average, and we expect a strong close to the year for our grain franchise. Potash revenues and volumes were up 15%. The strong performance was driven by positive demand fundamentals and strong network performance that supported efficient potash export cycles. While Canpotex is fully committed to the end of the year, compares are more challenging, and we expect growth to moderate as we move through Q4. And to finish out bulk, we closed our third quarter with coal revenue up 3% on 2% volume growth. Growth in Canadian met coal was driven by improved production at our mines and continued inventory drawdowns. This was partially offset with our U.S. coal franchise driven by a facility outage that happened during the quarter. Now moving on to merchandise. Energy, Chemicals & Plastics revenue and volume were down 2%. The decline was driven by softer base demand, lower crude and lower refined fuel volumes due to customs border challenges going into Mexico. These headwinds were partially offset by new headwinds and increased volumes of LPGs. With LPG volumes starting to ramp up and refined fuel shipments rebounding in Mexico, we expect ECP to improve as we exit the year. In Forest Products, revenues and volumes were down 3% and 1%, respectively. Volumes in this space continue to be impacted by macro softness within our base demand. However, our team continues to outperform the industry by offsetting some of the broader macro impacts to this business with self-help initiatives and extended length of haul. Metals, Minerals and Consumer Products revenues and volumes were up 2%. The growth was driven by frac sand volumes to the Bakken, new business wins in the aggregate space and an increase in both U.S. domestic steel shipments and trade between Canada and Mexico. These efforts helped to offset the impact of tariffs on cross-border steel. Now looking ahead, we are encouraged by industrial development projects that are coming online, along with further growth opportunities from our land bridge shipments. Moving to the automotive area. As Keith said, revenue was up 2% and 9% volume growth, both are records. I'm pleased with the performance and resiliency of our auto franchise despite the uncertainty from evolving trade policy. This continues to be an area of unique growth for CPKC driven by our advantaged footprint serving both production plants and auto compounds across North America. Despite some of the recent chip and aluminum supply challenges, we are well on our way to producing another record year. Closing with Intermodal, revenue was up 7% on 11% volume growth. We delivered strong growth from our domestic Intermodal franchise with volumes up 13%. We continue to have a strong line of sight to domestic Intermodal growth from multiple areas, including our business growth with Schneider, new auto parts moves volumes out of the Americold cold storage warehouse co-located with us in Kansas City and our service with CSX connecting shippers in Mexico, Texas and the U.S. Southeast. Moving to International Intermodal. Volumes were up 10% on continued growth from Gemini through our ports at Vancouver, St. John and Lazaro. While we definitely have seen pull forward volumes in a muted peak season, we expect our strong service product and diverse port access to continue to drive opportunities for us in international. In closing, while we are certainly not immune to the many challenges in the freight environment, we continue to drive differentiated growth with our unique and resilient North American franchise. We are delivering mid-single-digit volume while pricing to the value of our capacity and our service. Now looking forward, we continue to be well positioned to outperform the industry and the macro on the strength of this franchise, paired with our unique synergies and self-help. With that, I'll pass it to Nadeem. Nadeem Velani: All right. Thanks, John, and good afternoon. I'll be referring to our third quarter results on Slide 12. To start, CPKC's reported operating ratio was 63.5%, and the core adjusted operating ratio came in at 60.7%, a 220 basis point improvement over prior year. Diluted earnings per share was $1.01 and core adjusted diluted earnings per share was $1.10, up 11% versus last year. Taking a closer look at our expenses on Slide 13, I'll speak to the year-over-year variances on an FX-adjusted basis. Comp and benefits expense was $619 million or $615 million adjusted for acquisition costs. The year-over-year decline was driven by lower stock-based compensation and efficiency gains from workforce optimization and other productivity actions, including improved train weights along with lower dead heading and held away time. The decline was partially offset by inflation and volume variable increases from higher GTMs. To close the year, we expect our average headcount to continue to be slightly lower year-over-year, driving strong labor productivity gains. Fuel expense was $415 million, down 2% year-over-year. The decline was driven primarily by the elimination of the Canadian federal carbon tax on April 1, partially offset by a volume variable increase from higher GTMs. Overall, changes in fuel prices were a $0.02 headwind to EPS in the quarter. Materials expense was $114 million, up 15% year-over-year. The increase continues to be driven by the long-term parts agreement that was put in place in the fourth quarter of 2024. Higher materials expense had a favorable offset within PS&O for net savings in the quarter. The increase in materials expense was partially offset by reduced locomotive maintenance spend from improved fleet performance. Equipment rents expense was $109 million. Increased car hire payments along with inflation impacts from growth in automotive volumes drove the increase. Depreciation and amortization expense was up 6%, resulting from a larger asset base. Purchase services and other expense was $565 million or $555 million adjusted for acquisition costs and purchase accounting. The decline was driven by lower casualty costs, savings from the long-term parts agreement as well as other productivity and in-sourcing initiatives. Overall, we delivered solid financial results despite a $39 million sequential increase in casualty expense with a $0.03 impact on earnings growth. Looking ahead, Mark and his team have our network running well and the volume outlook is solid with strong harvest in both Canada and the U.S. We continue to generate strong labor productivity and maintain line of sight to solid margin improvement in the fourth quarter. Moving below the line on Slide 14. Other components of net periodic benefit recovery was $107 million, reflecting the effect of favorable pension plan asset returns in 2024. Net interest expense was $222 million or $216 million, excluding the impact of purchase accounting. The year-over-year increase was driven by interest incurred on new debt issued in Q1 and Q2 of this year. Income tax expense was $296 million or $325 million adjusted for significant items and purchase accounting. We continue to expect CPKC's core adjusted effective tax rate to be approximately 24.5% in Q4 and for the full year. Turning to Slide 15 and cash flow. Year-to-date cash provided by operating activities increased 6% to $3.8 billion, while year-to-date cash used in financing activities was up 45%, driven primarily by the share repurchase program. From a CapEx perspective, we invested $860 million in the quarter and remain on track to invest approximately $2.9 billion in 2025, in line with the outlook we provided in January. Focusing on our share repurchase program, we have continued to take advantage of the volatility in the market to reward shareholders with disciplined and opportunistic returns. We see strong value in our share price at current levels. And as of the end of the third quarter, we've repurchased 34 million shares or approximately 91% of the program we announced in March. As we look towards the end of the year, our network is running well and prime to serve strong harvest in Canada and the U.S. John and his team are delivering mid-single-digit volume growth and strong pricing in a challenging macroeconomic environment. We are controlling our costs, improving the resiliency of our business and the power of our North American network. We remain well positioned to meet our guidance and lead the industry with another year of double-digit earnings growth. With that, I'll turn it back over to Keith to wrap things up. Keith Creel: All right. Thank you, gentlemen. Why don't we open it up for questions, operator? Operator: [Operator Instructions] We'll take our first question from Fadi Chamoun with BMO Capital Markets. Fadi Chamoun: So a question on the M&A topic, if I may. There's been a lot of kind of conversations, discussion out there that if this UP and NS merger ultimately happens, it's going to trigger potentially the end game, which effectively ends up being 2 North American -- kind of 2 major North American railroad, as I understand it. And I was just wondering, Keith, from your perspective, does this have to happen? And ultimately, does this consist of moving into that scenario in a multiple 1 phase or 2 phases? Or also, is there a scenario where one merger happened and ultimately, the rest of the industry can continue to operate at the status quo? Keith Creel: Yes, Fadi, that's a really good question in a lot. I mean, obviously, it's going to depend on the details. We've not yet had the benefit of reading UP/NS' merger application. I would say this, I know there's an echo chamber. I read it, I hear it. I sense it. I know there's a lot of invested investors that perhaps want this to be a layup. This is not a layup, number one. It's not a foregoing conclusion that it's going to get approved. What we do know is the hurdle is going to be high. These are rules that have never been tested. There's a public interest test, enhancing competition, a review of downstream impacts, which, to your point, includes the likelihood or potential of additional rail consolidation that those have to be met, and this STB is thorough. I'm certain of that. I can say that more so than anybody else in this industry because I've walked this walk and experienced this journey in getting our deal approved, which was under the old rules with the hurdle rate not even remotely close to being the same standard. So again, I think to assume or to expect it [indiscernible]. That being said, if it gets approved, that's a big if. But if it does, then to your point, depending on what the conditions are, would answer the question. I would make a case to serve and to meet and exceed all those tests that how could it be approved without significant conditions to protect balance in the industry, to protect competition, to enhance competition, given the market power that, that size railroad would exert. So I would agree. [Mr. Ben] and I definitely agree, this STB is smart. Maybe what we don't see on this -- or maybe not being recognized this STB has experienced the applicants behavior historically in previous mergers -- from 30 years ago, the integration risk that occurred and most recently, the service failures that occurred in the United States rail industry just 4 years ago. The applicants were before the STB in a service hearing expressing concerns. The applicants of STB relative to the allegations of serious concern on utilizing embargoes to regulate their network. So that may be ignored. And I don't believe that this regulator would set those memories aside in the weight of how they review not only the application, but ultimately determine what their conditions might be to protect the overall strength and health of the U.S. rail network because ultimately, that's what their mandate is. It's to protect the U.S. rail network to make sure that their decisions protect the public interest and ultimately lead to if we have consolidation, an environment that exists. So if the UP/NS are stand-alone, the others that have to compete have a fair shot of doing that. And it's not competition. Let me be clear, it is not competition that anyone is scared of. I think that's a very assumptive statement to make. It's anticompetitor that we recognize and that we're concerned about, and it will be our mandate and our objective to make sure that if that merger is approved, conditions allow anticompetitive behavior to be minimized or eliminated. So yes, with the right conditions, Fadi, that's a potential outcome. But again, there's so much more to be determined out of this process. There's a lot of stakeholders that are going to weigh in. There's going to be people that speak loudly and speak boldly and there are going to be customers, quite frankly, that perhaps they don't want to voice their strong heartfelt fillings for fear of intimidation or fear of retaliation, but I'm sure that if they're not said publicly, they'll be said privately. And all those facts and conditions and stakeholders' views, I believe this STB will take seriously. And I believe their decision, if approved, will contain significant conditions or if they don't meet the standard, I believe they have the mandate and they have the commitment to get this right. History needs it to be right. Our nation needs it to be right. And if they don't meet the conditions of the standards, I believe they'll reject it. Operator: We'll take our next question from Chris Wetherbee with Wells Fargo. Christian Wetherbee: Appreciate the comments, Keith. I guess maybe just piggybacking on that. As you think about the sort of landscape for now, and we don't have the application yet and we don't know ultimately how the STB is going to respond to that, sort of what's the strategy that you can employ? Are there opportunities for you in the relative near-term to leverage other relationships in the space? I guess how do you think about sort of the landscape right now, at least over the next several quarters? Keith Creel: Yes, the answer is absolutely yes. And we said when this all started, we're not going to sit on our laurels. We've been very engaged with the nonapparatus to look at creating alliances and to leverage as the regulations require us to, to exhaust all avenues, to achieve merger like benefit without the risk that merger represents. So yes, there's opportunities that we're exploring with the Western competitor to UP. There's opportunities that we're exploring with the Eastern competitor to the NS, and we're starting to connect the dots to create markets. And I'll tell you the strategic piece of our railroad that's becoming even more so critically important is that Meridian Speedway. That Meridian Speedway that what was when we took over the railroad is no longer the same. It has been enhanced with the connection at Meridian with the CSX via Myrtlewood, Alabama, through Montgomery to Atlanta. It unlocks a second mainline alternative that gives us unique industry advantage to create markets and bridge traffic between Dallas markets and between Southeast U.S. markets. And I'm not talking about just Intermodal. I'm talking more importantly, the industrial heartland. You think about the industrial development that's being driven to realize President Trump's ambitions, the additional infrastructure that's being put in place for these AI data centers and power centers along that corridor between those southern states and our network runs straight across it. That transaction that we made, which was a niche acquisition over the last 2 years, we've been investing heavily in it. I had the opportunity just last month to take an inspection trip with the CSX team that started in Montgomery, Alabama, went through Myrtlewood over to Meridian and Shreveport. So what was a little short line railroad by, I would say, January, February of 2026 is going to be a Class 4 railroad that allows us to create a transit time and a product off never before possible that's going to connect Atlanta to Dallas in about 30 hours. You think about -- and people have always thought about the Speedway as being the Intermodal product, yes, it is. And yes, we're going to protect our commitments to our partners in that joint venture in what is now NS and perhaps in the future might be UP. But at the same time, it's still the railroad that we dispatch. It has tremendous opportunity. It's not exclusive to freight traffic topic. So to create a product that allows us to connect the industrial heartland between Atlanta and Dallas is a pretty powerful model. And in 30 hours is truck-like competitive, single truck-like competitive. I think it's a unique differentiator that can't be replicated in UP/NS combination that's going to allow us to win market share working with our partners in the West and our partners in the East. And I can tell you they're motivated to work. Operator: We'll take our next question from Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Maybe just to stick on that topic, Keith, can you give us a little bit of perspective in terms of the headlines we've been seeing around the Meridian Speedway and some of the service disagreements. I don't know if we're going to see anything settle until the government reopens, but I would appreciate your perspective there. And then just what's the possibility to put through on the big side of things when you get that track speed up? Is it 2026 when things start to unlock at the beginning of the year? Or is that going to be more of a ratable game as we look into next year? Keith Creel: Well, the service product, the actual infrastructure will be done in January. Track speed to be out there. It's going to be a 49-mile hour railroad. You're talking about 100 miles transit time from Montgomery to Meridian combined is going to be 3.5, 1.5 per hours. So you put that with a 6-hour run to Atlanta on the CSX, you got an 11-hour product to Meridian. And I think right now, what the NS does is 12 hours. And there's room to improve that. It just depends on the density that we put over it for the additional capital investment if we want to unlock some additional speed. So that's not full potential. That's just the right thing which we think for the market of the sweet spot. Now the dispute itself between ourselves and NS, and that's the dispute is because we have a commercial agreement with the NS, to me is, quite frankly, a self-serving narrative that has no merit. We have prepared our response, we'll give it to the STB as soon as they open up, and it will lay out the real details. What this is, is a story of 2 partners that don't like our decision to run the railway the way it was designed. This railway goes back to 2006 when the NS invested with KCS to create the Speedway, there was financial consideration given. There was infrastructure built for 8,500-foot trains. Our predecessors at the KCS allowed the NS to run long trains. Frankly, the way I see it as an operating officer, it was the demise of our customers. That's what we stopped, and that's what NS and UP does not like. There are provisions within that agreement. NS knows what they are. We know what they are. If they want to invest monies to run longer trains, then they need to come to the table and invest the money. The business today doesn't justify it, and I'm not going to subsidize NS' operation nor am I going to subsidize UP's operation for their operational synergies at the cost of my service to my customers. I have a responsibility to protect my customers as well. And that's kind of what it boils down to. It's built to run 8,500-foot trains. That's what we're going to do. Now what we have done out of respect for Mark George and his team for a temporary time period until we can get an additional crews, which we've hired and are in training right now, there's going to be an additional train start that comes on middle of November. In the meantime, NS has worked out a temporary agreement with us to pay us for the additional delays that were occurring, allowing one long eastbound run until that second train start is added the middle of November, and then we're going to revert right back to an 8,500-foot railroad. And I'll tell you this is kind of the proof in the pudding. When you try to oversubscribe a network and run long trains and the network is not built for it, some is going to suffer, whether it's the communities and the crossing you block, whether it's the yards where you're holding the trains out with some of the applicants have some history in that or it's our trains that had to take a siding for someone else's train at our demise. We ran the railroad for 7, 8 weeks at 8,500 feet over the last 2 months before we allowed this exception to occur. We measured the delay. Our trains are taking over [1-hour] delay a day to accommodate a longest train. It doesn't make any sense. It's not the right operating decision. It's not the right commercial decision. It's not the right bottom line decision. We're being fair and it's no more than that. Operator: We'll take our next question from Jonathan Chappell with Evercore ISI. Jonathan Chappell: Keith, I'm going to let you take a little break here. Nadeem and John, we've seen the quarter-to-date volumes trending not at mid-single digits. So I think there's an anticipation just given the way that October has been that getting to that mid-single-digit full year, that double-digit earnings growth full year may be a bit challenging and really, frankly, off the table. So it's a bit surprising that you've kept it. Can you kind of just help us forge the path over the next 8 to 9 weeks on how you get that volume up to the mid-single digits, how you get that sub-57% OR? Just what do you have line of sight on that's clear to you that, that's still attainable with just 8 weeks to go? Nadeem Velani: Yes. No, good question. I'd say that if you look at our year-over-year, certainly tough compares as we speak. So that's known to us. So not really any surprises on that front. But we also have some very easy compares in November when you think about some of the labor disruptions a year ago that impacted our business through some of our customers as well. And so when we look at the opportunity in November and December, we think that we have the ability to continue to deliver the mid-single-digit RTMs and that will be -- I think we have strong visibility. Now there's a chip shortage issue on the auto side that we -- that's come up, and we're mindful of that. But we think on the bulk side, there's enough offsets to be able to support our top line view and our guidance from that perspective. From a cost point of view, from an operating leverage point of view, I think we're going to see benefits similar to what we saw Q4 a year ago, the previous year to that. We've had some very strong finishes to the year. And we have good visibility to the ability to get a sub-57% type of operating ratio or that level, plus or minus, depending on what mark-to-market the stock price is as well. But we are very confident, we'll be able to achieve at least 10% EPS growth for the year. So we're not backing off of that with 8 or 9 weeks here left to go. Operator: We'll take our next question from Steven Hansen with Raymond James. Steven Hansen: Quick one. I just wanted to dovetail back on the grain opportunity. I recognize you've described it as being a sizable harvest. But do you feel like the customers have given you a sense for whether there's upside opportunity or how that's going to track in terms of timing? Just mindful of some of the issues still out there and pricing on the farm and whether or not farmers are going to be eager to move it through the fourth quarter or going to be deferring into the first half? John Brooks: Yes. Thanks, Steve. It's John. Yes, certainly, it's something we're watching closely. There's no doubt it feels like the grain companies are having to sort of pull the grain into the elevator a little bit versus maybe that typical push we'll see at harvest. Right now, I'm pleased with our cycles. I'm pleased with the number of sets we have in play in Canada. And honestly, we've been able to -- whatever softness we've maybe felt in the North, we've been able to backfill with good opportunities on our Southern franchise. So it's going to be teamwork between the 2 franchises, Canada and the U.S. and we're going to need sort of all the markets at play, but our execution is, as we described, we're going to run it hard right to the end. Operator: We'll take our next question from Scott Group with Wolfe Research. Scott Group: So Nadeem, Sense per RTM have been down a bit the last couple of quarters. Can you just talk about underlying pricing trends and when you think this metric turns positive? And then maybe, Keith, just bigger picture. When I think back to the Analyst Day, you guys talked about a mid-teens earnings algorithm. It's been closer to 10%. That's still really good on a relative basis, but not like at the absolute level you talked about. Do you still think mid-teens is the right algorithm? What do we need to unlock it? Is it just macro? Is it more price cost, I don't know -- how do you -- what do you think we need to sort of get back to that mid-teens growth? Nadeem Velani: All right. Thanks, Scott. So just a reminder that federal carbon tax that was removed in April, that did impact sense per RTM, but the thing is it also a flow-through, so it does come out of our expenses. So that's been a big headwind on sense per RTM in the last few quarters. But all that to say, in Q4, we should see positive sense per RTM. So we should see it inflect positive right now as we speak. So that will be supportive, I'd say that you'll see small low single digits, but it will be positive as we speak. We've also had some mix impacts that have impacted that. Autos, for example, the length of haul has been up significantly and the mix of business, but we should see that turn. Pricing has been strong. John and his team have done an exceptional job of being able to keep that above inflation and closer to 4% on a same-store basis. So I'd say that, that will continue as we foresee into 2026. To your point on double-digit versus kind of mid-teens. The macro has been challenging. There's been -- sort of also hurt us. Crude this quarter was a significant -- casualty with the crude derailment was a significant headwind, which we didn't foresee. If we didn't have that, if we had a more normal casualty expense in the quarter, we would have been sub-60% for the quarter. Now that's on us. We put it on the ground, and we have to take those costs. But I would imagine, and I expect going forward, we'll have a more normal casualty. Our safety numbers have been strong, but the cost of incidents have been high. So that will be supportive. As far as the mid-teens, we'll start seeing benefits of share repurchase starting next year, right? We announced the program in Q1, kind of mid-late Q1 of 2020 of this year. So 2026, we'll start seeing year-over-year benefits from the lower share count. And that was part of the algorithm of getting double-digit closer to mid-teens type of growth. We've delivered quite well on the volume front, but I think we could do more with a better macro environment. So we're still waiting for that turn. But as that inflects and we start seeing a more supportive economy, we start seeing some of this tariff noise get behind us and more certainty for our customers. We start seeing the benefits of strong bulk volumes, especially with this very strong Canadian grain crop. I think you have a potential in 2026 for that to turn closer to what we highlighted at our Investor Day as mid-teens EPS growth. And that's kind of what we had highlighted as through to 2028. So we're kind of in that sweet spot of 26% to 27% to 28% being in that mid-teens, and I still feel that we can achieve that. Operator: We'll take our next question from Konark Gupta with Scotiabank. Konark Gupta: I think maybe it's for John perhaps. If we look into Q4, I guess, you have easier comps coming up in November, December, but any insights into the potash and intermodal traffic, John, so far in October? It seems like pretty low. And I think you flagged some of the comps issues in the potash, but anything else besides the comps that's being on the potash and on the intermodal side, any issues you're seeing with imports coming down on the U.S. ports? John Brooks: Yes. So yes, the potash is all driven around the compares. We just -- we had some surge testing and some different things we did last year that made October awfully strong. Now I do expect Canpotex, as I said, is sold out to close the year. We're going to run that and push that as hard as we can. In the Intermodal front, I expect a really strong close on our Domestic Intermodal. We've got continued good line of sight, as I mentioned in my prepared remarks, to a number of pieces of the business that are going to start up in the quarter. And frankly, we're just starting to see the ramp-up of our reefer business in and out of Mexico with Americold. So I continue to be -- and frankly, our transload business across Canada continues to be strong. So I see pretty good numbers on our Domestic Intermodal side. The international has been a challenge relative to the third quarter, some of the maybe the pull-ahead volumes and muted peak. But that being said, I'm not seeing the blank sailings. I'm not seeing additional challenges. I can tell you, we're kind of foreseeing the current run rate to persist as we move through November and December. Operator: We'll take our next question from Walter Spracklin with RBC Capital Markets. Walter Spracklin: I'd like to come back to you, John, on volumes. And I know Norfolk Southern in their call flagged that they were seeing some diversions in volume away from them as a result of the proposed merger. And I think most would see CSX as the beneficiary of that. But I'm curious to see if you're seeing any customers being -- making decisions along those lines that would favor you in seeing in terms of volumes over to your line currently? Or could you see that as contract negotiations come up? Do you see any opportunity to take advantage of that if that is indeed a trend we're seeing into 2026? John Brooks: Well, I sort of emphasize what Keith said. There's certainly a lot of dialogue going on, on that front and what sort of products we can partner and create to leverage the strength of some of those other franchises. Those are things that maybe we've looked at in the past, but are certainly maybe coming to the forefront in terms of opportunities. I do believe that narrative becomes a part of what our 2026 growth platform could look like and add. There's no doubt about we're already seeing opportunities shift on to our Meridian Speedway route with the CSX. As Keith mentioned, the product design is to be up and running in Q1 of '26. But it's not a bad product as we sit here today. And there are certain customers that certainly want the optionality or have been willing to test that product. So -- and that -- we talk a lot about maybe in and out of Texas, Atlanta in those marketplaces, but there's an awful lot of freight that is just really conducive to our network into the Southeast that flows out of Mexico. And that's frankly an area whether it is competing against short sea today or taking trucks off the road that we've been able to key on with the CSX team. And frankly, a lot of that is new growth opportunities. It's not taking freight off of NS or another competitor. It's new opportunities we're bringing the roof. But in the same vein, there are other opportunities where customers are looking for optionality, and we'll give them that. Mark Redd: And John, I would add from an operating side, I mean, from the M&B connection that we have through Myrtlewood, it's -- Mike Cory and team -- CSX team has been -- they've been really energized with us on the operating side to make that happen to get the speed of the network up and just make the good positive connection that Myrtlewood itself. So it certainly is promising. Operator: We'll take our next question from Ken Hoexter with Bank of America. Ken Hoexter: Mark, first time in a while, I think we've heard you break out kind of the KCS network versus the CP network and performance. Can you delve into maybe what's left to get KCS to CP operating levels? I don't know, Nadeem, if you want to talk about the cost synergies or go back to the synergies of what you've achieved and where we're trending on those? And then, Keith, just an M&A quick one. But do you think political pressure to get the M&A process moving faster can have an effect? Or will this take the full 16, 17 months of a normal process? Keith Creel: Yes. Let me -- I'll answer that one before Mark. I think there's no way in the world for this to have a thorough review that it occurs less than 16 to 17 months. I think that's efficient. If you think about our review, our review took a lot longer than that. You've got an STB that -- quite frankly, the Chair of the STB has signaled, and I believe I'll hold them to his word that he's going to take the statutes and the time line seriously. And that means don't exceed them. And I also think it means, especially with the gravity of this transaction, it also means don't cut them short. You've got a lot of people that deserve and want and will need to take ample time to review the application, ample time to respond. And I think that's the only way you get to a place where the STB can make a fulsome thorough decision as if all the facts have been shared and heard and understood and then they'll ultimately decide, does it or does it not meet the public interest test, does it or does it not enhance competition? And if so, what conditions are required for that to be true. And again, I get back to -- I'm not going to put odds on it. It's not a layup. I'm going stick with basketball. It's not a half shot, it's a 3-quarter shot the way I see it. So we'll see how efficient the applicants are to navigate that. Mark Redd: So from the -- Ken, from the operating side, I would say 3 things. One is just getting that operating system behind us. I mean that just in itself helps us. We've made those steps. I talked about it in my noted remarks. Bargaining with some of the unions that we have down on the KCS property, we continue to do that as we leverage some of the agreements, some of the stuff that we can do with customers to streamline some of the crew districts, which we have done, we will continue to do that. Those are opportunities. I think probably one of the biggest ones is just next week. I mean, as we walk into year 3 of GM meetings in Calgary that I lead with the GMs, we look for opportunities specifically on KCS of how we can look at CapEx that we put in the ground, how we can leverage those sidings, leverage those locomotives, the crew districts that we have that we can redefine the dead heading, the recrews, all of that type of stuff that we could just do a better job of that because we know more of than we did from day 1. Some of the car fleets that we can interchange and spend faster from John's group selling the service that we could do something differently. I mean all that conversations I will have next week that will probably expose tens of millions of dollars that we can pull out just from the operating expense side that we'll look at and certainly put that right back in our annual budget because it's budgeting time for us. Nadeem Velani: And Ken, just on your third question, we had about, I think, $165 million of synergies on the expense side that we've achieved year-to-date. I'd bucket that in operational benefits, operational improvements that some of the things that Mark just talked about. I'd say that from a sourcing point of view, so utilizing kind of merging contracts with both companies and being able to look at our procurement practices and be able to benefit on our contract spend is a big part of it. And then I'd say that the operating efficiencies and now that we're past the day in on the IT cutover, we've been able to reduce headcount on the G&A side by about almost 300 people total with the combined entity. So those are the 3 buckets I'd highlight as leading to the majority of the expense benefits on the synergies. And I'd highlight that, that's significantly higher than what we had initially thought we'd achieve as part of the combination. Operator: We'll take our next question from Tom Wadewitz with UBS. Thomas Wadewitz: So Keith, I wanted to ask you a bit more on the kind of views on the deal and how your commentary -- how you look at it differently than what we've heard from Jim Vena. His characterization is, hey, it's less than -- it's maybe 10 specific production plants that are dual served. Your commentary is like, hey, it's a number of large terminal areas or city areas that have a lot of overlap. And I guess the other thing I want to ask about is there's a bit of a paradox in the sense of you're saying there's really not risk for CP that's CPKC that's north-south flows. But at the same time, the kind of market power of such a large railroad UP/NS would really be something of concern. So I don't know if that market power or the risk is like bundling, like they take some plants you serve and they serve a lot more plants of a chemical customer and they somehow rest some business away from you? Or just how we ought to think about the risk and why from a rail perspective, it's a concern to have such a big competitor. Just wanted to ask -- see if you could offer more on how you framed it in terms of overlap and risk. Keith Creel: Yes. I think sheer size and scale market power is something you have to be aware of. Historically, you can protect gateways, but if you've got enough reach and scale, it's not the gateway traffic that gets impacted. It's the captive traffic. So will or won't the applicants utilize and leverage that market power to take prices up on captive if they're not rewarded with traffic over the gateway. And that's their question to answer, not mine. Those would be the things that I would look at. And then the other thing I think about is to minimize it to only a few people that are impacted, enhancing competition, number one, it's not -- there's no precedence on what that definition standard is yet. But I would argue that just considering a 2:1 as the definition of reducing competition, and that's the only concerns that need to be addressed is a very minimalistic ill-fated definition. I just don't think that's going to meet the STB standard. And that's, quite frankly, the way it's been presented. You've got overlap in key markets. You've got customers going to have fewer options. I don't say you're enhancing competition if you reduce options. So again, all that's got to be worked out in the application. The other thing I want to be true and I want to make sure conditions exist is that the applicants are held to their commitments and held to kind of teeth so they don't behave an anticompetitive behavior. I don't take it lightly with our experience since our merger with what happened in the battle that we had to fight just over an existing condition that was given to the KCS that we inherited by way of the UP/SP merger, the Southend rides. A lot of people have forgotten about that. I have not. UP decided once we came together by sake of name change alone what historically had been acceptable Southend rides traffic that CP would interchange the KCS to go to the Houston marketplace, was cut off by the UP. They said, "You know what, you're not CP interchange into KCS anymore." My name alone -- your shippers are not entitled to that market anymore. That's anticompetitive. You cut off a market. They knew it was wrong, we knew it was wrong. We took them to the STB. The facts were heard. It took 2 years to get to a decision just because you can. I don't think it's right for any railroad or any business just because they can to try to impose their wheel that has an adverse impact in the marketplace. So when you want to talk about -- what we're concerned about, that's the kind of behavior we're concerned about. And I hope that I'm surprised, and I hope that Mr. Vena and team submit the conditions and the assurances in their application that makes us all rest easily. I don't know. All I know is what's happened in the past and what's happened in the past is not a very warm thought about what might happen in the future without the right conditions and the right teeth to, I guess, make sure that those conditions are enforced in a decision if a decision comes that's favorable, so we can protect and enhance competition for this nation's freight shippers. Operator: We'll take our next question from Brandon Oglenski with Barclays. Brandon Oglenski: John, as you look into next year, especially with all the ups and downs of trade, but can you talk to maybe some of the business wins that you have that support the longer-term growth profile of this business? And maybe if you could give us some early insights on maybe where you see volumes next year, too, if you're willing to go there? John Brooks: Well, Brandon, I don't know if I'm quite ready to go there yet, but I'm sure that will be a topic in January. I know it will. Look, I fully expect we will outperform -- we'll do what we do. We outperform our peers. We outperform the macro. I fully expect that in 2026. I don't see the recipe right now changing a whole lot. If some of this grain, whether it be soybeans or the Canadian crop rolls out of Q4 and into next year, that's going to be an area of strength for us. There's a sizable crop on both sides of the border. If we don't get it now, we're going to get it next year. So I see that as an opportunity. We exceeded my $300 million target this year for where I saw new synergies. I fully expect our self-help initiatives and synergies, whether it be continuing to grow our MMX, our Intermodal route, our 180, 181, the reefer business that I spoke to, continued growth down at Lazaro with Gemini. I fully expect the synergy area to produce another $300 million of opportunity for this franchise. We'll continue that price discipline that Keith spoke to. And maybe 2 areas that are a little unique to next year that I see is we've got a really strong industrial development pipeline shaping up. These are French new facilities that are being built on our railroad that will be up and running here in Q4 and early in 2026. And frankly, that's a $200 million-plus opportunity of, again, just new business that's going to start up on the railroad. And then you combine that finally with stuff we already talked to relative to some of these partnerships and opportunities with our connecting roads. And that's sort of what the recipe looks like, Brandon. Operator: We'll take our next question from Ravi Shanker with Morgan Stanley. Ravi Shanker: So just on pricing, I know you kind of commented on the kind of pricing being above the long-term target of 3% to 4%. I think it has been for a few quarters now. I'm wondering if there's any opportunity to maybe take up that long-term target? Or do you think that you guys are just overperforming now for whatever reasons and maybe that kind of comes back down to that 3% to 4% over time? John Brooks: I don't -- Ravi, I don't see it really -- inflation has certainly come down in those pressures. I think we've felt them kind of through the year. We knew they were going to play out that way. Again, it's all around pricing, the value of the service and capacity. And frankly, that's a discipline that as Nadeem said, I'm super pleased with the team's efforts down there. I'll tell you, we're definitely outperforming our peer railroads on that front. And we're going to push hard. Those targets for my sales team are going to continue to be in that neighborhood as I look to 2026. So yes, those -- I fully expect those pressures to be out there, but we're going to fight for every quarter point based on the service and the capacity this railroad provides. Nadeem Velani: Yes, Ravi, if we had a stronger macro, as I commented earlier, I think that would be supportive of some incremental pricing, but I don't think that, that's something that we've been able to benefit from the past, say, 10 months or past year. Operator: We'll take our next question from Ariel Rosa with Citigroup. Ariel Rosa: Keith, you mentioned that maybe some shippers or various stakeholders might be reluctant to speak up for various reasons. I'm just curious behind the scenes, what kind of conversations you're having? And where do the fears lie in terms of what the risks are that are posed from kind of the UP/NS proposal? And then not to be overly cynical, but is there any dimension in which you worry that by virtue of being a Canadian rail, your voice might not be listened to as carefully or kind of -- you won't get the same weight that a U.S. rail might have as the kind of merger process moves forward? Keith Creel: Well, I guess the way I'd answer the second question first is we're a North American rail company. We're uniquely the only rail that connects all 3 nations. 40% of our revenue, 40% of our business is in the United States. The monies we invest are significant. 1/3 of our employees live and work and our taxpaying members in the United States, taxpayer citizens, we are undeniably wrapped in the American flag, and we care as much about America as we equally care about Canada as we equally care about Mexico. We have that responsibility. So I can't decide if someone is going to dismiss our impact. I think it's material. I think it's meaningful. I think we've invested heavily into this nation as we'll continue to do that. And we're going to have a voice. It's up to those that listen to decide if they want to diminish it. I think it's relevant, and I think it's truth-based, and I think it's facts that truly can't be denied. The part about the customers, I can't reveal to specific discussions, but undeniably, there's a common theme and concern about retaliation. People are reluctant to speak up publicly. Yes, you hear associations. I heard Mr. Vena say they don't have a direct commercial relationship with UP. I would agree. But they're speaking on behalf of their customers, who do? So to be just so dismissive, I think, is a bit irresponsible. But again, that's my view, not obviously Jim's. But in time, we'll see. There'll be private discussions. There'll be public discussions. You're going to hear the associations speak out. In the end, I'm sure that some customers will take that step, their application and their comments will bear their concerns and they'll best bear their concerns better than I can. But I think a powerful thought. I hear this word, there's been 400 customers that have offered letters of support. And I'm not saying that doesn't matter. Their voice matters, but how many more have said nothing. [Power] says a lot. Operator: And we have reached our allotted time for Q&A. I'd now like to turn the call back over to Mr. Keith Creel. Keith Creel: Okay. Well, listen, thank you. Let me wrap up with where I started. Thank you for your time this afternoon. It's been some thoughtful discussion. I know this is an industry that, quite frankly, seems to be continually in a state of change. Regardless how those changes may roll out, this company, you can believe, is going to be focused on safely and efficiently delivering for our customers and delivering on the growth opportunities that this unique network has created, that enables the value creation that we've committed to for our shareholders and for those that have trusted us with their capital dollars. We look forward to executing a strong fourth quarter, and we look forward to the first quarter sharing those results with you. Everyone, have a blessed holiday. Until then, we'll talk soon. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Barry R. Sloane: Thank you, operator, and welcome participants to our Q3 2025 financial results conference call. I'm Barry Sloane, President, Founder and CEO of NewtekOne and Newtek Bank National Association. Joining me on today's call is Frank DeMaria, Chief Financial Officer of NewtekOne, the publicly traded holding company, stock symbol NEWT on the NASDAQ; and Scott Price, our Chief Financial Officer of Newtek Bank National Association. We certainly appreciate everybody attending the call today and the investment that you've made in analyzing and evaluating Newtek as an investment opportunity. We'd like everybody to try to focus today, in addition to the great financial numbers that we put out, really look at the investment in NewtekOne from a business perspective; how we raise deposits, how we make loans, how we're able to do this with low expense ratios in the marketplace and really create what we believe is a business model for the future for a technology-enabled bank. Once again, focusing on technology and efficiency in a market that we clearly see is rapidly changing. Obviously, the focus on credit quality is important. I think we'll be able to demonstrate that; our credits have stabilized, both within the bank and at the holding company through the NSBF results. We have a slide to demonstrate that. And we're also going to be able to focus on raising deposits below the risk-free rate, which we also think there'll be future benefits based upon how we have ourselves situated in the Newtek Advantage by performing payroll for our customers, merchant services for our customers connected with a bank account, which we actually think is rare and unique in the marketplace today. In addition to that, as you could see from the press release, we just put out; we have some outstanding numbers for return on average assets, return on tangible common equity, efficiency ratio. And also, we're excited about approaching our 3-year anniversary as a bank holding company owning a nationally chartered bank, and we're very pleased that we have been able to demonstrate our ability to manage the bank, manage risk and hit all of our strategic goals and objectives, importantly, according to plan. Investors that focus on what we're doing in the marketplace believe we'll be happily rewarded over the course of time. What we do believe is that we really don't compare and contrast well to $300 million to $500 million community banks. I just came from a conference sponsored by the American Bankers Association on small business finance and small business as a targeted marketplace. I met some of my competitors. We're just very different than them in every facet, and we'll try to bring some of that as we go through the call. We'd love for you to ask questions, why can we grow deposits below the risk-free rate without traditional bankers and branches? Why are NPLs higher? Important to note, they're higher, but we're still profitable. And also, why are these 3 things that we do very well going to continue such as raising deposits below the risk-free rate, being able to do loans with our lending operating system in remote locations as well as the important progress that we've made in our Alternative Loan Program. We'll focus on that today. For those people following along, please go to newtekone.com, go to the Investor Relations section, where you can find the PowerPoint presentation. Please go to Slide #2 and note the statement regarding forward-looking statements, make sure that gets absorbed. Now go to Slide #3. Important always to reemphasize the mission of the company because at the end of the day, it always gets down to the customer. If you do a good job for the customer and there's good margin in your business, you're going to do well for all your stakeholders. Our mission has not changed since the company was formed in 1998, which is providing business and financial solutions to independent business owners all across the United States. Within this mission and recently acquiring a bank and being a bank holding company, we've opened up 22,000 depository accounts in our window of time, and we have 10,000 borrowers in our database that we've been able to do remotely without traditional bankers, brokers, BDOs or branches. We do payroll for 20,000 employees, and we're processing electronic payments for over $5 billion on an annualized basis. On Slide #4, once again, focusing on who we are and our mission statement, take a look at Newtek being a technology-oriented financial holding company. We look at that particular organization as we are now also a depository. That's important to note. We do not want to be compared as a community bank that's traditional. We don't look like one. We don't compare like one. And what we really do well, acquire customers cost effectively, service their needs with great margin and make loans on a risk-adjusted basis. We manage credit risk. We don't avoid it. So, if you look at our financial statements, we typically have higher reserves. We also have higher nonaccruals. But on a net basis, after that expense, we're still extraordinarily profitable. So, in January of 2023, Newtek acquired what is now known as Newtek Bank National Association to add depository solutions. We use proprietary and patented advanced technological solutions to acquire customers cost effectively. We receive about 600 business referrals that are unique a day. And we have a full menu of best-in-class on-demand solutions because our customers, they want you on demand. A typical entrepreneur and business owner doesn't necessarily want you from 9 to 5, Monday to Friday. They want you on Saturday. They want you on Sunday, they want you in the evening. We service this independent business owner clientele, which is extremely important. When you go to Slide #5 and focusing on this target market of independent business owners, SMEs, SMBs, small and medium-sized enterprises, small- and medium-sized businesses, there's more than 36 million business owners in the U.S. according to the SBA. According to U.S. Chamber of Commerce, it represents 43% of U.S. GDP. And according to the Small Business Administration's website, through the last 5 years, we have been able to support or stabilize over 110,000 jobs, which is the second highest amount of jobs supported by all the lenders in the SBA 7(a) program. We think this market is important. We think it is valuable. We do know that the top 4 banks and many other financial institutions based upon what I saw at these recent conferences are trying to figure out how to bank this particular customer base, and they have to go beyond just getting their deposits, which they typically take in, in a noninterest-bearing fashion. We do that for this customer base, and we believe we're being rewarded for that. Slide #6 talks about those nuts and bolts that we all like to focus on. So, we take our slide rulers out and our compasses and our protractors and look at all these nice numbers that we've got. So, we have a very healthy Q3 and 2025 earnings and revenue growth. When you look at Q3 basic and diluted, $0.68 and $0.67 over the course of the first 9 months of the year, it's $1.57 and $1.54. The growth rates are up 47% comparatively and 22% when you look at that year-over-year comparison with revenue growth of 19% to 16%, respectively. Important trends in book value, $11.72. Mind you, we started off in Q1 of 2023 with tangible book value of $6.92 per share, and that's grown to $11.22. So tremendous growth in tangible book, all the while we paid a very healthy dividend to our shareholders, currently $0.19 a quarter or $0.76 for the year. We've also experienced continued success in growing core deposits. Business deposits sequentially over the quarter of $52 million or 17%. Consumer deposits climbed $95 million or 12%. We're growing deposits without the use of branches, bankers, brokers or BDOs. Next bullet talks about a very important category, which we refer to as our Newtek it's Newtek Alternative Loan Program. In our Alternative Loan Program, we finance that through securitizations. We use securitizations to be able to better asset liability match these longer-term duration-based assets. We are currently expecting an ALP securitization in the fourth quarter of 2025 that will be our largest to date. The range here of $325 million to $350 million of ALP loans will clearly be our biggest. This will be the 17th securitization in NewtekOne's history and fourth in this particular category. We're excited about it. We look forward to bringing it and should be a very profitable endeavor for all of our shareholders. Capital position bolstered and capital structure simplified. In the recent quarter, we were very pleased with the capital that we raised. We issued Series B preferred and common equity. We boosted Tier 1 capital and common equity Tier 1 by roughly $80 million and $30 million, respectively. We're very pleased that we're able to boost our capital ratios to support the growth rates that we're doing on a safe and sound basis. Regarding operating leverage, our efficiency ratio declined from 61.8% to 56.3% at the holding company, even with assets up 43%, but operating expenses only up 8.5%. Our return on average assets for the quarter was 3.15% and continue to trend well ahead of the industry. Payments, payroll, insurance, they're additive to earnings, a good value proposition. We'll talk about that within the confines of the presentation today. But also importantly, they're very additive to our deposit gathering function, and they bring tremendous value to our business customers. If you're doing business with ADP, for example, you're not really connected to an ADP bank account because they're not a bank. If you're doing payments through Worldpay or Fiserv, you're not really connected to a bank. With us, we give you one solution, fully integrated with a dashboard called the Newtek Advantage that gives you transactional capability, analytics and data to be able to manage your transactions. So, one other important item for Q3 financial highlights in NSBF, that is our nonbank lender that is in a wind-down mode. This is left over from when we were a BDC. This is held up at the holding company. The loss in this business because it is not originating, it's in a wind-down mode, keeps going smaller and smaller, and we've got a slide to accentuate that. So we had a $14 million loss for the first 3 quarters of 2025. In 2024, the full year's loss was $28.7 million. So, we're probably trending to an $18 million to $20 million type loss. That is going to continue to decline over time, and we have a slide to focus on that. On Slide #7, we can focus on the Q3 2025 financial highlights. We talked about return on assets, return on equity, return on tangible common equity, efficiency ratio, all very, very strong, particularly compared to industry standards. I would like to point out that our NPL to total loans at 8.1%, which is fairly high compared to a community bank or the banks that you typically look at. But I think it's important to note, this has already been written off or written down. So, the important part to notice is as we're building new portfolios, these numbers are stabilizing, and we believe our data will show that. When you adjust for the NPLs, it 3.8%, that will be taking out the NSBF portfolio, which was probably underwritten during one of the most difficult times for small business finance. 2021, 2022 and 2023, going through that 0 rate environment with prime was 3%. We know prime went up to 8.5% at some point. Now it's starting to come down. The wind we think is finally at our back. We're experiencing lower provisions, and we believe this is stabilizing and will be less of a headwind going further. Slide #8, Newtek Bank National Association, the financial highlights. Please go to the last column, Q3 2025. ROAA, 3.57% return on tangible common equity, 32% efficiency ratio rounds up to 47%. NIM, 5.4%. I look at the NIM, some of the top 4 banks, just dwarfs that. This is that reoccurring benefit that you're going to get as we begin to build a bigger and bigger portfolio at the bank. Needless to say, at the bank, we're dealing with CECL, which is negatively biasing us currently because you have that big charge upfront and you don't get that high coupon from this particular portfolio until over time. So, I think that due to the negative type of accounting machinations for CECL, this will be more beneficial as time goes on as we begin to use the balance sheet more, particularly with SBA 7(a) lending, keeping some loans on our balance sheet, not selling them all off. That's a strategy that we've seen other people in the space been quite successful with. Look at our quarter-over-quarter loan growth, 9% held for investment, deposits up 11%. I'm reading research reports from other banks our size that we're being compared against. They're growing 2%, 3%, and they're getting rave reviews. I don't know what the problem with us is, but we'll keep doing this, and I'm sure we'll get there eventually. Look at our capital ratios very strong, 11%, up to close to 15% on the 3 key leverage ratios. Once again, very important, allowance for credit losses, 5.42%. We have the reserves that will be able to support higher losses and higher charge-offs. Slide #9, tangible book value per share growth. We talked about this earlier, real tremendous increase. All the while we paid a healthy dividend now to our shareholders of $0.76 on an annual basis, $0.19 per quarter. As you can see tangible book value increasing materially from $6.92 to $11.22. Really, we're very proud of growing this tangible book value number. Slide #10, deposits. We talked about the growth in deposits. We're currently at about 3.72% on deposits. We think that number can maybe get down to 2% to 2.5%. That's going to depend upon the merchant business and the payroll business and the insurance agency and the lender helping chip in and embracing clients to give us the depository account all the other things that we do. From a risk standpoint, 78% of our deposits are insured, very valuable with a loan-to-deposit ratio of 95%. Slide #11, the Alternative Loan Program, extremely important to NewtekOne, this business is currently done up at the holding company. It was developed in 2019. Historically, our charge-offs have been below 1%. I believe we had $5.7 million of charge-offs historically, $720 million of total loans originated. Important to understand what this program is about. We have a funnel to lend money to businesses. When the referrals come in, the customer doesn't know what the best loan might be for them. It could be a revolver. It could be a 7(a) loan. It could be a 504 loan, or it could be what we refer to as the Newtek Alternative Loan Program, which has similar characteristics to a 7(a) in that it's got a 10-year or 25-year fully amortizing amount of principal with no balloon, but the credits are much, much stronger. We have guarantors that range from $5 million to $100 million on AOP loans. Our average loan size is about $4 million to $5 million. So great growth opportunity. If you do 200 units of AOP loans, it's $1 billion of loans. So, we do believe there's great growth opportunities here. And as we'll show you in slides going forward, very profitable opportunity. It's important to note that Newtek, unlike these other $300 million to $500 million banks, make loans and sell them or sell them into securitization vehicles. Other banks hold them. One of the reasons why they hold them is they can't replace them. We have a machine that makes loans and sells them. We have a machine that acquires deposits. This machine has been going on for over 2 decades, except on the depository side, obviously, that's somewhat new. But we're showing that we're able to acquire deposits at attractive rates. I think it's extremely important to be able to analyze this Alternative Loan Program business. And as I mentioned, we're about to do our fourth securitization in Q4 2025, the biggest ever. On #12, this will give you an idea of what the metrics are for these types of loans. First of all, high FICO scores. Weighted average LTV and originations, 47%, debt service coverage on average, 3.4x. Weighted average gross coupon 13.17% and we say weighted average spread to the base rate. The base rate is the 5-year treasury. So, these loans are typically fixed or 5 and then they adjust at the margin, they're float at the initial rates, and they can never go down. They also have prepayment penalties of 5% in the first 36 months and then 3% in months 36 to 48. So, these are not prepaid. We want that spread income to be kept over a long period of time. So, we talk about diversification in states, diversification in industry. Let's go to Slide #13. So, we have these securitizations on our books. On Slide 13, the 2022-1 deal, that's been paid off. So, we wound up having all the cash flows behind the bonds repay the bonds. So, the bonds don't exist. The security holders are very happy. They got their money back, and we're able to roll these loans into a new transaction. The 2024-1 was our next deal. That was done with a joint venture partner, similar to 2022-1. So you could take a look at the AOP loans, the weighted average yield, notes and securitization, the spread, the weighted average rate of 6.72%. Now the important part is the gross spread before the servicing fee and after the servicing fee. So we're the servicer. So it's a good servicing stream because of the call protection. The servicing lasts for a long period of time, 496 basis points on 2024-1. On the recent deal was 5.68%. We believe that the spreads we're going to be getting on the next year will be closer to the 5.68%. So you could see once you put the business on and the loans go into the securitization structure, there's no costs. So we're leveraging the infrastructure across the entire business line and putting these loans in. So there's not a transactional cost for deposits. So the cost of funding is greater in a securitization, but it's match funded. So you don't have to worry about interest rate risk. But look at that spread margin. If I was to go to a banker and say you can get 568 basis points of spread, that's after the servicing fee. And there's no cost associated with it. They would say, where do we sign up? Well, good news, we have it. It's our program. We have a track record. We have alliance partners that are getting more and more familiar with the business, and we believe this will be a growth area for the company going forward. Slide #14 gives the status of the 3 completed ALP securitizations. 2022 was gone. 2024 is on the books, 2025-1 on the books. This will give you a feel for the original balances, the notes paid down and whether we did this with a partner or not. By the way, the partners and the joint venture partners in the deal, they invested side-by-side with us from first loss. So we do know where these valuations trade and we mark them appropriately. All this data is in our Qs. It's a 14% yield with a 15% frequency over the life of the pool and a 20% severity that gets you to a 3% historical charge-off. And that's how we've come up with our valuations. Slide #15, Newtek Bank National Association Credit Quality. We think this is an important slide because it will show you that we're, as this portfolio is seasoning because [mind you], we took over the bank, it was $180 million of total assets. Today, I think we're looking at about $1.4 billion of total assets. So we're building a new portfolio. But as you're building a new portfolio, particularly in the types of loans that we do, these aren't car loans. These aren't residential mortgages. I mean, most of the 7(a) loans have these types of characteristics. So you do have a ramp of NPLs and charge-offs, but this is starting to level off. Most importantly, the allowance for credit losses, we believe will adequately cover the NPLs. So we're pleased with the performance. There's no surprises here. This performance is done according to the plan. So for those that were concerned that we're not going to make it, I don't fully understand the marketplace here. We have people rooting for us. We have people rooting against us. Ring against us over the course of 25 years is not a good bet. We're very pleased with the management team, with the relationship we have with the regulatory authorities, with all of our providers and warehousing line securitization investors. We just came back from an ABSE's conference. We had 3, 4 meetings in 2 days. We couldn't be more pleased with how the business itself is performing. Slide #6, the SBA 7(a) loan portfolio, Newtek Bank. The big issue here is there is a concentration in 7(a), particularly with respect to the allowance for credit losses combining for 89% we believe that we're going to begin to layer in more CRE, more C&I into the bank portfolio, and that will level off. And we're very pleased about that initiative, and that is also according to plan. Slide #17, we talked about NSBF. That is the old nonbank SBLC Small Business Lending Corp. licensed nonbank SBA lender. Some of you may not know that when we acquired the bank, we were not able to put these assets into the bank because of the debt. These loans are sitting in securitizations. There are 3 securitizations right now that exist 2021, 2022 and 2023, although the 2021 is callable and we'll look to try to do something with that cleanup call shortly. But this is the legacy nonbank subsidiary that's holding a portfolio in a wind-down mode. Note, the increase in nonaccruals from Q3 2024, this is declining, extremely important. It's still increasing, but it's increasing at a lower rate. The aging of the portfolio, these are seasoned loans. They are less likely to default. The accruing portfolio of $215 million is sitting in securitizations with $140 million of bonds against them. The nonaccruals at fair value, which will be liquidated over the next 12 to 24 months, $64 million that should get turned into cash and be available for a bunch of things, dividends, share buybacks, paying off debt and other things. NSBF equity, $256 million. Notice that the NSBF loans as a percentage of the total balance sheet or the consolidated balance sheet of NewtekOne is shrinking. Just Q3 2024 was 32%, Q3 2025 down to 16%. So this loss is declining materially. Once again, we talked about $28.7 million loss in 2024. It's probably going to come in at $18 million to $20 million for this calendar year. And the performing loans are also paying down. So when they pay down, if they're in securitization, they pay off the debt. When they're outside of securitization, I think we have about $55 million of those, that's canceled it was right to the subsidiary. And we do believe the nonaccrual inflows in the portfolio, they've decelerated for 5 consecutive months. We're pleased about that as well. Slide #18, operating leverage being captured. This is all about the efficiency ratio, declined from 61.8% to 56.3%, and that's at the holdco. At the bank, I think we're at 46% or 47%. We're pleased with that as well. This is all while total assets are growing, revenues are growing, but operating expenses are not growing at as high a rate. Slide #19 talks about the subsidiaries. Our payment processing business, we expect to contribute $16.5 million of pretax income in 2025. And we also are looking for greater contribution from a deposit perspective. We'll have some of that data going into the next quarter. Insurance policies, 10,000 policies in 2025. It's up 34% year-over-year. That's the total cumulative policies, and we expect the insurance agency to contribute about $800,000 of pretax. The payroll business contributing about $600,000 in pretax. Payroll clients, $860, but there's 20,000 employees that we're doing payroll for. And that business is growing nicely. All these 3 things are great complement to a depository, and they should be part of the total treasury management system, which we have through the Newtek Advantage. So we all believe that these business lines should continue to contribute growth in business deposits and bring in sticky, more attractive deposits. One last item, we will be launching a new offering, not a new product, but a new offering, the NewtekOne Triple Play, which will give a customer an unsecured line of credit for up to $10,000 provided they are credit approved and a merchant account or a payroll account. So you get a line of credit, you get a bank account and a merchant and payroll account, all at the same time. NewtekOne’s Triple Play. Last slide, #20. We talked about this, the capital that we raised in this particular, I'd say, recent quarter. And Patriot Financial, we appreciate their investment exchanging $20 million of the Series A convertible and an additional $10 million cash investment for shares. And those shares are locked up for 24 months. Patriot sits on the Board of the bank. They have a pretty good bird's eye view. We really appreciate a sophisticated institutional bank investor having faith in our organization. Second, we issued $50 million of fixed reset noncumulative preferred perpetual stock, $50 million in issuance. And we also refinanced the merchant business, Newtek Merchant Solutions through Goldman Sachs Alternatives, $95 million financing solution. It took out, I believe, it was about a little over $30 million of financing. That gives us plenty of cash capital going into 2026 to be able to pay off our unsecured debt of any WTZs and other obligations in the future. We are very well positioned going into 2026. And with that, operator, I'd like to turn this over to Q&A, where I'll have my CFOs and my hope to answer any questions we might have from investors or analysts. Operator: [Operator Instructions] Our first question comes from the line of Tim Switzer of KBW. Timothy Switzer: First one I have is just on credit trends real quick. Could you guys update us on what you're seeing in the market? There's obviously been some disruption in a bit of a credit cycle. And I'm curious, are there any certain areas where you're seeing more pressure in terms of like industry or geographies relative to others? Barry R. Sloane: Yes. So Tim, I think regarding credit trends, we do believe this is an economy of haves and have-nots. I think that, that's kind of been the case for a while. And I think we've experienced quite a bit of stress and strain and uncertainty in the small business community. With rates spiking up, obviously, we're starting to get that rate relief. We appreciate the drop in rates today as well as the inflation pressures. We are staying away from the volatile businesses and volatile industries where they are commodity-based. Anything that relates to oil and gas, transportation is a difficult category and clearly, agriculture. So, anything that's related to those particular industries, we're staying away from. The consumer side is still pretty strong. As long as we have an equity market and a home real estate market where values are holding or appreciating, we think that spend will continue. And we do believe that our portfolio, primarily driven by the seasoning is flattening out. Mind you, we've been a lender in this space for over 25 years. So, we know it well. We've seen it in high rates, low rates, inflation, deflation. So, we have a pretty good feel for it. We also get a very good sense from our portfolio of customers and payment processing and payroll and things of that nature. So, we have a very good cross-section of credit and see what's working and what's not. Timothy Switzer: Got it. That's helpful. And then there is no slides on updated guidance this quarter. Are you still confident in the previous guide for $0.65 to $0.80 for Q4? Barry R. Sloane: Yes, that's a good question, Tim. I would say this. Right now, we have a government shutdown. And if the government gets open within 2 weeks, I wouldn't see any dramatic changes. But then again, I can't bet on that. This is a pretty volatile uncertain. So, we don't have a reason to pull the guidance, but hopefully, people invest in us, not necessarily on what happens in the fourth quarter, but from a standpoint of the business model, looking at book and things of that nature. But just to be totally fair, we can't live by the previous guidance given the basis of the government shutdown. Timothy Switzer: Yes, that's fair enough. Can you maybe elaborate on, I think you're still able to originate or at least process some loans that have already been approved before the SBA shutdown. Can you maybe explain that and then maybe provide a timeline on what's kind of the deadline on when your originations and ability to sell loans would actually start to be more challenged if the shutdown lasted, say, to like Thanksgiving or something? Barry R. Sloane: Sure. So given that we've been doing this for a long period of time, beginning of September, you start to cover your portfolio. So you can estimate what's going to be closing throughout the month of October and maybe even in November. Although you can't get a guarantee number, we are still taking in applications. And there is also a provision in the SBA's SOP that allows you to bridge a borrower through a period of time and then roll it into a 7(a) loan. So it's very hard to predict whether this will affect us or not affect us, but we do know the ways to be able to get through these shutdowns; over more than 2 decades, we've experienced this, and we have all the tools, and we currently are providing bridge financing to borrowers to enable to fund them into a bridge that will get taken out with a 7(a) loan. Timothy Switzer: Okay. I got it. And then the last question I have is, can you provide the Tier 1 and total capital risk-based ratios for the holding company? I don't believe I saw that in the release or Slide 10. Barry R. Sloane: Frank, could you help with that? Frank DeMaria: Yes. Currently, Tim, we're looking at about 12.5% on leverage at the holding company and just shy of 16% at the for total risk-based capital. Operator: Our next question comes from the line of Crispin Love of Piper Sandler. Crispin Love: Just first, just following up on the shutdown. Barry, did you pull PLP numbers ahead of the shutdown in September for potential SBA 7(a) loans in your pipeline? And if so, kind of what type of volume could you do from those pulls in the fourth quarter? Barry R. Sloane: I don't have the second number, but we did pull product, and that's pretty much covering loans that we had going forward that probably fund about 45 days from the time we get the PLP number. So I mean, we're probably covered for half the quarter. But I also want to point out, Crispin, that if you look at our mix of loans, it's changing. AOP, we've done more CRE, we've done more C&I. So this is one of these times where I don't really want to predict what Chuck Schumer is going to do or Trump or John Thune or Mike Johnson. So it's, when I say it's a tough time, this is temporary. This too shall pass. It's only a quarter. I know we're all focused on the next quarter, and that's what we do when we look at these things. But this too shall pass. And frankly, it's made of the difficult, a lot of people have dropped out of the 7(a) space. because of the changes in the SBA program. So we're sorry for other people's misfortune, but we've been able to weather these storms over time. We'll be here for many years and many quarters after this one. Crispin Love: Okay. Great. And then just on the $29 million of loans under the fair value option that revenue line item in the quarter. Can you just discuss some of the key drivers there, what you might expect on a go-forward basis as it can be fairly volatile, especially with the large securitization coming in the fourth quarter? Barry R. Sloane: Yes. Frank, I believe that's the mix of governments and ALP, but I'll let you answer that question, Frank. Frank DeMaria: Yes. No, Crispin, you're spot on. We're ramping up for the next securitization. And as you saw on that slide, we're looking at somewhere between $325 million and $350 million in capital. So a lot of that this quarter is related to that. And similar to what you saw last quarter, you will see kind of that, I'll call it, that flip in the fair value line as we close the securitization and pull the residual onto the balance sheet. So you'll see that again, as you alluded to, in the next quarter. But most of that is related to the originations and backing the inventory for the securitization. And then to Barry's point, some additional 7(a) guarantees that we're holding a little bit longer for sale and obviously, with the shutdown, but we plan to continue to sell those once the government reopens. Crispin Love: Okay. Perfect. And then, yes, just last point on. I just want to make sure I'm thinking about the guidance correctly. So you're not pulling the guidance, but not affirming the prior guidance. Is it really just more of a timing issue, whether that gain on sale revenue hits in 4Q, 1Q or beyond rather than anything more than that? Barry R. Sloane: I can't comment on it. It's very difficult to forecast. And I really can't comment on it at this time. I mean the one thing I could tell you, the stock price with a 10 or 11 handle, does it really make a difference? You don't have to answer that, but that's my view. Operator: Our next question comes from the line of Steve Moss of Raymond James. Stephen Moss: Barry, maybe just, maybe on the SBA program from a higher level or just the business activity. Just kind of curious what's your sense of customer demand or customer confidence? I realize maybe the closure of the SBA makes a little harder to get a read, but just kind of curious how you're feeling about the potential pipeline if, or potential activity within the space you land? Barry R. Sloane: Steve, I think it's a great question, and it's pointed to this particular market, which right now, as we know, there are lenders that are leaving the space, and it is harder to do loans. I think when I was asked this question last quarter, and there was a discussion about the changes that the agency had made, whether it would affect originations or not, I didn't believe that it would. It has. It's in a tougher market to do loans. One particular area has to do with merchant cash advance and not being able to refinance a merchant cash advance loan. And the second area has to do with anybody in the ownership chain, even if it's 1%, that cannot prove that their U.S. citizen can't get an SBA loan. And I think you'd be surprised at the amount of participants that would apply that can't do it. Now we've also got customers that are coming to us that insist that they're citizens, they have the documented proof, but the database isn't saying that they are. So, you can't make a loan. I will also tell you; we've got people that were approving for financing. And due to the uncertainty in the marketplace and tariffs and things of that nature, they're not taking it. So, I would just say that on a going-forward basis, it's going to be a much harder business to do business. We feel good about it. We feel good about our position in the market from a long-term perspective. But I think that where it was a very effervescent year from October 1, 2024, to September 30, 2025, I think you're going to see some different numbers in this coming government fiscal year from all originators. We finished up last year second to Live Oak Bank from SBA statistics. But I think that whole top 20 is going to shake up quite a bit. We like the business. We've been in it for a long period of time. We think it's a great program and a great product. Stephen Moss: Okay. Great. Appreciate all that color there. And then the other thing I noticed was you're talking about diversifying the bank balance sheet here, adding more C&I and CRE. Just kind of curious what does that look like in the future, the type of loan you're thinking about adding? Could some of the ALF loans end up on the bank balance sheet? Just any color there would be great. Barry R. Sloane: Yes. So, Steve, I think that diversification is extremely important. And there's a lot of good opportunities for us in straight C&I line of credit type lending and CRE type lending. One of the things we're going to, I'm going to suggest to my team, I think we're going to look to do an Analyst Day sometime in December or very early in January right after the new year and be able to reforecast out and give the analyst community, investors some better guidance on a going-forward basis. But I think that when you look at total loan originations across ALP, CRE, C&I, line of credit, clearly, where historically, we were very much well known as an SBA 7(a) lender, it's the furthest thing from the truth. And we like the program. We think it's great, but it's going to be part of a diversified approach to really developing that franchise in the SMB marketplace. But I think SBA, we're right now, the uninsured balance sheet is probably 44% to 45%-ish, not including what is going on in NSBF. We would like that to come down a little bit, and we clearly want to grow the Alternative Loan Program business dramatically from where it is today. It's very profitable. credits are bigger, customers are bigger and the returns equal the 7(a) business. Stephen Moss: Okay. And, And maybe on that point, just where I was going to go to my next question is on the business here. It's clearly a big securitization coming. Is this kind of like what you expect to be the more normal run rate in future securitizations kind of in this $300 million plus range? And maybe do we see more than 2 a year? Barry R. Sloane: Good question. I'd like to keep it at 2 a year, and the goal would be to get those numbers bigger. This is the first time we've ever done 2 AOP securitizations in the same calendar year. So I'd like to do 2 a year, get the numbers bigger, bigger pools are better. There's more diversification. You get better receptivity from investors. So Yes, I definitely appreciate the question and would like to do bigger deals. It's an average loan size of $4.5 million to $5 million. So not a lot of credits. I mean we'll do 2,500 to 2,700 credits now, just to do another 200 credits. It takes a lot of effort to do $1 million loan, takes about the same amount of effort to do that bigger loan. Stephen Moss: Right. Okay. That's helpful. And then in terms of, you touched on your 3-year anniversary here coming up in January. Kind of curious as to what potential flexibility we may see or we should expect after that 3-year anniversary, if any? Barry R. Sloane: It's a good question, Steve. I think you'll see from a flexible standpoint, I think you'll see the business model, all the things that we talked about. But I think you'll see from my mouth to good, better execution on the deposit side, better execution on the AOP side in terms of more volume, but no change in the product mix, which is important. But I think you'll see a bank and a bank holding company that maybe you're more familiar with in analyzing the metrics than what you've seen to date. That's our goal to just be able to provide more information, better information. We're hopeful that we provided additional information in this deck that will give people a better insight in terms of what we're doing. We want to be as transparent as we possibly can. Stephen Moss: There definitely was a lot of information in the deck. I'm still trying to digest it. Maybe put it this way, with the 3-year anniversary, you're 12.5% leverage right now. Would you go down to like a 9% or 10% type number in the next 2 or 3 years? Barry R. Sloane: I think we do plan on using the balance sheet a little bit more and using more leverage. So, I appreciate the question. It's not going to be dramatic. But I think what's important, I think, A, to yourself, investors, regulators, they want to make sure that we have the capability, the management team, the systems, the software, the policy in place to be able to manage the business and manage the growth. We clearly had people that said to me, you can't grow this fast, you can't do what you're doing. Well, we're still here, and our plans are intact. As I've stated in many calls, we're on plan. We're on plan with NPLs, with capital, with, we're on plan. So, with our 3-year anniversary here, we're looking to continue to grow and hopefully get better recognition from the markets for what we've been able to do so far. So yes, I appreciate you focusing in on that time frame because it is important to us. Operator: Our next question comes from the line of Hal Goetsch of B. Riley Securities. Harold Goetsch: You mentioned on the call, and this is kind of a sector question that some SBA lenders are leaving the market. And I was wondering if you could give us a little color on that, why that is? And you have been taking share. So, I wanted to get your feel on the long-term outlook for SBA lenders, your ability to increase share? And the other question is just on the ALP side, the government shutdown isn't holding up the ALP program, right? So, correct me if I'm wrong, but then if it isn't, like can you give us a little color on originations through the first 3 quarters of the year or the third quarter and your outlook there, if you can because that isn't being impacted. Barry R. Sloane: Sure. I appreciate it. So I mean this is public information. BayFirst, which was a top 20 lender pushed out of the market. I think their business went to an entity called Banesco. There were one of the SBA changes relating to limited underwriting score and go. I think they dropped the cut from like 500 to 350. So a lot of competitors entered the space after PPP that were basically technology providers. And they really didn't provide the fulsome lending that's required, in my opinion, in a regulated environment. So I mean that's the only name that I could openly talk about in the public market because it's out there. But we are familiar with several other lenders right now that basically have got to cut back. We hear this and see this from the interviewing process with people coming to us expressing reservations about what they're doing going forward. This does not affect the AOP business at all. And I think just from a volume standpoint for us, we might have a little bit of a degradation in the next quarter or 2 in 7(a) volume. But we believe we'll be able to deliver good numbers from a market multiple standpoints, and we'll be able to make it up. From an AOP perspective, we were targeting, I think, between $350 million to $400 million in AOP loans for this calendar year, and I believe that's what will hit. We hope to do materially more than that next year. I don't have a number on that, but if I had to come up with a number, I would say $500 million to $600 million, but I haven't really cleared that with my boss. Peter Downs the President and COO of the bank. He's the boss in that area. Harold Goetsch: Okay. And if I could ask one follow-up. It seems like the loan, the LTVs on the LP loans are quite good, right? And what are the, refresh me on the collateral for those loans, if you could. Barry R. Sloane: Yes. One of the things, how I will do is DBRS is the rating agency, and they put out a nice presale agreement. I'll make sure that we can get you a copy of those, so you can get a description of what the loans look like, how they're underwritten. Anybody that wants that, please let myself or Bryce Rowe. I'm sure DBRS will be happy to provide that. What goes into it is these are businesses that do have a business valuation, so we get a business appraisal. About 65% of our loans typically have commercial real estate liens behind them. If it's not a commercial real estate lien. We're looking at intellectual property. We're looking at machinery, equipment, inventory and most importantly, personal guarantees. So, every 20% equity owner or greater must personally guarantee it. So, in many cases, we're getting things like marketable securities, real estate assets, it could be residences, it could be investment in real estate property to all go into that LTV. The reason why these borrowers subscribe to these types of loans is because of the long amortization, you're basically giving them equity because they get to keep the principal for longer periods of time. And the flexibility in the covenants, which we think I'll take a personal guarantee and lean on personal assets over a covenant that you're dealing with 45 days in arrears after the fact. Operator: Our next question comes from the line of Christopher Nolan of Ladenburg Thalmann & Company. Christopher Nolan: Barry, what's the thoughts on increasing the dividend? Barry R. Sloane: Good question, but always a tough one. We obviously have one of the best dividend-paying stocks in the market. As a shareholder, I'm a participant in that. I love the dividend. I would say, to be frank with you, we're not getting a tremendous amount of value for its dividend or the increase. I would say, and this is not my decision. It's the Board's decision, who has to declare it. I would say if there was a choice in A or B, and there's a choice C, which is do nothing, by the way. But if there was a choice A or B, we'd probably be more inclined to buy stock back to increase the dividend. But we also might wind up with C, which is do nothing. But I think to answer your question, I would just say it's possible, but unlikely that we'll increase the dividend in the near term. Christopher Nolan: Got it. Great. And I guess the capital ratios look awfully healthy and kudos to you guys. Do you guys sort of get a nudge from regulators, whatever to pad your capital ratios a little bit just because of the unconventional business model? Barry R. Sloane: I would have thought that would have been the case, but the answer is no. They typically don't tell you what to do. They tell you what you can't do. So no, nothing along those lines, although to be frank with you, that was a management decision that we made during, I guess, what I'll refer to as our maiden voyage currently. So we're comfortable with it. We wanted to demonstrate to the market, we're well capitalized. We've got generous allowance for credit losses, and we know how to run a bank. We, as a nonbanker that's CEO of a bank, so I guess I am a banker now, we brought in really experienced people across the board in every single area. And I think that's been good. And not everybody works out. I've been asked, are we going to have changes and all that stuff. And look, if I was to say, no, I'm not going to change anybody in my management team out, they lose their incentive to work hard and deliver the results. So we're going to continue to work on building this platform together, upgrading it. And I hand it all off to the management team of the company for delivering these results. They've done a terrific job. And we do plan on using the balance sheet more and utilizing more of the capital going forward. Christopher Nolan: Final question. You guys sort of seem, I mean, you have an unusual business model. It's highly profitable and it works properly. The, but you guys see, while you're a technology bank, you sort of have one foot in technology, one foot in traditional banking. And when you start looking at models like LendingTree, which are much more focused on the user interface, mobile and everything else, less so on the back end, but you guys have the back end down. Is that the direction we you see the model evolving? Or what are your thoughts on, because it, does your stock price values help if you start becoming a FinTech, which actually has a bank behind it? Barry R. Sloane: Yes. So I love the question, Chris. I thank you for it. First of all, I want to put the names aside for the moment. But I look at organizations that are trading at pretty substantial multiples like a LendingClub or Live Oak or SoFi. And SoFi is a little bit different. But some of these companies for the first several years, they flatlined. They didn't move until the market got comfortable with their model and what they were doing and developed a better understanding and then all of a sudden, it started jumping because some people don't feel the multiples match up or make any sense. But when you think of LendingClub, I mean they do, do small business lending, but it's not a huge number. Look at a company like Innova, which doesn't currently own a depository, it's trading at a multiple in the teens and you look at our multiple. So I think that there's not a lot different than they're doing what we're doing relative to the returns on equity, returns on assets. I just think this is a familiarity issue. But I will tell you that the people that I meet with who spend the time and put the work in, they like what we're doing. If you look at our shareholder base, according to NASDAQ, it's 52% of institutional. I'm pretty confident that number is more like 65% or 70%. So if you play around with the math, there's 10 million shares in the float and there's 2.5 million shares short. Something just doesn't make a lot of sense here. But that's for other people to figure out. I mean there are people that like the stock here, and there are people that I that don't like it because there's a big share short. We'll figure this out. But in the meantime, we're building a great business. We got 22,000 digital depository accounts, 10,000 lending customers, 20,000 employees that we do payroll for. We move money quickly, efficiently at lower cost. Someone's got to like what we're doing. And that's why at the beginning of my presentation, I said, please focus on the business. Do you like this business? You like the business; you should like the stock. Operator: Our next question comes from the line of Ivan Jimenez of Greenholder. Ivan Jimenez: My question relates, I just want to understand the math right. You have $1.2 trillion in assets. I correct? Barry R. Sloane: At the bank. At the bank, it's $1.4 billion, I believe, at the holdco, it's $2.4 billion approximately. Ivan Jimenez: And you start... Barry R. Sloane: That's the market cap. Ivan Jimenez: You started with $300 million. Am I correct? Barry R. Sloane: National Bank was $180 million in total assets when we bought it approximately. Ivan Jimenez: So in essence, your model has gone from a BDC that we used to have to raise money every quarter or whatever, whenever you needed money to basically a depository. So that's your primary source of funds now. Am I correct? Barry R. Sloane: Yes, it is. Ivan Jimenez: That's where, 78% of that is guaranteed deposits. So these are deposits of less than the FDIC rate. Am I correct? So you don't have this risk of pull out? Barry R. Sloane: Yes. We have a deposit base, which I think is about $1.2 billion. We still do have other liabilities, but more and more of the liabilities are going to come from deposit gathering. We're going to look to grow the balance sheet and the earnings of the bank. Ivan Jimenez: Okay. That was my question. I just want to make sure that I heard the numbers right. Barry R. Sloane: Yes. No, the growth numbers are numbers that do not exist. And obviously, it's off a low basis, but these are numbers that don't exist in the banking business. I read research reports. People are growing their deposits and loans by like 1% or 2% or 3%. It's like, all this is fantastic. It's great growth, and I'm kind of scratching my head going. Hey, what about me? Ivan Jimenez: That's correct. the numbers, I just want to make sure that I heard right because to me, those numbers were important for what I'm doing. Operator: I'm showing no further questions at this time. I would now like to turn it back to Barry for closing remarks. Barry R. Sloane: I want to thank everybody for attending. I really appreciate the work the analysts have done and the great questions, thoughtful, insightful, forward-thinking both for us and the industry. And Bryce and I are always available along with Frank and Scott to be helpful and answer any questions you might have. So thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon. I will be your conference operator today. [Operator Instructions] Before we begin, I would like to remind everyone that today's call may contain forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements about BridgeBio's future operating and financial performance, business plans and prospects and strategy. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially from those expressed or implied in these forward-looking statements. For a discussion of these risks and uncertainties, please refer to the disclosure in today's earnings release and BridgeBio's periodic reports and SEC filings. All statements made here are based on information available to BridgeBio as of today, and the company undertakes no obligation to update any forward-looking statements made during this call, except as required by law. With that completed, BridgeBio, you may begin your conference. Chinmay Shukla: Good afternoon, everyone, and thank you for joining BridgeBio Pharma's Third Quarter 2025 Earnings Call. I'm Chinmay Shukla, Senior Vice President of Strategic Finance at BridgeBio. With me today are Neil Kumar, our CEO, who will provide opening remarks and discuss overall corporate performance; Matt Outten, our Chief Commercial Officer, who will provide more details about our commercial performance, particularly the continued success of Attruby; and Tom Trimarchi, our President and CFO, who will review our financial results. During today's call, we'll cover our strong commercial execution in Attruby's third quarter on the market. We'll provide updates on our late-stage pipeline, including the Phase III readouts of encaleret and BBP-418, which were announced this week, as well as discuss infigratinib in achondroplasia, which we expect to read out in early '26. We will end with a discussion of our robust financial position. Following our prepared remarks, we will open the call for Q&A. For the question-and-answer session, we will also be joined by Ananth Sridhar, Anna Wade and Justin To, who lead encaleret, BBP-418 and infigratinib, respectively. With that, I'll turn it over to Neil for his remarks. Neil Kumar: Thank you, everyone, for joining us today. As always, this is a forum in which we communicate salient aspects of our business that are of interest to investors, and we welcome your questions and feedback along the way. On the first 2 of these calls we have done, I've focused my early comments on Attruby, which continues to be the core of our business. As both Matt and I will elaborate on, we see continued momentum, both scientifically and commercially in this franchise and are ever more confident today that we will achieve our goal of 30-plus percent market share by volume in the years to come. But I wanted to start today by talking about our recent R&D progress. As you all know, we had the distinct privilege of announcing 2 stellar Phase III top line results over the last 3 days. It is quite the coincidence that these readouts happen to stack on top of one another after 6-plus years of working on these programs. But these few days serve as a testament to the longer-term productivity of the R&D engine we have created. Slide 10 of our updated corporate presentation shows the industry-leading time lines that we have been able to achieve, and Slide 11 shows the remarkably high probability of technical success across our programs across the nearly 10 years that we've been operating. Probabilities of technical success north of 70% start to move us from a lottery ticket-like entity to an engineering company-like entity, one that will undoubtedly face failure, but that can reliably produce medicines that matter with reasonable cadence. The speed and efficiency of the BridgeBio engine is only possible because we target well-described genetic diseases at their source. It's also the product of our decentralized hub-and-spoke model that is fueled by our tireless employees that are dedicated to making an impact to the patient communities that we serve. I'd now like to highlight some of the most remarkable aspects of the data we have shared over the last few days and encourage those seeking to learn more to access our webcast on each readout. On Monday, we read out our Phase III FORTIFY trial of BBP-418 in limb-girdle muscular dystrophy type 2i. The study exceeded all of our expectations, meeting all primary and secondary interim analysis endpoints. The primary endpoint, glycosylated alpha-dystroglycan was successful to a high degree of statistical significance. Though even small changes in ADG have been shown to be clinically meaningful, it is remarkable to see some patients attaining normalized levels of ADG. And the 80% increase in glycosylation meaningfully moved patients to healthier levels of muscle function. Across the key clinical endpoint studied, ambulatory function and pulmonary function, BBP-418 not only stopped the decline that was seen in the placebo, but showed a statistically significant incline in function. Patients are walking better and breathing better than when they started. In addition, this small molecule is distributed systemically, and we look forward to sharing additional data associated with its impact on other tissues, including importantly, the heart muscle. Earlier today, we shared the top line data from our Phase III CALIBRATE trial of encaleret in autosomal dominant hypocalcemia type 1. We saw profound and highly statistically significant normalization across blood and urine calcium as well as highly statistically significant normalization of PTH. Just to reiterate, a vast majority of patients fully normalized urine, serum and PTH levels. As I mentioned on the webcast, when we speak of cures in therapeutic medicine, this is the type of impact we seek. And as I mentioned on our last earnings call, we are moving expeditiously not only to launch this drug, but also to initiate its Phase III in chronic hypoparathyroidism. Here, encaleret in a cohort of 10 patients normalized urine and serum calcium in 80% of subjects within 5 days of dosing. Importantly, this drug brings differentiated promise to the hypoparathyroidism community across at least 3 potential dimensions. First, it's oral. Second, it potentially normalizes urine calcium, the cause of downstream kidney conditions. And third, it might avoid potential downstream bone-associated resorption issues that could require bisphosphonates. Finally and importantly, for both small molecules in LGMD2I and ADH1, we saw a safe profile, supporting their ability to provide lifelong improvement for patients who have no disease-modifying therapies available today. Of course, these data are only interesting to the extent that we can get the therapies into the hands of patients. This is where the ongoing success of Attruby gives me confidence that we can distribute at scale. We have been in the marketplace for nearly a year, and I feel our message is just beginning to resonate. The numbers to support that include the fact that we have delivered 5,259 unique patient prescriptions to 1,355 unique HCPs, generating this quarter $108.1 million in net product sales. In the long term, although our goal is 30% to 35% share by volume, I believe we have the potential to be a market leader. The best point estimates to date on key endpoints at the lowest price point backed by an aggressive research plan support that future. Early performance of Beyonttra in Europe where physicians have been quick to recognize the strength of our data also supports that future. Our partners at Bayer have done a wonderful job prosecuting the acoramidis hypothesis in Europe, closing in on market leadership in Germany with an NBRx of nearly 50% just 6 months into launch. In that geography, among other tailwinds, regulators have also been quick to shut down Pfizer's inaccurate claims of "near complete stabilization." On that topic, as I was putting together my comments, I stumbled upon an old e-mail that Dr. Jeff Kelly, the inventor of tafamidis, had sent to Dr. Isabella Graef, one of the inventors of acoramidis. In it, and I directly quote him, he says, "given the variability in stoichiometry in the experiments between tafamidis and AG10 and TTR, the data always tell the same story that AG10 is better than tafamidis as would be expected from the determined binding constant." I have to say I agree with him. Moving on from competing, we are also asking ourselves what is unique about our product. As many of you know, in patients with cardiac arrhythmic involvement, we observed a 43% reduction in risk of CVH associated with cardiac arrhythmia and a 17% reduction in TEAEs related to new onset AFib. That is unique. In patients with the most common variant, V122I, we published a 59% hazard reduction, which to our knowledge is the largest point estimate in terms of reduction demonstrated in the field. We expect to further elaborate on these data at the upcoming AHA conference, so please stay tuned for that later this weekend. Additionally, we've continued to interrogate what in my mind is an incredibly unique factor, our early time to separation. In a recent JACC paper, we published that the effect of acoramidis on recurrent and cumulative cardiovascular outcomes was observed as early as 1 month. One question is, why is this prompt effect occurring? One hypothesis is that the answers may reside in the cardiorenal axis similar to what has been described for SGLT2 inhibitors, and we intend to explore this further in the clinic. In addition, we intend to bring a new clinical CMR study to the field to further interrogate Attruby's impact on disease regression as measured by cardiac function and structure. Some of you may have seen another single-site CMR study recently published by [indiscernible] in which they suggest the "potentially superior effect of acoramidis" versus tafamidis on important parameters like LVEF and LV mass. These new research areas marry nicely with the continued execution of our ACT-EARLY, a potentially profound study that explores the effect of acoramidis in presymptomatic variant patients and in the context of this mass action disease. Finally, we'll continue to study the efficaciousness of the drug in the context of real-world evidence studies. We've been proponents of leveraging RWE as early as the survival studies done by Dr. Masri, Moore and others. Given that in the modern marketplace, it is an exceptionally difficult thing to conduct double-blind head-to-head studies, RWE will serve as an important tool in identifying the right patients for the right drug. and we'll have more to publish on this front in the months to come. These research efforts tie together with the continued strengthening of our access profile and increasing diagnosis rates of patients with ATTR cardiomyopathy. Matt will have more to say about our access program, but we continue to offer best-in-class programs and are improving with every month the ability to "make it easy for those patients and physicians that desire access to Attruby." I'll end with a brief comment on future growth. The obvious growth in our portfolio today sits with the expansion programs of hypochondroplasia and in chronic hypoparathyroidism, branching from our achondroplasia and ADH1 programs, respectively. But shareholders should not overlook the deep ownership and close oversight we have with our sister companies. At GondolaBio , in particular, we now have 17 programs across the Mendelian landscape, including what we believe to be a potentially best-in-class asset in EPP in Phase II and buttressed by exciting programs in alpha-1 antitrypsin deficiency, hereditary pancreatitis, ADPKD and many other areas. As these programs move forward and we continue to solidify BridgeBio, we can access new growth opportunities at the right time to increase the scope of work we are doing for patients. With that, I'll turn it over to Matt, our Chief Commercial Officer. Matthew Outten: Thanks, Neil. I'm excited to share our Q3 progress and discuss some of the positive trends behind Attruby's continuing success, along with the excitement that the new Phase III data from both encaleret and BBP-418 have created. Starting with Attruby, as we have seen throughout the year, the ATTR-CM market continues to expand with growth coming from all segments of the market. We've been particularly encouraged by the increase in prescribing from both returning and new physicians with a steady rise in first-time prescribers adopting Attruby in their practice. Importantly, once physicians begin prescribing Attruby, they continue doing so, a clear reflection of the consistent clinical performance we've seen in real-world use. This persistence stems from Attruby's differentiated profile of being the only near-complete stabilizer on the market versus a partial stabilizer and a partial knockdown. Attruby has also shown the fastest time to separation from placebo to date. While patients are getting diagnosed faster and at a younger age, many continue to go undiagnosed or progress on their current medications. When that happens, they need something that can stabilize the tetramer and do so quickly. The bottom line is that patients and physicians want a medication that works well and works fast and Attruby continues to deliver on both efficacy and speed. As we look towards Q4 and the 1-year anniversary of the launch of Attruby, there are several factors I would like to highlight. First, Attruby's strong launch trajectory continues to demonstrate consistent growth across all market segments. We expect this momentum to carry into the coming quarters, positioning Attruby for meaningful share expansion over time as awareness and adoption continue to increase. Second, the ATTR-CM market itself continues to grow quarter-over-quarter with no signs of slowing. This ongoing expansion effectively enlarges the total opportunity that Attruby is competing for and supports a sustained growth runway for the brand. Third, as the U.S. health care environment becomes increasingly cost conscious, Attruby remains the least expensive option in the ATTR-CM market. Combined with being commercialized by a U.S.-based company, this positions Attruby well for long-term competitiveness as pricing and access pressure continue to evolve. Finally, we continue to see encouraging underlying trends for Attruby with continued growth in the total number of patients on therapy and a steady increase in ongoing treatment utilization. Together, these trends underscore growing prescriber confidence and sustained demand for Attruby. Building on the momentum from Attruby, we are now turning to the next wave of potential launches in our pipeline. Let me begin by reinforcing how excited we are by the recent readouts for BBP-418 and encaleret, which represent one of the most remarkable dual clinical successes in rare disease drug development. Both encaleret and BBP-418 exceeded expectations across their primary and secondary endpoints, positioning each as a potential first and best-in-class therapy with a compelling value proposition. Together, these programs will redefine care for patients with anticipated strong support from the clinician and payer communities based on the strength of each respective data set if approved by the FDA. We expect an additional readout for infigratinib in the first half of 2026 and look forward to discussing the commercial opportunity at that time. The launch of Attruby has provided invaluable experience in scaling rare disease commercialization from building disease awareness and engaging HCP networks to executing patient identification and access strategies. These learnings are directly informing our next wave of launches, including encaleret, BBP-418 and infigratinib. Many of the same leadership, operations and market access teams who drove the success of Attruby are already in place to support these programs. In preparation for these upcoming launches, we have continued to expand disease state education initiatives and have begun hiring key commercial leadership positions. The response to our initial positions has been remarkable, underscoring both the strength of the BridgeBio platform and the excitement around our pipeline of transformative therapies that will meaningfully improve outcomes for the communities we serve. The hiring momentum will continue to ramp over the next several quarters, leading into the respective potential approvals for each indication. Importantly, encaleret and BBP-418 will represent first-in-class options in their indications, while infigratinib would be the first daily oral medication in achondroplasia, allowing children a needle-free option for their daily care regimen. Beyond the U.S., we're actively building the infrastructure to support global commercialization, enabling coordinated launches and sustained access. Through our expanding global footprint, we are well positioned to deliver meaningful innovation to rare disease communities worldwide, ensuring global access, continuity and impact. With that, I will turn it over to Tom, who will discuss BridgeBio's financials. Thomas Trimarchi: Thank you, Matt, and good morning, everyone. I'll now discuss our financial results for the third quarter of 2025. Please note that our commentary on today's call will focus on GAAP financials unless otherwise indicated. Total revenues were $120.7 million in 3Q 2025, consisting of $108.1 million of Attruby net product revenue, $4.3 million of royalty revenue and $8.3 million of license and services revenue compared to $2.7 million of the same period last year. The $118 million increase in total revenues was primarily due to a $108.1 million increase in net product revenue from Attruby driven by strong growth across all market segments. We also recorded $4.3 million in royalty revenue from ex-U.S. net sales of Beyonttra in Europe and Japan. Total operating expenses for the third quarter of 2025 were $259.3 million compared to $193.9 million in the same period in the prior year. The $65.4 million increase in operating expenses was primarily driven by a $68.8 million increase in SG&A expenses, partially offset by a slight decline in R&D expenses. This reflects our continued investment in the Attruby brand awareness and ongoing investments in our late-stage clinical programs. Turning to our balance sheet. We ended the third quarter with a strong cash position of $645.9 million in cash, cash equivalents and marketable securities, which provides significant cash runway to continue supporting our transition into a diversified late-stage multiproduct business. In closing, our commercial launch of Attruby continues to accelerate, and our pipeline has never been stronger. Following the positive results from LGMD2I/R9 and ADH1, we now look forward to top line results from achondroplasia in early 2026. With that, I'll turn the call back over to Chinmay. Chinmay Shukla: Thank you, Neil, Matt and Tom. We will now turn the call over to the operator, who will open the line for questions. We kindly request that you limit yourself to 1 question. Thank you. Operator: [Operator Instructions] Our first question will come from the line of Salim Syed with Mizuho. Salim Syed: Congrats on all the week's successes. Neil, Matt, maybe this one for you. Possible to comment on the percentage of new patient share. I know last time you provided the number, I think it was 18% to 20% on the 2Q call. Just wondering if that's increased since then. And if that remains the primary focus for growth? Or are you also seeing an increase in the switch category? Neil Kumar: Yes. Salim, good question. I'll take a crack and Matt, you can elaborate if I miss something. I mean I'd say our naive share, it's hard to tell, honestly, because we don't have all the numbers yet from Alnylam and Pfizer for the quarter. But our best guess is that the naive share is well in the 20s now. We've seen double-digit growth, obviously, in overall script quarter-on-quarter number, and that script growth has been even more profound in the NBRx setting. That means that we've seen a little bit of a downturn in the switch setting, and that's mostly because we're seeing a lot of combo use. There's some work that we could do in terms of reminding people that why not use the best stabilizer on top of a knockdown if you're going to go that route, but our NBRx share continues to grow nicely. Why do we focus on that? I mean, you know this as well as I do. But ultimately, your peak steady-state share is pretty simple, right? It's a fraction of new patients that you're capturing multiplied by the fraction of the total market that is new each year divided by the annual dropout rate. And if you look at this marketplace, the annual dropout rate is pretty high, something like 40% is what we modeled when you certainly look at Pfizer. And the fraction of the new markets that are adding patients to the market, it's not just replacement over time is going to be greater than that. So any time those 2 things are -- effectively, that fraction is greater than 1. What you ultimately want to do is maximize a fraction of new patients that you capture. So whatever if it's at 30%, then we're going to be a multiplier of that on peak year share. So -- as we look forward over the course of the next 3 to 4 years, obviously, our goal is 30-plus percent market share. We're well in range to do that even with the numbers that we have today, and I expect them to continue to grow. Operator: Our next question comes from the line of Tyler Van Buren with TD Cowen. Tyler Van Buren: Congrats on another solid quarter of Attruby commercialization. So could you elaborate on the ATTR cardiomyopathy diagnosis rates and if you're continuing to see momentum build since the launch? And forgive me, but I have to ask a second one. So there are some centers that might prefer AMVUTTRA as they collect money on a much higher ASP despite the cost that it adds to the system. So curious to get your thoughts on that market dynamic. Do you expect this to impact a minority of the centers and patients -- and is it something that you have to adjust your strategy to in those centers? Neil Kumar: Yes, 2 great questions, Tyler. Thanks for them. And I would say just in terms of market growth, again, until we get the full revenue numbers from Alnylam and Pfizer, I won't know precisely or be able to back into precisely the number of scripts on the quarter. But I can say pretty reliably, if you go back 1 year, so quarter and what that looked like this quarter last year, there's been a pretty robust and continued growth in diagnosis. Certainly, what we're seeing in the field is a lot of growth in diagnosis. new practices, as you can see from our ACP data as well as doctors finding more of these patients. I think the PYP reimbursement concerns were overstated. We don't see that being a drag in terms of people finding new patients. And there's a lot of excitement and education going on in and around this category. If you go to any of the conferences, and I'm sure the same is going to be at AHA, these sessions are packed. People are keen to learn more about ATTR cardiomyopathy. And with all the publications ongoing, there's a lot of people who want to throw their hat in to be part of the next wave of learning in this space. So I expect that diagnosis rates will continue to increase and get us closer to that 250,000 that ultimately we should get to in the U.S. Second question on the buy-and-bill dynamic. I mean it's not -- I don't think we have to adjust our strategy because we always knew that, that was going to be the case. Certainly, there are certain centers of excellence that if you have a reasonable CFO at a hospital system, you're going to be 340B pricing. And so there's a lot of profit that one can take. from that. But I would say, writ large, unlike rheumatology, when you get out into the high-volume heart failure practices, this is not a meaningful part of the profit center associated with those practices. And so you're not see a lot of cardiologists just looking at buy-and-bill as the way to make more money. So we haven't seen that. And overall, I would say, amidst the specialty community, you see just a lot of focus on doing the right thing in terms of data efficacy, in terms of safety and ultimately in terms of cost. Right now, you're seeing a lot of combo use. You're seeing some centers do a lot of super high-priced drug use, but I even hear physicians within those centers saying, I'm not sure I should be putting someone on $1 million worth of therapy if indeed there's no data to back up the fact that, that's more efficacious than a low-cost small molecule like ours. So I think, again, in the long term, as you saw in the TNFs and other buy-and-bill type things, the combination of good data and what payers will ultimately do as they control this category more, I think, will drive certainly that NBRx share up for the small molecule stabilizers as compared to the high cost with worst point estimates, knockdowns that are buy and bill. Operator: Our next question will come from the line of Biren Amin with Piper Sandler. Biren Amin: I got to say it's the first to have 3 positive investor calls by a single company in 1 week. So congrats on that. My question, you talked about market access as a top priority for the company. Thoughts on Pfizer matching the 28-day free trial with VYNDAMAX, any impact from this program that you foresee? Neil Kumar: Yes. Great question, Biren, and thanks for the compliment there. We see it as a positive. Anytime you actually roll out a program that's generous to patients, I assume our competition is going to match it. And ultimately, it gets us thinking about what else we can do. I mean, I think if you look across the totality of our programs, they continue to be the most generous in the space. But overall, we welcome that type of competition. It shouldn't really be access ultimately that's driving the differential share that we gain. Ultimately, all we want is an even playing field, and that's what we've been talking about writ large across the payer and provider landscape and then ultimately to let our efficacy data speak. If you add anything? Matthew Outten: No, I think that's exactly right. It's it's not a bad thing when someone copies a good program. And so in terms of it impacting, I don't think we've seen an impact from it. It's -- when you're the first one to do it, I think people remember that one maybe a little bit more, but we were happy to see them offer that. Any competitor ought to be thinking about doing the same thing, whether it's the free drug for life that we did for our patients in the clinical trial or with the 28-day free trial. So I think... Neil Kumar: Maybe one final thing, Biren. Obviously, our LDN is completely differently designed than theirs and the entirety of the patient and physician experience is pretty different, not just because of some of the programs that we rolled out. So I'd encourage you to go and hear from patients and physicians, just how quickly are they receiving therapy in the context of our drug and how easy is it for them to continue on the drug product. regardless of the programs that are put in place, just the way we've designed this with a high-touch, white glove rare disease approach has meaningful advantages. Operator: Our next question comes from the line of Mani Foroohar with Leerink. Unknown Analyst: You have Ryan on for Mani. Congrats on the quarter. Maybe just could you talk about how you see the size of the OUS opportunity relative to that of the U.S. and ATTR, particularly as those launches start to ramp up? Neil Kumar: Yes, I can take that, and Matt, you can elaborate on it. I think the OUS opportunity has been quite interesting, obviously, as I mentioned in my outset comments, Bayer has done a very, very nice job in the countries that they've commercialized in to date. What makes it interesting, obviously, is ultimately, in some ways, they're able to fast forward to what I think the ultimate answer is in the United States, which is accurate advertising, obviously, issuing some of the incomplete statements around near complete stabilization that our competitors have. And I think secondly, a lot of the experts are able to look at the totality of the data and understand from a health economic real-world evidence standpoint, which therapy should be used frontline and which therapies should not. So I think we're relatively advantaged in that marketplace in terms of share. Where we're not advantaged, obviously, from an overall market standing standpoint is the price point. The price point is going to come down as we move from some of the countries we're already commercializing in countries like the U.K. And so ultimately, I expect to see the ratio of sales between Europe and the U.S. to be pretty similar to what we see in TAF. But again, I think Bayer has done a really nice job of accelerating some of those market dynamics in Europe in ways that we simply can't do given the current status of the playing field in the United States. Operator: Our next question will come from the line of Josh Schimmer with Cantor. Joshua Schimmer: Quite the weak for you guys. Have you had any discussions with payers regarding what might happen to formulary positioning of Attruby when TAF generics do enter? And separately, have you discussed with payers the use of combination therapy as it stands now? I'm a little surprised they're on board with it given the cost and the lack of data. Neil Kumar: So no, to the first question, we've been focused on Attruby solely and really getting it as on equal playing field with TAF and to date. I think on the second, we also haven't had conversations around combo therapy. I think we've had conversations with physicians around it, and I expect that payers will do more to control this category as we move forward. But right now, the mechanisms of B versus D and things of that nature make it, I think, a slow-moving train in that respect. It will ultimately happen, but I don't think it happens in the next 6 to 12 months. Matthew Outten: Yes. And I think we just really remain -- as Neil said earlier, we just remain focused on making sure Attruby is available to any patient who wants it. And as long as that is out there, we feel really good about our data, and we can fight it out in the doctor's office versus trying to fight it out in the payer space. Operator: Our next question comes from the line of Cory Kasimov with Evercore. Cory Kasimov: So your prepared comments noted the impressive growth, both in unique prescribers as well as prescriptions per prescriber. Can you talk about what's primarily driving that momentum, whether it's the greater penetration within existing accounts, expansion into new centers or improved conversion rate? Neil Kumar: Yes, I won't break it down quantitatively, but it's actually kind of equivalently both. And I would say one interesting piece is a lot of these new prescribing HCPs are effectively capitated parts of a center of excellence or the referrers into centers of excellence. One thing we were finding early on were some centers of excellence where our share might not have been as high. When we went and spoke to the physicians, they would say, yes, we believe that Attruby is a stellar drug, and we would like 30%, 40% of our patients to be on it. But if a patient comes in already on TAF, we're not going to change them. And so it behooved us to get out to those practices that we weren't covering. We have a smaller sales force than does Pfizer or Alnylam. But we've started to do that, and we've employed some IT techniques as well so that we get sort of alerts anytime someone is prescribing. And we're just getting to know some of those what people call ancillary or satellite practices better. So both things have been driving the scripts. Operator: Our next question comes from the line of Anupam Rama with JPMorgan. Anupam Rama: Just 2 quick ones for me. Just I'm wondering what the marketing message is around -- to docs around patients with mixed phenotype for Attruby. And then actually a higher-level strategic question. After the first couple of days of this week, like the path to top line diversification here is pretty clear, and I know we're waiting on infigratinib. But Neil, maybe following on some of your prepared comments, how should we be thinking about investments into kind of the early-stage and mid-stage pipeline? And when do we learn more about those programs and catalyst time lines and things like that? Neil Kumar: Yes. Thanks for those questions. On mixed pheno, honestly, we don't see -- I mean, this is more of a question that we get from investors than we do from physicians or in the field. For the most part, the patients that we serve have to do with cardiomyopathy, and that's the salient set of characteristics that drive their mortality and morbidity. In and around mixed phenotype, the best thing we can do is continue to hammer our variant message. Obviously, variants are where you get mixed phenotype, you don't get mixed phenotype within the context of the wild-type population. And as we suggested in our prepared comments, we continue to, I think, publish the most impressive data within the context of the variant population, that 59% hazard reduction, I think it's the largest point estimate and the only statistically significant point estimate in that space. Again, stay tuned for some of the things that we're going to be publishing at AHA, but I think it builds on that within the variant population. And all of that connects back to the fact that biochemically, we have a differentiated binding profile for those variants. And I think if you look at the JACC paper associated with the AMVUTTRA trial, you can see that they didn't quite do in variants what people suspected they might in terms of a differentiated efficacy. So we continue to believe we have the most efficacious profile within that space and the V122Is are going to be the most common of the variant population that we see. I would say, finally, just on that variant population, it's just another good example of how we're trying to really view Attruby as a unique property and look to see whether or not we can in presymptomatic patients, intervene early so that they can stave off future heart failure altogether, and that's that ACT-EARLY trial. So I think we're doing quite a bit to address that marketplace. Secondly, just in and around top line diversification, I'd say, first and foremost, we're laser-focused on nailing the launch of the 2, hopefully, the third product to come here in early next year. Three launches for any company, I think, is a big thing to do, and it's going to be big for BridgeBio here for us to stick it. Obviously, it's going to be a couple of first-in-class launches and then another competitive launch. So a couple of different characteristics as we build out our commercial muscle. That being said, this is maybe -- save 8, 9 years ago, the most interesting time to do research and early development in rare and orphan disease, almost no competition, to be honest. And the scientific tailwinds are, I mean, nothing short of mesmerizing. You're reading the journals, Anup, I know, just as I am, but the pan-genome, long-read sequencing, what we're learning about non-coding regulatory regimes, all of that is really suggesting a wide variety of new targets we can go after to help patients in profound ways. And that's why the buildup of some 17 assets in the context of Gondola. And I would say, again, as Bridge shareholders, there's 0 information asymmetry between those 2 entities and a high degree of ownership that Bridge has into Gondola. So at the right time, again, when shareholders and the Board and management are aligned that we have capacity, I think we have growth that we can access from there. And by the way, we're looking across the industry right now. There are several other entities out there that may be deprioritizing rare and orphan disease because investors don't view it as high a priority as I&I or certain areas of oncology. And where we do view it as attractive, we can be a reasonable partner all the way through the life cycle of early research all the way to commercial. So the aperture is pretty broad right now. I'd say the competitive intensity is pretty low. So at the right time, I think we'll be able to return to growth in terms of programmatic growth in the right way. But we got to stick the landing on these launches first. Operator: Our next question will come from the line of Andrew Tsai with Jefferies. Lin Tsai: Congrats on the strong execution. My question is around -- back to Attruby. You're accumulating a lot of real-world evidence suggesting better efficacy over tafamidis. That's great. But I'm curious what your guys' thoughts are in doing a head-to-head study to fully prove that out. I'd also imagine that could help mitigate against any risk of a future tafamidis generic, so kill 2 birds with one stone. Neil Kumar: Yes. I mean, I think great question. Thanks for the question. A couple of comments there. Number one is, I think we've been doing a lot of this sort of head-to-head competitive. We are a better stabilizer across the 4 in vitro assays across every single serum TTR measurement that we've seen across NT-proBNP, across whatever point estimates we can look at where you can line things up, it appears that we are a better stabilizer and that better stabilization leads to better outcomes. I'm not so sure that, that is going to continue to resonate with the clinical community versus kind of the area that we're set off now in, which is describing what's unique about our property given the fact that it is an ever more potent stabilizer. So some of the things you're seeing in terms of publications in the variant population in terms of AFib and the cardiac arrhythmic population, some of the things that we'll be looking at in terms of the cardiorenal axis, those are all completely unique. And I think aspects of the compound that are -- they won't easily be matched by the other therapies in this space. So I would say that's one thing. The second thing is the double-blind head-to-head is something that I still think about a lot, but the double-blind head-to-head that's doable for us at this size is a double-blind head-to-head against serum TTR, which we obviously win, and I'm not so sure it drives any market share or a double-blind head-to-head against NT-proBNP, which I also think we will pretty obviously win. But also, I'm not sure it would drive a ton of market share. And the reason I say that is I think people are really -- they think about different patient populations, what patients want. When we talk to our customers, they're not looking for a double-blind head-to-head to say this drug product is definitively the one I'm going to use in every case. And a good sort of eye-opener on that was the JACC paper that AMVUTTRA published. But if you really cared about double-blind head-to-head, you look at the vu arm and you look at the TAF arm, both monotherapy, and you see that they deliver the exact same results. And by the way, acoramidis beat TAF everywhere we looked in our trial. And that was actually baselines were very, very close in the HELIOS-B trial. So if people really, really cared about these like head-to-head type studies, they would look at that data and scratch their heads and be like, what's going on? Obviously, what's going on is that the PK of knockdown starts in the 60s and ultimately gets to the 80s only after 22 months for AMVUTTRA, and that's probably why it doesn't outperform TAF in that HELIOS-B characterization. So I'm not so sure that spending $300 million or whatever, $400 million and et cetera, et cetera, to run a double-blind head-to-head would do much here. And then finally, you and Josh both referred to TAF generic, and I'm not going to make any comments on timing there, although I have a view that I think most of you know. But even if it does go generic and Pfizer determines that they don't want to defend this property in any way, shape or form, I mean, look, we're basically a generic in terms of pricing as compared to AMVUTTRA. I don't see payers stepping in and saying, you can't use this drug or you have to step through this drug, certainly in the United States anytime soon and especially given the differentiated data that we have already presented. And the final point on that is I really do think real-world evidence is -- I mean, you talk to the FDA, you talk to a lot of clinicians these days. They're very keen on understanding how these drugs perform in the real world. And so I think a lot of differential work that we do will be associated with real-world evidence. And I think a lot of that will actually be pretty impactful for the prescribing universe we look at, maybe even more impactful than a very specific clinical trial. So those would be my comments on that. Operator: Our next question will come from the line of Danielle Brill with Truist. Danielle Brill Bongero: And since we're going to expect a positive Phase III, maybe I'll pivot and ask a question on infigratinib. Neil, what are the most important differentiating elements for infigratinib in achondroplasia in view? Is it more about efficacy or route of administration? And can you talk about safety and how important that is? What level of hyperphosphatemia is acceptable in your view? Neil Kumar: Yes. Great question. One thing I've learned from Matt and others now having a commercial franchise is that the customer is always right, and you can never really tell why a customer may prefer one drug product versus the next. That's what makes market share relatively hard to project in the absence of head-to-head -- double-blind head head-to-head trials. The good news here is that we're more efficacious, we're safer and we're more convenient with an oral ROA. So whatever your preference in terms of why you're determining which drug to use, infigratinib is going to win. As a scientist, obviously, down deep, I would prefer the most efficacious product win. And I think we've already demonstrated and we'll continue to demonstrate superior efficacy. Why? Because, as you know, this targets this well-described condition at its source, addressing both of the salient effector signaling pathways. It's superior in every preclinical model. It's superior in animal models. It's superior in Phase II data. It's the only product that's provided proportionality impact. And I think over the longer term, we'll provide a broader diaspora of impact for this community that we serve as compared to the CMP products. So I don't think there's any aspect. We obviously don't see the hypotensive results, and I don't think we're going to have as robust a Section 4 as the CNP products have in terms of safety. I think this will be a safer product. Grade 1 hyperphosph, I think it could be 15%, 20% could be -- like people do not care about that as much as the Street cares about that. Again, what they do care about are things that ultimately would be things associated with hypergrowth, spinal situations, things of that nature. And we see no evidence of any safety issues in and around that. So I think the drug will be more efficacious, safer and ultimately more convenient. And I think that will open up the market, which obviously is starting to stagnate a bit given the current profile of the drugs. I think we can continue to address unmet need. And I think however you want to slice and dice it, we'll have a great offering for the community here. Operator: Our next question will come from the line of Jason Zemansky with Bank of America. Jason Zemansky: On all the progress. Maybe to connect some of the dots from your previous comments here, I mean, in thinking about infigratinib as a growth driver, I mean, you've guided to opportunities of $2 billion each in achondroplasia and hypochondroplasia. Can you walk us through some of your key assumptions here given the competitive landscape? Is this more that you're capturing share from a competitor? Are you growing the market appreciably? I mean what gives you confidence in both of these numbers? Neil Kumar: Yes. I mean I think, first, we do tend to estimate these numbers starting with the treatable population and making assumptions in and around there. Certainly, in the context of an already launched product, we're going to be looking to both take share as well as to grow the market. I think it's important to realize that there are substantial parts of the unmet need here that aren't addressed by once-daily injectables. We've heard that when we go out into the community. We've heard that in talking to physicians. I think it's a bit unfair to look at the market sometimes with a suboptimal therapy and conclude that, that is the market size. I play in EPP as well, and I wouldn't look at CLINUVEL's product and determine that EPP is an extraordinarily small market. So I think the unmet need is relatively well described in terms of numbers of patients. And it's not in the context of this condition that we don't know how to find the patients and that they are not already well identified. So I think it just comes down to offering them something that they want, and I think this could be that from our research. Operator: Our next question will come from the line of Paul Choi with Goldman Sachs. Kyuwon Choi: Congrats on the string of good news this week. I also want to stay on the topic of achondroplasia, Neil. And as you know, the current approved product is 3/4 of the sales are coming from ex-U.S. with only 1/4 of the sales from the U.S. market. And so could you maybe comment on what could be market expanding for the U.S. market in particular here? How large -- you talked a little bit about the TAM, but just sort of what are the key factors from market expansion happening here? And then in terms of the product, just sort of how much you think incremental the hypochondroplasia opportunity could be to your infigratinib sales? Neil Kumar: Yes. Thanks, Paul. I'm a bit remiss to comment on the commercial tactics or performance of one of our competitors. There's nothing in and around the unmet need, the physician community or the community affected with achondroplasia that's starkly different between Europe and the United States. And so I think, again, a solid therapy could work well in both markets. And I'd expect actually the normal ratio that you see with drug products to be true in the context of this category as well. So why the launch hasn't gone that well for our competitor in this case? I mean, number one, I go back to injectables. We do hear a lot of needle phobia, particularly in the U.S. markets, which we know better since we're a U.S.-based company. So we talk a lot to folks here, and I think there is a reasonable amount of needle phobia. I can't comment on the way that they've targeted and their commercial sales force, but recall that in Europe, generally, you have centers of excellence that have taken on a higher percentage of the population in any given geography. So it's easier to identify precisely who to call on and when to call on them. So I think the dynamic could -- that could lead to a slower ramp for them here in the United States. But again, I just go back to the treatable population, both for hypochon and achon. And I think that even under conservative assumptions, this is a large unmet need that then translates into a reasonably large TAM. Operator: Our next question will come from the line of Martin Auster with Raymond James. Unknown Analyst: This is Thomas on for Marty. I want to add our congrats on all the news this week. I actually want to circle back on the CALIBRATE data this morning. Could you provide any more detail on the serious treatment-related adverse events observed with encaleret in periods 2 and 3? And anything to say about those on standard of care in period 1 as well would be helpful. Neil Kumar: Yes. So this is really a -- I mean, it sounds serious, serious related TEAE is a serious thing. But in the context of these drugs, it's all hypercalcemia. So basically driving calcium levels in the serum higher than what you had intended. And in the case of the standard of care, it actually was quite high. Again, like standard of care is taking calcium. So this does happen. You titrate it. In this case, the patient had to go in to the hospital and received IV fluid until that blood calcium was decreased. Actually, in the case of encaleret, it was much milder. It was a very mild digression into hypercalcemia, but that patient had some altered mental status and UTI, obviously, nothing to do with the drug at all. So that's what took them into the hospital and they were dosed down, no discontinuation. So again, I think the most important part here is that the drug is probably -- we saw less discontinuations on drug than we did on standard of care. So the drug is safer than standard of care and obviously driving 76% normalization versus less than 5% that's profound. And I think in large part because you've got an allosteric mechanism that very precisely targets the calcium sensing receptor. So very much like Attruby or acoramidis, when you've got something like that, you've got a small molecule with a very specific target, not likely to have a significant side effect profile. Operator: Our final question will come from the line of Trevor Allred with Oppenheimer. Trevor Allred: Congrats on the quarter. I wanted to follow up again on encaleret as well. Can you give us -- can you talk a little bit more about what gives you confidence in encaleret as a $1 billion-plus product? And can you talk a little bit about your expectations for the potential upside opportunity in chronic hypopara? Neil Kumar: Yes, sure. I guess I don't necessarily like to talk about things in terms of the dollar amount, but I'm curious what's your price assumption? We haven't determined the price, but what will be your pricing assumption on encaleret for ADH1? Trevor Allred: I think I'm in the range of $200,000. Neil Kumar: So less than Yorvipath? Trevor Allred: Yes. Neil Kumar: Why? Trevor Allred: I mean it could be more than that... Neil Kumar: That's like 8x or 10x the population. Anyway, that's an extremely low number. I've not heard that. But let's just put it in a normal rare disease context of whatever, $300,000, $400,000, $500,000 in that range, you're talking about a couple of thousand to 3,000 patients on drug to achieve the touch of numbers that you put forth. And we always start with prevalence here. Obviously, the prevalence is much higher than the identified population. But the thing -- and I think in large part due to like what happened over the last 5 or 6 years, where everyone claimed every large -- every genetic disease was a super large disease. Recall, this is not SCITX1 OR GACI or one of these conditions that severely limits lifespan. For those conditions, I think over -- you take the number and then people apply the genzyme factor and say, it's going to be 4x larger, not usually because those children aren't necessarily having children. Most of those mutations are germline. Those are very, very constrained populations. Same would be true, for instance, for Canavan disease, which is another disease we work on. It's not going to be a large population. It just -- it makes no epidemiologic sense that it would be. In this case, totally different, a large population, mostly germline that even when untreated, allows people to go on and have children. Obviously, 2, 3, 4 different studies that we and others have conducted suggesting a prevalence of up to 12,000 in the U.S. That's not going to be off by an order of magnitude, 1,000 people on the ICD-10 code, 3,500 patients already identified. And an easy way to identify them in terms of going and looking at the nonsurgical hypopara community and doing genetic testing is another tailwind that I believe allows us to believe that we could get a few thousand people on this drug. I think importantly, the guidelines are already in place to suggest that for nonsurgical hypopara patients, they get genetic testing. And so it's up to us to really drive that into the community. I'm not going to suggest that it's going to be a quick launch because we have to educate. We have to ultimately get physicians to work into their work protocol, the fact that they're genetic testing and even in the cases, as you know, of BRCA or targeted cancer therapy, sometimes you can see as little as 40% testing in the community. So it's up to us to ensure that we work with the right providers and make sure that people are looking for ADH1 where they ought to be looking. But I would say the final thing that gives me hope that we can start to identify these patients and get them on product is just how good the drug is. When you're talking about less than 5% response on standard of care, you're talking about a lifelong set of symptoms like fatigue, brain fog, seizures. I mean this is -- I know a lot of people in the rare disease world think if people aren't passing away from the disease, it's not severe. This is like way more severe than having acne every day or losing your hair, both of which I have. But I mean, this is really life-destroying. And so 76% response rate, full normalization, getting close to a therapeutic cure for a majority of patients. That's the type of thing that I think will drive physician excitement and patient excitement and will allow us to find a reasonable fraction of these patients. Operator: And that will conclude our question-and-answer session. I'll hand the call back to Chinmay for closing comments. Chinmay Shukla: Thank you, everyone, for joining us for our Q3 2025 earnings call. We appreciate the interest and look forward to updating you on the progress of our company in 3 months. Thank you. Operator: This will conclude today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Coronado Global Resources Third Quarter Investor Call. [Operator Instructions] There will be a discussion of results from the CEO and CFO, followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Chantelle Essa, Vice President, Investor Relations. Please go ahead. Chantelle Essa: Thank you, Rocco, and all for joining Coronado's September call for 2025. Today, we released our quarterly report to the ASX and filed with the SEC. Our quarterly financials are expected to be released to the market on the 11th of November with our Form 10-Q. Today, I am joined by: our CEO, Douglas Thompson; and Chief Financial Officer, Barrie Van Der Merwe. Within our report, you will see our notice regarding forward-looking statements and reconciliations of certain non-U.S. GAAP financial measures. We also remind everyone that Coronado quotes all numbers in U.S. dollars and metric tonnes unless otherwise stated. I'll now hand over the call to Douglas. Douglas Thompson: Thank you, Chantelle, and thank you, everybody, for making the time to be with us again today. Overall, we continue to see positive progress in our plan, and this quarter's results reflects this. After ending June on a 6-year record for ROM production, we concluded September quarter with growth across all production and sales metrics. Production was the highest on record since quarter 1, 2021. Our investments are delivering. Quarter-on-quarter, we saw a 3.2 million tonne annualized step change in production. We expect to deliver material volume increases again in quarter 4 as our high-return Mammoth and Buchanan growth projects are both progressing towards steady state. Both are currently between 60% and 70% of expected run rate. We expect the annualized incremental tonnage of approximately 3 million tonnes per annum to show in '26 and beyond as these projects ramp up to full capacity. Our cost reductions also continue to progress to plan. Our costs have reduced again this quarter and continue to be below guidance levels. Despite the step change in performance, earnings remain challenged in the sustained low coal price environment. We announced a transaction with Stanwell, a strategic partnership that is intended to add near-term liquidity to our business via a new structured ABL over the 2026 rebate and offer ongoing financial support when liquidity is below $250 million, effectively resetting legacy agreements. Turning to metrics. The key metrics achieved in quarter 3 were: the group ROM production, 7.4 million tonnes, an increase of 6%; saleable production, 4.5 million tonnes, an increase of 21%; and sales volumes 4 million tonnes, an increase of 9%. And at a group level, our total recordable injury rate was 1.16, well below industry averages in both Australia and the United States. If I turn to our group performance, as I've said, the quarter delivered good production results, a 21% improvement on saleable production, a full year record of 4.5 million tonnes. And we built an additional circa 600,000 tonnes of product inventory again this quarter, which will support our improved production volumes in quarter 4. The inventory -- the total inventory at the end of the quarter was approximately 1.7 million tonnes. Despite the material improvements in operations, sales volumes are marginally below what we had planned for the quarter. A few short-term equipment outages combined with port and vessel delays in both Australia and the United States in the last week of the quarter, which put pressure on our planned railing and shipping. With the major expansion projects now complete, quarter 3 proves the value and future potential created by these business improvements. Turning to the Australian business unit. We improved in all areas. We increased ROM production, saleable production and sales volumes in the quarter. And the third continuous miner commenced production in late June as planned, and Mammoth now has 3 production panels in operation. Mammoth is expected to deliver planned run rates in quarter 4 with up to an additional 2 million tonnes of incremental production delivered per annum from '26 and beyond. Cost reductions continue to be realized with average mining cost per tonne sold in quarter 3, below both forecast and budget and well below the low end of our guidance levels. Moving on to the U.S. business unit. Operations focused on firstly commissioning and then ramping up with the Buchanan expansion project after first production from the new shaft, which was also delivered to plan in late quarter 2. The U.S. delivered higher ROM production and saleable production with sales volumes slightly below what we had planned due to a delayed vessel in the last week in September. Together with the dual longwalls at Buchanan, we expect the U.S. business unit to exceed 7 million tonnes per annum in the future with the additional capacity that has now been created via the projects. It's great to see the successful volume uplift post the completion of these 2 major projects and look forward to enjoying further incremental tonnages that these projects will deliver for the business into the future. With that, I'll hand over to Barrie who will talk to our financial position for the quarter. Barend Van Der Merwe: Thank you, Douglas, and good morning, everyone. Our continuous improvement in production and unit costs continued in the September quarter. The unit cost was under the bottom end of guidance at $89.70 per tonne and September month's was $80.10 per tonne with 2.7 million tonnes of ROM mined. As I outlined in the half 1 results presentation, the correlation between strong ROM performance and unit costs is well established. Cash capital expenditure reduced as expected and was $59 million for the quarter. We were paying some of the last bills associated with expansions. This is $16 million less than the June quarter, and we expect the cash CapEx to be at the bottom end of guidance of $230 million for the full year. We can therefore deduce that the last quarter spend will be about $20 million. Despite the rail availability and shipping delays that Douglas spoke about that we had at the end of September, we still had a 560,000 tonne build of product inventory that will be sold in the December quarter, it will contribute towards cash. But despite all of that, our sales volumes were up 329,000 tonnes, which is 9% higher than the June quarter. And a lot of this was driven by strong thermal coal production at Curragh. EBITDA before the Stanwell rebate that's currently deferred was $4 million positive. The working capital outflows that I outlined in the first half results presentation did materialize as we expected. The outflow of this working capital and the cash we spent to increase the product inventory was offset by other working capital levers that we pulled at the end of September. We didn't use the ABL as was envisaged when we did the half 1 results presentation. The other cash outflows that we had in the quarter was the capital expenditure of $59 million. We paid interest of $26 million, which was mainly the coupon on the high-yield notes that's payable in quarter 1 and quarter 3. And then we had to cash back a further $29 million in guarantees mainly relating to the U.S. workers' compensation obligations. As I said earlier, next quarter, we expect CapEx to be $20 million plus/minus. The cash backing of $29 million will not recur and interest will be less. It will be around $15 million for the quarter. Our quarter end cash balance was $172 million and $16 million was available on the ABL facility with Oaktree, and that ABL was still only $75 million drawn as was the case at the end of the June quarter. The earnings adversely impacted by a PLV index that remained flat on the first half of the year, the buildup of the product inventory as well as lower realized prices due to the sales mix, we did get a preemptive covenant waiver from Oaktree during September. And at the end of September, this facility remains available, subject to the borrowing base. The recently announced transaction with Stanwell addresses both Coronado's near- and longer-term funding needs in a depressed metallurgical coal market. Subject to completion of due diligence, long-form agreements and approvals, financial close is expected towards the end of November with the proposed ABL facility, adding approximately $165 million to available liquidity after settling the outstanding amount to Oaktree. The waiver of the remaining rebate under the amended coal supply agreement, the ACSA and the prepayment mechanism when Coronado's liquidity is under $250 million could add up to a further $250 million in cash flow over the course of FY '26 at current market prices, noting that the amount does depend on Stanwell's nominated tonnages. It's also important to understand under this arrangement, Cash flows occur monthly and not upfront at the start of the year. As our recently commissioned expansion projects ramp up and reach nameplate performance, this will further contribute to lower unit cost and improved cash generation. Our arrangement with Stanwell provides immediate liquidity relief and longer-term support, we will continue to evaluate other available options to ensure that the capital structure improves and adequate liquidity is available in the current low price environment. Coronado will release its quarterly financial statements for the September quarter to the market on 11 November, 2025. And I'll hand you back to Douglas now for a market overview and the conclusion. Thank you. Douglas Thompson: Thanks, Barrie. As Barrie mentioned that coal prices remained stable throughout the September quarter. Look at the Australian benchmark, it averaged $184 a tonne, which is unchanged from the June quarter. And the U.S. East Coast benchmark averaged $175 a tonne, which is slightly lower than the previous quarter at $178 a tonne. If we look ahead to the September quarter, we expect prices to remain supportive for a few key factors: Firstly, in India, the post-monsoon restocking cycle is expected to lift demand. And this may be further supported by the Indian government's recent antidumping investigation into coke imports, which could benefit domestic coke producers. Secondly, the CFR China price continues to hold a premium over seaborne benchmarks, and this reflects ongoing domestic supply constraint, which will also lift import demand. And third, we're seeing continued rationalization of high-cost supply as producers respond to margin pressures and elevated royalty burdens in Australia. While the macroeconomic uncertainties and cautious buyer sentiment may keep short-term pricing contained, the market remains very volatile to geopolitical developments, trade policy changes and weather-related disruptions. Many of these could have upward potential on price volatility in the months to come. We remain on the view that the long-term outlook for seaborne coal is very positive. The results delivered by our team in Q3 speak volumes. Operational performance has lifted, now reaching historic highs. There is solid execution across our investments, which is supporting this uplift. The market remains subdued and it has been so for a prolonged period of time, presenting a challenge to producers and is impacting the industry as a whole. With that, I'll hand over to Rocco, and we'll take your questions. Operator: [Operator Instructions] And our first question today comes from Glyn Lawcock with Barrenjoey. Glyn Lawcock: Just firstly, a lot of moving parts in the quarter. Could you maybe just sort of simplify a little bit? I mean, if it hadn't been for the one-offs and the build in product at the port, do you think the business is free cash flow positive in the quarter? And what about now, if we look at the current settings you'd expect for Q4, is the business now on a stable free cash flow position? Barend Van Der Merwe: Yes. So Glyn, it's a good one to expand a bit. So I'll step through the quarter first, and then I'll talk about kind of how it moves going forward. So if you look at how the bank balance moved for the quarter, it was down $90 million. Now within that, we paid $60 million of CapEx, $30 million of interest and we cash back $30 million of guarantees. So if I look at quarter 4, we'll spend about $20 million on CapEx, $15 million on interest and we won't have the cash backing. So if everything else stays the same, and that's before working capital, I'd say, underlying, you're probably burning $40 million to $50 million in the fourth quarter. Then you need to overlay the expansions keep on going up. So you need to take a view on what cash that will give you. And then you need to get into working capital. Now for quarter 3, the quarter was really working capital neutral. So whatever levers we pulled at the end of Q3 -- end of Q2, we pulled again at the end of Q3. So that's a wash. As we move into quarter 4, obviously, at some point, we need to reinvest in the working capital, and it's mainly debtors and accounts payable because inventory are dealt with separately. And so you'll have to invest some in working capital. I think the way to think about that is you'll fund that from the new ABL that comes into the business. And then also the inventory you'll sell down, the product inventory you have. So what I'm saying is if you look at that whole part of kind of the working capital, there's a working capital outflow net coming and you'll fund it with the ABL that comes in. Underlying business, I'd say like-for-like basis, should current prices burn about $40 million to $50 million, but offset by whatever the expansions gives you in addition. And then the last point, which was very topical in Queensland over the last couple of days, you need to go and look at the BOM website and kind of take a view on kind of the weather at Curragh. A bit of a long one, but I hope the long one simplified it a bit into buckets. Glyn Lawcock: Yes. And obviously, pricing is $10 a tonne better off today versus the Q3 at the moment? Barend Van Der Merwe: Correct. Douglas Thompson: Exactly. Barend Van Der Merwe: Correct. Glyn Lawcock: And then maybe just on pricing, just U.S. domestic price settlement for -- coming up for next year. Any update on that you can provide? Douglas Thompson: Glyn, at this stage, no negotiations are ongoing within the market. So unfortunately not. Operator: [Operator Instructions] That concludes the question -- I do apologize. It looks like we have a follow-up from Glyn at Barrenjoey. Glyn Lawcock: Sorry, Douglas. I think there's quite a lot of competing calls on -- in a particular line, it's just probably holding and keeping everyone at bay. Just given the 0.5 million tonne inventory build and the issues at ports, do you think you can catch that up and ship the increased production you hope to deliver in Q4 as well? Or is there going to be potential for bottlenecks and et cetera? Just thinking of your allocations. Douglas Thompson: Yes. We've got capacity. Our team is looking at the moment to what we can pull forward before the end of the year with shipping and particularly its rail access. In the U.S., as you know, they don't have at port storage capacity. So what you put in a train set needs to be offloaded directly into a ship. There's very little latent time. So that is rail part constraint. - The other one is in -- Australia is getting rail lines. Now, part of it we did in Q3 was we caught up on some of the thermal contract deliveries through to Stanwell. So that was also what pushed some of the thermal up in the quarter. In quarter 4, the power station will obviously see additional burn and they're calling on, can we give them some additional. And that will free up lines domestically that won't have to go to port. So the team are working through those catch-up options. And what I'm trying to signal is there's a number of them open to us that we're working through at the moment. Operator: And our next question today comes from Daniel Roden at Jefferies. Daniel Roden: I just wondered, you mentioned that you're 65% of capacity at Mammoth. I was wondering if you could just give us a bit more color on, I guess, how that's going? And I guess from today, you've got your 3 continuous miners on site. They've been there for a couple of months now. What -- like how do you see the -- like what are the stage gates and what are the, I guess, outstanding elements in terms of that ramp-up profile to get from 65% up to that 100% capacity of the 2 million tonne per annum? And probably just [indiscernible] and noting that in previous, I guess, commentary around that it was a 1.5 million to 2 million tonne per annum kind of project, and you seem to have settled around that 2 (sic) [ 2 million tonne ]. Is there any risk that we kind of fall back into that range? Or are you still pretty confident at that 2 million tonne per annum? Douglas Thompson: It's a great question. The milestones, let me just talk through the technical milestones first. We -- as we built the mine out from December, you start with one, obviously continuous miner fleet. You have to then build the mine, build the infrastructure around it, create the space for a production panel, and that includes conveyor belt systems so that when you're in the production panel and your shuttle cars are running back, they can load on to your spine conveyor and bring it out to surface. So that's why we've been staging them one after the other as we've built that infrastructure, and that's why it's important to call out. We now have 3 production panels. We've built out all of that infrastructure. The other was getting the permanent ventilation system designed and built because you need to underground once again build the crossovers as the mine gets expanded that you then flow of fresh air in and exhaust air out through the system, and that needs infrastructure built underground. So that's been going for the first 6 months. And that is now all established and put in place for the mine and the 3 panels operational. Into how is the ramp-up going at 60%, as you design a mine of this nature, you do all your geological research and guess and that, most of that is playing out how we modeled and expected. But until you really cut the first coal, the teams then learn how they're going. And one of the things that we have learned in the ramp-up is the bolter configuration that we bought, so what puts in the support infrastructure as you're building the underground mine, we've had to do some modifications. Those modifications are occurring now. It's proven successful. So we're getting the [ bolt ] rate we need, and that will continue into quarter 4, and we will put that behind us. So we've changed some of the way in which method of work gets done to cope with the geology and the bolting rate ramp-up profile. Yet the last part of your question, the 2 million tonnes, it will be situational. The system we've built and technically is performing when it gets to full run rate that it can do that 2 million tonnes per annum to hit the upper end of what we've got planning, and that's what we'll plan from '26 and beyond. But we may flex it as we go into different areas within the mine. And I don't want to get over my skis here. But as we consider Mammoth 2 into the future, there might be an opportunity that we build out a fourth panel and during late '26, maybe early '27, we'll bring another production unit online at Mammoth that will give us some more upside capacity out of the mine, that will benefit for when Mammoth 2 gets built out into the future. I hope that gives you some color on our plan. Daniel Roden: That's very clear. And maybe I think I've done my own checks and I'm pretty comfortable with it, but maybe just an opportunity to talk through there's some media around the Buchanan issues and maybe just a little bit of light around how that's going, what impacts you're seeing? And do you expect some impacts to continue into Q4? Douglas Thompson: Yes. Look, thank you for the question. I'll say this, we don't get drawn into speculation. We don't comment on stuff. We've got a plan. We just stick to what we're doing, and we try and keep the market informed as we appropriately have. People are going to speculate. We've had to come out and clarify what is factually incorrect. Recently, a comment was also made that we went to Oaktree and try to get more funding and we were declined. Well, that's factually incorrect as well. So unfortunately, the journalistic effort that goes into these articles are limited, and I'll have a kick at this. When you write about an underground mine and put a picture of an open cut mine adjacent to it, you really don't know what you're talking about. But stepping off that, what occurred at Buchanan is we had a fall of ground in our North mine at an intersection well away from the working areas, so that had nothing to do with the coal seam. But it impacted our conveyor system from that longwall coming out. We worked with [indiscernible] mines to put a plan in place to secure that. We put it back into production. The impact of that was not material because we had the second longwall that was still in operations at that time. So that we felt we needed to come out and clarify when that incorrect article was written. The speculation more recently around the Stanwell deal, I write off to -- look, we've put out a limited release on what the detail is around the deal. We've done that because we're still respectfully working through with Stanwell on the deal. And I'll say we've got a very detailed term sheet agreed with them. But we're working through due diligence. And once that long forms are done, then we'll announce it to the market. Now Q10 will obviously give a lot more color on it. But speculation will stay speculation, and I won't talk about it much more than that because that's a credence it deserves. Daniel Roden: Yes, very clear. And maybe just last one for me, and maybe I can return to the queue if there's some other questions. But I guess your sales mix for the quarter and I guess, an outlook as well, but you made comments about, I guess, the market is not paying for premium quality met coal. Is there anything on that front you can do, I guess, on a forward-looking basis to change and I guess, optimize your product mix for sale to the market that sits outside of your contractual obligations to, I guess, help improve earnings on a quarterly basis into '26. Is that -- like how much flexibility would you have around doing things like that? Douglas Thompson: Daniel, we do have some flexibility and your mind has gone to all the key doors that you got to step through. One is we are contracted and people really want our product. We haven't had any of our clients not take product that they want or that is under contract. So then it's what can you build within your flex of what's not contracted. Part of what we did in the quarter in the product mix, and you would have seen it in the results, we did do more thermal, and that was a catch-up with Stanwell. The power demand in Australia now is heading towards its peak at the end of the year as it heats up and everybody fires up air conditioners. There's a couple of other power stations within the state that are having difficulty getting to their performance rates. So our clients asked us if we can provide more and we could. And as you say, on some of those premium products, the pricing isn't just there. It's a very narrow trade there that sets the rest of the market and secondary products -- so we've been looking at, well, where can we get a yield advantage as we produce the product and pricing. And that's why you've seen a little bit more of thermal going into the export market through this quarter as well, where our sales and marketing have been able to pick up some good pricing through that, and we've got a yield advantage as well. So we're pushing all of the avenues we can, but we are fairly well contracted. So the options we have are limited in the near term what we can do in that regard, but we've done what we could. Daniel Roden: Yes. Understood. And maybe I might just slip one more in and then I'll hand it over. But you've mentioned in this release and previously that you're exploring potential avenues around minority asset sales or other transactions in the business. Have you got any updates or commentary that you can provide any color around any of that? Or I imagine pretty limited, but yes, I appreciate the comment. Douglas Thompson: Daniel, we've been applying our minds to all options that create value for shareholders as we're going through this difficult period of time, and we've been finishing off these major projects that create long-term value in the assets, which included, as we said, we've had a number of approaches because people can see we've got great assets. They're now well derisked because of the capital projects are now tucked away and starting to deliver and they're fully permitted [indiscernible] long life and they products that clearly meet long-term market need. But nothing out of that has come to the point that it is a firm offer on that it's people putting overtures to us. And then on the minority sale process, that's still a process that's a [indiscernible] I won't comment on that at this stage, but strong interest in it. Daniel Roden: Yes, your U.S. assets given the current geopolitical environment would be interest. But appreciate that color and commentary. Operator: And our next question comes from Chen Jiang with Bank of America. Chen Jiang: My question is in regards to your -- the financial support transaction announced on Tuesday. So just to clarify, the previous liability or the agreement signed with Stanwell in June, there's no change for that one from pricing or repayment perspective. But the new one you are going to sign with Stanwell is just an extension of the legacy contract from 2037 to 2043. But how should I think about the thermal coal price because the legacy contract, thermal coal price, I think, from memory, was like $30, whereas your new contract signed with them in June was, I think, market price. So that's my first question. And also second question is the prepayment from Stanwell because I guess, the waiver -- sorry, the rebate for '26 will be waived. So there's no more Stanwell rebate, I guess, going forward. That contract is going to expire end of FY '26 anyway. So how should I think about the prepayment Stanwell, especially from P&L and accounting perspective? Barend Van Der Merwe: Jim, the -- so on the first part of your question, just confirming that the rebate waiver, that's a full waiver and the rebate ends, as you say. So come the end of this year, the rebate ends. For the next quarter, we still have the deferral of the rebate that we agreed earlier this year. So that's the position on the rebate. In terms of the coal sales agreement called the ACSA, the amended coal sales agreement that expires it's at the end of '26, early 2027, that position is unchanged, but the rebate goes away now. I think the dollar per tonne that you've got associated with that is quite accurate. So you can continue looking at that. Now I'll just talk about that immediate prepayment part first. So what the agreement with Stanwell says is they will give us a prepayment up to a maximum of the discount that they would have received. So the way to think about it for next year is if our liquidity is under $250 million, maximum prepayment that we can get is the coal market price, less port and rail, obviously, next year, less the $30 that you quoted times the tonnes they nominate. So -- and I actually -- when you go and look at my script, I gave you an estimate there of what I think it will be. So it can probably be up to $150 million. While we say up to $150 million, we'll give more detail on this in the 10-Q and beyond that. But as the liquidity kind of goes down from $250 million, that prepayment increases. The closer you get to $250 million, the less the prepayment is. So that's the concept. So that's the first part, how the rebate works, how the coal sales agreement work. Then on the extension of the NCSA, the new coal supply agreement from 2037 to 2043 -- the easiest way to look at that is earlier this week, we put out some material we used to cleanse our noteholders from a transaction we were discussing with them. On Page 17 of that release, there's a slide that's got quite a bit of detail about how the existing -- the pre-existing Stanwell arrangement works, and there's some data there that will give you what you need. The principle is that NCSA can be extended, the term stays the same as what it is today. So there's not changes to the price of that contract. The only change is that Stanwell can nominate a wider range of tonnes instead of 1.8 million to 2.2 million, they can now nominate 1.2 million to 2.2 million tonnes. But that doesn't only apply to the 2037 portion. That applies from 2027. So that applies across the 15 years of the life of that agreement. The last thing I'll just say for clarity for everyone is the transaction we did earlier this year with Stanwell, the $150 million, which was a rebate deferral for nine months and a prepayment, 800,000 tonnes associated with that transaction, nothing changes. That stays unchanged as is. Chen Jiang: Also another follow-up. I mean, in a few years' time, say, when you -- when the industry turn around and your profitability improve in a few years' time, what is the change for your dividend policy over the long term? Because from Tuesday's release, it says the dividend payment, there are some certain requirements, I guess, you have to pay Stanwell. Am I correct? Whenever -- if you want to declare dividend to shareholders, then you probably need some sort of consent from Stanwell or any payment to Stanwell. I'm just wondering what kind of payment you need to pay Stanwell if you want to declare a dividend? Douglas Thompson: So when you look at the announcement we made earlier this week, in the last paragraph, we've provided some details on that. So we don't need any consent from anyone to declare dividends. Dividends is at the discretion of the Board, and the Board will take into account business circumstances, et cetera, market outlook, all of those things when they declare a dividend. I think importantly, the Board will take into account the capital structure of the company as well. Even as we stand today, there's quite a bit of gearing in the company. And so that is something we look at seriously before declaring dividends. And you can imagine that -- and it's only fair that Stanwell would want some level of deleveraging to occur when we declare a dividend. So the arrangement with them isn't saying you can't declare a dividend, and I can't say that. We can still make distributions as we get profitable. But this prepayment bucket that we've agreed with Stanwell that gets us through the tough times, that has to be repaid as we declare dividends. It's similar to the arrangement we've got with our noteholders where if we declare dividends, we need to make a prepayment offer to them as well, whether they accept it or not is up to them, but they had a similar requirement. So it's no different for Stanwell. If in future, we do owe them contingent monies in that concession bucket, then if we declare a dividend, they need to get an equal amount or potentially a higher amount depending on how much money sits in that contingent repayment bucket. Principally the more they help us, the more we need to repay them first in relation to dividends. So they need to get more money than shareholders if we owe them a lot. Again, those details as to where is the threshold, what's the amount, that will be forthcoming in due course. Operator: And our next question comes from Rob Stein at Macquarie. Robert Stein: This might have been gone over, but I just wanted to double check. In terms of waste levels and stripping and the like, what were the activity levels like in the quarter versus the quarter prior? Just noting the average mining cost per tonne sold. Just trying to comp that to sort of understand the quarter-on-quarter difference and what's happening at the waste level to sort of understand the unit cost mining movements. Douglas Thompson: Yes. So Rob, the balance of things is the volumes getting moved is improving. So we haven't cut back on waste movement to -- and I think what you're trying to ask is have we high graded the mines over the period of time. And no, we haven't. And the benefit that we're drawing upon is our four dragline fleets that we've been talking about that was part of the $100-odd million that we took out of Curragh through the course of last year, we pivoted away from truck and shovel as we got our mine set up to be a more productive dragline mine. That has continued on. I think we spoke about it in the last quarter where one of our draglines is now performing at world benchmark levels and the other three are getting there as we build the capacity around them. So the draglines are now getting to position that they are moving a lion's share of it. And I say draglines, dragline systems, so that includes dozer push and cast blast, which is the cheapest form of moving waste and then truck and excavate. So we rationalized truck and excavate at the mine, and we've kept that installed capacity through our own fleets and contractor fleets at the same level through quarter 2 into quarter 3. So that volume is sitting consistent with our mine plans and liberation of coal. Robert Stein: Okay. And so even considering the fact that Mammoth coming up, 65% of capacity, hopefully pushing up in the subsequent quarters, that additional volume, one, helps dilute your costs, I would assume. And two, also replaces probably a little bit of high-cost marginal tonnes with low-cost underground tonnes. Is that the way to sort of think about your unit cost evolution going forward? Douglas Thompson: That's correct. I think the strategic drive when we stepped back and looked at the business a couple of years ago and put this plan in place that I keep on referring to was one is Buchanan needed to be debottlenecked. We had two longwalls that had great capacity, but we had one shaft to get it to the surface. So we identified the engineering fix there was using an old vent shaft and doing it as cost effectively as we could, which the team has now delivered that we debottleneck those and we can get the incremental tonne out of the U.S. In Australia we were ideally looking for an incremental tonne that could dilute higher costs as stripping ratios go up, but then also derisk because our two open cuts in Australia are in reasonably close proximity. So weather systems that moved over the mine generally impacted our cash flow from both mines. And we could see that there is real potential for underground mines. So we went about designing it, and that's what we've managed to get approved and built. So it offers not only what you've described as cheaper tonnes and over the life of the asset as stripping ratios get higher as they naturally will build the capacity within our business to bring underground mining skill from the U.S. to Australia as we're building out and then we'll be able to exploit the resource for longer through that skill set, building Mammoth 1, 2 and 3 and twinkle in my eyes potentially another underground in the future in the south, but it's twinkle in the eye down the line. And that will ensure that stripping ratio doesn't beat out the economics. So yes, dilutive there. And then the other is it derisks, it gives you a better quality margin because in periods of wet weather when ultimately you're running Mammoth 1 and 2, you've got a sufficient capacity coming out of the underground that you don't have to build large working capital in wrong production to ride through weather system impact, you can produce it as you go. And that will help improve margin of the mine and quality of margin over time. So that's really been the key drivers behind building this underground mine, as you've described. In time, it offers other options that you reconsider how you run the underground versus open cuts and change your production profiles and the like, and that will be largely market-driven. Robert Stein: That's really good color. So if I take a step back, and I mean, there's been a lot of noise, I guess, around the finance structure of the company, how you -- which is primarily driven by Curragh. But if I just take it back to an engineering stance or an operational stance, how happy are you with the current status of, one, your growth plans; two, your productivity agenda; and three, metrics such as safety and operational health. Has that been altered in this recent volatile period in the sense that prices haven't really gone your way, but similarly, the finance structure of the company hasn't been stable? Douglas Thompson: This is public, so my team will call the proverbial out of me, if I'm not honest. I'm never happy in that regard because I can always see more on an engineering solution to be more productive. And frankly, that's your best cost out. You can save yourself to a point that you really need to drive productivity in the business to get cost out and find engineered solution or technical advancements. So we will always drive. I'm very pleased with what the team has delivered with our longwall [indiscernible] dragline systems that now we're operating those draglines in a far better performance. There's more that we can get out of them. We're designing as you build strike length out in the north that we can run a figure of eight type engineered solution on two of our draglines at least, which will drive cost down further. The team have restructured the dumping strategy. So our haulage profiles are a lot shorter than what they used to be historically. So we've taken a lot of cost out of the business by dropping haul strings on trucking lengths. And we're really simplifying the mining systems at Curragh, where it was a very complicated, convoluted far too many hands on the pillars of the two mines because we had contractors that were highly integrated into it. Diligently through what we had the One Curragh plan, took control back of the mine plans across the mines, now broken it down into three mines with appropriate leadership teams and technical skill to run those three mines, and I include the underground mine in that. So they're a lot more focused, simpler to operate, and we're really driving the mines down to unit cost focus. So I'm pleased where we're going, but I know there's more within the system and the plan that we can squeeze out of it over time. And Mammoth is a large contributor to liberating those options that we have. Canada has always been a very reliable, good performer. You just look at our ability to move a longwall compared to industry's performance. With what we've done there with the optionality of the old shaft and the new shaft and capacity between the two longwalls, it will help us to be able to run the mine a lot more efficiently. And in both systems in Australia and in the United States, we've effectively taken the engineering because your question is engineering linked and pulled the bottleneck out from underground or in the operating systems and put them at both prep plants. And managing a bottleneck in the processing plants is generally the easiest to solve technically because it's on surface and you can drive improvements in those and both of them are now, the system proving the bottleneck is there. So I think once we solve those, there's further upside that can come out of the system. So I'm quite excited out of it. The last place to pivot to you was your question around, well, under this pressurized period, have we pivoted away from our plan in regards to safety and the way in which we're executing. The underlying plan, the discipline has been held to very tightly because we all invested really strongly after COVID. When coal prices are really high, we told our Board allow us to execute this plan and catch up on old stripping ratio deficits to set the draglines up. So we haven't compromised on that. Have we pulled sensible levers in stripping ratio and truck and shovel in the short term for coal pricing? Yes, we have, but we haven't damaged the underlying quite intentionally. And then from a safety perspective, I really take my hat off to the team that have driven safety. The culture in the business in the U.S. has always been very strong from a safety perspective. And at Curragh, we went on the last four years of really simplifying safety, driving a solid safety culture. And you can look at the graphs that we put out, the lag indicators are performing really well, well below industry average, but I'm excited on the lead indicators on how the team are applying themselves to learn from incidents, set new systems in place and engineering controls. And the one that stands out the strongest is the dragline systems that now we design a system that's first to industry that has proximity detection of people and equipment coming to draglines. And our team designed that with partnership and have gifted it to industry and I think have offered the industry a change. The regulators and alike have looked at it and we've received due recognition from industry and then also industry awards from it. So the mine has really come up a curve of maturity around safety as well. So I can confidently say no compromise, but you can never take your eye off the ball with regard to safety. You have to stay on it constantly. Operator: That concludes the question-and-answer section of today's call. I'll now hand back over to Douglas for any closing remarks. Douglas Thompson: Thanks, Rocco. Thank you to everybody for making the time for joining us today. If you've got any further questions, please don't hesitate. Chantelle and the team will respond to those as she always does, very punctually. Thank you. Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
Operator: Good afternoon. My name is Stephanie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the KLA Corporation September Quarter 2025 Post-Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics for KLA. Please go ahead. Kevin Kessel: Welcome to the September 2025 quarterly earnings call. I'm joined by our CEO, Rick Wallace, and our CFO, Bren Higgins. We will discuss today's results as well as our December quarter outlook, which was released after the market close and is available on our website along with the supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. All full year references made refer to calendar years. The earnings materials contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events, presentations, corporate governance information and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Bren with financial highlights and our outlook. Before I turn the call over to Rick, I wanted to provide a save the date for our Investor Day. It has been rescheduled for Thursday, March 12, 2026, in New York. Now over to Rick. Richard Wallace: Thank you, Kevin. To kick off our call today, I'll cover a few highlights from our quarter that showcase how the company is benefiting from the growing relevance of process control and AI infrastructure investment and our momentum in advanced packaging. KLA delivered strong results across the board in the September quarter with revenue of $3.21 billion and non-GAAP diluted EPS of $8.81. GAAP diluted EPS was $8.47. This performance demonstrates how KLA's process control leadership has expanded beyond leading-edge R&D investment to address all growth markets in WFE, including high-bandwidth memory and advanced packaging. Accelerating investment in scaling AI infrastructure is fueling technology development investment across the leading edge, driving more designs, increased complexity, shorter product cycles and higher-value wafers. Alongside this growth, the industry is also seeing rising demand for advanced packaging. In this complex environment of rapid AI technology development, process control accelerates time to results by resolving process integration challenges during the fab ramp-up phase to optimize time to market for a diverse mix of semiconductor designs. KLA's leading-edge customers are also challenged to optimize yield and limit process variability in high-volume production environment, resulting in increasing process control intensity. In this increasingly complex semiconductor device technology landscape, we're seeing rapid growth in demand for KLA's advanced packaging portfolio, which has emerged as a meaningful market for the company as heterogeneous device integration has become more complex. KLA's advanced packaging systems revenue continues to gain momentum through a combination of intensity gains and market share improvements across our portfolio. For calendar year 2025, we expect advanced packaging related revenue to exceed $925 million, up approximately 70% year-over-year. KLA's service business also continues to deliver strong growth. Services grew to $745 million in the September quarter, up 6% sequentially and 16% year-over-year. Consistency and resiliency are hallmarks of the KLA's service business. Finally, the September quarter was strong on both cash flow and capital returns front. Strong cash flow in the quarter was at a record of $1.066 billion. Over the past 12 months, free cash flow was $3.9 billion, with a free cash flow margin of 31%. Total capital return in the September quarter was $799 million, comprised of $545 million in share repurchases and $254 million in dividends. Total capital return over the past 12 months was $3.09 billion. In summary, KLA's business is both enabled and benefits from today's technology inflections and the growth drivers related to AI as well as from growth in advanced packaging. KLA's business has gone from being primarily indexed to leading-edge R&D investments in foundry/logic customers to now addressing all growth markets in WFE, including memory, advanced packaging and leading edge and legacy node logic. As we look ahead over the next several years, the long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relevant performance opportunity for KLA. In this dynamic growth environment, our consistent execution reflects the resilience of the KLA operating model, the strength of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights. Bren Higgins: Thanks, Rick. KLA's September quarter results reflect double-digit year-over-year growth and improved profitability. Revenue was $3.21 billion, above the guidance midpoint of $3.15 billion. Non-GAAP diluted EPS was $8.81 and GAAP diluted EPS was $8.47, each above the midpoint of the respective guidance ranges. Gross margin was 62.5%, 50 basis points above the midpoint of guidance, driven by a stronger product mix and manufacturing efficiencies. Non-GAAP operating expenses were $618 million. Operating expenses included $360 million in R&D and $258 million in SG&A. Non-GAAP operating margin was 43.2%. Other income and expense net was a $28 million expense with upside to guidance principally driven by a favorable mark-to-market adjustment on a strategic supplier investment. The quarterly effective tax rate was 14.1%. Net income was $1.17 billion. GAAP net income was $1.12 billion. Cash flow from operations was $1.16 billion, and free cash flow was $1.07 billion. The breakdown of revenue by reportable and end markets and major products and regions can be found within the shareholder letter and slides. Moving on to the balance sheet. We ended the quarter with $4.7 billion in total cash, cash equivalents and marketable securities and $5.9 billion in debt. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. A cornerstone of KLA's business is consistent strong free cash flow generation, driven by one of the best operating models in the industry and a predictable, highly differentiated service business. This helps drive a comprehensive capital return strategy that includes consistent dividend growth and increase in share repurchases over the long term. Our actions this year emphasize our commitment to capital returns and our confidence in KLA's long-term shareholder value accretion. On April 30, 2025, we announced the 16th consecutive annual dividend increase, up 12% to $1.90 per share per quarter or an annualized dividend of $7.60 per share. Along with this action, we also announced a $5 billion share repurchase authorization. Turning to the outlook. It continues to be driven by increasing investment in leading-edge logic, HBM and advanced packaging. Growth of advanced packaging supporting heterogeneous chip integration has led to a new meaningful served market for KLA. What was once a rounding error in wafer fab equipment is now, according to KLA internal estimates, an approximately $11 billion market, growing faster than core WFE. This is particularly true as chip density shrink and the processing required for package increase risk for our customers. For KLA, this creates a new served available market that will augment the company's revenue growth over the next several years. The market and technology road map for leading-edge WFE supporting high-performance compute is driving relative inflections for process control. This opportunity, coupled with the evolving complexity of advanced packaging, supports an even broader market opportunity for KLA. As we approach the close of calendar 2025, we continue to expect mid- to high single-digit growth in WFE, modestly improved from our previous outlook discussed last quarter. Growth in 2025 is being driven principally by increasing investment in both leading-edge foundry/logic and memory to support growing AI and premium mobile demand, partially offset by lower demand from domestic China. Given KLA's business momentum, expanding market share opportunities and higher process control intensity at the leading edge across all segments, we remain on track to outperform the WFE market in 2025. The advanced packaging market is also expected to grow more than 20% compared to last year. Finally, customer discussions have become more constructive on expectations for calendar year 2026 to be a growth year for the industry with a broader spending profile than 2025 for both WFE and advanced packaging. While it is still too early to provide precise calendar 2026 revenue guidance, our view today is that first half revenue levels will be roughly flat to modestly up compared to the second half of calendar 2025, with accelerating growth in the second half of the calendar year. This outlook is inclusive of the revenue impact related to additional market access loss related to certain customers in China resulting from extended export controls from the U.S. government. We estimate the revenue impact on the December quarter and calendar 2026 to be approximately $300 million to $350 million for KLA. For calendar 2026, this impact is spread roughly evenly across the first and second half of the calendar year. KLA's unique product portfolio differentiation and value proposition are focused on enabling technology transitions, accelerating process node capacity ramps and ensuring yield entitlement and high-volume production. The market environment and the complexity of our customers' technology road maps are compelling and bring challenges and opportunities for KLA to continue its relative performance. In this industry environment, KLA remains focused on supporting customers, investing for the future, executing product road maps and driving productivity across the enterprise. KLA's December quarter guidance is as follows: Total revenue is expected to be $3.225 billion, plus or minus $150 million. Foundry/logic revenue from semiconductor customers is forecasted to be approximately 59% and memory is expected to be approximately 41% of Semi Process Control systems revenue to semiconductor customers. Within DRAM -- excuse me, within memory, DRAM is expected to be about 78% and NAND, the remaining 22%. As always, these business mix approximations pertain solely to our semiconductor customers and do not fully reflect our total Semiconductor Process Control systems revenue. Gross margin is forecasted to be 62%, plus or minus 1 percentage point, based on relatively consistent factory output versus the September quarter and product mix revenue expectations. Operating expenses are forecasted to be approximately $635 million in the December quarter as we continue to make product development and infrastructure investments to support expected revenue growth. Given our expectations for company growth and product development road map requirements, we will maintain our operating expense trajectory. Our business model is designed to deliver 40% to 50% incremental non-GAAP operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of approximately $32 million expense for the December quarter. The effective tax rate assumption has risen slightly to 14%, reflecting the impact of recent global tax changes. For the December quarter, GAAP diluted EPS is expected to be $8.46, plus or minus $0.78, and non-GAAP diluted EPS of $8.70, plus or minus $0.78. EPS guidance is based on a fully diluted share count of approximately 132 million shares. In conclusion, our near-term revenue guidance shows modest growth and is consistent with our views from the start of the year of relative top line stability. We expect to meaningfully outperform the mid- to high single-digit WFE growth rate in 2025, driven by rising process control intensity, inclusive of the significant growth of the advanced packaging market. KLA focuses on delivering a differentiated product portfolio that addresses customers' technology road map requirements, which are driving our longer-term relevance and growth expectations. KLA's business is well positioned for today's technology inflections and growth drivers. We are encouraged by the customer engagement that informs our business forecast. Long-term secular trends driving semiconductor industry demand and investments in WFE and advanced packaging are compelling and represent a relative performance opportunity for KLA over the next several years. In addition, the growing investment in custom silicon, particularly among hyperscalers developing their own custom chips, has led to a proliferation of unique device designs and increased demand on our customers to deliver performance, volume and time to market. As design complexity and diversity grow, so does the need for advanced process control. As a result, KLA has seen growth in process control intensity as each new chip design requires rigorous inspection, metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Let's begin Q&A. Richard Wallace: Thanks, Bren. Operator can you... Bren Higgins: Sorry, I was just going to pass it over to you to start the process. Thank you. Operator: [Operator Instructions] And we'll take our first question from Harlan Sur with JPMorgan. Harlan Sur: Congratulations on the strong quarterly execution. Last quarter, you had this early view given your lead times, customer discussions on calendar '26 being a growth year. You reiterated that today, but talked about being more constructive on that growth rate. So it was another day -- with another 90 days of visibility given that leading-edge design starts are continuing to expand at a rapid pace, the recent and significant AI data center infrastructure announcements, has the magnitude on the WFE growth outlook improved? Or is it more just confidence level on the growth that you were thinking about 90 days ago? And you mentioned the broader spending profile on WFE and advanced packaging. Can you guys just elaborate on that a little bit? Bren Higgins: Sure, Harlan. I'll start. Thank you for the comments. I don't know if it's really a strengthening outlook as much as it's just we're getting closer to it. Customers, particularly our long-standing customers and their lead time expectations, we're starting to get more constructive about exact timing. We're encouraged by what we're seeing certainly for KLA at the leading-edge with a broadening level of investment. We think that's going to be positive on leading-edge foundry/logic. DRAM is also constructive. And with the investments in HBM, that's been very process control intensive. And so that's been a really good sign as well. Flash market is, I think, continues to grow. The rest of the legacy market, I'm not so sure there's much growth there, and I think we'll have a little bit of a correction in China. Obviously, we're feeling the effects of some new control that's impacting our view into next year. But we were expecting China to normalize anyway. So I think as we look at it all, we're pretty constructive on WFE growth, rising and capital intense or process control intensity. And packaging has a lot of momentum, both in terms of intensity. So we feel pretty good about what's in front of us, and we'll have a lot more to say specifically about growth in the industry and our expectations for KLA beyond what we said in the comments. We'll have a lot more to say when we report for December and January. Richard Wallace: One thing, Harlan, just to add to Bren's comment. What we do see and kind of feel is body language from customers are pretty strong in terms of wanting to make sure they're securing slots. So we're having kind of conversations with people not wanting us to get away from them because they're worried that they may not be able to achieve their objectives if they don't line us up. And I suspect that's across the other equipment guys, too. Harlan Sur: Got it. And I appreciate that. And then specifically on advanced foundry and logic, in addition to the increased process control intensity, as the industry moves from 2-nanometer to less than 2-nanometer, right? There's an added dynamic, I feel like where your foundry customers are standing up fabs in totally new geographies, right? So more uncertainty on yield ramps, systematic defects, like different type of workforce, right? And then on the advanced logic side, the large guy here is more focused on building out a world-class foundry business, which means way more focus on yield and manufacturability versus their historical trend. Wondering if these additional dynamics are driving the potential for incremental process control spend as you look into next year? Richard Wallace: Well, sorry, I do think that there -- as the customers are dealing with the new design rules and some of them, especially that are maybe back in it, if you will, trying to do leading edge, they're benchmarking what do they need for process control, and we're seeing kind of very constructive conversations around that. So I think that's true. I think it's kind of filling out the rest of the players, if you will, in terms of how they're thinking about investment and process control. So yes, I'd say that, that strengthens, if there are more players doing more leading edge in more locations, that's going to be accretive to overall intensity. Bren Higgins: Yes. One of the themes over the last couple of years has obviously been significant investment augmented by China and legacy design rules. But when you think about leading edge, leading edge was tremendously efficient, right, with most of the investment being really driven by one of our customers. I think as you start to see a broadening out there, it creates more opportunities for leading-edge engagement, process control intensity as a lot of the strategic investment happens to support what is an accelerating growth opportunity for our customers. So I think we're encouraged by that profile as we move forward. Operator: We'll take our next question from Vivek Arya with Bank of America. Vivek Arya: On the foundry/logic side, you are, I think, guiding it to decline to 59% from 74% of sales, I believe, so a decline of over $300 million sequentially. I'm curious what's causing this drop? How much of this is the China restriction? How much of this is the China impact? And is this kind of just a 1 quarter lumpiness? Or is there more to read into it as we look into the first half of next year? Bren Higgins: Yes. So Vivek, for our semiconductor customers on the mix side, on the leading edge, it's upticking in the December quarter, but it's being offset by a reduction in China. China was elevated in September at 39%. And just for a reference point, our expectations for the total year for China, and I have been pretty consistent with this for the last 9 months or so as we thought it would be somewhere in 30% plus or minus range. So it was a little bit elevated versus the annual trend. So as China comes down, part of that is you have leading edge going up. And then you also have memory as -- and particularly in DRAM, we see that upticking in the December quarter. So there's some moving parts there but that's what's happening. As it relates to the recent export controls, I would say the impact on the December quarter is fairly immaterial to the company overall and that we were able to move slots around. We've got certain products where customers get in the queue, and so we can pull business forward. It's a lot of different customers. But obviously, over the long term, that's lost business. And so as we said in the prepared remarks, we think that's about $300 million to $350 million between now and the end of '26. So hopefully, that gives you a little color on the moving parts. Operator: Our next question will come from C.J Muse with Cantor Fitzgerald. Christopher Muse: I guess I was hoping to focus on gross margins. You guided down 50 bps. I'm assuming that's just product mix. I would love to hear your thoughts there. And then, Bren, you're highlighting, again, the 40% to 50% incremental operating margins. If we are in a world where WFE continues to grow kind of in a double-digit world over the next couple of years, should we be thinking that you're at the higher end of that range given kind of greater contribution from the higher-margin silicon? Bren Higgins: Yes, C.J., on the guide down, you're right, it's about 50 bps, and it's mostly related to just mix adjustments in the quarter. As I've said over the last couple of quarters, there is a tariff impact that we're dealing with, which is more or less consistent quarter-to-quarter. That's roughly 50 to 100 basis points of the impact. So yes, we're guiding 62% and output is relatively consistent. So it's really a mix issue. In terms of how we were thinking about running the company and over the long run, certainly our 40% to 50% long-standing incremental operating margin target does drive how we size the company. Gross margin obviously is a factor in that. And so we have to think about where gross margins are trending as we consider that. We outperformed that target pretty significantly as revenue has grown in the mid-teens. I'd call it above trend line growth in 2025. So as we move forward, I think the easiest way to think about that is if you're more or less a trend line, we're more or less in the middle of the target range. And if growth levels are above that high single-digit trend line, we should outperform it. If growth level is below, we'll probably underperform the target a bit. But that's how we're going to size the company over time, and our performance over longer periods of time is obviously very consistent with that. Operator: We'll move next to Joe Quatrochi with Wells Fargo. Joseph Quatrochi: I appreciate the qualification or quantification on the advanced packaging WFE. I was curious just to think about just the advanced packaging process control intensity. I think just based on some of the things you put out there or talked about in the past, it's like high teens. Is that the right way to think about it? And then how do you think about where that goes over time? Bren Higgins: No, I wouldn't say it's that high. I think if you look at KLA's share of WFE, I mean, one of the interesting things, as I said in the prepared remarks, is it wasn't much of a factor for us in our business. And you don't have to go back more than just a few years, and the percent per KLA was in the 1% range. And now if you take our views on 2025 at $11 billion or so, we're approaching 6%. So we've seen an escalation here in terms of intensity as the requirements have changed fundamentally related to the high-performance computing on the logic side and the memory side. So we think that, that continues over time. I don't think you're going to see that kind of -- that slope of growth. But we do expect that as density shrink and processes become more complex, that it does play to the need for more advanced systems. And of course, we have our front-end portfolio that we can use to address this interesting market. So I think it's a new SAM for KLA. We have a lot of great drivers within WFE that we think are driving process control and KLA share of the market, and we're augmenting that growth with this growth that we expect to see in advanced packaging that likely over time grows modestly faster than WFE. So it's a really encouraging opportunity. And I think as we start to move up the value chain in terms of new capability required, and I think it creates an opportunity for us to drive something in the neighborhood or better than general corporate averages on margins. Operator: We'll take our next question from Tom O'Malley with Barclays. Thomas O'Malley: Nice results. I wanted to ask a bigger one that people have been trying to the earnings period here. I understand that it wasn't in the preamble. But Lam went out and talked about $100 billion of AI spend is roughly equivalent to $8 billion in WFE or additional spend. And they talked about most of that being related to memory. Do you agree with that statement? Or do you have any qualification for how you would look at that ratio? Richard Wallace: I think in general, this is Rick. I think in general, if you think about what goes into a data center, the percent that is memory, the percent that is GPUs or logic and then the rest, you're probably at about -- if you take $100 billion, then you could say that half of that would be semiconductor related and the intensity on that kind of gets you to that run rate. But I don't think it's necessarily 50-50 in terms of memory and in terms of the logic side. So our view is you're pretty close. And then we would -- as we were just talking out in packaging, so we get closer to $10 billion on the $100 billion because of the investment that's not just semiconductor but packaging. And we think our opportunity in that is pretty good because, again, those are all the high challenging process control elements, kind of everything that we've been talking about larger die, more valuable die, more HBM is really challenging from a process control, getting more so and then packaging. So we're in general agreement, we would add back in the packaging part, and we think our participation in there is above our average intensity for the rest of the industry. Operator: We'll take our next question from Timothy Arcuri with UBS. Timothy Arcuri: Bren, Rick was talking about customers starting to want to get in line for. So I would imagine bookings were pretty good. So can you give us RPO? I know it was $7.9 billion last quarter. Where did it end this quarter? Bren Higgins: Tim, we don't -- we changed our disclosures, so we're not disclosing that anymore. But what I will tell you is that if you look at our lead times, our expectations for our lead times, as I said last quarter and they've been converging after a couple of years of elevated backlog related to a number of greenfield projects that have now shipped through. And if you look at the composition of our business going forward, really tied to our -- some of our long-standing customers that tend to operate in 6-month kind of lead time windows. Our lead times have converged and I think, normalized between 7 and 9 months. Now if you go back and look at 2020, 2021, even go back historically for KLA, it used to be about 6 months. Now our customer base is broader today. And I think there's a combination of a little bit more new fab activity that will push those up. But the context that we provided in terms of our expectations for growth next year and how that plays through in terms of KLA's first half and second half is supported by an order flow that is consistent with those lead times. So I think that, that is how you should think about it in the 10-K each year, we will provide our -- as we have historically, we'll provide our backlog. And so that will give you an anchor point in terms of backlog on an ongoing basis. But 7 to 9 months, and it looks pretty consistent in that range as we go forward. Timothy Arcuri: I guess you did give it there last quarter, Bren, is that like new this quarter? Bren Higgins: Yes. We changed our disclosure, Tim, and we highlighted that we were going to make that change back in the March quarter earnings results. We said when we started the new fiscal year beginning July 1 that, that disclosure would change. There were a number of reasons for that. The primary reason being the inconsistency in how that disclosure was being interpreted and reported across our industry. So we have aligned more closely with the disclosure that our peers have, and that's what we're going to do here going forward. Timothy Arcuri: Okay. Then I guess as my second question. So you said last quarter, Bren, that China was going to be for you, down 10% to 15% this year. But even to get down 10%, I have to have China down like $250 million Q-on-Q in December. Is that the right number that China is going to be back to like 30%, 31% in December? Bren Higgins: Yes. In the December quarter, I think China will be high 20s. So yes, you're in the range. We'll see how the quarter finishes up. But I think in the high 20s is how I'm modeling and then it translates into maybe 30%, maybe 31%, very consistent with the way I've talked about it all year long. And the other thing I'd say is, as you look at 2026, we think it's probably it comes down into the mid-20s. And obviously, some of that is driven by the export restriction, but also some general normalization that we've been talking about that would be coming. So we think it's likely to settle somewhere in the mid-20s as we look at 2026, at least how we see it today. Operator: We'll take our next question from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: Bren, I have a 2-part question. One is in the past, you've spoken about 2-nanometer gate-all-around is 100 basis points improvement in share for you versus 3-nanometer gate-all-around. A, is that true, still the case? And number 2 is, I think if I remember right, the advanced packaging share is about 50%. If I do the math on that $11 billion and $925 million, it seems like advanced packaging, WFE intensity is around mid-teens. Do you think advanced back-end inspect -- process control intensity is getting higher than front end? Or do you think it's still below? Bren Higgins: I think it's still below. I mean just the first part of your question, we haven't -- look N2 has been a more intensive process control intensive node. Obviously, you have an architecture change that's quite significant. The other issue is that as you think about larger die that creates opportunities for more process control intensity. So -- and I think the litho scaling and litho layers with larger die designs or HPC designs tends to drive more litho layers in the process as well. So when we look at N2 overall versus N3, we do see an improvement in overall intensity. There is a share element to it, too. We're encouraged by some of the share movement we're seeing. But overall, that's how we see it. As it relates to advanced packaging, I think our logic share is higher than our memory share. We'll have more to say in terms of articulating how this market breaks up. But as I look at KLA share of the advanced packaging market, we're about 6%. And if you look at KLA's share of the PC market, it's closer to 8%. So the process control intensity is not as high and sampling rates are pretty elevated these days. And we'll see over time if that changes. Certainly, the need for more capability will be a requirement here moving forward. But we'll see how those things trade off over time as our customers move forward. Sreekrishnan Sankarnarayanan: Then I think you also mentioned that some of your front-end tools are being used for back end. I'm just kind of curious, especially on the macro inspection or inspection side, is that an overkill? Like even ASML spoke about introducing new i-line tool for advanced packaging. Would you consider introducing new tools for back-end packaging? Or are you going to use the front-end tool? Richard Wallace: No, I mean -- it's funny you say that because that was our initial reaction when the customers want us to put our front-end portfolio in the back end, we said, are you sure? Because the cost of that are you sure you need it? And they were quite certain that they needed it because of the -- just think about the cost of yield failure in packaging and how much it's worth to ensure that that's not happening. So that's what we've really seen in terms of that. They're not -- it's obviously not our most advanced tools, but it is. They are systems that we use in the front end and that would have been considered the most advanced tools if you go back a few years. So absolutely, they're the ones that pulled us in. I mean we did not come to them. It was almost the other way. They said, we want you to provide this capability. So when we think about the road map for packaging, and remember what we're talking about advanced packaging, we're, in many ways, early innings because there's still other technology inflections that are going to go into HBM over the next several years as the rest of the market catches up with these advanced packages. So we're really talking about a pretty small percentage of available packages being inspected at this high level. Now over time, people will learn more about it, and they won't inspect at the frequency. So that's why we see the growth will continue, but it won't continue at the rate we've had for the last couple of years, but it should outpace overall WFE growth. And our share position is great for 2 reasons. One is that we've got this capability. But beyond that, unlike our competitors that are coming from the back end, we have road maps and a lot of customers have tremendous value in that road map ability. Operator: And we'll take our next question from Charles Shi with Needham. Yu Shi: I noticed that based on your Q4 guidance, the KLA process control revenue in DRAM is probably going to grow 50%-ish year-on-year. I don't think the overall DRAM WFE is growing that much. And I think historically, people don't really think the KLA as a DRAM house, more of a leading-edge logic house. So wonder what's happening this year? Why is it growing this much faster than DRAM WFE? Specifically, is it kind of tied to the EUV insertion DRAM? And how do we think about 2026 DRAM side of the process control growth? Richard Wallace: Yes. It's an interesting observation. For those of us who have been around for a long time, we remember when DRAM was actually leading technologically and was the biggest market for inspection for KLA. And what happened was, for many years, there was a bit of a holiday in terms of design rules in DRAM and the need for process control and what the use case was. But when you get into what's going on with -- especially around the high-bandwidth memory and the challenges that people have relative to the new design rules, we're actually seeing, in some cases, higher sensitivity requirements, in some cases, for DRAM on some layers than we're even seeing in logic. So we've had a bit of a reversal of some -- in some areas, and we've seen big adoption of early on as people are debugging these processes and then realizing they don't have a lot of process margin. So that's the other thing is there -- and when they start EUV, then they're using our systems for print check. So you see a lot of applications happening, and that's really what's been driving this increase. We thought it would happen. Years ago, we were hoping it would happen sooner, but it's definitely we're seeing leadership in some areas in terms of the need for process control as they retool these DRAM facilities to deal with some of the new market requirements. Bren Higgins: Look, the introduction of EUV was certainly a factor in terms of process control intensity. We think overall, probably changed it about 1 point. But then if you look at the requirements for HBM, we think it's increased it another point or so. Rick talked about a lot of the issues. The other thing you have to keep in mind is that the reliability requirements in a stack of DRAM chips in an HBM device, the device is only as good as the weakest DRAM. And so the performance requirements, the process variability that the customer can accept, you can't bin these devices that go into an HBM integration. So there are a number of things that are happening there that are positive for process control intensity. Yu Shi: Got it. Maybe a quick follow-up. I think going back a couple of years ago, you guys talked about the delayed pellicleization, what that means to the KLA mask inspection portfolio. I thought the thesis was that without pellicle, your existing mask inspection plus print check probably works the best. But with the pellicle, maybe actinic works better. I know this has been an ongoing discussion for many years, but we are hearing recent -- some recent reporting out of Taiwan, talking about your leading foundry customers potentially converting a fab into a pellicle fab and wonder what that means to your overall strategy on mask inspection. Mind if you shed some light on that? Richard Wallace: Yes. So rather than going to specific strategies, specific customers have, I can tell you we're in conversations with all the leading mask manufacturers in the fabs in terms of what is their strategy relative to reticle qualification and requalification because it's a critical area. And although we don't have all the pieces in that, we have many of the pieces because there's many points along the way, whether you're calling the reticles in the fab, you're doing recall or you're doing verification and print check. So we're heavily involved in those conversations. As you know, the challenges with pellicleization and the trade-off is throughput. And so that's always the issue of using pellicles as you give up some of the light performance. There have been advancements and we're well positioned to support those. But when we talk about a record year in our reticle business, obviously, people are buying with the future in mind as they do that, and we continue to see growth going forward. We feel pretty good about our ability to participate as we go forward in terms of any scenario that plays out. But I can tell you, we're very heavily involved in customers with those conversations. Operator: We'll take our next question from Chris Caso with Wolfe Research. Christopher Caso: I guess the first question is regarding the commentary on '26. Could you give a little more detail about what you're seeing first half versus second half? I assume that it's a combination of advanced logic and DRAM driving that second half? And is that just simply a function of where your lead times are that some of the improvements we've seen over the past couple of months are just now flowing through in orders given where the lead times are right now? Bren Higgins: Yes. As we said in the prepared remarks, I think the first half is maybe flat to slightly up. We'll see as we move forward where that ends up. But at least that's how it looks today. And I think you'll see growth accelerate more into the second half. Lead time discussions, we're talking about slots, but I think there's some facility dynamics also that are influencing some of the timing. But would expect advanced logic and the broadening of the investment that I mentioned to be a driver into the first half. But there's continued momentum on the DRAM front, too. So we're pretty encouraged by what we're seeing there. Obviously, it'll be offset by some weaker numbers out of China, but the leading-edge dynamics are encouraging. Christopher Caso: Just a question on gross margins as we go into '26 also. And with some of the mix changes, particularly with China probably coming down as a percentage of the mix, anything we should think about with respect to gross margins as we start modeling through '26? Bren Higgins: Yes, Chris, I'll give a little bit more specific guidance on margins and operating expense expectations based on our revenue picture next quarter. Gross margins for KLA are generally impacted, I'd say, almost exclusively impacted by what we sell, not so much who we sell to and where we sell it. So it really is a factor of how it's impacting certain product types that we have a pretty extensive portfolio of products, the broadest in our segment of the industry. And depending on what you're buying, it can carry different margin profiles. Certain parts of the market, like packaging tend to carry a more dilutive stream. As I mentioned earlier, I think, over time, that goes from being a headwind to a tailwind. Service tends to grow and has a dilutive gross margin, but we believe an accretive operating margin. So you do have some of the moving parts. The tariff impact, when you compare year-to-year, we really -- that's more second half dynamic this year. And my hope is given some of the things that we have going on in the company in terms of assessing how we can try to mitigate that exposure that, that becomes less of a headwind over time. I think structurally, we're in a world where we'll be dealing with higher tariffs, but I do think there are things we do in terms of how we operate the company, where there's some ROI in terms of just how we move parts around the world and how we reduce the leakage and drawback scenarios as we understand and track different parts attributes that help reduce some of that. So I think there are a number of dynamics at play that will become less of a headwind over time. And depending on the growth of the business, obviously, that will have -- volume will have an impact, too. So I'll have more to say about it. I think those are some of the context behind the different moving parts. Operator: We'll take our next question from Shane Brett, Morgan Stanley. Shane Brett: I wanted to follow up on Charles' earlier question, but your memory customers have been talking of CapEx growth into 2026. But just given how strong this December quarter DRAM guide is, how should we think about your memory growth expectations into next year relative to this really strong December quarter? Bren Higgins: Yes, I apologize. I know that Charles asked that and we didn't answer that question. There are definitely some timing factors that are influencing process control, timing relative to other products. As I look at where we're at, I mean, this year has been a very strong year in DRAM for the company. I would expect next year to be a growth year as well. And I think a lot of these announcements, I think, as we start to see that play out, we'll see whether that is more of a second half dynamic into next year and how much that sort of carries forward. But what is clear is, across all of our customers, I expect them to spend more and to see growth in our DRAM investment from our customers into next year. Operator: [Operator Instructions] We'll take our next question from Edward Yang with Oppenheimer. Edward Yang: Rick, Bren, most of my questions have been already answered, but maybe you could talk about your outlook for foundry-related revenue opportunities outside the dominant Taiwanese customer. I think at least one major foundry has historically underinvested in yield improvement tools. Maybe that tune is changing. So are you seeing any change in engagement there? Bren Higgins: Yes. I would say that we're encouraged by -- as we said earlier, we're encouraged by the broadening of investment that we're seeing at the leading edge as we go into next year. Richard Wallace: Yes. The conversation qualitatively, the conversations we have with customers that are looking to, as you mentioned, not the leader that are looking to do advanced logic, we do have a lot of conversations around what they're asking our advice, what do they need to be successful, especially since they maybe haven't been pressing the latest nodes. And so there's a lot of conversation we have about the specific things they're trying to accomplish. It depends on the dynamics. It depends on their mix. It depends on their die size. It depends on what their expectations are for how fast they want to ramp. But it is, for sure, a lot of conversations we're having. And as Bren says, we feel pretty good about those discussions. I think for a lot of people, the process control part, they haven't really fully understood how the world has changed in the last few nodes. And so those conversations are ongoing. Edward Yang: And just as a quick follow-up. Yesterday, the leading AI accelerator company talked about a $0.5 trillion backlog. We're seeing these flurry of deals involving the major AI lab players. From your vantage point, can you level set for us, is the semi-cap industry position to serve that scale of demand? Or is the ecosystem discounting some of these projections as aspirational? Richard Wallace: Yes. I don't -- I guess I would maybe pass it a little bit differently in the sense that I think the semiconductor industry has been prudent in terms of adding capacity. And right now, when we talk to -- when we try to reconcile the external discussions about CapEx and what that translate into in terms of wafers, not enough wafers will be available to achieve those objectives in the time frame. And our view is that it's not necessarily a bad thing. It means it's not going to -- it's unlikely to overheat if those forecasts remain intact because there's more gating factors than there are people making announcements. It's easier to make an announcement about investment in the data center than it is to build a new fab. So I think it's going to take some time for the industry to absorb and support the capacity demands implied by all the public announcements. Operator: We'll take our next question from Blayne Curtis with Jefferies. Blayne Curtis: I just want to go back to the DRAM comments. You talked about the increasing capital intensity. I'm just kind of curious about kind of the conversations. Obviously, massive numbers have been thrown out there. Just kind of curious, I think someone asked this prior about what -- was that always the plan to have DRAM up this much? Or have things been pulled in? And then I guess, just if you could elaborate a little bit more color on those conversations you said where they're looking for capacity, like what's holding it up? Is it just they need fab space? Or are they unsure about the demand? Just any color there would be great. Bren Higgins: Yes, I would say that you definitely feel there's more urgency on the DRAM front in terms of timing. We'll have to see how that plays out in terms of slots as we move into next year. Given our lead times, what we can accommodate, obviously, we try to work closely with our customers on that front. But there's certainly -- I think from a pricing point of view, I think the dynamics that are driving HBM pricing overall, there's definitely a sense of urgency from our customer base. And as I said earlier, across the top 3, I do expect higher investment levels next year than we're seeing here in '25. Richard Wallace: I think the other way to think about it, if you think that there's 3 components, primary components that go into supporting these AI infrastructure build-outs, you have obviously the GPUs and the accelerators around those, you have the packaging and then you have the memory. I think you're going to see over time that you go in phases of which one seems to be short supply. And we kind of went through a phase of that with packaging being behind. And now I think the realization by a lot of our customers is they might -- there might be more opportunity in memory than they thought, and those are accelerated from what they even told us a few months ago. So I think that, that's part of what you're seeing. I think everybody is a bit amazed by the number of applications that are being realized using AI. Even inside of KLA, we keep coming up with new ways to leverage the technology. And I don't think we're the only ones doing that. So I think the memory guys are right now feeling, wow, there's more opportunity if they could add capacity. And those are kind of the conversations because they realize that it takes longer, as I said, to ramp the supply chain than it does to make these announcements about CapEx. Operator: We'll take our next question from Jim Schneider with Goldman Sachs. James Schneider: Maybe just one follow-up relative to the earlier question about the diversification in your leading-edge logic and foundry customer base. Is that something that's more on the inquiry level at this point? Or are you actually seeing that either in your order book or in the form of forecast from those customers at this stage? Bren Higgins: I would say we are seeing it and certainly as it informs our views of next year, we're seeing it in the order forecast. And the -- as Rick talked about earlier, I think there's a lot of collaborative discussion about how we can help navigate and ramp and drive time to results in this capacity. James Schneider: And then maybe just as a quick follow-up. Maybe you can help us just refresh your expectations about kind of confirming mid-teens is the right level for service growth in 2025 and maybe give us a sense about whether that could accelerate next year? Bren Higgins: Yes. We've seen service actually pick up a little bit here. It's been a little stronger than we expected. Obviously, we've had some FX benefits, but we've also had some strengthening as utilization rates have gone up. We've seen some strengthening in some of our billable business. So I think our service growth will be in our target range of 12% to 14% this year. And I would expect right now, as I look at next year, that we'll be in the same range as well. So I think we feel pretty good about where that is, both based on the growth expected in the installed base, the lifetime increase in the tools, the incremental value that's coming from the complexity in the systems and how that's affecting the pricing as it relates to contracts, the opportunities in the acquired businesses that we've acquired over the last few years to drive their service business and new requirements that we're seeing, this is a factor in '25 as well. But as you think about packaging, a different service model for packaging, but also for DRAM, where the utilization rates to some of the earlier questions have been higher and higher expectations of performance of our system. So I think there's some new opportunities for growth there that, frankly, if you go back a couple of years, I don't think we fully anticipated, both on the packaging front but also on the high bandwidth memory front supporting HPC. Operator: We'll take our next question from Timm Schulze-Melander with Rothschild & Co. Timm Schulze-Melander: Actually, I just had one with respect to your outlook for next year. You talked about this broadening in demand for 2026. Could I just ask, could you just paint some color around to what extent that already bakes in high NA engagements or whether that would be an upside to your outlook for '26? Bren Higgins: One thing, look, on the R&D front, there's a lot of collaboration with customers. How that translates into revenue is not part of the outlook. Most of what the engagement is, is on ramping the continuation of the N2 ramp, our 2-nanometer ramp across our customer base. And so it isn't influenced by the adoption of high NA in that time frame, certainly not in a material way. Operator: We do have time for one additional question. We'll take our final question from Brian Chin with Stifel. Brian Chin: I appreciate that. Maybe a question here. I think there was a reference earlier about the potential for some acceleration in second half of next calendar year. I'm sure it's not one single thing, but how much of that second half outlook is tied to new cleanroom space availability, knowing that some of your tools, probably some of the first that go into a greenfield fab. Bren Higgins: Look, there are some issues, I think, with space constraints potentially. It's not, of course, on every customer, but I do think that it could affect some timing as we move into the second half of next year and into '27 as you start to think about the next node ramping and some of the new fabs coming online in memory. So right now, I don't think space is going to be an issue. Obviously, that would depend on the strength of demand, yes, that could change. But for now, it's certainly a factor, but I don't think it's a big factor as it stands today. We'll see how things go. Brian Chin: Maybe if I have time for a quick follow-up. Just on advanced packaging, I think to date, a lot of your inspection business strength has been strongly tied to logic. How much of your continued optimism on market and KLA growth in packaging next year involves expansion opportunities in HBM packaging? Bren Higgins: I feel good about market share, both in logic and in memory on the packaging front. We've seen positive trends in both segments over the last couple of years, and I think that, that continues into next year. Kevin Kessel: Thank you, Brian, and thank you, everybody, for your interest in KLA. We appreciate your time today, and we'll be in touch. I'll turn it back over to the operator for any closing instructions. Operator: Thank you. And this does conclude today's KLA Corporation September Quarter 2025 Post-Earnings Call. Please disconnect your line at this time, and have a wonderful day.
Matthew Bellizia: Okay, we might start now. It looks like we're stabilizing on the list. So good morning, everyone. Welcome to the Dubber Corporation's FY '26 Quarter 1 Update. Andrew, if you can move on to the key messages, please. So we did report positive net operating cash flow for the first time in history, excluding the exceptional cash flow items, which Andrew will talk to. Whilst there is a chunk of money in the quarterly -- in the onetime exceptional cash flows, most of it's not continuing. So we don't expect that to -- we expect this to be a little bit abnormal, the cash out for the quarter, and that should stabilize going forward. The group remains well capitalized with over $14.5 million of working capital, with a cash balances at 30th of September of $9.5 million and our $5 million undrawn facility. During the quarter, we exited our U.K. property leases, finding an annual saving, which will start flowing through of $2 million per annum. Cost us $300,000 to exit those leases. Our underlying recurring revenue for the quarter was $8.2 million, which is flat month-on-month with the previous quarter. Now we've excluded VMO2 from that. We do still have some VMO2 revenues, but we're not going to call that recurring revenue on the basis that VMO2 are still planning to move their services away. So excluding that, we were flat, and we had -- and probably our growth has been washed a bit by another change that I'll talk about coming through. The group has signed a new partnership with Crexendo. Crexendo, why this is good, and I'm going to talk about this on a slide, but Crexendo is the third biggest UCAS provider in the U.S. So Microsoft Teams, Cisco, Webex, and Crexendo is #3. That gives us a whole new market to attack and grow our business. Our Communications Service Providers still increased again. We are still focused, consistent with what we told you last quarter and the quarter before to get to cash flow breakeven during FY '26, and the recovery of the funds continues. Moving on to the CEO presentation, and reiterating that. To hit operating -- normalized operating cash flow breakeven during FY '26, a lot of it is driving revenue now. It's all about sales, marketing, and growth in this business. This is what's going to dominate our journey going forward. We are continuing a cost-out program. We continue to look for efficiency gains within the business. And that is anything we can do to automate the business, such as right now, we're working on automating invoicing. So when someone subscribes to our service, it adds a license into our system, it flows straight through our billing system, straight into NetSuite, and invoicing straight to the customer. So as much automation we can drive through the business, so we're a real simple automated SaaS business is what we're driving for to continue to optimize our costs. We've covered the real estate leases. And we're also working on decommissioning our U.K. data center, which will result in probably somewhere between $1 million and $2 million saving. This is a data center that came through acquisition with Speik and Aeriandi. We're moving Vodafone from Aeriandi to the Dubber platform. As you know, VMO2 intends to leave. We've got our payments customers being migrated across to the Dubber platform, and our archive customers. And once that's complete, we'll save another chunk of costs through the business. I'll move to the next slide to talk about revenue growth because it's a bit more focused on revenue through that quarter. Our strategy to grow our revenues is to go a bit deeper into some verticals, deeper in that specializing in verticals and bringing real value to some of those verticals, financial services and other verticals, where we can really get really good revenues, being a bit more specific about the value we bring to them so we can charge a bit more and get more content through that. We're also finding more CSPs. There's some telcos that who've got to focus on driving Recording as a Service products. We're talking with multiple telcos now about being the partner with them for Recording as a Service. And we're concentrating on partners who bring real value, such as Crexendo, and open up new markets so that it helps us not just to partner for the sake of a partner, but a partner that can really bring true revenue and a whole marketplace with them, a whole new platform of technology that we can integrate with and bring through. Our product is a very feature-rich product. We've actually invested again a lot more in R&D this quarter. We need to continue to drive that value through our sales and marketing message to get people to understand the value of moving from recording to our entry-level recordings plus trends through to our full AI SKUs and the benefits they bring to our business. This quarter, we've released 2 more features, which I'll talk about more in the later slides, but a new signals feature, which listens to all your voice recordings across your business and tells you all the key topics discussed in your business, not just those pertaining to sales or complaints, it does a broad brush of your entire business. We've also brought in our new natural language search with agentic AI, which we'll talk about in the same slide. The sales motion, we are driving promotions, particularly into the last quarter this year. With a number of partners, we are running promotions in the last quarter to drive AI uplift and AI sales. We are going to continue to differentiate our products through the greater value that our AI brings. And I've talked about -- and of course, it drives increased ARPU. We're also looking at bringing through partner training programs. We're talking with a company right now that's looking at bringing specialized training programs so that our partners have got a better skillset and better understanding. They've got to get certified to sell our products. So we think in a 30-minute [ to 1 hour ] training session, understanding the value supported by partners will help drive better uplift as well as, I think I mentioned last quarter, the training videos and the promotional videos that we're bringing through embedded into our products, so people, our existing customers, can see all the benefits very simply of the AI SKUs and what they bring for their business. Moving to the next slide, if I may, Andrew. On the Communications Service Provider updates, I've talked about Crexendo's Netsapiens. In terms of Cisco, Cisco is changing the way they engage with us. Instead of paying us for Dubber Go, we still have the Dubber Go Dubber Go SKUs. Nothing's changed with what we supply to Cisco, but we will now be [ remunerated ] by the end customers and selling them trends and AI SKUs and working on that upsell. When Andrew presents to you in a little bit to show you the numbers were flat quarter-on-quarter, this is the change that flattened our revenue for this quarter, but we hope to be able to get some growth back to replace this revenue by selling directly through a new motion in the Cisco environment and replacing this revenue in a different manner. We continue to see good engagement from Cisco partners and for the Dubber premium products for the Cisco Marketplace. But the change we're talking about pertained to the 30-day recording product, not our core products. Next slide, if I may. We've launched our first agentic AI product called the Insight Agent. The next slide will give us a better understanding of the agentic agent, so [ I might ] step onto that. But this is now allowing you to ask natural language questions, any question you like, across your entire voice recording platform in your business -- what was our best-selling product last week? Our agentic AI will have subagents, which will then analyze our [ offer expansion ] moments and information, our offer accepted moments, different moments, and there's 10 or 20 different agentic agents that operate and go back up to a key decision maker that come back and give you the outcome about what was our best-selling product last week. So in this case, it comes back with, Smartphone X2 was the top-selling product with 300 sales-related mentions across 77 conversations. Naturally, like all our products, you can quite easily drill down to hear those conversations and see what's going on. But there's a lot of conversations that happen in business between staff and staff, staff and customer, staff and suppliers. This agent now is going to allow you to delve into these conversations and find real value. Again, as a business, I still think we have to improve the way we get this messaging to our resellers to unlock the value of this business, so it's better marketing, better information to our sellers, better training for our sellers, so they understand the values our products bring in order to boost our sales going forward. And another example is the next screen of the same one. What were our most [ successful ] negotiation techniques last week? Volumes discount achieved higher acceptance rates than percentage discounts. Marcus C achieved the highest negotiation rate at 94%. So I hope that gives you an understanding of what the Insight Agent that we're launching with agentic AI, and again, the company continues to spend strongly in R&D. I'll now hand over to Andrew to handle the financial update. Andrew Demery: Thanks, Matty. So yes, revenue for the quarter was $9.4 million, so that's down 7% on the equivalent quarter last year and 12% on Q4. That's really reflecting the reduction in the VMO2 revenues as that process started in the quarter. If we exclude VMO2 from both Q4 and Q1, and any one-off revenues Q2 -- sorry, Q1 was $8.2 million, which, as Matt said, was consistent with Q4. So that's a like-for-like comparison, excluding VMO2. So yes, we saw some growth. That change to Cisco has impacted the quarterly revenue growth, so it's offset that as well as I think we talked last quarter a little bit about some of these long-term deals that were rolling off towards the end of last year for archive services and so forth that have been renewed, but at different rates. So they're largely done last year, but we see a bit of an impact quarter-on-quarter, obviously, from the [ full ] quarter's roll-off of some of those deals. So yes, some reasonable underlying growth has been just offset on a recurring basis quarter-on-quarter. So, yes, there's still a good growth prospect going forward, as Matt's talked to, with some of the new products coming through. And yes, we continue to add partners to the group. Again, that's not a primary focus, but again, we're still seeing the demand from new partners to take the Dubber suite of services and add them to their portfolio for their end customers. So this chart is really a reflection of what we've been talking about for a while. We achieved -- we got to cash flow run rate breakeven at the end of June. Obviously, the reduction in revenue resulting in VMO2 hasn't been offset by cost reduction, given the nature of our margins in the business. So that gap has opened up a little bit in this quarter. We've got $2 million of annualized savings coming through from Q2 as we've exited our surplus U.K. lease portfolio with all the ancillary costs that go with it as well coming off, too. So we'll start to see a benefit on operating costs for that coming through in the coming quarter that we're in. So just to touch a little bit more on that. Obviously, our gross margin impacted by that revenue reduction. Direct costs continue to come down a bit as we continue to get those operating efficiencies and improvements that we've been delivering over a long period of time now. I think, as Matt talked to, the next big [ lick in ] direct cost is the exit of the data center, which will go hand-in-hand with that -- with the customer migration and exit in the U.K. at the moment. So there will be another step change in the -- an improvement in margin at that point underlying for those customers once we're able to execute on that over the coming year. And operating costs continue to come down. You'll see more of that, obviously, as we said, from the leases and other cost-saving improvements, a bit more weighted towards the second half -- sorry, the second quarter of the year rather than Q1. So yes, we'll see some continued savings in operating cash-based costs as we come into the next quarter and over the rest of the year. If we look at the statutory cash flows, we had record receipts of $12.4 million in the quarter, which was good to see, up from $11.9 million last quarter. Again, that's largely around the timing of receipts from customers, but we're all over that at the moment, which is good. I'll talk a bit more about the operating cash outflows on the next slide, as it's probably a better representation of that. Net cash inflows from investing represents some payments we received on the exit of those leases for some of the surplus assets that were in those leases at the time. So we've got a little bit of income there. We had some outgoings as well, which we'll talk about on the next slide as well. But as Matt already touched to, we've got $14.5 million of available working capital at the end of the quarter, so remaining really well capitalized as we go through the rest of the year. So just touching on, if we look at the normalized operating cash outflows, we were at $11.7 million, down from $11.9 million down from $11.9 million and $12 million previously, so then again, continuing to reduce. So we had -- as Matt touched on at the opening, we've had a positive $0.7 million increase in operating cash, which is the first time we've had that as a business, I think, ever. So that was a good result. We spent about $1.4 million on abnormal items, so a bit bigger than last quarter. It really is starting to come down, even though it doesn't look like it. So we've just given you a bit of detail on the slide about where some of those go. So legal expenses for directors and the companies. They're all related to things that were done last year, paid in this quarter, so they are largely nonrecurring going forward. We obviously filed some claims for the historic term deposit matter in Q4, which we paid for this quarter. So again, there's some costs around that. We had some costs for the exit of the leases that we paid out in that cash flow as well. So again, they're definitely nonrecurring. Our historic tax repayments are now effectively done, so they shouldn't recur, and we had some redundancies as well. So those numbers will absolutely be reducing in general into the coming quarter. Substantially lower is what we expect. So the reported operating cash outflow will look much closer to the true operating cash flow going forward. Matthew, over to you. Matthew Bellizia: Okay. Thanks, Andrew. Again, this will be frustrating for shareholders because due to the legal nature, we can't disclose too much, but we continue with the investigation and recovery of funds through the Board subcommittee that we appointed in January to run this. There are still 3 cases underway, the Victorian Legal Services Board, where our argument really is the money was taken en route to a trust. The cases against the former CEO and Mark Madafferi, the lawyer, as well as the case against BDO. So again, we can't provide much detail on that, but these claims do continue, and hopefully, they do result in something for the shareholders in due course. Finally, wrapping up into the last slide before we move to questions. This business now is all about growth. We've reset our cost base, we've done a number of changes, we've cleaned up properties, other bits and pieces, we're driving automation, and obviously, we'll continue to have a lens on cost. We're still negotiating some vendors, such as Salesforce and others, into new deals and new prices to help drive down costs. But essentially, the way forward for this company is growth, growth, growth. I think we've actually got a really good product range. I think, again, we've got to get really better at our marketing. We're going to reset that. I'm going to bring that back home to Melbourne and reinvent our marketing team going forward. But it's really getting the messaging out, driving demand through effective marketing, both to end users and to partners, bringing in partner training to drive them to have better knowledge of the value proposition of our higher-value SKUs and continually improving the way our partners understand and sell our value propositions. We believe we have a good value proposition. We've just now got to get on to better execution at sales growth, and that will be where we spend money, invest money, and grow this business. Now we're leveling back into a more stable position and get ourselves hopefully cash flow breakeven as well as moving into a growth trajectory. That's all we have this quarter. We'll turn to questions if we can. Matthew Bellizia: If excluding VMO2 from both quarters, what's the percentage and dollar increase or decrease in sales? I might throw that to Andrew. Andrew Demery: Yes. So yes, that $8.2 million is the same number for both quarters. VMO2 is not in either of those numbers that we sort of restated. As Matt says, we're considering VMO2 nonrecurring from now on, whilst there are revenues in the quarter for that, and that will be in Q2 as well, and ultimately, there will be an end date on that. So yes, it was a flat quarter-on-quarter for the reasons I talked about. Matthew Bellizia: Okay. Does the change to Cisco's commercial model with Dubber adversely affect the timing and dollar value of Dubber's cash flow from Cisco? So the answer to that, and I think probably summing that up, the answer is yes, we would have shown growth, other than the Cisco not paying us does obviously impact cash flow in the first instance until we replace it back through customer growth. So there would have been normalized growth, but the Cisco is why we leveled out. And obviously, now we've got to get the motion going with Cisco to replace that and get growth there as well as our ordinary course growth. I hope that answered that question. Given the spend on legal costs was over $700,000, can we read that the company believes a recovery of some sort? Otherwise, why is the spend so much? I think the slide presented $172,000 on current spend, Andrew, for the quarter. Some of those payments and the stuff in Andrew's slide went back 6 months -- Andrew? -- and beyond some of the costs incurred, and some of that was pertaining to ASIC investigations and other fees, was it not? Andrew Demery: Yes. Matthew Bellizia: Can you clarify that please? Andrew Demery: So yes, if you split that $700,000 up, yes, the $172,000 number was the company seeking to recover. The other fees were a generic bucket of fees where we've had to respond to asset requests and a variety of other things, and that's over a 6- to 9-month period, and a lot of those got cleared in this quarter. So yes, some of it is responding. Some of it is on the offense, let me put it that way. So yes, we're being careful and cautious with the spend that will go to recovery. We need to make sure there's an ROI on that, I think, the questioner is pointing out. Matthew Bellizia: How are Dubber going to compete with the impending avalanche of customers talking to people to customers talking to AI service agents, which already have inbuilt recording [ radio ]? I think the question is you have lots of individuals -- sorry, you have a lot of products out there today that offer recording for individuals. Microsoft Teams you can record and so forth. We don't play in that space, in those individuals where I want to record my onetime conversation. We are much more in company space, compliance recording, and then AI across that where the intellectual property of the conversation is more owned by the company than it is an individual and just an individual using conversation. So in the consumer space where 2 people can record a call on Microsoft is not really our space. We are in the space where you need to have compliance recording, it needs to be saved in a compliant location, captured in the right manner, and then AI across that space. I hope that answered that question. When you achieve, say, $1 million in positive cash flow, what are you going to do with the cash? The cash here is invested very tightly and very wisely nowadays. We're very frugal with what we spend, and the money we do spend will either be invested in the R&D of our product or the growth of our sales and marketing, which we intend to get return on investment. So we are -- any cash that this company has is all about spending on either improving our service or improving the revenue growth of the business. You said, if I heard correct, bring back home to Melbourne regarding marketing. Can you elaborate, please? Yes, the marketing currently function runs out of New York. So it's just a bit difficult time-wise to get as much marketing and effectiveness as I'd like. So I want to get more senior marketers based in Melbourne next to me so we can have a real impact on what messages are going out, what marketing activities are being driven, and how we're going to grow this business. That's all the questions we have at the moment. We'll give another 30 seconds or so or 1 minute to see if anyone wants to add any questions. Okay. A clarification on one of the questions. Corporate customers who implement their own AI customer service agents with inbuilt recording, which replace human agents. Okay. That's essentially what -- that's in the contact center space a lot more. So there's a lot more agents typically going in -- this is AI agents bots. They're typically replacing things in contact centers. Again, it's not really a space that we've played. We have a little bit of contact center stuff, but not much. So again, it doesn't have a substantial impact on us. Now there is also a need to record agents. In fact, there's also an AI need to record what the agents say because agents get stuck -- this is robotic agents. They get stuck at certain junctures as well. So there actually is a market where even though you've got robotic agents, you still need AI to make sure they're performing and doing what they should do as well. So it's not really our space, but I understand. Hopefully, again, I answered that. Any guidance on revenue growth for the next 12 months, Andrew? Andrew Demery: No. I think we'd expect to have underlying revenue growth. Obviously, we're not providing any specific guidance aside from -- again, the key is to get the business back to the operating cash flow breakeven. So that will be through a combination of the ongoing efficiencies in the business and growth. Yes, there's a number of uncertainties around VMO2, for example, in terms of how that goes. So yes, we don't specifically want to pull out any revenue forecast at this point. Matthew Bellizia: Surely, there are sales targets for the teams. Absolutely, there are sales targets for teams and KPIs on what they do. But I don't know whether we intend to or want to give guidance to market on internal sales targets or where we're going. But absolutely, we're running the sales teams tightly and professionally, as you should expect. Are there any remaining major single partner exposures like VMO2 or Cisco that can upset the growth trajectory going forward? Don't believe so. The other substantive customer is Vodafone, who's migrating from Aeriandi starting on the 16th of November across to our Dubber platform. And there's lots of promotional stuff showing that Vodafone is going more into Dubber. But we've been visiting all their customers, showing them the value proposition of Dubber, the Dubber AI, and there's a migration commencing out of the data center across. So that gives you a fair bit of assurance that our substantive revenue partner is vesting in with us, not moving away. Are there any further questions? Well, if there's no further questions, I'll wind this up because I have been told I've let these go too long previous quarters. So thank you everyone for joining. I hope we provided a reasonable update to you, so you understand where your business is heading and look forward to a further update in 3 weeks' time at the AGM. Thank you, everyone.
Operator: Good afternoon and welcome to the Moelis & Company Earnings Conference Call for the Third Quarter of 2025. To begin, I'll turn the call over to Mr. Matt Tsukroff. Matthew Tsukroff: Good afternoon and thank you for joining us for Moelis & Company's Third Quarter 2025 Financial Results Conference Call. On the phone today are Navid Mahmoodzadegan, CEO and Co-Founder; and Chris Callesano, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. These measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com. I will now turn the call over to Navid. Navid Mahmoodzadegan: Thank you, Matt. It's great to be with all of you for my first earnings call as CEO. The firm had a very strong third quarter. We achieved adjusted revenue of $376 million for the quarter and $1.05 billion for the first 9 months of 2025, representing increases of 34% and 37%, respectively, versus prior year periods. Our level of client engagement and new business origination continue to be robust, and our pipeline remains near all-time highs. To give you a sense of the firm's momentum, in just the past week, we advised clients on several significant transactions, including Essential Utilities on one of the largest U.S. utility mergers in history, the Delaware Attorney General on OpenAI's recapitalization and the New York Giants on the landmark sale of a minority stake in the historic NFL franchise. We remain active on the hiring front and finished the quarter with 170 managing directors. Year-to-date, we've hired 10 managing directors, including 5 MDs since our last earnings call. These MDs will enhance our expertise and global reach in key sectors and products, including technology, industrials, private capital advisory, capital markets and M&A. Now let me discuss each of our businesses, beginning with M&A. Our business this quarter benefited from both an increase in larger strategic M&A and sponsor transactions, resulting in a meaningful increase in our average M&A fee. On the strategic side, we are seeing corporates lean into transformative deals to achieve scale and navigate rapid technological change. This activity is supported by improved clarity around trade policy and tariffs and a more accommodative regulatory environment. On the sponsor side, the significant pent-up need for sponsors to return to capital to LPs and a robust financing environment have accelerated sponsor activity. These dynamics set the stage for what we believe will be a steadily improving multiyear M&A cycle. In Capital Structure Advisory, our team continues to be engaged on a healthy level of liability management assignments. While ample liquidity and access to diverse pools of capital are resulting in fewer traditional restructurings, our team is a leader in delivering out-of-court solutions for clients. Additionally, our recent investments in enhanced credit side coverage have diversified this business and position us well for future opportunities. Turning to Capital Markets. Our Capital Markets business has been a standout performer with year-to-date revenues more than double the same period last year. We're on pace for a record year as our enhanced capabilities in public and private capital markets have positioned us to take advantage of a risk-on environment to raise capital around growth companies and emerging technologies. We believe the massive expansion in private credit has also created a significant opportunity to help clients access this important asset class. And finally, as we look at Private Capital Advisory, we expect this business to be a key engine of growth, becoming a meaningful fourth pillar of our business and complementing our leading sponsor franchise. On our Q2 earnings call, we highlighted 3 significant hires, including our new Global Head of PCA. Since their joining, we have had seamless integration with our sector and sponsor coverage teams and seen substantial growth in active mandates focused on GP-led secondaries. We are very excited about our team's early momentum and expect PCA to become a significant contributor to our firm. We are continuing to hire talent at all levels and plan to build this business into a market leader. Looking ahead, we are optimistic about the continued improvement in the transaction environment. In the very near term, the U.S. government shutdown, depending upon how long it goes, could slow the pace of regulatory reviews potentially affecting deal closing time lines. However, from where we sit today, this is not impacting our clients' appetite for strategic transactions, and we expect continued acceleration in deal activity. I'll now pass the call to Chris to discuss our financial results before I wrap up with a few closing remarks. Chris, over to you. Christopher Callesano: Thanks, Navid, and good afternoon, everyone. As Navid mentioned, we generated adjusted revenues of $376 million for the third quarter of 2025, an increase of 34% from the prior year period. For the first 9 months of 2025, we generated adjusted revenues of $1.05 billion, representing an increase of 37% from the prior year period. The increase during the quarter and the first 9 months of the year were driven by significant growth in our M&A and Capital Markets businesses, partially offset by a decline in Capital Structure Advisory. Our business mix for the third quarter and first 9 months of 2025 was approximately 2/3 M&A and 1/3 non-M&A. Turning to expenses. Our adjusted compensation expense ratio for the third quarter was 66.2% bringing our year-to-date ratio to 68%, down from 69% in the first half of 2025. Adjusted non-compensation expenses were $53 million for the third quarter, resulting in a 14% non-compensation expense ratio. Our adjusted non-compensation expenses for the first 9 months of 2025 were $163 million, resulting in a non-compensation expense ratio of 15.6%. The main drivers of the expense growth during the first 9 months of the year were increased deal-related T&E and client conferences, continued investments in technology and data, including AI and higher occupancy costs as a result of headcount growth. Our adjusted pre-tax margin was 22.2% for the third quarter, bringing our adjusted pre-tax margin to 18.2% for the first 9 months of the year, a significant improvement compared to the same 3- and 9-month periods in the prior year. Our tax rate for the third quarter was 29.5%, consistent with the prior quarter. Turning to capital return. The Board declared a regular quarterly dividend of $0.65 per share, consistent with the prior quarter. And during the third quarter, we repurchased approximately 206,000 shares of our common stock on the open market for a total cost of $14.5 million. Finally, we continue to maintain a strong balance sheet with approximately $620 million of cash and liquid investments and no debt. I will now pass the call back to Navid. Navid Mahmoodzadegan: Thank you, Chris. I wanted to briefly touch on the three areas that I am intensely focused on in my new role: clients, culture and growth. First, clients. Clients will continue to remain at the center of everything we do. Our success flows directly from the success of our clients. Second, culture, maintaining and protecting our collaborative team-based culture enables us to provide the highest quality advice to clients and attract and retain the best talent in the world. Finally, growth. We have a tremendous opportunity to hire and develop difference makers to fill white space and further build leading centers of excellence throughout our firm. As we think about the opportunities ahead, we've never felt better about the quality and capabilities of our franchise and how well we are positioned to advise our clients in a more active market environment. With that, let's open the line up for questions. Operator: [Operator Instructions] your first question comes from the line of Ken Worthington with JPMorgan. Kenneth Worthington: A little esoteric here. Maybe first on restructuring. One of the narratives in the market is the disruptive nature of AI, particularly in parts of the tech sector. Are you seeing this risk start to pop up in your dialogue with your clients on the restructuring side? And is AI a theme that you think might be meaningful to restructuring as we look out over the next 1 to 2 years? Navid Mahmoodzadegan: Yes. Thanks for the question, Ken. Look, I think AI is going to have a profound impact on our economy and sectors of our economy and companies in particular. It's obviously early days there in terms of the direct disruptive impact AI is going to have. But I do think, to your point, while it's still early days, I do think that disruption is going to create opportunities for us on the restructuring side as the rollout of AI and the impact on AI becomes apparent to corporate P&Ls. And so early days, I don't know that we've seen sort of a direct set of mandates that have come from that, but I think that's on the horizon. Kenneth Worthington: Okay. Great. Sort of in the same vein, different topic, private credit. There seems to be differing perspectives between the banks and the alternative asset managers in terms of the state of the private credit markets. So for you guys as a third party in the market, are the recent higher profile defaults that we're seeing a concern to you? And do you see risk to M&A if we start to see "more cockroaches" emerge in private credit? Navid Mahmoodzadegan: Sure. Look, we -- as you point out, we've seen an explosion of private credit as an asset class. That's generally good for our business because it gives us more opportunities to advise clients on accessing the private credit market. That's an area that's outside of the traditional banking system and banks that have advisory franchises attached to them. So we like the growth of private credit. We have deep sponsor relationships and lots of active dialogues with companies and sponsors trying to match sources of capital with our client base, alternative sources of capital with our client base. So big picture, very good for our business, as I highlighted in our remarks. Our Capital Markets business is benefiting from that. I don't think the -- a couple of the high-profile situations -- by the way, there were banks involved in some of those situations as well. I don't think those were particularly insulated as private credit situations or explicitly private credit situations. But look, when that much capital goes out in an asset class into all bunch of companies, there's going to be some mistakes. There's going to be some idiosyncratic situations that pop up. That's not a surprise that you'll see some of those, but I don't think there's a systemic problem with private credit. I'm not a believer in that scenario. I think private credit is going to continue to grow. There's a need for that source of capital to provide for companies and for growth. And there's lots of companies that find that source of capital really attractive. And I think that trend is going to continue, and it's good for our business. Operator: Your next question comes from the line of Devin Ryan with Citizens JMP. Devin Ryan: I want to start with just a kind of broad M&A question. Obviously, tracking some of the headline numbers, the recovery started kind of earlier in the summer and it seemingly continued, but a lot of that activity was driven by kind of larger deals, and so that helped the headline, but it wasn't as broad of a recovery. So I love to get a sense of how you're seeing kind of the breadth in the market today, whether that's smaller deals or sponsor deals, how the pace of those transactions are trending? And if it is really reaccelerating there and broadening, kind of when did that pick up? And any other framing around that would be helpful. Navid Mahmoodzadegan: Sure. Yes. Thanks for the question, Devin. So I think you're right. It's definitely a larger transaction-driven market today. We see that certainly on the strategic side and also on the sponsor side. There's definitely a flight to size, a flight to quality in terms of the volume of sponsor transactions that are getting done today. And so I think both -- on both -- in both markets, larger transactions are definitely in the middle of the fairway. I do think we've seen and are starting to see a broadening of that market. What's really been missing on the sponsor side, especially is that heavy flow middle market, sub-$1 billion kind of flow of transactions. I do think it's starting to broaden out. We saw evidence in the third quarter of an uptick in volume of sponsor activity, not just deal size and dollar volume, but volume of transactions. And I do think that's what's coming, a broadening of that sponsor flow, that middle market flow I think, is hopefully in the offing as we roll into 2026. That's what it feels like to us. But you're right on the larger transactions, higher quality transactions, that's been driving a lot of the business over the last couple of quarters for us and for the industry. Devin Ryan: Yes. Great color. And then a follow-up here just on compensation. So revenues up really strong year-to-date, 37% comp, expense up 24%. So nice to see some leverage there. Obviously, we don't know the full year revenues, but it would be good just to get a sense of how you would frame the 68% comp ratio year-to-date. Like is that a good number on the year? Or is there potentially -- is that one step toward potentially additional leverage as we get better visibility on the full year? And that's one part of the question. The second part is just based on where we are in this kind of M&A recovery that you talked about, Navid, still seems like a fair amount of revenue upside for Moelis as conditions normalize. And so just trying to think about how much more comp leverage there may be in that scenario to the extent the 37% year-to-date is just the beginning of potentially much more revenue upside from here. Navid Mahmoodzadegan: Thanks, Devin. Let me try to take -- tackle that question. So I think we kind of look back historically at this time last year. I think our year-to-date comp ratio was 75%. We ended the year at 69% when you factored in the fourth quarter. And now year-to-date, we're at 68%. So I think we are making progress towards a more normalized comp ratio. And I think we've committed that as the market improves, as we realize a return on many of these investments, we've been making great investments in very, very talented people in big TAMs that as we see a return in that, as the market improves, depending upon market conditions and what the competitive environment looks like for talent, we want to bring that comp ratio down further. We'll see what that means for the fourth quarter. Right now, 68% is our best guess. But last year, we were at 75%, and we ended up at 69% depending upon the fourth quarter. So we appreciate very much the flexibility our investors and the confidence our investors have shown in us to exceed normal ratios for a period of time here. That's enabled us and given us flexibility to do great things that we're really excited about in terms of continuing to build the firm. But these kinds of ratios aren't where we want to be. We want to be at more normalized ratios, and we're committed to getting there over time. Operator: Your next question comes from the line of James Yaro with Goldman Sachs. James Yaro: So we're 9, 10 months into the second Trump administration. Companies do appear more comfortable with the regulatory backdrop. Maybe you could just talk about the antitrust dialogues that you're having with -- in the boardroom. And then maybe you could also just talk about the broader deregulatory impacts and whether that's driving deal activity as well. Navid Mahmoodzadegan: Sure. Well, look, as I noted in our remarks, clearly, the more accommodative regulatory outlook, the perception that the government is going to be more accommodating on improving transactions. Clearly, in the last administration, there was a view that bigger is worse. And I think as we look at the landscape, I don't think that's the view of the current administration. And so that is allowing for companies to think big and pursue larger transactions, which may have been more difficult in the prior administration. So that's driving the ambition and a lot of the transactional activity we're seeing today. And unless and until the administration acts in ways that are unforeseen, I think that trend will continue. And it's not just the types of deals that are going to be allowed. It's the types of flexibility around remedies and being more accommodative towards solutions to potential problems. And again, this is in the U.S. So we'll see what happens outside the United States, a different regulatory scheme. But clearly, in the U.S., it feels like everyone in the ecosystem is assuming that many things are now possible that weren't possible before. In terms of deregulation generally, I think that has added to the risk on environment and the feeling that our economy is going to continue to grow and there is a premium for growth and people need to invest in growth and future opportunities. And I think that's sort of adding a little bit of fuel to the fire, both in terms of where the stock market is, which obviously helps dealmaking activity, where the financing markets are. All of those corroborate enhanced deal making. James Yaro: Yes. Okay. That makes sense. So you're obviously investing in building out the secondaries business. So you clearly have a view on the importance of this offering. But just I'd love to get your perspective on how you think about the right mix of secondaries versus regular way in terms of historical context, sponsor exits, i.e., IPOs and M&A in a more normal backdrop for sponsor activity that at some point will be here? Navid Mahmoodzadegan: Yes. So I think the GP-led secondaries, the continuation vehicles, which is kind of the first part of the PCA business that we're investing in, I think that, that product is here to stay for a long time. I think irrespective of whether or not the M&A market is open or the IPO market is open, there's going to be a category of company and a category of sponsor that -- where the sponsors look at that company and say, I have more to add to this business. I see more upside in this business longer term. I want to continue to own and manage this business or this set of businesses. And yes, I need to get some return back to some of my investors who need liquidity, but I'm not prepared to sell this company yet and I'm not prepared to take it public yet. And so we think there's a permanence to the CV product that isn't directly tied to how healthy the M&A market is or how healthy the IPO market is. Clearly, there are some categories of transactions maybe over the last couple of years where one of the primary drivers was, hey, you can't sell the company right now or you can't take it public right now, and we got to get liquidity. But I think there's a much broader category of situation that is going to be around for a long time, which is why we're investing so heavily in that product. As it relates to the IPO market, look, I love the healthy IPO market. I think it's good for the M&A market. I think sponsors getting a return, whether it's through the M&A market or the IPO market is good for deal making. It's good to increase confidence in putting more money out and buying more companies and investing in more things. I think those things come together. I don't view it as if the IPO market is healthy, it takes away from the M&A market. I think these markets work very much together in terms of kind of creating a positive capital cycle. Operator: Your next question comes from the line of Ryan Kenny with Morgan Stanley. Ryan Kenny: I wanted to follow up on the regulation comment. So clearly, it's a more supportive environment. And my question is, when you talk to your corporate clients, are they hearing and feeling that message similarly? And is there any nuance in regulation that we should think about in certain industries like technology? Do you need to see a few deals in each industry get approved first before others get comfortable moving? Any thoughts there, maybe industry by industry would be helpful. Navid Mahmoodzadegan: Yes. Look, I think you rightly point out that against this backdrop of a more accommodative antitrust or regulatory backdrop, there are definitely nuances as it relates to certain types of cross-border deals, economic companies that are have security sensitivities, CFIUS and other issues like that. You're seeing some noise around certain types of media companies, right, and what's approvable and what may not be approvable. So I think there are idiosyncrasies in some of these sectors. But I think generally, putting aside some of those idiosyncrasies in some of the sectors, the overall thrust is a much more accommodative thrust. But you're right to point out that it's not -- there are elements in some of these sectors given the political landscape that create some nuance. Ryan Kenny: And then just a follow-up separately. In the quarter, there was the $19.1 million benefit to revenues from the gain on Moelis Australia. Can you just unpack what drove that? And should we expect more share sales ahead? Christopher Callesano: Yes. We booked a gain of $19 million as a result of, like you said, selling the shares in MA Financial Group. That was our Australian JV when they went public or they went public on ASX back in 2017. So we were thinking owning the shares or equity in MA Financial is not a strategic investment for us. However, maintaining that partnership and alliance with them is what's strategic. So as a result, from time to time, we sell down a portion of those shares and as we've done historically, we reclassified that gain from other income to revenues. And the rationale for that is many of our investment bankers, Moelis bankers worked on helping build this business over the years. And as a result, we consider these gains equivalent to revenues. So we do still have some investment, and it is possible from time to time periodically. Last time we did it was a year ago at this time, we will sell some additional shares down. But again, the important thing is we continue with that strategic alliance with MA Financial. Operator: Your next question comes from the line of Brennan Hawken with BMO Capital Markets. Brennan Hawken: I'd like to follow up on that Moelis Australia question. So you said that you had reclassified the revenue from other income to adjusted revenue and that, that movement was EPS neutral. That EPS neutral clause, does that just applies to the reclassification of revenue, not the impact of the gain, right? Christopher Callesano: Yes. We reclassify it. So the gain is $19 million. It's booked in other income, and we reclassify it to revenues. That's right. Brennan Hawken: Got it. Got it. Okay. Were there any expenses tied to that gain? Like did that impact the comp ratio? Should we back that out of the adjusted revenue to think about what a sort of core comp ratio is? Can you maybe help us understand how that gain might impact the expenses? Christopher Callesano: Yes. I mean, I think, again, like I said, our rationale is bankers do work on this, right? So we've built this business over the years. And for the evaluation of comp purposes, we do reward people for their contribution to this value creation. So we don't book. They're an equity method investment, right? So we just pick up below the line any of their P&L, and we don't receive that portion or a portion of their revenue. So as a result, we just wait until we have a realized gain and we take that realized gain and we book it to revenues. Brennan Hawken: Got it. Okay. And then on the MD count, it looks like that's down by 3 quarter-over-quarter. And you did have a -- it looks like you had a $6.5 million benefit from comp forfeiture. I know that there was a sort of senior person who left in restructuring, but was there sort of more elevated churn here this quarter, which led to that? Or was that just sort of a single isolated incident? Or have you been more actively managing or refocusing the talent pool? Any color on that would be great. Navid Mahmoodzadegan: Yes. If you kind of look year-over-year, I think our MD count has gone from 157 at this point last year to 170 today. And when you look at that, that's the increase, the gross number of MDs is roughly split kind of half and half between internal promotes and external hiring. There have been some levers in that, which is what gets you to your kind of net adds of, call it, 13 over the last 12 months. But it's -- again, as I said, a combination of internal promotes and external hiring that makes the difference. Christopher Callesano: Yes. And those forfeitures, right, of compensation. So it really depends, right? So it is ex-employees. It could be competing or other reasons. Sometimes they're booked to other income for GAAP purposes. Sometimes they're not. Sometimes they're just credited directly to compensation. So we just reclassify it to compensation. That's where we think it belongs, and that's where the expense was originally booked. So that's why we do that reclassification. It really just depends on how GAAP books it. Brennan Hawken: Okay. So it's not necessarily an indication that there was -- anything was elevated here this quarter? Christopher Callesano: No, no, not at all. Operator: Your next question comes from the line of Brendan O'Brien with Wolfe Advisors. Brendan O'Brien: To start, I just wanted to follow up on Ken's first question on the restructuring outlook earlier and maybe drill down more specifically to your business. You did a good job outlining some of the bigger concerns on the credit side, but at the same time, the Fed lowering rates should help to alleviate some of the stresses put on corporate balance sheets. And so just given these puts and takes, I just wanted to get a sense as to how you're thinking about the outlook for this business, both in 4Q and into 2026. Navid Mahmoodzadegan: Sure. Look, we -- as I think you all know, we have an outstanding practice in CSA and restructuring, a great team that's been successful for a long time and continues to be successful. We are seeing more muted level, to your point, around ample Capital Markets, good economy. We are seeing less new origination of business than we saw a year ago. I remind everybody that last year was a record year for our CSA business, up 30% over the year prior. And so I think we've sort of outlined that business was unlikely to be flat this year, likely to be down a little bit. And part of that is the market environment and part of it is a tough comp over last year. Brendan O'Brien: That's helpful color. And then just drilling down a bit more on the sponsor side and specifically exits. Obviously, that's been a big area of focus over the past few years. But with the IPO market reopening, one of your peers citing a notable uptick in bake-offs and the secondary market already eclipsing last year's record level. It feels like exit activity has really taking a step function higher. Just want to get a sense as to what you're seeing or hearing from sponsors on the outlook for exits and if you're seeing any signs of activity on the exit side, in particular, broadening out beyond the highest quality assets. Navid Mahmoodzadegan: Yes. Look, I think we said that in our remarks and in one of the other questions. We're definitely seeing the broadening. I think that's kind of what's been missing is kind of just the heavy volume of middle market activity, and we think that's coming. We're seeing signs of that already. Our engagement level, dialogue level, pitch activity in our sponsor universe is very high. So our outlook for that business is good and getting better. And I do think as you kind of roll forward here into 2026, there's likely to be further improvement in the overall level of sponsor activity. We're definitely seeing that as well. Again, supported by ample financing, pent-up demand and need for sponsors to get liquidity. The fact that there's an active -- more active strategic environment now helps, too, because sometimes those businesses are sold to strategics and not sponsors. And you're seeing it on take privates, some large-scale take privates here recently. So there's more take private activity as sponsors look at companies that are better off in the private markets. We're seeing it with holdco financings. We're seeing it with CVs. And so there is a lot of activity around sponsors these days, and we're really well positioned to capitalize on given that, that's been a fundamental and important business for us since the beginning of Moelis & Company. Operator: Your next question comes from the line of Alex Bond with KBW. Alexander Bond: Now that we're a decent way through the fourth quarter, just wondering if you could share how you're starting to think about the pace of your hiring activity in 2026 relative to this year. Maybe assuming we continue to see a gradual improvement in M&A volume, should we expect hiring to be at a similar level next year relative to this year? And then also just maybe how you're thinking about the hiring trajectory specifically for the PCA business? Navid Mahmoodzadegan: Sure. Thank you for the question. Yes, look, we're -- we still have -- as I mentioned, we hired 5 people this quarter, 5 MDs this quarter, 10 for the year. We have a number of active dialogues that we're trying to get over the finish line today. And as you know, recruiting is a 365 year-round affair. And our focus is on building out PCA, as you mentioned, that's a really important strategic priority for us to make sure we get that team built out fully because we think there's a significant opportunity to go take advantage of. And we're focused on other big TAMs where we're still light on coverage or where there's still white area that we can fill in and go after big opportunities. So hiring continues to be a very important priority. We have lots of great conversations happening and a lot of focus on trying to convert those and have people join us. The hiring activity that we've had over the last 3 or 4 years has been really spectacular. The success we've seen in Capital Markets and oil and gas and tech and the early signs in PCA have just given us a lot of confidence to continue to attack the hiring opportunity and continue to grow the franchise. Obviously, we want to do that in a prudent way. We want to do that in a way that's consistent with our culture that's critical. And we want to bring in people on the platform that can really thrive as partners of the firm. Operator: Your next question comes from the line of Nathan Stein with Deutsche Bank. Nathan Stein: I wanted to ask a bigger picture question. So the group sold off today, early this afternoon after the Fed comments came out. Do you guys -- how do you guys think about maybe the change in the marketplace just given the Fed comments today? Navid Mahmoodzadegan: Look, as I said, I don't -- you can always sort of impute go-forward market activity based on perceptions of interest rates and where interest rates are going. And clearly, that's a variable in transactional activity, but it's not the only variable in transaction activity. As I said before, the need for strategic acquirers to get scale, efficiencies and position themselves well for technology change, the need for requirement for sponsors to return capital and keep that return of capital and deployment cycle going, all of those things are driving a lot of what's happening in the M&A market. Cost of money is a variable. And clearly, low interest rates and ample credit is a positive to the marketplace, but it's not the only variable. And so I don't read the market commentary is -- the Fed commentary is fundamentally changing our outlook for the business. We'll see what rolls forward, but I don't believe it's going to fundamentally change the direction of travel and what we're seeing in terms of demand in the environment for transactions. Nathan Stein: Great. And then if I could just ask a follow-up on pipelines in general. across different sectors. You guys have done a lot to build out your tech offering in the last few years. So maybe just talk about your M&A -- let's just say, M&A deal pipelines within tech and any other sectors you'd like to highlight? Navid Mahmoodzadegan: I was sitting down to look through our different sectors to get ready for this call and anticipating someone would ask the question of what sectors are hot and what aren't. And what I saw in our activity levels and our pipelines was pretty good broad-based strength across most, if not all, of our sectors. Certainly, tech is at the top of the list in terms of where we're seeing a lot of activity. But we're also seeing a lot of activity in parts of health care and industrials and in sports media and entertainment and the world of data centers and AI and digital infrastructure. And we're seeing it, I'll say, pretty much across the board in terms of industries where we're seeing activity, M&A pipeline building, et cetera, et cetera. So I wouldn't want to suggest it's narrow. It's pretty broad-based. Is there a follow-up? Operator: That concludes our question-and-answer session. I will now turn the call back over to Navid for closing remarks. Navid Mahmoodzadegan: Great. Well, thanks, everybody. Really appreciate your time today, and we look forward to seeing you all again soon. Thanks so much. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, and welcome to the OPKO Health Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would like to now turn the conference over to Yvonne Briggs. Please go ahead. Yvonne Briggs: Thank you, operator, and good afternoon. This is Yvonne Briggs with Alliance Advisors IR. Thank you all for joining today's call to discuss OPKO Health's financial results for the third quarter of 2025. I'd like to remind you that any statements made during this call by management other than statements of historical fact will be considered forward-looking and as such, are subject to risks and uncertainties that could materially affect the company's results. Those forward-looking statements include, without limitation, the various risks described in the company's SEC filings, including the annual report on Form 10-K for the year ended December 31, 2024, and subsequently filed SEC reports. Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, October 29, 2025. Except as required by law, OPKO undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Regarding the format of today's call, Dr. Phillip Frost, Chairman and Chief Executive Officer, will provide opening remarks. Dr. Elias Zerhouni, Vice Chairman and President, will then provide an overview of BioReference Health and OPKO's Therapeutics segment. After that, Adam Logal, OPKO's CFO, will review the company's third quarter financial results and discuss OPKO's financial outlook, and then we'll open the call to questions. Now I'd like to turn the call over to Dr. Frost. Phillip Frost: Good evening and thank you for joining us today. During the third quarter, OPKO Health continued to execute well against our strategic priorities. We completed the sale of BioReference Health's oncology division and related testing services. This transaction is a significant milestone designed to streamline our lab business and ensure profitable growth. The sale provided $192.5 million at the closing and $32.5 million in the performance-based earn-out. BioReference is now focused on our core clinical testing operations in the New York, New Jersey region and driving adoption of our 4Kscore test nationwide. We're devoting a portion of the sale proceeds to our stock repurchase program, reinforcing our commitment to increasing shareholder value. So far, during 2025, we repurchased $25.1 million worth of stock. As of September 30, we had $126 million remaining under this program. On the pharmaceutical side, we are advancing our pipeline of innovative therapeutics with 4 candidates now in the clinic and several more in the pre-IND stage. We're pleased to have significant partnerships to provide nondilutive funding to support the development process for several of these programs. This morning, we announced a research collaboration and license agreement with Regeneron, a leader and innovator in antibody-based therapies. This program will leverage ModeX's MSTAR platform with Regeneron's proprietary binders to discover and develop multispecific antibodies that allow us to explore several indications of mutual interest. Currently, ModeX has 3 programs in Phase I clinical trials. Our most recent candidate, MDX2004, a multispecific immune rejuvenator, entered the clinic last month. Our most advanced immuno-oncology medicine, MDX2001 is a T cell engager enhancer directed at 2 tumor antigens, CMet and Trop2 found on a variety of solid tumors. An abstract on this program was presented at the recent ESMO meeting in Berlin, Germany. It has advanced to its fifth cycle of escalation, which is approximately tenfold higher than the initial starting dose with acceptable safety and tolerability. Based on the outcome of these studies, we anticipate further Phase Ib expansion cohorts for next year. Our EBV vaccine being developed in partnership with Merck has advanced for immunogenicity, safety and tolerability evaluation in Phase I human trials. Enrollment in this ongoing trial is progressing well, and the data will inform the Phase II trial design. Our next immuno-oncology candidate, MDX2003, a tetraspecific T cell engager expander that targets B-cell leukemia and lymphoma. We expect this compound to enter the clinic early next year after appropriate regulatory review. Finally, MDX2301 is our bispecific tetravalent antibody designed to prevent and treat COVID infections. Funded by BARDA, we expect Phase I safety and immunogenicity studies to begin early next year. The ModeX multispecific COVID antibody neutralizes all known strains of the virus, including the most recent variants. It is designed to confer broad protection against evolving outbreaks, particularly for subjects with underlying immune impairment such as cancer patients, diabetics and the elderly, thus having great medical value potentially and global health impact. Our collaboration with BARDA continues to advance the development of broadly protective multispecific antibodies for both COVID and influenza viruses. We're progressing our development of OPK-88006 for the treatment of MASH and obesity for both subcutaneous and oral administration. We have partnered with Entera Bio for the development of the oral formulation. The subcutaneous program is expected to enter the clinic in early 2026 with the oral formulation to follow later that year. Our international operations, including OPKO Health Iberoamerica and EirGen Pharma continue to provide steady sales growth and meaningful cash flow to assist in funding our R&D efforts. Overall, we remain highly committed to maximizing shareholder value. Through strategic actions such as the sale of select BioReference assets, the execution of our share repurchase program, the advancement of the ModeX portfolio of products in clinical trials and a new ModeX R&D alliance, we are focusing our operations to provide growth opportunities while returning capital to investors. We are confident in our strategic direction, our team and our ability to deliver on our milestones. With that overview, I'll turn the call over to Elias. Elias? Elias Zerhouni: Thank you, Phil, and good afternoon, everyone. As Phil mentioned, in mid-September, we closed the sale of BioReference Health oncology assets to Labcorp. BioReference now operates as a streamlined clinical laboratory focused on its core testing services in the New York, New Jersey region and correctional facilities nationwide. In addition, its 4Kscore test franchise for prostate cancer risk assessment is poised for growth with the recent FDA label expansion, allowing use of the test without the requirement of a digital rectal exam, which opens a significant new market of primary care physicians who currently perform over 90% of PSA screening tests that rarely performed digital rectal exams. Excluding the assets sold to LabCorp, BioReference testing volume increased by approximately 5.3% in the third quarter compared with the year ago period. Our approach is to increase profitability by focusing on and expanding existing customer segments, optimizing our test menu to increase our operating margins and implementing additional operational efficiencies where possible. We're also strengthening our market position by forging novel relationships with additional ACOs, IPAs, FQHCs, regional health system and specialty health care companies. In addition, we have begun pursuing new revenue streams to bolster growth such as direct-to-consumer lab testing companies, employer-based testing and early phase clinical trials. The 4Kscore test volume increased more than 20% in the third quarter versus the comparable year ago period. As for our sustained efforts to drive operational efficiency, the BioReference employee headcount now stands just over 1,500 people, and this represents a 25% reduction from January. As a result of improved margins realized by these expense reduction efforts and strategic divestitures, BioReference is now well positioned for sustained growth and profitability going forward. Now, turning to our Therapeutics segment. We were delighted to enter into a license and collaboration agreement with Regeneron. Under this collaboration, we will apply our MSTAR platform with Regeneron's proprietary binders to develop medicines capable of targeting multiple biological pathways in a single molecule that will include disease indications of mutual interest to Regeneron and ModeX Therapeutics. Now, Regeneron will be responsible for funding the entire development process and all commercialization efforts. As part of the agreement, we will receive milestone payments for research expenses, development, clinical, regulatory and commercial achievements for each program, which taken together could total over $1 billion if multiple programs successfully advance. In addition, we'll be entitled to receive tiered royalties up to the low double digits on global net sales. We're particularly excited to be working with Regeneron given its leadership and experience in antibody therapeutics. I myself and some of the ModeX teams have already worked with Regeneron's R&D group in the past, and we look forward to reconnecting and expanding the scope of our collective efforts. Now, moving to the most advanced clinical study. Our collaboration with Merck on the Phase I Epstein-Barr Virus vaccine trial is progressing according to plan and preliminary safety, tolerability and immunogenicity data are becoming available. Over the coming months, this data will guide Merck's decision on the design and execution of Phase II studies. We have several programs in our immuno-oncology and immunology portfolio that are advancing in development. Our lead product is MDX2001, a first-in-class tetraspecific T cell engager as described by Phil, with 2 cancer targets, CMet and Trop2 and 2 T cell engagers, CD3 and CD28. It has progressed to its fifth dose level, which is 10x the starting dose in a Phase I clinical trial. We are noting acceptable safety data at this level. After enrollment of the highest possible dose cohort, we will focus on assessing signals of efficacy in select tumors in an expansion cohort. We're also pleased to present a poster on our progress with MDX2001 at ESMO 2025. MDX2004 now is a new first-in-class multispecific immune rejuvenator that has the potential to treat a variety of oncology and immunology indications. MDX2004 stimulates T cells to proliferate through 3 signaling pathways to achieve optimal activation and proliferation. Of note, it is a first-in-class multispecific antibody directed to CD3/CD28 and 4-1BB that stimulates T stem cells to undergo self-renewal and give rise to mature T cells, and that is the reason for its designation as an immune rejuvenator. We announced this week that Phase I studies on this new medicine have begun. The first patient has been administered drug at the starting dose in Australia. And this trial marks clearly another significant milestone for our technology platform. And next week, we'll make a presentation on MDX2004 at the Society for Immunotherapy of Cancer Conference or SITC. MDX2003, a tetraspecific CD3/CD28 T cell engager for lymphoma and leukemia targeting both CD19 and CD20 is in the pre-IND stage, and we expect this program to enter the clinic early next year. We continue to work with BARDA on our COVID and influenza programs. The main focus of these programs is to advance multispecific antibody protein candidates that provide broad and potent coverage against all known circulating strains in Phase I clinical trials. Our work to develop the COVID multispecific antibody is focused on the unmet need in patients with underlying immune impairment, as Phil mentioned, such as patients with cancer, diabetes or the elderly, who respond poorly to vaccination and are highly susceptible to severe complications or death from COVID infection, and we anticipate commencing Phase I studies early next year. In addition, we are advancing our pre-IND influenza program against both flu A and flu B to achieve universal protection and we'll seek additional funding to accelerate its clinical development. Through the close of the third quarter, we have received $22 million in non-dilutive funding from BARDA for these 2 programs. We are also continuing our development efforts with respect to OPK-88006, which is a novel long-acting GLP-1 glucagon receptor dual agonist to treat MASH and obesity. We're developing a subcutaneous formulation and in collaboration with Entera Bio, we're also developing an oral formulation. At the ENDO conference in July, we presented favorable pharmacologic and pharmacokinetic in vivo animal data, demonstrating excellent bioavailability for the oral tablet formulation. We're in the pre-IND stage with both of these programs and anticipate entering the clinic next year. We're also working with Entera Bio on an oral GLP-2 tablet for short bowel syndrome. Recent positive pharmacokinetic data from preclinical animal models indicate an extended half-life and robust oral bioavailability, which results -- these results were presented in September at ESPEN or the European Society for Clinical Nutrition and Metabolism Congress. This program has the potential to transform the treatment paradigm for patients with short bowel syndrome who currently rely on daily injections. Our international pharmaceutical operations continue to provide operating cash flows and despite foreign currency pressures have executed their growth plans in local currencies. Rayaldee has offset the volume declines resulting from the Inflation Reduction Act through the realization of a higher net realized price and achieved year-over-year revenue growth. So in conclusion, we're really pleased with OPKO's strategic direction with BioReference poised for profitability and growth as well as the advancement of our pharmaceutical programs and partnerships into clinical trials. So now, let me turn the call over to Adam to discuss our financial results. Adam? Adam Logal: Thank you, Elias. We ended the third quarter with over $428 million in cash, cash equivalents and restricted cash, more than sufficient to fund our ongoing operations and development plans. Capital allocation remains on track within our plans. Our strong cash position allowed us to repurchase 11.1 million shares during the third quarter of 2025. And for the full year, we have repurchased nearly 25 million shares for approximately $33.5 million. We have $126 million remaining authorized under our buyback program and expect to continue to make additional common stock repurchases throughout the end of the year. We have deployed nearly $100 million so far this year in convertible note repurchases and conversions and common stock repurchases and over $215 million since the start of 2024, demonstrating our commitment to strengthening our balance sheet and returning capital to our shareholders. Let us turn to our financial performance, starting with our Diagnostics business. Revenue for Q3 2025 was $95.2 million, including $19.5 million from the oncology assets recently sold to Labcorp. This compares to $121.3 million in Q3 2024, with the decline primarily due to revenue attributable to the Labcorp transactions that closed in September 2024 and 2025. Revenue in our continuing business has delivered strong growth, highlighted by an increase in 4Kscore volumes and resulting revenues of nearly 20%. Total costs and expenses were $115.2 million, down from $184.2 million last year. This includes $25.2 million related to the oncology assets that we sold and approximately $4.2 million in expected nonrecurring costs for severance during the 2025 quarter. Costs and expenses were partially offset by the gains recorded related to our transactions with Labcorp with $101.6 million in gains recorded in 2025 and $121.5 million recorded in the 2024 quarter. As a result, our diagnostic operating income improved to $81.6 million compared to $58.5 million in the third quarter of 2024. Depreciation and amortization expense came in at $4.7 million, down from $6.1 million in 2024. Importantly, the actions we've taken throughout the year are expected to deliver over $25 million in annualized cost savings, and we remain on track to achieve breakeven operating results in Q4 2025 and are well positioned as we head into 2026 for sustained and growing profitability. Turning to our Pharmaceutical business. Revenue was $56.4 million, up 8% or $4.1 million from 2024's $52.4 million. Product revenue was $37.7 million, down slightly from 2024's $39.1 million, reflecting lower sales in Chile as well as foreign currency headwinds within our Latin American businesses. These sales were partially offset by increased revenue from Rayaldee. Rayaldee contributed $7.5 million during Q3 2025, a 29% increase from 2024's $5.8 million, primarily reflecting lower government rebates during the 2025 period, which more than offset an approximately 20% decline in volumes. IP transfer revenue rose to $18.7 million, up from $13.2 million, which includes our Pfizer profit share payments of $8.8 million, reflecting a 25% increase from 2024's $7 million. We remain optimistic about the efforts Pfizer has made and we expect them to make throughout the remainder of 2025 and into 2026 on the effectiveness of their global commercialization program. In addition, BARDA funding increased to $8.2 million from $5.5 million, reflecting expanded activity for our infectious disease antibody programs. Costs and expenses were $80.6 million, down from $84.6 million, driven by cost containment activities throughout our Iberoamerica and Rayaldee commercial organizations, partially offset by increased R&D investment. R&D for 2025 totaled $29.6 million, up slightly from $28.2 million for the 2024 quarter, primarily due to our ModeX development activities. As a result, our pharmaceutical operating loss was $24.2 million, a 25% improvement compared to last year's operating loss of $32.2 million. Depreciation and amortization expense was $18 million in both periods. For our consolidated financial results, consolidated operating income of $48.1 million improved from 2024's $14.2 million as a result of the improved results at BioReference. Both periods benefit from gains from the disposition of assets, resulting in net income in Q3 2025 of $21.6 million or $0.03 per basic and diluted share compared to $24.9 million or $0.04 per basic share and $0.03 per diluted share in Q3 2024. You will recall the 2024 period benefited from gains on certain underlying investments. Looking forward, we're continuing to execute our multi-phase plan to drive profitability within our Diagnostics segment by reducing the fixed infrastructure cost and improving operating efficiency. Following the oncology transaction closing in September, the remaining BioReference business has a clear path to cash flow positive and profitable growth, excluding any nonrecurring or noncash items. We are resetting the Q4 outlook for 2025 to reflect the disposition of the oncology business. As a result, we expect total revenue to be between $135 million to $140 million, with revenue from services of $70 million to $75 million, revenue from products of $40 million to $45 million and other revenue of $25 million to $30 million, including our Pfizer profit share of $10 million to $12 million and revenue from BARDA of $7 million to $9 million. Total costs and expenses are expected to be between $175 million and $180 million, excluding any nonrecurring or restructuring costs. Research and development expense is expected to be between $30 million and $35 million, offset partially by the BARDA revenue. And depreciation and amortization expense is expected to be approximately $24 million. As we look forward to 2026, we're providing some high-level guidance, which will more fully detail early in 2026. We expect BioReference to be profitable and to grow revenue in the low single-digit percentages. We expect to see our in-line pharmaceutical businesses, including Rayaldee to grow in the mid-single-digit percentages and to improve its operating income by approximately low -- by low double-digit percentages. We expect NGENLA profit share payments to increase to approximately $32 million to $35 million. Finally, we plan to invest up to $100 million in our R&D programs, net of any partnering reimbursement as we expect to have up to 6 Phase I programs enrolling patients during 2026. This concludes our prepared remarks. Operator, let's open the call for some questions. Operator: [Operator Instructions] Our first question comes from Maury Raycroft of Jefferies. Maurice Raycroft: Congrats on the progress. I had one for MDX2001. Wondering if you could say how many patients you've dosed at the fifth dose level? And will you proceed to dose level 6 with the program? And is there anything more you can share on the safety profile and potentially whether you're seeing any efficacy signals at this point as well? Elias Zerhouni: Well, we've -- I'll let Gary answer that question. Gary, would you like to give those details? Gary Nabel: Sure. Elias Zerhouni: Gary Nabel is on the line. Gary Nabel: Gary Nabel, I'm the CEO of ModeX. We're in our fifth patient at the fifth dose level. And again, when the suitable observation period has been complete, then we'd go on to the next. In terms of signals, I think at this point, it would be probably not wise to comment on efficacy because any responses that you see with this small number of patients are anecdotal. And I think that really the time to take a look at efficacy would be, as Elias and Phil were mentioned, when we go to the expansion cohorts in Phase Ib. We're just as interested as you are and can't wait to get those results, but I'm afraid we just have to follow the process, and we'll certainly share any news as soon as it becomes available. Elias Zerhouni: Just to be clear, Maury, Gary is mentioning 5 patients at the current dose level, but the total number of patients is higher, obviously, that we've exposed. And obviously, we're interested in continuing, which based on all the data we have. Maurice Raycroft: Got it. Yes. It’s okay. Phillip Frost: Total numbers are close to 30 or so, but yes, 5 in this cohort, as Elias mentioned. Maurice Raycroft: Okay. And you will go to dose level 6 as well? Phillip Frost: We would expect. Maurice Raycroft: Okay. Okay. That's helpful. And I had a quick question on the 4Kscore. For that label expansion and the 20% growth that you mentioned, is the growth directly related to the expansion? And how should we think about the importance of this product as a contributor going forward? Elias Zerhouni: Yes, that's a good question, Maury. No, it's not. The growth is really based on the former label. The label was really changed this quarter. And obviously, what it does is it really expands the market to the primary care doctors. In the past, the urologists would have to order the test because they had to determine whether they need to do biopsy or MRI. Now, because you don't require the digital rectal exam anymore, which we've proven with the data that we have accumulated, Dr. [ Jane Hsiao ] was telling the FDA that it didn't add anything much to the accuracy of the test. And so that was a point that the PCPs, the primary care doctors kept asking us, we would like to have the test perform after we do our PSAs. And that is the expansion market that we're talking about. But we're just at the beginning of doing that. And as you know, the 4Kscore franchise is a national one. So it takes time to get going with that. But it's doing well on its own with the old label, and we hope it will grow significantly with the new label. Adam Logal: Yes, Maury, just to put a little bit of an explanation point on that. Through June, I think we were up either 12% or 14%. And we saw the acceleration picking up before that label change came through. So we are certainly excited about that. And obviously, we are working with payers to ensure we align volume potential with the payer policies as it relates to the DRE. Maurice Raycroft: Got it. Okay. That's helpful. And is this something you could provide more granularity on going forward just with helping us better track the progress there. Adam Logal: Yes, for sure. Operator: Our next question comes from Yi Chen of H.C. Wainwright. Yi Chen: My first question is, could you give us some more color on the Regeneron collaboration, whether the program is exclusively focused on oncology or it could be some candidates in other therapeutic sectors? And also, can you comment on how many total programs are currently ongoing? Elias Zerhouni: Let me start and then I'll give it over to you. So there's nothing exclusive on the field, oncology or immunology. We've really agreed to work on 4 programs, which may have more than one product, obviously, but 4 specific programs for specific indications, which cover metabolism, oncology as well as immunology. And with that, I'll turn it over to Gary to give you more specifications on how exactly the collaboration is going to work forward. Gary Nabel: Yes. Thanks, Elias. As Elias mentioned, one of the reasons we're excited about this collaboration is that it will allow us to work in areas that we haven't worked on in the past, and they would include the areas of metabolism and more activity in the area of immunology as well as some selected oncology opportunities. As you know, Regeneron has a very deep library of human antibodies that are monoclonals. We have the capacity to put those together into the formats that allow us to make multispecifics. So together, we can do things that neither of us can do alone. And that's always the mark of a good collaboration. As Elias pointed out and as in our press release, there are 4 targets to start with, but the agreement is written in a way where that can be expanded should we find something of interest. So a lot of work to do to explore the initial candidates, but we're very excited to work with them because of their deep expertise in the antibody area and their success in bringing products to patients in the past. Yi Chen: Got it. And could you tell us whether the milestone payments include both preclinical as well as clinical milestones? And also, could you give us a rough estimate as to the time frame to -- for the first milestone? Is this something we can reasonably expect to occur in 2026? Elias Zerhouni: The answer is yes and yes. So we have preclinical milestones and then post Phase I milestones if Regeneron takes it over. Regeneron will reimburse us for all the preclinical studies and costs, and then there will be milestones for progression within that all the way to Phase I. And then after that, they take it and there will be the typical milestones, development, approval and commercial following that. Operator: Our next question comes from Kevin DeGeeter of Ladenburg Thalmann. Kevin DeGeeter: Maybe 2 for me. The first one is on MDX2001. Can you walk us through your current thinking on how you're thinking looking at patient selection for the Phase Ib expansion cohorts? Are there specific tumor types that makes sense based on how you think about the profile of this molecule? Elias Zerhouni: Yes. Well, based on what we've done so far, we obviously read out the safety and tolerability in different types of tumors and then we narrow it down. But I'll let Gary be more specific on that. Gary? Gary Nabel: Yes. I would say there are criteria that we apply in the first part of Phase I, where you're just trying to explore and confirm safety, we're pretty agnostic to the tumor types. Once we've maximized the dose and we're seeing -- and once we see biologic activity in our patients, what we then do is we look at the tumor types where we see the highest levels of CMet and Trop2 and also the tumor types that are -- have shown, I'd say, the property of being more immunogenic that they are more likely to respond to immune therapies. We will ultimately explore the harder targets as well, but we'd like to establish efficacy where we have a better chance of succeeding first. High on our list are tumors like lung cancer, like non-small cell lung cancer is very high on our list. And then depending on availability of patients, tumors like renal cell carcinoma and perhaps some of the PD-1 failures in melanoma. But after that, any tumor type, and there are 13 different tumor types that express CMet and Trop2, we essentially will go down that list. And at some point, we may do what we call an expanded basket trial as well where we look for signals of regression. But the first expansion cohorts will be based on levels of expression and expected response to immune therapy in humans. Kevin DeGeeter: That's very helpful. And then as my follow-up question. Adam, with regard to the guidance of getting the diagnostic service business to profitability, how do you -- what's sort of the baked-in assumption with regard to the sustainable gross margin of the -- your remaining diagnostic services assets? Adam Logal: Yes. So gross margins, we expect Q4 to be in the mid-20s. And then with the main reason being in the mid-20s and that the high 20s is just the challenges around the holiday season in December. In the first half of next year, we would expect that number to get into the high 20s to low 30s. Operator: Our next question comes from Ted Tenthoff of Piper Sandler. Edward Tenthoff: Congrats on all the progress, including the new Regeneron deal. It really feels to me like ModeX just as the gift that keeps giving. Is there other updates that maybe could be happening on the partner front in infectious diseases beyond obviously, the great EBV deal with Merck? Elias Zerhouni: I'll let Gary respond. Gary, can you respond? Gary Nabel: Yes. Well, needless to say, we do -- as you point out, we do have other infectious disease targets that we're working on is besides COVID. We're very encouraged by the early data with flu, with the caveat being that, that's all preclinical at this point. But with BARDA, we're hoping to move those products into Phase I as well. We also have a program for HIV and have discussions with the various major players, the pharmas involved in HIV, particularly now looking at opportunities to either improve treatments or eventually to try to affect cure in some patients with some of our immune therapies. And then the last thing I should point out is that our new molecule, MDX2004 that just started in the clinic this week as an immune rejuvenator has potential for treating a variety of different viral infections and nonviral infections, a rejuvenator of the immune system. So after we establish the safety, which is the goal of the first studies, we'll be exploring that as well. So we continue to update partners or potential partners on our progress. And at the appropriate time, we'd be delighted to work together with the relevant experts in the field. Edward Tenthoff: That's really helpful. And I'm so glad you brought up MDX2004. What are other indications where it might make sense to develop this unique multi-specific? Gary Nabel: Well, there are a number. One that comes to mind is hepatitis B. We know, for example, that hepatitis B, a certain percentage of cases will clear with time if the immune response is strong enough. And so again, after safety is addressed, that would be one area that we would want to explore further, and there are a variety of ways to do that. Even for chronic diseases, even where there's chronic infection, for example, in diabetics, where the immune system is really not functioning correctly, there's some potential value to providing a boost to the immune system to protect against everyday pathogens and perhaps even to enhance vaccine elicited responses. HIV -- chronic HIV is another example. So we do think for MDX2004, in addition to the immuno-oncology applications, that's an aspect that we would be very interested in doing further studies. Edward Tenthoff: And sorry to keep asking, but each of your answers prompts another question. Could you envision a day where you combine MDX2004 with some multispecific cancer assets? Gary Nabel: Yes, it's a great question. And the answer is yes. We could imagine using combinations of that sort. And it doesn't need to be limited to just the ModeX immunotherapies. You could imagine doing combinations with PD-1s, with CAR T cells. So there is a range of potential, obviously, early days. We need to get some experimental data for it, but there are a number of indications that I think would be worthy of further consideration. Operator: Our next question comes from Yale Jen of Laidlaw & Co. Yale Jen: Just a few here. The first one is in terms of the EBV virus vaccine data, first Phase I data, do you anticipate to report that data in near term? Or you think that Merck may not report that data just to go ahead for the Phase II? Elias Zerhouni: Yes, yes, you should, you should because you're on the coordinating committee. Gary Nabel: Yes. Thanks, Elias, and thank you for the question. We're in very close contact with Merck. Merck is obviously responsible for executing the trials, but we work together closely and look at the data and discuss what is the best way forward. The decision about when and where to report will, of course, be Merck's. It is something we've discussed, and I think they understand that there is an obligation to present data that's part of the NIH guidelines on doing clinical studies in humans. So I think that -- and as you know, Merck is very science and data-driven. So I would expect that at the right time, which I think is when the data is complete and we can understand what it means, I would be surprised if they didn't report it. And I -- how that relates to the start of Phase II, I can't say at this point. My guess is that it would be somewhere within a time frame where they've made their decision and would be progressing the study. But they're very science-driven and I think, responsible in their clinical development. Yale Jen: And maybe a follow-up on that is that would either Merck or you guys will at least inform the public that the program we are heading to or starting Phase II study? Gary Nabel: When the decision is made for sure, yes. I think that will be shared. And for those Phase II studies, as you can imagine, for EBV, you have a select population that you're going to be studying. You have -- you're looking for subjects who are EBV negative, and that's actually a minority of our population. And you're also looking for patients who are highly susceptible to the effects of infection and particularly to infectious mono. So I think that you would almost have to make the trial known to those people. I think many of them will be early college aged students who will be at risk of acquiring infectious mono when they start school and they're exposed to EBV through their classmates. So I think very much so it would be something that would be out in the public domain once it starts. Yale Jen: Okay. Great. That's very helpful. Maybe the last question here is that you guys mentioned that you have a program which is targeting CD19 and CD20 together. Now the question is that at least in many tumors -- cancers that the CD19 and CD20 seems very much overlap in terms of their time of expression in the cells progresses. So what was the rationale in terms of design this product with highly sort of overlapping expression period. Just curious about that. Elias Zerhouni: Yes. I'll just try -- go ahead, Gary. Go ahead. Gary Nabel: No, go ahead, Elias. Elias Zerhouni: I just wanted to -- no, I just want to correct something. It's not always overlapping. Actually, we know that in cases of lymphoma and leukemia, sometimes what you see the CD19 disappears and then there is a clonal expansion of CD20. Or if you do CD20 only, you can see CD20 going down and then a clonal expansion of CD19. That's the idea of having 2 targets because then you prevent or delay the appearance of resistant variants. Correct me if I'm wrong, Gary, but I thought that was clear that we're not addressing tumors that have both CD19 and CD20. Obviously, some will have that. But the population that resist therapy often has the emergence of a clonal CD20 or a clonal CD19 that then recurs that makes the disease recurrent. Gary, go ahead, if I missed anything. Gary Nabel: Yes. No, no, I think you said it. I think another way to state it is that when many lymphomas arise, you're correct that there is both CD19 and CD20 on those lymphomas. But what we're seeing increasingly is that after treatment and in some cases, with glofitamab as a T cell engager or with CAR T cells, which often will target CD19, sometimes CD20. Once you start selecting against those tumors, you then promote the outgrowth of variants that now are downregulating the first antigen, in many cases, CD19, and they become resistant to the therapy. So the idea would be that at the start, this dual targeted antibody would allow us to treat the escape mutants from those other therapies. Now should it prove to be effective, and we think there's a good chance it could, if it works, then it could allow you to move up in the treatment line that you would actually use that earlier so that you wouldn't give the tumors a chance to develop -- to down modulate and to escape. So this is a way of -- in the long run, we hope of preventing tumor escape and to provide better upfront coverage. There's already some data in the CAR T cell world that some of the dual-targeted CAR T cells say, against CD19 and CD20 do better than CD19 alone. Our approach now does this with an engager-like molecule, which is a lot easier to administer to patients. And so we think it's worth advancing this for more -- so it would be available for more patients. Elias Zerhouni: Let me add one point that may escape a lot of folks. Our [ quadri-specific ] does not need to engage both CD19 and CD20 to be active. If it engages CD19 alone, it will be effective. If it engages CD20 alone, it will be effective. It doesn't have to be simultaneous. And that's really an important concept because what you see early on, you have a dominant clone, dominant CD19, 90% of the cells are CD19 positive. And then you may have a much lower proportion of CD20s. It doesn't matter because our antibody will attack the CD19, they will regress and then the CD20 will emerge. And then at that point, you attack the CD20 or if they're both equivalently present, then both of them may be engaged and attacked at the same time. You see what I'm saying. We don't depend on having both the CD19 and the CD20 engaged for the therapy to be effective. I think that's an important basic concept. Yale Jen: Okay. Great. That's a very clear explanation. I really appreciate that. Elias Zerhouni: By the way, it's the same for MDX2001. You don't have to engage both CMet and Trop2 to make it happen, but it does help in controlling the heterogeneity of the disease, depending on how many CMet or Trop2 receptors you have. The same is true for CD19 and CD20. Operator: Our next question comes from Michael Petusky of Barrington Research. Michael Petusky: Adam, I just want to clarify something real quick. The $4.2 million in severance, that's in addition to the $25.2 million of expenses -- costs and expenses associated with the assets that are being sold. Is that correct? Adam Logal: That's right. Michael Petusky: All right. Great. And then I guess one of the earlier callers sort of alluded to increased granularity. I'm going to actually give it a shot and ask for it now. Would you guys be willing to share sort of year-to-date revs through 9 months of 4Kscore or third quarter revenue associated with the test? Adam Logal: So we haven't separately disclosed it yet, Mike, but we certainly are -- we'll take it back and we'll start to provide more clarity there. Michael Petusky: Okay. Could I ask in terms of the -- and I really super appreciate the '26 high-level guide. In terms of the low single-digit growth that you guys expect in the lab business, what are you assuming around volume growth and pricing? I mean, I don't know, is pricing sort of a neutral, a bad guy? Can you just sort of talk about what you expect in terms of volume growth and pricing for '26? Adam Logal: Yes. Thanks for the question on that one. So we would expect volume growth to be in the low single-digit numbers. We're assuming stable pricing. I think as we see more success with some of the conversations around 4Kscore, we see potential upside for overall reimbursement, which would drive up total ASPs. But beyond that change, ASPs would be pretty consistent with what we've seen this year. Michael Petusky: Okay. And then just last one and sticking with the ‘26 high-level guide. The Pfizer profit share guide that you gave, to me, feels a little lighter than I would have guessed. Can you just talk about what's going on there in terms of conversion to weekly and just any other sort of data points you can share around that relationship and that effort to get that business going? Adam Logal: Yes. So the overall market, I think, is converting slower than what we thought and I think what many in the industry thought. There's not many daily patients today that are converting as quickly as what we expected to see in the original models. So that phenomenon is going to continue. I think even though there's 3 players out there with us and 2 competitors, we think the market is -- should start to pick up steam, but it just -- it hasn't. We think Pfizer has been done well from a global perspective. We think based on the data we look at from Symphony and IMS, we think that data shows that Pfizer has about 1/3 of the overall long-acting market. So they're competing globally quite well. They've got a bunch of efforts to increase share in each one of the territories they've got the product in, and we think they're going to be successful. We've talked a little bit about the expansion trials that will increase the number of indications that it will have access to, and we know they're pursuing those and hope to get approval for those in a few years' time. We've taken a 10% to 15% increase over current year forecast for the profit share. Certainly, we'd love to see it come in better than that, but I think that's consistent with what we saw this quarter, in the last couple of quarters where we think we'll be at, at this time. Hopefully, that helps. Michael Petusky: Great. It really does. Let me just sneak one last one in. Just around -- and this should be a quick answer, I think. 4Kscore, I think you said the test volumes were up 20% in the quarter. Would revenue be up approximately 20%? Or would that be lagging that 20% figure? Adam Logal: It's similar, both the same. Operator: This concludes our question-and-answer session. I would now like to turn the conference back over to Dr. Frost for any closing remarks. Phillip Frost: Well, I want to thank everyone for your participation and good questions, and we look forward to continuing the conversation 3 months from now. Thank you. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good day, and welcome to the Chipotle Mexican Grill Third Quarter 2025 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead. Cynthia Olsen: Hello, everyone, and welcome to our third quarter fiscal 2025 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Scott Boatwright, Chief Executive Officer; and Adam Rymer, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I will turn it over to Scott. Scott Boatwright: Thanks, Cindy, and good afternoon, everyone. Our third quarter performance fell short of our expectations due to persistent macroeconomic pressures. However, we are moving quickly with a clear actionable plan to accelerate transaction growth. Let me first review our third quarter results. Sales grew 7.5% to reach $3 billion including a 0.3% increase in comp. Digital sales were 36.7% of total sales. Restaurant-level margin was 24.5%, a decline of 100 basis points year-over-year. Adjusted diluted EPS was $0.29, an increase of 7% over last year. And we opened 84 new restaurants, including 64 Chipotlane. Now I want to spend a minute addressing a few of the consumer headwinds we have experienced. Earlier this year, as consumer sentiment declined sharply, we saw a broad-based pullback in frequency across all income cohorts. Since then, the gap has widened, with low to middle-income guests further reducing frequency. We believe that this guest with household income below $100,000, represents about 40% of our total sales. And based on our data is dining out less often due to concerns about the economy, and inflation. A particularly challenged cohort is the 25- to 35-year-old age group. We believe that this trend is not unique to Chipotle and is occurring across all restaurants as well as many discretionary categories. This group is facing several headwinds, including unemployment, increased student loan repayment and slower real wage growth. We tend to skew younger and slightly over-indexed to this group relative to the broader restaurant industry. Finally, the promotional environment has intensified with value as a price point and menu innovation escalating throughout the year. Despite these headwinds, Chipotle maintained stable wallet share in the third quarter, but we aim to get back to consistent share gains. While value as a price point is not and will not be a Chipotle strategy, we are using this challenging period to strengthen our consumer flywheel by improving execution, enhancing how we communicate value, and accelerating menu and digital innovation. I will give you more specifics on our initiatives to drive transactions in just a moment. But first, I will review our 5 key strategies that will help us win today and grow our future. And these include: running successful restaurants with a people accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; sustaining world-class people leadership by developing and retaining top talent at every level; making the brand visible, relevant and love to acquire new guests and improve overall guest engagement; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers and in our supply chain; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. I will start with a combination of operations and world-class people leadership. We recently held our team director conference with our leaders who each oversee a subregion or region of the country. What is incredible about being in a room with these 80 leaders is that 85% were promoted internally and the average tenure is nearly 15 years. Additionally, 29 started as crew members and grew within the organization. So this group understands that during challenging times, experience in the restaurant is more important than ever, and improving it will build loyalty and drive higher frequency in the future. During the meeting, we discussed that Chipotle has experienced slowing transaction trends several times since going public. During each period, we doubled down on getting the fundamentals right in our restaurants, which reinforces and strengthens our value proposition through execution, not discounts. And this enabled Chipotle to exit each period stronger with accelerating transaction trends that followed. As a reminder, our value proposition includes food made fresh with the highest quality ingredients, prepared using classic culinary techniques, served in generous portions with reliable accuracy and fast, friendly service. Currently, all of this is delivered at a price point that is 20% to 30% below our peers. This gap has widened over the last few years as our pricing has consistently trailed the broader restaurant industry. In fact, our pricing has tracked more closely with food at home and food away from home. Bottom line, our value proposition has never been stronger. Now it is important that we deliver this exceptional experience consistently across 4,000 restaurants every day for every guest. With this in mind, we renewed our problem detection survey. While we improved in key areas like dining room cleanliness, friendliness and portion sizes, we have room to be better. For example, in my visits to our restaurants, I still see inconsistencies in delivering Chipotle standard of excellence, including digital order accuracy, ingredient availability and the cleanliness of our dining room and drink stations. To address this, we are reemphasizing standards with system-wide retraining and are resetting quarterly bonus incentives to better align with digital order accuracy and the guest experience. Additionally, we are upgrading our restaurants with a high-efficiency equipment package, or HEAP, as we call it, to improve the team experience and throughput, while maintaining or improving upon our high-quality culinary. As a reminder, these include the dual-sided plancha, the three-pan rice cooker and the high-capacity fryer. While throughput reviews continue to show progress on expo and the 4 pillars, we believe the rollout of HEAP will drive the next step function change in throughput as it simplifies prep, enabling our teams to be properly deployed at peak periods more consistently. In restaurants where our high-efficiency equipment package is live, feedback from the field has been positive. Our teams report more consistent, higher-quality culinary execution, more efficient prep, and an overall improved team experience. For example, the new plancha cooks chicken and steak to perfection in less than half the time, expanding morning capacity and helping us to keep up through peak. In these restaurants, we are seeing the taste of food and guest satisfaction scores improve in addition to a yield savings and greater labor efficiency. We remain on track with the rollout of HEAP across the country, which we anticipate will take around 3 years. Shifting to marketing and menu innovation. In the third quarter, we accelerated our marketing spend to communicate the brand's extraordinary value through menu innovation, our rewards platform and high engagement promotions like the college football BOGO and Chipotle IQ. Based on our data, these initiatives successfully drove transactions and deepened guest engagement, helping to offset some of the incremental consumer headwinds in August and September. This response reinforces our focus on transaction-led growth going forward. I will start with menu innovation. Through our research, we found that over 90% of Gen Z consumers say they would visit a restaurant just for a new sauce. Adobo Ranch proved this to be true and it was our first new dip in 5 years that help acquire new guests and drive incremental transactions. Earlier this month, we rolled out Red Chimichurri, which pairs exceptionally well with our limited time offer, carne asada. The sauce is prepared with only real ingredients, no artificial preservatives, colors or flavors and made fresh in our restaurants every day. As we rolled it out, it drove a step-up in transactions and is around low double-digit incidents. It also drove an acceleration in trial of carne asada. Our culinary team is working hard to meaningfully accelerate our pace of innovation for 2026 to deliver new flavor experiences that are on trend, on brand, and operationally friendly to execute. In addition to sides and dips, our innovation will include 3 to 4 limited time protein offers. Our past cadence of 2 offers a year has helped to drive a step change in transactions. In fact, we see in our data that new and existing guests who purchase LTOs increase frequency and spend over the following year compared to guests who do not purchase an LTO. Adding 1 or 2 more will keep Chipotle more visible, relevant and loved throughout the year. Moving forward, we also plan to build awareness around new occasions that we believe could scale and be sizable pieces of our business over time. A few weeks ago, we launched a 60 restaurant catering pilot in Chicago. The test includes the high-efficiency equipment package to expedite prep and increase capacity in addition to a new technology stack to better manage orders. We also plan to make a full marketing push to drive demand into catering, including third-party platforms. As a reminder, our goal is to scale the catering business within our restaurants without disrupting the core operations. With catering at 1% to 2% of sales versus our peers at 5% to 10%, it could represent a meaningful opportunity in the future. And last month, we rolled out Build Your Own Chipotle, our version of a family or group occasion with the ability to build custom bowls and tacos for a party of 4 to 6. Early guest feedback has been positive and we are seeing little cannibalization as it is bringing new guests and driving higher frequency. We believe the family or group occasion is another big opportunity over time as groups of 4 or more only make up about 2% of transactions. Finally, we are elevating how we communicate Chipotle's value. Despite our extraordinary value proposition, we are seeing examples where this is not reflected in consumer perception. We are planning to launch a new creative campaign that spotlights what sets Chipotle apart, including clean ingredients, freshly prepped in our restaurants each day using classic culinary techniques, served in abundance at a speed and price point you can't get anywhere else. You will see new ads that address these aspects of our value proposition in really creative ways rolling out over the coming quarter and into 2026. Now turning to digital. We believe we have an opportunity to create more engaging experiences that drive consumers into the rewards funnel, increasing our active members and resulting in higher frequency and spend. We learned from Summer of Extras that gamification is a great way to drive frequency, even with our most infrequent guests. Combination of Summer of Extras as well as incremental promotions like Chipotle IQ and Freepotle, resulted in loyalty comps accelerating versus non-loyalty comps over the last several months. Additionally, our College Rewards program or Chipotle U, is off to a good start as enrollees are increasing their spend after joining the program. We will continue to build awareness around Chipotle U and believe the program will be a great way to increase engagement throughout the year with this important cohort. Going forward, we are planning to make some significant additions to the rewards program to drive an increase in active members and improve engagement. We'll have more to share in the coming quarters. Now moving to expanding access. Over the past several years, we have made tremendous progress scaling our new restaurant openings from 140 openings in 2019 to an expected 315 to 345 this year, all while delivering industry-leading economics and returns, on average, that is nearly 1 new restaurant opening every day. In North America, our new restaurant openings remained strong with consistent new restaurant productivity around 80% and year 2 cash-on-cash returns around 60%. We remain confident in our ability to reach 7,000 restaurants long term. In Europe, we have made great strides in culinary and operational execution, and we continue to grow comps, restaurant margins and cash-on-cash returns. Next year, we will begin to expand new restaurant openings in the region, and we continue to believe Europe is a big opportunity for Chipotle over time. In the Middle East, we opened 2 partner-operated restaurants with the Alshaya Group bringing our total to 7 restaurants, including our first in Qatar. Additionally, this week, we opened our first Chipotlane outside of North America in Kuwait and we will open 2 additional partner-operated restaurants in the Middle East next month. The familiarity, excitement and fandom for the brand delivered at U.S. standards has been strong, reflecting an opening volumes that rival the best we have seen in the U.S. and Canada. And in September, we announced our first joint venture partnership in Asia with SPC, with restaurants in South Korea and Singapore anticipated to open in 2026. South Korea is a trendsetter for pop culture across Asia with growing influence in the United States and the response to our announcement has been exceptionally strong. With high brand familiarity in both markets, a passion for exceptional culinary experiences, and a rapidly evolving dining out landscape, these are ideal entry points for Chipotle in the region. In 2026, we anticipate opening between 350 and 370 new restaurants. In addition to growth in North America, this will include 10 to 15 new partner-operated restaurants in the Middle East, South Korea, Singapore and Mexico in 1 to 2 new company-owned restaurants in Europe. To close, I want to reiterate that our brand and value proposition are in a great place, and we are leveraging this challenging time to refocus and provide clarity for our organization. Through our rigorous ground-up review of the business, we have identified ways to accelerate our flywheel of operations, marketing and digital that will further strengthen and grow this great brand. In operations, we are elevating hospitality and throughput. In marketing, we are sharpening our message to highlight our extraordinary culinary and strong value proposition, while expanding menu innovation and growing new occasions. And in digital, we are creating more engaging personal experiences that deepen our guest loyalty and grows our rewards platform. We are also working to define the next evolution of our long-term strategy, which we are calling recipe for growth. and we'll have more to share in the coming quarters. As we execute this plan, we are confident that we will return to consistent, positive transaction growth, putting us on a path to surpass $4 million in AUVs over time, expand to 7,000 restaurants in North America long term, and accelerate international expansion as we make our way to becoming a global iconic brand. With that, I will turn it over to Adam. Adam Rymer: Thanks, Scott, and good afternoon, everyone. Sales in the third quarter grew 7% year-over-year to reach $3 billion, including a comparable sales increase of 0.3%. The restaurant-level margin of 24.5% declined about 100 basis points compared to last year. Earnings per share grew 4% year-over-year to $0.29 on a GAAP basis and grew 7% to $0.29 on a non-GAAP basis adjusted for unusual items. During the quarter, we experienced another step down in our underlying trend. While we did see encouraging results as we accelerated our marketing spend and rolled out carne asada, and Red Chimichurri, our underlying trends remained challenged throughout the quarter and into October. Taking this into consideration as well as the ongoing macro uncertainty, we now anticipate full year comps to decline in the low single-digit range. As a reminder, we will be rolling off 2 points of price in early December. Additionally, inflation is accelerating into the mid-single-digit range, primarily due to tariffs and rising beef costs, and we anticipate it will remain in this range in 2026. We do not plan to fully offset this incremental inflation in the near term. And while this will pressure margins, we think it's the right thing to do to continue to provide extraordinary value to our guests during this challenging economic backdrop. I will now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 30%, a decrease of about 60 basis points from last year. The benefit of our menu price increase from last year and cost of sales efficiencies more than offset inflation, primarily in beef and chicken as well as the impact of tariffs. Tariffs impacted the quarter by about 30 basis points, and we continue to estimate that we will see about a 50 basis point ongoing impact from tariffs which does not include any impact from Mexican or Canadian imports that fall under the USMCA exemption. For Q4, we anticipate cost of sales to be in the high 30% range as we have a full quarter of our premium carne asada limited time offer as well as higher beef prices. Labor costs for the quarter were 25.2%, an increase of about 30 basis points from last year, as higher pricing was more than offset by lower volumes and wage inflation. For Q4, we expect our labor cost to be in the high 25% range with wage inflation in the low single-digit range. Other operating costs for the quarter were 15%, an increase of about 120 basis points from last year, primarily driven by higher marketing costs and lower sales volumes. Marketing costs were 3% of sales in Q3, an increase of about 90 basis points from last year. As Scott mentioned, we accelerated our marketing spend in the quarter, which helped to offset some of the slowing underlying trends we experienced in August and September. We expect our marketing costs to remain around 3% of sales for Q4 and for the full year. For Q4, we anticipate other operating costs to be about 15%. G&A for the quarter was $147 million on a GAAP basis or $139 million on a non-GAAP basis, excluding about $8 million related to retention equity awards granted to key executives in August of 2024. G&A also includes $137 million in underlying G&A, $8 million related to noncash stock compensation, which included a reduction in our performance share accruals, $1 million related to payroll taxes on equity vesting, $1 million related to our upcoming All Manager Conference, which will be held in Q1 of next year, offset by $8 million in lower bonus accruals. We expect G&A in the fourth quarter to be around $161 million on a non-GAAP basis, which will include $145 million in underlying G&A as we make investments in people and technology to support our ongoing growth, around $26 million in noncash stock compensation, although this amount could move up or down based on our actual performance, around $2 million related to our upcoming All Manager Conference offset by $12 million in lower bonus accruals. Depreciation for the quarter was $91 million or 3% of sales. For 2025, we expect it to remain around 3% of sales. Our effective tax rate for Q3 was 23.1% for GAAP and 22.8% for non-GAAP. Our effective tax rate benefited from lower nondeductible expenses. For fiscal 2025, we estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $1.8 billion in cash, restricted cash and investments with no debt. During the third quarter, we purchased $687 million of our stock at an average price of $42.39 bringing our year-to-date total to a record $1.67 billion at an average price of $47.74. During the quarter, the Board authorized an additional $500 million to our share repurchase authorization and at the end of the quarter, we had $652 million remaining. To close, I want to thank all of our restaurant and restaurant support teams for their hard work and commitment to Chipotle. In times like these, our strong economic model gives us the flexibility to invest in our brand, our guest experience and our value proposition. And as we have seen in the past, this will further strengthen Chipotle and allow us to emerge from this period of consumer uncertainty even stronger than when we entered it. We are confident in our path forward, and we are ready to take your questions. Operator: [Operator Instructions] The first question today comes from Andrew Charles with TD Cowen. Zachary Ogden: This is Zach Ogden on for Andrew. So Adam, last quarter, you brought up the idea of changing the pricing strategy from one per year to more of a learn and go approach. So one is that the strategy for 2026? And then two, is this a change in philosophy that you're prioritizing traffic growth over margin expansion? Or is, say, the high 20s restaurant margin at $4 million AUV still feasible and I guess, assuming normalized inflation? Adam Rymer: Yes. So as you know, we're currently running price of about 2% from the increase that we took in December of last year. And that's been enough to really offset the underlying inflation that we've seen so far this year. And that compares to the 4% that the industry is running as a whole. And so it's been really great how we've been able to offset underlying inflation while also increasing our value gap. And that's something that we've done historically, and we want to continue to do in the future. . But as we look into next year, as we mentioned in our prepared comments, inflation is stepping up into that mid-single-digit range. So given the elevated inflation and the ongoing consumer uncertainty, we're going to take a slow and measured approach to pricing in 2026. And I think that's kind of what you're getting at is we're going to kind of take it over time rather than all at once. And at this point, we don't plan to fully offset inflation in 2026. And so this will pressure margins in the near term, but we believe it's the right thing to do for our guests in this environment, and it will further increase our value proposition. And we'll create a temporary dislocation, but we believe that we can get that back over time. Scott Boatwright: I believe, Zach, you also had a question, a follow-up question about our long-term algorithm that we've talked about quite extensively. It will always be our endeavor regardless of what's going on with the economy to expand our margins responsibly based on the flow-through historically we have stated, which is around 40%. Zachary Ogden: Got it. And Scott, the last couple of calls, you've expressed confidence in returning to mid-single-digit same-store sales. So is that still the case for 2026? Or I guess what would be a reasonable time to get back there? Scott Boatwright: Yes, I believe that it is. It will all depend on what's going on in the consumer backdrop. The economists we have spoken to over the last several quarters, say, Q4, Q1 likely to be the toughest for the consumer. Specifically the cohort under $100,000 annually, which I talked about in prepared remarks. And then some easing in Q2. So I don't have a crystal ball, but here's what I will tell you, our aim is to continue to be a transaction-led growth company, full stop. And we're confident in our ability to get back there through the acceleration of the consumer flywheel I talk about often, operations, digital and marketing. Operator: Next question comes from Lauren Silberman with Deutsche Bank. Lauren Silberman: If I could just start on the comp. I guess it's a fairly wide range of outcomes for Q4 with a down low single digit for the year. Can you just help level set where you exited the quarter and what you're seeing from a traffic perspective? Adam Rymer: Yes. Sure, Lauren. I'll start off on this one. So towards the end of July and into August, we experienced a step down like we talked about in our prepared comments. And that was somewhere around the 200 to 300 basis point range. And then as Scott mentioned in his prepared comments, we increased spend on our media as well as our promotions that helped offset some of the softness that we were seeing specifically in August and September. And we also saw a strong reaction when we launched carne asada and even Red Chimichurri in early October. However, during this whole time, the underlying transaction trend remained under pressure. And in recent weeks has softened even further. So when you account for this recent trend as well as the ongoing uncertainty in the economy, the way that we're kind of looking at Q4 is really with a much more conservative view. And right now, at this point, we expect comps in Q4 to decline somewhere in the low to mid-single-digit range. Lauren Silberman: Okay. When you look at what's going on with traffic, where are the losses really coming from? I understand some of the cohort commentary, but do you think you're also losing customers that are trading down or out of the space, losing frequency of transactions with your more loyal customers? Scott Boatwright: Yes, Lauren, I'll tell you based on the data that we have, we're seeing that significant pullback from that cohort under $100,000 annually. And also that age group 25 to 34, which we over-indexed to is about 25% of our total sales has pulled back meaningfully. . Based on our data, both purchased and in-house data, it shows that we are gaining market share, but that cohort, meaning we're not losing them to the competition. We're losing them to grocery and food at home. And so that consumer is under pressure. It is one of our core consumer cohorts. And so they feel the pinch, we feel the pullback from them as well. We were able to reengage them through the Summer of Extras promotion that we ran both through our loyalty rewards campaign as well as some digital initiatives that we did around Chipotle IQ as well as Freepotle. So we know with the right activations, we can get that consumer back into our business. And we're going to leverage what we've learned from Summer of Extras to really inform the 2026 digital strategy. Operator: The next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: I wanted to delve into the kind of HEAP throughput that you're seeing at the pilot locations. Can you talk about how meaningful that has been, I think you referred to potentially yielding a step function and throughput. And I'm curious as to what the actual results are. Scott Boatwright: Yes. So we're still early innings, unfortunately. We're in 175 restaurants today, another 100 this quarter. And then we'll start with all new restaurant openings, as I said on the previous call here going forward. And so what gives us a lot of optimism around the project is we're already seeing labor efficiency gains, we're seeing better culinary, better food scores, better guest experience scores, we're seeing better delivery of distribution of labor during peak hours, which is leading to improved throughput for those restaurants. I can't get into specifics at present, but all signs are pointing up and to the right. Sharon Zackfia: And a follow-up on the price question. Is it fair to assume that you're going to exit the year with no price at this point? Adam Rymer: And I'd say, at this point, we're going to look maybe later in the quarter and starting to understand some of the impacts of price. So you might see us test in a small number of restaurants. But expect the 2 points of price that we're running right now to fall off in December. So that's kind of how we're looking at it towards the end, but it's still kind of fluid at [ this point ]. Operator: The next question comes from Danilo Gargiulo with Bernstein. Danilo Gargiulo: Scott, it seems that the consumer environment is deteriorating and the many marketing efforts are not fully offsetting the traffic retraction. So while the LTO dips and marketing uplift may be helping traffic in '26, can you help us understand and maybe expand on the operational actions that you are taking in the near term to be inflecting the traffic regardless of the macro action? Scott Boatwright: Yes. So thank you for the question, Danilo. I'll tell you, we ran a problem detection study. We actually renewed our problem detection study over the last quarter, which highlighted some key operational concerns that we are addressing as we speak. Jason Kidd, as you know, is probably just over 120 days in as Chief Operating Officer. And I'll tell you he has quickly gathered the team, rallied the teams. They truly respect his leadership and his approach. And the problems that we have identified, he and the teams are actively working against solutions for those problems as well as modifying our quarterly bonus program, incentives target specifically for our restaurant teams to tie to the outcomes that we want to see going forward. And so it's all grounded in this new strategy that I referenced very quickly at the end of the call around recipe for growth. And it's a 3-pronged strategy. Of course, it includes operations, digital and marketing. So from an operations perspective, we're digging in on what are the main friction points for the consumer today because they're different than they were just a year ago. It is my belief that the consumer that we -- that is in the market today is more discerning. They're looking for value and not necessarily value as a price point, but value as a benefit over price, and I talk about that a lot. And so we have to over deliver on those expectations in this consumer environment, and I promise you my operations team under Jason's leadership are heading in the right direction, focused on the right activities and continue to strengthen our experience in restaurants. One of the other challenges that we see and some of the learnings we pulled out of Summer of Extras is that there's more work to be done in really reimagining our loyalty program and how we show up in digital commerce. And so I won't get into the nuts and bolts of that, but just know that there is a lot of work behind the scenes that is going into how do we reimagine rewards for the Chipotle customer going forward. Most importantly, targeting those consumers that aren't already in the funnel, to get more consumers into the funnel because we know once they're in our funnel, we can drive transactions and really drive demand. And then the last leg would be around this idea of better communicating our value proposition and our uniqueness as a brand. And so Chris and team are working on what that looks like today. So we talked briefly on the prepared remarks about new ad campaigns and new ads in general that will do just that. I'd also add one extra spin on that rev on that is we're rapidly increasing the pace of innovation as it relates to culinary innovation. And so you will see more in 2026, because we know new news is really resonating with core consumers today. Danilo Gargiulo: Excellent. And maybe, Adam, I was wondering if you can update us on the ROIC of the incremental units being built. Specifically, if today, you're seeing more cannibalization on your existing stores versus the past and if the 8% to 10% net unit growth guidance that you shared for the long term, is still reasonable today? Or if there is any capacity constraint or return constraint that will make you think that the 8% to 10% may not be achievable going forward? Adam Rymer: Yes. Thanks, Danilo. So no, in terms of impact that new restaurants are having on our existing restaurants on a per restaurant basis or a per new restaurant basis, we're seeing very similar levels to what we have in the past. The overall impact as it impacts our overall comp is increasing as we increase that percentage growth over time. But that's natural as you kind of go up in that. And then plus those new restaurants drive a much higher comp. They comp much better than our existing restaurants. So that helps offset that. So net-net, you're seeing about a 100 basis point or so impact to our overall comps from this NRO growth. Scott, do you want to talk about in terms of kind of the pace that we're at. I think that was the second part of the... Scott Boatwright: Yes. And I'll tell you that 1% has been historical for the last 10 or 15 years is what we typically see in a given year regardless of the number of openings. But I'll tell you, Danilo, it's a great question. We believe we've reached the right pace that enables us to consistently open the best locations, staffed with the most talented teams to maintain industry-leading unit economics and returns. And I don't know if anyone else in the space is growing at that clip. If you frame it in this reference point is it's a restaurant every 24 hours, which is incredible growth. And we feel really comfortable in that as a sweet spot. And it doesn't mean we won't flex up, Danilo, but we feel great in that range today. Operator: Next question comes from David Palmer with Evercore ISI. David Palmer: Great. I'm trying to put this into a question. In the near term, obviously, you're sacrificing incremental margins. Some of this is comps. You're pointing to low to mid-single-digit same-store sales declines in the quarter. And some of it's some outsized inflation, but some of it's also that you're trying to not price to that inflation and perhaps give better or work towards a better value for the consumer and hopefully, over time, maybe get recognized for that. And I'm wondering what that could mean for [ 20 ]. You mentioned that incremental margins would be -- you're still thinking 40% long term, but it also feels like in the near term that, that's not going to be the case that you're maybe going to earn the right to get back to that incremental margin by maybe rebasing those restaurant margins into 2026 as we find perhaps, some stability in traffic and your core consumer can find their own footing in terms of their own economic well-being. So I'm just wondering how we should be thinking about that where we might sort of find a base in terms of restaurant margin? And just broadly speaking, how you're thinking about this because -- is this -- do you think that the solution really is going to be just giving better value to the consumer? You've tried to these other levers. Is this basically going to be about just giving better food value and then eventually, you're just going to start to really comp strongly again because this is a very good brand. I wonder how you're thinking about all that. Scott Boatwright: Yes, David, you're heading down the right path. I'll tell you the core value proposition that is Chipotle is still firmly intact. And the business fundamentals are still strong. And what we're faced with today, and we talk a lot about this is while we have opportunities, we believe that the consumer slowdown is really affecting our business in a meaningful way. But we would never let a good crisis go to waste, David. I think you and I talked about this in the past. We are going to double down our efforts on the consumer flywheel and ensure we are delivering on value in the most meaningful way in this environment, and we will emerge stronger as an organization than we were when we went into this consumer slowdown. And so if we need to invest some component of margin to really drive top line transactions in the near term, David, there could be something there. Again, not being able to price against the inflation that we'll see next year is one leg of that. And so once we believe that the consumer is on better footing, we'll do what's right and appropriate for the business and for the consumer to get back to our long-term algo. Anything you would add to that, Adam? Adam Rymer: No. I mean, just a reminder that, as you know, David, I mean, we take price to offset the impact of inflation and then we're going to drive that margin north with transaction growth. I mean, this has been our approach in the past. It will continue to be our approach in the future, and it has led to us lagging the industry when it comes to price on pretty much every comparison, 1 year, 5 year, even 10-plus years. So the fact that our pricing will lag 2026 inflation, I mean, just look at that as a temporary dislocation that we know we can get back over time and then we can return back to that ideal 40% flow through over time as we get back to mid-single-digit comps and are driving transactions again. Scott Boatwright: One of the things I would tell you, David, I think is encouraging, unfortunate but encouraging is that the fast casual sector is just out of favor and has been deemed unaffordable. And we are loved into that. And so -- but I'll still tell you, we are still a 20% to 30% discount to our fast casual peers in the sector. And so we've got to do a better job as an organization, communicating that value in the most meaningful way to really differentiate what makes Chipotle unique and special. Operator: The next question comes from Drew North with Baird. Andrew North: Great. I wanted to ask another one on 2026, maybe asking it in a different way, but Adam or Scott, any guardrails on how you're thinking about 2026 from a comp perspective or maybe traffic and the time line getting back to positive traffic? Or maybe how you're thinking about the shape of the year when considering the comparisons, pricing dynamics and all the internal initiatives for next year? Just trying to help frame up the right expectations there as we look out to next year. Adam Rymer: Yes, I'll start and kind of frame up the baseline, and then I'll let Scott kind of take it in terms of initiatives. So we're obviously not guiding to 2026 yet. We'll do that in February. But one thing that I would say that's important to note is, as you know, we've had several underlying step-downs throughout the year. I mean, February and May and August and then this most recent one in October, and despite many initiatives helping to offset most of these step downs, obviously, as we've guided, 2025 will be in that negative low single-digit range. So we're ending the year at a lower sales level than we began. And so that's going to create a tougher compare until we fully lap each of those step downs. So you've got to take this into account. And if you do that, you'll come up with a baseline in 2026, that starts negative, but then we're confident that we can build upon that with the initiatives that we have in place for 2026 to get that north of there. And Scott, if you want to comment on some of those. Scott Boatwright: Yes. Here's what I'd tell you, in the Recipe for Growth strategy, just think about it as we're developing a road map of initiatives with clear ownership, expectations and deliverables that will serve as our top enterprise priorities for the year. The good news is it aligns with our 5 strategic priorities, and we'll use it to accelerate the consumer flywheel that you hear me talk about often, which will strengthen our value proposition and really get us back to mid-single-digit comp growth. In the end, it's meant to inspire our teams to think boldly, act with urgency and more importantly, deliver on a growth mindset for 2026. Operator: The next question comes from Sara Senatore with Bank of America. Sara Senatore: I have, I guess, a 2-part question. The first is just about the value proposition. And Scott, you said the fast casual is being viewed as perhaps not -- it's unaffordable. But I guess trying to reconcile that with the idea that you're not really losing share of restaurant wallet, I guess, either QSRs or casual diners or your peers. So it actually sounds like maybe the value proposition is appreciated. And so I was just curious where you're kind of seeing that feedback about fast casual because it's not showing up in your share. And I guess on that same note. Do you see any difference in daypart like lunch versus dinner. We've heard now that weekday lunch is perhaps weaker just because of -- it's easier to give up. So anything there? Scott Boatwright: Sara, thanks for the question. Dayparts are holding up very consistently roughly 50-50 between lunch and dinner. So no meaningful shift there. I will tell you, candidly, through our problem detection study, there were a few remarks that said that the brand was unaffordable. And I think they were broad-based in general, but I am curious to know further, does that consumer believe to be -- believe us to be lumped in with other casual or fast casual concepts at the $15 price point, which just isn't true. And so while I'm not going to disparage the competition or have a price pointed ad, I do want to communicate that you can get extraordinary value for around $10 at Chipotle in a way that doesn't say what I just said and that's the challenge. Sara Senatore: I see. So just to follow up on that. As you talk about things that you've trialed in terms of how do you communicate value, can you give me any sense, like as you're doing through social media or targeted marketing through your app, just the idea of communicating value without a price point, it seems a little bit tricky to me. Scott Boatwright: It is. We did test that ad, I just mentioned to you, where we showed a lot of abundance. We showed classic culinary and we showed consumers eating Chipotle. And we said at the end of the ad, you can get all this around $10. And in the testing, the consumer missed that message point altogether, and said that's really not meaningful to me. What was meaningful to me, was looking at innovation, looking at culinary and looking what makes Chipotle special and unique. So I think there's more work to do, and Chris will tell you, he's got several work streams underway to really figure out what's the right approach. We are engaging other ad agencies to bring in ideas to ensure we have the best thinking in the room. But we will -- you'll see some new ads and a new strategy in 2026. Operator: The next question comes from Dennis Geiger with UBS. Dennis Geiger: Scott, I wanted to come back to some of the comments around menu innovation looking to 2026 for what sounds like at least 1, maybe 2 incremental LTOs that I think you've mentioned. Any other learnings maybe from the '25 LTO launches to help you think about those launches next year in the current environment to maximize impact, whether it's something with marketing or timing or anything like that. Obviously, you guys have a long track record under your leadership of successfully launching LTOs. So you've done it well historically. Just anything new given the environment that we're in, takeaways from this year as you think about ramping up those launches next year? Scott Boatwright: Yes, it's a great question. Here's what I'll tell you is the repeat LTOs still performed well. Well the initial transaction lift seem to be muted because of the consumer backdrop. Each one did drive transaction and spend in incidents. And we also learned this year that a consumer that buys an LTOs, lifetime value goes up exponentially. Meaning they're going to spend more throughout the year than a consumer that doesn't purchase an LTO. What gives me a lot of confidence in the 2026 strategy, what surprised me this year was the success around dips. And so Adobo Ranch was highly successful. Red Chimichurri is proving to be just as, if not more successful. And it's even driving an incremental trial on carne asada. What's exciting about 2026 is there could be a blend of new innovation as well as historic innovation that has worked really, really well. But at the end of the day, what we know is working is new news and new product news and product innovation. And so we're going to lean into that more meaningfully in the coming year. So you'll see not only LTOs around proteins, but you'll also see us pepper in sauces, dips or sides that we think will have a step-change improvement in the consumer experience. Dennis Geiger: That's terrific. One more, if I may. Just on some of your comments just a few minutes ago about investing a component of margin potentially to help drive the top line drive transactions. Beyond the pricing piece, I'm not sure if I missed it, but any other aspects that you could share now and maybe what that might look like? Could there be anything else on portion size above and beyond what you've done? Anything else that you're contemplating that you'd share kind of on that opportunity to invest to drive the top line? Adam Rymer: Yes. Thank you, and I appreciate you mentioning portioning because we are seeing incredibly positive transaction in social media around abundant portions at Chipotle, which we invested in, obviously, this year and have had a meaningful impact on. So that's one component of it. The other is you will see incremental ad spend. I think we've said historically, we'll spend around 3% annually. That number will remain intact, but there could be strategic opportunities. And again, I said, we will always have a return-focused approach to marketing. There could be strategic opportunities that present themselves where we could incrementally spend as long as we're driving. I think I've said publicly a 4-plus ROAS, return on ad spend, where we know we can drive top line and margin. Operator: Next question comes from Chris O'Cull with Stifel. Christopher O'Cull: Scott, you mentioned the locations with the new equipment are seeing improved guest satisfaction scores. But have you observed any concerning trends in customer metrics for the rest of the chain, particularly regarding speed of service or food quality? Scott Boatwright: Nothing that stands out as divergent. Here's what I will tell you is we are struggling in digital with accuracy. And I'll tell you why, and I'll tell you why I think that is. I think we made a shift in our annual incentive plan to focus on, on time versus accuracy because we were doing pretty well in accuracy at the time we decided to make that change. Our accuracy has fallen off. And so we are redesigning the incentive plan to accurately target the right things that the -- if you think about the consumer need states in digital specifically, it's give me what I ordered accurately on time and high quality and in abundance. And it's very simple to deliver on those 3 need states, but you have to incentivize the right behavior for our 130,000 people in the field. And so we're shifting that back to accuracy. And as you can imagine, accuracy versus on time is far more important. If you're a 5 minutes late, but everything is in the bag it's not that big of a deal. If you show up 10 minutes early and my kid's quesadillas is missing. Now we have a real problem. And so I don't think we're actively incentivizing the right behaviors. And so we're going to get back to what we know to be true about those consumer need states. Operator: The next question comes from Brian Bittner with Oppenheimer. Brian Bittner: I understand the reluctance to price right now and to even talk about pricing in this environment. But I think we're trying to better understand what the action plan for pricing is when that 2% rolls off December into '26. I mean can you talk to us about how to think about the right base case or even the possible scenarios that you're thinking about for 2026 pricing against that mid-single-digit cost inflation? Adam Rymer: Yes. Yes. So I can jump in here. So as we talked about earlier, we want to take a slow and measured approach. And so what that ultimately means is typically, in the past, you would see us take price across the country and one fell swoop maybe over a week or 2 we're going to look at this over time. It could be over 4 or 5 or 6 months. It could be over 12 months. It really depends on as we start to roll a certain amount of restaurants and get some good reads on what we understand the resistance to be, the reaction to be, will determine from there. So that's why we're being a little bit vague because the strategy is still very fluid. But we do know it's not going to be what we've done in the past, which is all at once. And then that's kind of the general strategy in terms of the rollout. And then in terms of this mid-single-digit inflation that we alluded to, which is driven mostly by cost of sales. That number is much higher than what we have seen in the past. I mean, typically, we've seen a low single-digit inflation of around 2%. And so that's given us some caution with the consumer environment to not go that high to offset that, like we typically have in the past. So we'll be more patient with that over time. But we'll continue to talk about this each quarter and give you updates as to kind of what we're at, what we're seeing and what we're running. Scott Boatwright: Yes. I don't think we've talked about or are prepared to talk about risk mitigation strategies as it relates to that inflation as well. And so it is not our intent to sit idly and accept 5% inflation in the upcoming year. We will work to offset that with our partner suppliers as well. Brian Bittner: And as it relates to the unit growth, you are accelerating openings in '26 to a very impressive unprecedented level, clearly, strong growth. Is there -- and I know you've talked a lot about historically, the cannibalization factor has remained very, very steady. But does this at all elevate your risk and your ability to drive same-store traffic growth moving forward? Just given the multiple years of such high growth and the fact that, that's accelerating, what's just -- what gives you confidence that you can execute on a same-store basis while opening this many units? Adam Rymer: Yes. So I can jump in here. So we definitely have the confidence we can still drive same-store sales, even if that starts to -- that growth starts to basically level off at some point here in the future as we approach 7,000 restaurants. Because you have to keep in mind, new restaurants do impact our overall comp by that rough 100 basis points or so. So that's actually going to come down over time. And our existing restaurants do a fantastic job of comping. We even see our restaurants that are over 15 or 20 years, comping as well when we're driving overall transactions up. So I don't think it's going to have any impact. If anything, it will start to give us a very small tailwind as that starts to level off. Scott Boatwright: Yes. I'd add to that. One of the unique things about the Chipotle brand, having worked in other brands. The cannibalized restaurants at Chipotle recover inside of 12 to 13 months. And I don't think I've worked in any other brand that recovers as quickly. And those new restaurants are outcomping the current base restaurants. So we feel really good that we're in a sweet spot. We have the development machine prepared to develop enough ready talent leaders to run those business units, and we feel like we're in a really good spot today. Operator: Next question comes from Jeffrey Bernstein with Barclays. Anisha Datt: This is Anisha Datt, on for Jeff Bernstein. I wanted to ask a question on comp trends. To what extent do you attribute recent comp softness to Chipotle specific factors versus broader macro trends? And what levers are you considering to reverse the comp trend? Scott Boatwright: Yes, it's a great question. And when we look at very analytically and we look at often, I'm sure there's some component of self-inflicted opportunity. As I talked about, the problem detection study and trying to understand how we better deliver on the consumer experience. I think there's a component of a more discerning consumer. And I think most of it, the majority of it is this massive pullback on who is a core audience of ours, 40% of our total sales, that household under $100,000 a year is pulling back. We're not losing that customer. They're just coming less often. We have data that shows that empirically. So that's what I would tell you. And we remain confident we can get those consumers back in transacting more frequently through better marketing messages, better digital campaigns and better innovation. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Boatwright for any closing remarks. Scott Boatwright: Thank you. And thank you for all the questions, and thank you for your commitment to our great brand. I want to say thank you to the 135,000 people working in our field organization in what has been a very challenging year. This group continues to show up every day and works aggressively and very hard to deliver on great consumer experiences. I'll tell you, our brand is made up of people and we're people that sell burritos. But at the end of the day, we have the best people in the industry. We believe we have the best product in the industry and the brand remains as strong today as it ever -- than it has ever been. And so that said, we look forward to a new strategy in 2026 that will get us back to mid-single-digit comp growth, and we'll talk to you all in the next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to the eBay Third Quarter 2025 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to John Egbert, Vice President of Investor Relations. John Egbert: Good afternoon. Thank you all for joining us for eBay's Third Quarter 2025 Earnings Conference Call. Joining me today on the call are Jamie Iannone, our Chief Executive Officer; and Peggy Alford, our Chief Financial Officer. We're providing a slide presentation to accompany our commentary during the call, which is available through the Investor Relations section of the eBay website at investors.ebayinc.com. Before we begin, I'll remind you that during this conference call, we will discuss certain non-GAAP measures related to our performance. You can find a reconciliation of these measures to the nearest comparable GAAP measures in our accompanying slide presentation. Additionally, all growth rates noted in our prepared remarks will reflect FX-neutral year-over-year comparisons, and all earnings per share amounts reflect earnings per diluted share unless indicated otherwise. During this conference call, management will make forward-looking statements, including, without limitation, statements regarding our future performance and expected financial results. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from our forecast for a variety of reasons. You can find more information about risks, uncertainties and other factors that could affect our operating results in our most recent periodic reports on Form 10-K, Form 10-Q and our earnings release from earlier today. You should not rely on any forward-looking statements. All information in this presentation is as of October 29, 2025. We do not intend and undertake no duty to update this information. With that, I'll turn the call over to Jamie. Jamie Iannone: Thanks, John. Good afternoon, and thank you all for joining us today. I'm pleased to report we delivered better-than-expected results across our key financial metrics in Q3. Our gross merchandise volume grew 8% to $20.1 billion. Revenue increased by over 8% to $2.82 billion, and our non-GAAP earnings per share grew over 14% year-over-year to $1.36. We achieved these strong top and bottom line results amid continued macroeconomic challenges across our international markets and increased headwinds for cross-border trade into the U.S. Now let's go deeper into the key drivers behind our strong Q3 performance. Focus category GMV growth accelerated to over 15% in Q3, outpacing the remainder of our marketplace by roughly 11 percentage points. This growth was broad-based as all of our focus categories grew positively year-over-year with most accelerating sequentially. Although we expect the level of growth in focus categories to normalize in the near future, our momentum speaks to the level of innovation we've driven for customers and the increased likelihood that enthusiasts consider eBay when shopping in these categories. Within our focus categories, collectibles was the largest contributor to growth, driven by another quarter of accelerating year-over-year GMV growth in both collectible card games and sports trading cards. Our off-platform marketplaces, TCGplayer and Goldin also saw GMV accelerate sequentially. Pokémon GMV grew in the triple digits year-over-year for the third straight quarter, benefiting from a strong product release cadence. We believe our continued momentum in trading cards is a direct result of the trust and innovation we've driven for hobbyists in recent years with features like My Collection, AI-powered listing tools, authentication and grading, consignment partnerships and integrated PSA population data. We've added new ways to buy and connect with other enthusiasts through eBay Live. We've also benefited from a consistent drumbeat of activations at major tentpole events like New York Comic Con and the National Card Collectors Convention, where we had our biggest presence ever this year. While we do not expect GMV growth in this category to be linear every quarter, particularly as we face more challenging comps starting in Q4, we are confident in a long runway for secular growth in trading cards. Motor parts and accessories, or P&A, was our second largest contributor to GMV growth in Q3, generating more than 1 point for the overall marketplace. The introduction of easy and free returns in the U.S. continued to build upon our trusted value proposition in P&A, while the cost and return rates for this program are well within our forecasted ranges. We continue to expand choice and selection in key inventory segments such as salvage and used parts, which help consumers find value at a time when many are stretched financially. Overall, we have over 750 million live P&A listings, which enables us to offer the largest online selection of unique auto parts and accessories in most of our major markets. Fashion was another notable driver of GMV growth in Q3, led by our luxury, streetwear and preloved apparel focus categories. In Q3, we reinforced our commitment to the circular economy through a collaboration with Marks & Spencer, one of the U.K.'s most iconic retail brands. U.K. consumers can now drop off used clothing at Marks & Spencer stores and give those items a second life through resale on eBay. The program keeps quality fashion in circulation by repairing, cleaning and reselling wearable items and responsibly recycling the rest. We're excited by the potential of this partnership to unlock more preloved clothing on eBay, extend the lifespan of high-quality products and raise awareness of our growing role in driving the circular economy. In September, we expanded our authenticity guarantee program in the U.K. to cover 70 luxury and premium brands in apparel, shoes and accessories, building upon our existing offerings in sneakers, watches, handbags and fine jewelry. This makes the U.K. our first market where luxury items can be authenticated from head to toe, reducing buyer friction and unlocking more high-value transactions across premium brands. eBay Live continues to build momentum with consistent quarter-over-quarter growth across every major key performance indicator we track, including viewers, watch time, sold items and GMV. In recent weeks, eBay Live's annual GMV run rate was up approximately 5x year-over-year. We've created more personalized entry points into eBay Live across our homepage, search and view item pages, making it easier for our scaled buyer base to discover and join live shopping events that speak directly to their passions. In Q3, we hosted some incredible eBay Live shopping events in the U.S. The Backstreet Boys joined Paradise Card Breaks at the eBay Open in Las Vegas. We had Milwaukee Bucks superstar, Giannis Antetokounmpo and his brothers joined Ken, Goldin for a memorable event at the National. Ken also teamed up with Logan Paul for a high-end sports card box break, which drew approximately 20,000 viewers over a multi-hour stream. eBay Live is also gaining strong traction in the U.K. following its formal launch in May at Comic Con London. Since then, we've seen a consistent cadence of exciting live shopping events from a Love Island Charity Auction stream and eBay's Endless Runway event at London Fashion Week to Pokémon weekend and new channels for toys and memorabilia. In September, SharkNinja also hosted our first refurbished appliance sales event with great success. It's exciting to see how quickly eBay Live is building cultural relevance and meaningful engagement with enthusiasts across the U.K. Overall, we're thrilled by the response we're seeing from sellers and buyers on eBay Live and see significant potential for live commerce to become a strategic growth vector for our marketplace. Improvements to our consumer-to-consumer or C2C value proposition in key geographies represent another strategic growth vector for our business. One year after we launched our U.K. C2C initiative, we continue to see compelling results. In the first half of 2025, we saw U.K. C2C GMV growth remain well above our prelaunch baseline as we introduced a buyer-facing fee and ramped adoption of our managed shipping program, which streamlines the shipping process, reduces cost and improves trust. In Q3, we introduced additional C2C changes, including faster payouts for long-tenured sellers, greater transparency into all-in pricing when sellers are listing items and negotiating offers and more competitive terms for items priced below GBP 20. As a result, we saw U.K. customer satisfaction improve notably alongside accelerating year-over-year GMV growth during the quarter. We recently added shipping support for bulky and heavy items through DHL, and we exited Q3 with the majority of U.K. C2C transactions utilizing our managed shipping program, which is now mandated for all eligible items. Earlier this month, we closed the acquisition of Tise, a leading social marketplace in the Nordics focused on pre-loved fashion and lifestyle goods. Tise has built a highly engaged Gen Z and millennial community and a strong track record in social community-led commerce. This acquisition strengthens our leadership in the circular economy, increases our presence in the Nordic markets and accelerates our work to make consumer selling more seamless, trusted and scalable. I'm excited to welcome the Tise team to eBay, and I look forward to our teams learning from each other as we drive innovation for fashion enthusiasts and accelerate the circular economy. Our years of investment in artificial intelligence have enabled us to leverage our scale and three decades of commercially relevant data and insights to transform the eBay experience for customers. In recent years, we've utilized generative AI to dramatically improve the selling experience on eBay through progressive iterations of our magical listing technology. In addition to selling, we've been testing a variety of agentic experiences in search and shopping to learn how buyers and sellers engage with AI at different phases of the customer journey. This includes both on eBay agentic experiences like our AI shopping agent pilot and third-party agents from companies like OpenAI. Our AI shopping agent has given buyers a new way to shop across our inventory with personalized product picks and expert guidance based on their individual shopping preferences. As the pilot has progressed, we've significantly improved the underlying technology powering the experience. For example, we were able to build hyper-optimized large language models in-house that perform specific shopping agent tasks at lower latency and for significantly reduced cost versus commercial models. With these learnings and efficiency improvements, we're now poised to gradually bring agentic capabilities into the core of eBay's business through the main search experience over the coming quarters. Our early learnings have also guided the development of our unified agentic commerce platform, which integrates our hybrid cloud infrastructure, large language model ecosystem, our model context protocol server and other agentic protocols with our proprietary data layer. This platform enables a fully connected experience between eBay agents and generalized third-party agents from companies like OpenAI, which allows us to service the most personalized and relevant products to shoppers in real time based on our 30 years of listings, pricings, transactions and behavior signals. We believe this platform will enable us to deliver more personalized, seamless and trusted experiences for eBay buyers regardless of where they started their shopping journey. With these capabilities now in place, we are well positioned to continue improving the on-eBay experience with agentic tools, touching more of the end-to-end shopping journey, but also connect to compelling third-party agentic experiences. I'm also excited to see how easy and seamless it is to shop on eBay using the iPhone camera after our recent integration into Apple's visual intelligence feature in iOS 26. Now when a user takes a photo or screenshot of a product they like to shop for online, they can quickly surface relevant listings on eBay, helping more iOS users discover our breadth and depth of unique inventory through an intuitive experience. iPhone users can also take advantage of a great new feature for auctions after we launched live activities functionality on iOS in September, which gives bidders real-time updates directly on their phone's lock screen during the final 10 minutes of an eBay auction. This engaging feature has seen click-through rates more than 4x higher than our standard push notifications for auction listings, helping ensure buyers never miss a chance to bid on their next great eBay find. Connections between buyers and sellers have always been at the heart of eBay's marketplace. And now we're using AI to make those interactions faster and easier to manage. In Q3, we rolled out an AI assistant for member-to-member messaging across the U.S., U.K. and Australia. This tool takes information from the listing details to provide immediate high-quality suggested answers to buyer inquiries, enabling quicker responses. Sellers have told us this feature has been extremely helpful in answering buyer questions promptly, giving them more time to list items and grow their businesses on eBay. Within member-to-member messaging, we've also rolled out a fully integrated offers experience directly into the messaging flow for customers in the U.S., Germany and Australia. This means buyers and sellers can now negotiate offers, view their full offer history and execute counter offers without ever leaving the conversation thread, reducing friction and driving improved sales velocity. With each successive quarter, AI is becoming more embedded throughout the eBay experience. As we build on this progress, we believe AI will continue to make eBay simpler, more personal and more connected for every user. Moving to advertising. In Q3, first-party advertising revenue on the eBay platform grew nearly 23%, driven by broad-based growth across our ads portfolio. Active Promoted Listings comprised nearly 1.2 billion of more than 2.4 billion total listings on eBay, while over 4.4 million sellers adopted at least a single Promoted Listings product during the quarter. Promoted Listings general ads were the largest contributor to the year-over-year ad revenue growth in Q3, followed by PL Priority placements, Promoted Offsite ads and Promoted Stores units. We continue to leverage our proprietary AI capabilities to enhance advertising performance. For instance, we recently launched a new multimodal embedding model on view item pages to deliver more relevant recommendations to buyers. This model led to a measurable uplift in Promoted Listings revenue by leveraging the listings imagery in addition to its title and other listings details to surface higher-quality recommendations. In Financial Services, we reached a major milestone for our Seller Capital program in Q3. Since the inception of this program in 2021, more than $1 billion in growth capital has been dispersed to eBay sellers across the U.S., U.K. and Germany through our financing partners, including more than $200 million through the first three quarters of 2025. Many sellers have told us this additional working capital has made a significant difference in their ability to invest in inventory, people and technology to grow their businesses on eBay. Turning next to our shipping initiatives, which have become a critical strategic imperative in today's increasingly complex environment for cross-border trade. The recent elimination of the de minimis exemption for imports under $800 has created incremental cost and friction for cross-border trade into the U.S. To help our sellers and buyers navigate these challenges, we meaningfully accelerated our multiyear product road map for shipping solutions. In October, we launched eBay International Shipping in Canada, our third largest quarter for U.S. imports after Greater China and Japan. This rollout brings the best parts of the U.S. program to both business and consumer sellers in Canada, along with additional capabilities like delivery duties paid functionality and automated application of country of origin data. In Q4, we also began enabling business sellers in Germany to access SpeedPAK, an end-to-end cross-border shipping solution offered through a joint venture, which is already available to sellers in Greater China and Japan. SpeedPAK automates customs documentation and tariff calculations, helping sellers manage new trade requirements with greater efficiency. By simplifying compliance and improving delivery time predictability, SpeedPAK strengthens the resilience of cross-border trade on eBay and ensures buyers continue to receive a reliable shopping experience with transparent duties. As we advance our strategic initiatives, we're equally focused on fostering the culture and talent that makes this progress possible. I'm proud that our dedication to building an inclusive workplace environment continues to be recognized externally. eBay has been named one of Forbes America's Best Employers for Company Culture, one of Time World's Best Companies and one of Newsweek America's Greatest Companies for 2025. These acknowledgments reaffirm our efforts to foster a positive, high-performing culture that attracts and retains some of the best talent in the industry. In closing, Q3 was another strong quarter for eBay, underscoring the momentum in our strategy and the resilience of our marketplace. Our focused categories continue to drive significant growth for our overall marketplace, driven by continued innovation, trusted experiences and increased selection for enthusiasts worldwide. Our agentic commerce platform opens up entirely new opportunities for eBay by enabling connectivity between on eBay and third-party agents to facilitate personalized conversational shopping experiences that bring eBay's unique inventory and trust to wherever buyers begin their search. AI also continues to make selling on eBay more seamless and efficient from our magical listing technology to our new member-to-member messaging tools that help sellers manage buyer inquiries in real time. I'm incredibly excited about our expansion of eBay Live into new European markets, which builds upon the tremendous momentum we're seeing in the U.S. as we bring live community-driven commerce to more enthusiasts. Lastly, our investments in global shipping services are not only helping us support sellers in the current environment, but are accelerating our road map to make cross-border trade more frictionless, which can drive more velocity for consumers and small businesses around the world. Together, these investments keep eBay well positioned for continued long-term sustainable growth as we reinvent the future of e-commerce for enthusiasts. With that, I'll turn the call over to Peggy, who will provide more details on our financial performance and outlook. Peggy, over to you. Peggy Alford: Thank you, Jamie. I will begin with the financial highlights of the third quarter. GMV grew 8% to $20.1 billion. Revenue grew over 8% to $2.82 billion. Our non-GAAP operating income grew 9% year-over-year to $764 million. Non-GAAP earnings per share grew over 14% year-over-year to $1.36, and we returned approximately $760 million to shareholders through repurchases and cash dividends. Let's take a closer look at our financial and operating metrics for the third quarter. GMV grew 8% to $20.1 billion on an FX-neutral basis, accelerating by roughly 4 points sequentially. Our growth in Q3 was primarily attributable to our focus categories and overall strength in the U.S. market, partially offset by a relatively more challenging macro environment internationally and changes to U.S. trade policy, including the elimination of de minimis exemption globally in late August. Foreign exchange provided a tailwind of approximately 180 basis points to spot GMV growth. Focus categories grew over 15% in Q3 with all focus categories contributing to our total growth from collectibles to P&A, luxury, refurbished, apparel and sneakers. In our U.S. market, GMV growth accelerated to nearly 13%, driven by broad-based strength across categories and by increases in both sold items and average selling price. In addition to overall strength in the U.S. market, our GMV growth continued to benefit from tailwinds like our Klarna partnership and efficiency and lower funnel marketing spend. Because GMV is reported based on the location of the seller, the delta between U.S. and international GMV growth was also influenced by demand shifting toward domestic sellers due to tariffs. International GMV grew nearly 4% on an FX-neutral basis with foreign exchange providing a tailwind of 350 basis points to spot growth. Despite facing relatively more challenging macroeconomic conditions outside of the U.S. in Q3, our international GMV growth also improved sequentially. Recent enhancements to our C2C value proposition in the U.K. contributed to an overall acceleration in U.K. volume growth. Our cross-border business was resilient in the third quarter. However, we saw a deceleration in year-over-year volume growth starting in September in key markets importing into the U.S. after the removal of the de minimis exemption. Shifting to our buyer metrics. Our trailing 12-month active buyers were over 134 million in Q3, up 1% year-over-year. Enthusiast buyers remained stable at roughly $16 million, while spend per enthusiast buyer grew year-over-year to over $3,200 on a trailing 12-month basis. Moving on to our income statement. Revenue grew over 8% to $2.82 billion on an FX-neutral basis in Q3, while foreign exchange was a tailwind of over 120 basis points to spot growth. Our take rate was 14% in Q3 as continued strength in advertising was partially offset by several headwinds. As sellers and buyers adjust to the new trade policies, we are seeing an uptick in returned and canceled orders, which led to a roughly 10 basis point headwind to our Q3 take rate as these transactions are included in GMV, but not revenue. Our average selling price was also increased in recent quarters, mostly driven by category mix shift, which also pressured our take rate. In addition, U.K. C2C represented a modest year-over-year headwind as we continue to scale our managed shipping initiative during Q3. Lastly, foreign exchange was a headwind of nearly 10 basis points to our take rate year-over-year. Total advertising revenue was $525 million, representing GMV penetration of 2.6%. Within the eBay platform, first-party ads grew nearly 23% to $496 million. We continue to deprecate legacy third-party display ads, which declined by 40% to $7 million. Off-platform ads grew 32%, reaching $22 million. Non-GAAP gross margin of 71.6% declined by over 80 basis points year-over-year due to expected headwinds from managed shipping, traffic acquisition costs related to promoted off-site ads, depreciation expenses and foreign exchange. These factors were partially offset by tax-related tailwinds as we lapped onetime expenses a year ago and continued cost of payment efficiencies in the quarter. Our non-GAAP operating margin was 27.1%, down 10 basis points year-over-year, including a foreign exchange headwind of 10 basis points. Marketing and operating efficiencies generated leverage in the quarter, which was partially offset by product development expenses. As we noted last quarter, given the recent strength in our business, we are reinvesting a portion of top line upside in order to accelerate our strategic initiatives, including eBay Live, shipping solutions and vehicles. We are also expanding our global employee footprint in order to optimize our location strategy and to comply with U.S. data transfer policies. Non-GAAP earnings per share was $1.36, up over 14% year-over-year, and GAAP earnings per share from continuing operations was $1.28, down 1% year-over-year as we lapped investment gains in Q3 of last year. Turning to our balance sheet and capital allocation. We generated free cash flow of $803 million in Q3 and ended the quarter with cash and non-equity investments of $5.3 billion and gross debt of $6.8 billion on our balance sheet. Our equity investments were valued at over $900 million. We repurchased $625 million of eBay shares in Q3 at an average price of nearly $88 and paid a quarterly cash dividend of $132 million in September or $0.29 per share. Moving on to our outlook. For the fourth quarter, we expect GMV between $20.5 billion and $20.9 billion, representing FX-neutral growth between 4% and 6% year-over-year. Based on current exchange rates, we estimate FX would represent roughly 180 basis points of tailwind to spot GMV growth. Our guidance reflects a continuation of the durable growth trends we've observed in recent quarters, driven by our momentum in focused categories and other strategic initiatives. Additionally, as commodity prices for precious metals have appreciated in recent months, we've observed a notable acceleration in demand for bullion and collectible coins on eBay, which may be a less durable trend. Our acquisition of Tise is also expected to contribute roughly 10 basis points to total FX-neutral GMV growth in Q4. These tailwinds are expected to be offset by a few lapping dynamics. In Q4 of last year, we observed exceptional GMV growth in trading cards due to a strong release calendar. We also saw a double-digit improvement in U.K. C2C volume growth and better-than-expected holiday season demand overall. This year, we will also face a full quarter of impact from the removal of global de minimis exemption versus a single month of impact in Q3. We expect the net of these headwinds to lead to a modest deceleration in GMV growth during Q4. We forecast revenue to be between $2.83 billion and $2.89 billion, implying FX-neutral growth of 8% to 10% year-over-year. Based on current exchange rates, we estimate FX would represent roughly 190 basis points of tailwind to spot revenue growth. Our guidance implies year-over-year take rate expansion primarily due to our remonetization of U.K. C2C volume and first-party advertising growth, partially offset by mix shift and headwinds related to trade policy. As I noted for GMV, we expect a full quarter impact from the de minimis change to apply incremental pressure on our core take rate, advertising and financial services monetization. On a sequential basis, take rate is expected to be modestly lower due to these factors as well as normal Q4 seasonality attributable to category and ASP mix over the holidays. We expect non-GAAP operating margin between 25.8% and 26.3% in Q4, representing non-GAAP operating income growth between 5% and 9% as reported. The year-over-year decrease in operating margin is primarily due to continued investment in our strategic initiatives as we reinvest a portion of our top line strength in order to drive medium- to long-term growth. We forecast non-GAAP earnings per share between $1.31 and $1.36 in Q4, representing year-over-year growth between 5% and 9%. We expect net interest income to become a headwind to year-over-year earnings growth in Q4 given prevailing interest rates and our lower cash balance. We forecast capital expenditure to be between 4% and 5% of revenue for the full year and our non-GAAP tax rate to remain stable at 16.5%. We expect reported free cash flow of approximately $1.5 billion for this year, including a headwind of $935 million from the unique tax items we paid this past Q2. On a normalized basis, free cash flow is expected to be roughly $2.5 billion for 2025. Lastly, we continue to plan on repurchasing approximately $2.5 billion of our shares for the full year. In addition, our Board declared a quarterly cash dividend of $0.29 per share for the fourth quarter to be paid in December. Next, I'll share a few preliminary thoughts on 2026. We are planning our business around a third consecutive year of positive FX-neutral GMV and revenue growth, reflecting our confidence in our initiatives and a continuation of the strong underlying momentum from this year. However, we are also mindful of several notable lapping dynamics in 2026. These include exceptionally high growth in trading cards and more recently, in bullion and coins and unexpectedly strong marketing efficiency. In aggregate, we estimate these factors could represent a lapping consideration of approximately 2 points of GMV growth for the full year in 2026. In addition, we expect to face incremental headwinds from annualizing breakage associated with the global de minimis changes. If the current level of impact remains stable throughout 2026, it would result in a headwind to FX-neutral GMV growth of approximately 1 point. We expect the gap between GMV and revenue growth to be relatively narrow in 2026 as continued healthy growth in first-party advertising revenue is expected to be partially offset by pressure on cross-border sellers and a higher mix of GMV from emerging businesses like Vehicles and eBay Live next year, which have lower average take rates. With regards to profitability, as we finalize our planning decisions, we'll maintain our focus on targeting the optimal combination of GMV growth and operating margin to maximize operating income dollar growth over the medium to long term. We expect to face a few modest headwinds in 2026 below the operating income line. Our lower cash balance and the expected slope of interest rates would pressure our net interest income year-over-year. And we are reevaluating our non-GAAP tax rate in 2026 and beyond, which may result in a modest increase partially due to the U.S. tax dynamics. Finally, a few observations on capital allocation. We expect to return approximately $3 billion of cash to shareholders through share repurchases and cash dividends in 2025, which would amount to over $12 billion of capital returns to shareholders from 2022 to 2025. Over the last few years, we were pleased to monetize several equity investments at attractive valuations, including Adevinta, Adyen and Gmarket. These asset sales enabled us to return significantly more capital to shareholders than our normalized free cash flow. Going forward, our framework for capital allocation has not changed. Our priority remains organic investment in the business to drive sustainable growth, and we will continue to evaluate inorganic opportunities to accelerate our road map. With regard to excess capital, we will continue to lean into returns to shareholders. Given our remaining investment portfolio, we do expect that free cash flow from our core business will be the primary source for capital returns in 2026 and beyond. In a normal year, we plan to target repurchases and cash dividends totaling between 90% to 100% of normalized free cash flow, absent organic or inorganic needs for that capital. In closing, we believe our strong Q3 results and Q4 guidance reflect the momentum we are seeing in our business. Our strategy is working, and we believe much of our growth is sustainable. We are taking advantage of the strength in our business this year and making incremental investments in focus categories, C2C, eBay Live, shipping, vehicles, Gen AI and other areas, which will help drive balanced top line and bottom line growth over the medium to long term. With that, Jamie and I will now take your questions. Operator: [Operator Instructions] Your first question will come from Scott Devitt with Wedbush Securities. Scott Devitt: It's been impressive to see the business growing at the rate that it is again. And we're kind of entering this new moment in time. And so I just wanted to zoom out for a minute. When you look back on the history of the Internet, Google Search and then the transition to mobile were significant developments that caused seismic change. And so we're kind of here again with AI. You talk a bit about some of the features, functionality that you're integrating into the into the platform and how you're attempting to use ChatGPT and otherwise. And I'm just curious, as you plan for the changes that AI is going to bring to the business, what do you think are the two, three, four most significant changes that you're anticipating in the way that eBay is going to be connecting with buyers and sellers as well as the approach to advertising in coming years? Jamie Iannone: Yes. Thanks for the question, Scott. So, look, I think in a number of ways. I think one of the biggest opportunities for us being really focused on non-new in season and used supply is to really be that unlocker of supply for consumers across the world. And so when you think about what's sitting in garages, closets, people's houses, the ability to leverage AI to make that almost instantaneous to list is a vision of ours that we've been progressing towards magical listing and is going well. And what I hear from consumers is, oh my God, if it's that easy to list, I have so much stuff that I could sell on the platform. So that's a big opportunity for us. I think the second is how it's transforming how people shop and the level of discovery that we can give them on the platform. When I look at what we're doing now with having so much rich data of 30 years of data of what's happening with our consumers in the marketplace, being able to leverage that in a way that really kind of delights the user and gives them an ideal experience, I think, is another huge benefit. How it changes recommendations, how it changes search, how it changes discovery on the platform is probably the second area that I'm most excited by. And then the last one I would say is really kind of the pace of innovation of the company leveraging AI. And you're seeing that this quarter as we announced a new visual camera intelligence with Apple in the camera phone as we bring new capabilities to save sellers time like in our member-to-member messaging that we're launching here, the work that we're doing in our own shopping assistant, we have a screenshot of some of that type of stuff that you're seeing in the slides that we put together, giving more relevant recommendations to our buyers on the view item pages. You talked about advertising. Even what we announced this quarter, where we're taking a multimodal approach to our advertising performance provides more high-quality recommendations. So, I'd say every quarter, AI is becoming more embedded throughout our experience. I feel privileged to be in a situation where we've got a technology infrastructure that really blends a hybrid cloud infrastructure, our own LLMs that we've been building on, agentic protocols and 30 years of data, bringing that all together to kind of bring those simpler, more seamless and more magical experiences to life for customers. Operator: Your next question will come from Nikhil Devnani with Bernstein Research. Nikhil Devnani: I wanted to ask about margins. You've had really strong growth this quarter and again, in the guide, but it doesn't seem to be flowing through the margin upside to the same degree. So could you please elaborate on where some of the incremental investments are right now? It's noticeable that product development has been ramping for the last couple of quarters. Should we be looking at this as a pull forward of certain fixed costs that would otherwise have happened in 2026 because you can now? Or are there also other more variable and persistent expenses that we need to take into account as we think about margins next year? Peggy Alford: Sure. Thank you for the question. So when we think about margins, we're really trying to balance driving long-term growth and then returning and flowing through upside to the bottom line. I'm very pleased with the 9% operating profit growth that we achieved in Q3 and this momentum that we continue to see in the business. Our non-GAAP operating margin in Q3 was 27.1%, and that included an FX headwind of 10 basis points, and we did generate operating leverage in the quarter. In terms of some of the expense lines, sales and marketing expense was up 2% year-over-year and flat quarter-over-quarter. and this was due to marketing efficiencies. Product development expenses that you mentioned, we actually did take some of the upside, and we were investing in product development against some of our very strategic initiatives, including eBay Live, our shipping solutions where we pulled forward our CBT road map to really help sellers navigate the changes in the trade policies and then really looking at more investment in our vehicles business as well. And we believe this strategy is working and will primarily benefit our growth next year and beyond. Our G&A expenses were up about 4% year-over-year and down 40 basis points as a percentage of revenue, and this was driven by lower employee-related spend. And then lastly, transaction losses were up 19%. A lot of it had to do with our higher consumer protection losses that were due to the ramp of the U.K. managed shipping program as well as some unfavorable fluctuations in buyer and seller fraud. This is an area that fluctuates quarter-by-quarter, but nothing really concerning in the trends. So, overall, we will continue to focus on ensuring that we're balancing top line growth and margin flow-through and trying to really get this balance right as we think about it going forward. Nikhil Devnani: If I could just follow up there. Do some of the investment this year ease the burden on next year? Or is there just a long list of things you want to go after as you think about the product road map? Peggy Alford: We will continue to invest in our priority areas as we look into Q4 and next year. We're pretty early in the planning cycle. And so we'll definitely provide more commentary as we get more information about how we want to invest in getting that balance right between top line and bottom line. But you can be assured that, that's what we'll be focused on. Operator: Your next question will come from Nathan Feather with Morgan Stanley. Nathaniel Feather: Really impressive growth this quarter. I guess just two on my end. First, given how quickly the marketplace has accelerated, how are you thinking about the portions that might be more temporary to this year and the portions that are more durable for 2026? And then looking forward to next year, what are the key kind of one or two opportunities that you think could be the most incremental to continue the sustained improvement? Jamie Iannone: Yes. So good to hear from you, Nathan. So look, I think the strength that we see was really broad-based in Q3, both in our focus categories and in our core categories. And it's really for us the culmination of years of investment, and that's helped us fuel consistent market share gains. When we look at the first half of this year, we actually think we picked up 2 points of segment share gains in our focus categories. And you saw the strength across core and across our focus categories. In terms of the durability, we did see some GMV upside from what we would characterize as transitory factors, which we discussed in our prepared remarks. But we do believe the majority of our growth was durable in nature. And overall, we're confident our strategy is working, and we're leaning in towards a path of sustainable growth. And as we think about growth vectors, I think it's a continuation of the areas that you've seen, the acceleration that we're seeing in focus categories. We've added fashion as our newest focus category, and we're seeing continued momentum there. We're going to continue to invest in the horizontal areas that we've been going after across selling search, leveraging AI, new discovering experiences, which we think will help focus categories and core categories. And we're excited about some of our newest areas of growth, particularly eBay Live. I talked about the growth we're seeing, which is a 5x greater run rate than we saw a year ago. And we're just launching some new geographies there in U.K. and Germany as well as our vehicles business. We're in the early phase of growth there, but the early customer satisfaction and feedback from our sellers and buyers is that the new secure checkout proposition is really resonating with them. And we're seeing great activity and purchases, multistate purchases that are now leveraging our financing, our insurance, our warranty, our transportation, title verification, that end-to-end process, which is pretty exciting. So those are the growth vectors that I would point out to you. Operator: Your next question will come from Deepak Mathivanan with Cantor Fitzgerald. Deepak Mathivanan: Great. Jamie, maybe I'll ask a couple of questions for you. So, first, how do you -- how are you currently strategically approaching partnerships with AI assistants and agents? Obviously, it seems like a lot of things are happening fast in e-commerce on the agent side. Are there any technical constraints or any other things that you would call out as a potential constraint for you? And then second question, staying on the AI topic, how should we think about the areas where you would be deploying the advancements that we are seeing with LLMs and other AI tools in 2026 into the eBay platform to improve the buyer experience. Anything you can share there would be great. Jamie Iannone: Yes. Great. Thanks for the question, Deepak. So, look, on the -- working with agentic partners, like we've seen on the selling side, where it's really helped us improve our experience, we're excited that our early work for buyers with agentic shopping and discovery really opens up new ways to explore eBay's inventory. So for now for more than a year, we've been testing a variety of agentic experiences to learn how buyers and sellers engage at different phases of the journey. We've called that our AI shopping assistant that's been live and making improvements month after month to really kind of fine-tune the experience there. And that's all led us to build what we call the unified agentic commerce platform. Think about that as taking our hybrid cloud infrastructure, the LLM ecosystem that we've built, including these models that we've been fine-tuning over time, along with our MCP servers and driving that, leveraging the LLMs that we've built with these Agentic protocols, combining eBay's 30 years of data and our rich history of what's happening with our customers. That now puts us -- and this is more to your second question, Deepak. That now puts us more in a really in an enviable position from a technology standpoint to experiment and innovate and really leverage the insights that we've had and that we've gained by doing that work. When I think about eBay as it relates to agentic commerce, clearly, we're working on bringing agentic commerce to our buyers on the platform, allowing them to search via natural language searches, et cetera. You'll see an example of that in the slides that we put forth together, if you're not in that test case of how we're using that to give them more variability and discovery opportunities as well. But as we think about our inventory, look, we think we've got really unique inventory because we're focused on non-new in season and used and refurbished across both C2C and B2C sellers and have 2.4 billion listings. Secondarily, when you think about eBay's inventory, it's generally more what I would say is a consider purchase rather than a commodity type of thing that you're just kind of refilling. And the third is that our focus category strategy over the last couple of years has really allowed us to apply services and value around the transaction. Think about authenticity guarantee, guaranteed fit, warranties on refurbish, one-click rating, what we're doing in international, et cetera. So, all of those, I think, gives us the experience of a really unique set of inventory, which is why we fine-tune and trained our LLMs to be able to search and discover that inventory and collect all those into an MPC -- or sorry, an MCP server that really leverages that data and insights. So overall, we're going to continue to do the type of thing that we showed in that -- in the slides there, which is allow agentic technologies to be used on the platform to discover inventory, to improve how our sellers surface inventory on the platform, to improve how recommendations show up on the platform by leveraging AI agentic technologies. And we also now have the technology that we can really have this collaboration between third-party agents and first-party agents on our own platform. Operator: Our next question will come from Shweta Khajuria with Wolfe Research. Andrew Northcutt: This is Andrew on for Shweta. I just want to focus a little bit on trading cards. So how should we think about the sustainability of growth within the category? And what type of signals or metrics could we use to kind of evaluate the success of the category? Jamie Iannone: Yes. Thanks for the question, Andrew. Look, as it relates to trading cards, we see a long runway of growth for trading cards. We believe most of the recent growth has been driven by the trust and the innovation that we've driven for hobbyists over the last several years. Think about all the things we've introduced, Andrew, like My Collection, magical listings, bulk listing capabilities, our partnership with PSA on grading and authentication and on vault storage. So I've always said that our trading card business is not linear. It's going to ebb and flow based on the popularity of whether it's new releases or collaborations or new rookie classes or chase cards. And we won't always be firing on all cylinders like we are now with all the sports leagues, NFL, NBA, MLB as well as Pokémon and Magic really having strong years. But what we see today is really a healthy balance between new buyers, sold items and ASP contributing to that growth. And that's what gives us the confidence in the durability of our GMV run rate moving forward, even if the year-over-year growth decelerates in the coming quarters. Operator: Your next question will come from Michael Morton with MoffettNathanson. Michael Morton: One big picture one and then maybe one more near-term financial. When we look at the strategy that you deployed with the trading cards, what seems to be really successful was the ability to reduce friction. I like walk through all the steps, but we know how that played out through the business. And a question we get a lot from investors recently is how big can your vehicles business be? And like when we look at what Caramel does and what you've done with prior focus categories, it was pretty effective and it's obvious that the cars come at high ASPs and it's going to be booked as GMV. So how should we think about this flowing through the model over the next year and any implications for take rates that could move one way or another we might not have thought through? And then just a near-term one, I think you rolled out halo attribution in the U.S. and like other North American markets starting in 2026. And I think you had a lot of success with that in other countries around the ad product. So wondering what the expectations are there to drive ads and the take rate. Jamie Iannone: Yes. Look, you're right on the vehicles experience, it really is about making it a seamless experience end-to-end, like we've done in trading cards and in other categories. And what we saw in Caramel was really this opportunity for sellers and buyers where we handle everything for them. So identity, title verification, the transfer of ownership, payments, financing, insurance, warranty and transportation because a lot of these cars go across state lines, for example. So where we're focused is really in the collectible car market, which is about a $75 billion addressable market of the $1 trillion-plus used car market that's out there. And we're excited by it because, a, it's really resonating with customers. We're seeing great activity that's really leveraging this end-to-end platform. So we just had a 2015 Rolls-Royce Ghost sold for $113,000, and it uses our secure purchase, our DMV services actually uses our buyer financing, et cetera, ranging all the way to a school bus from 2008 that was converted into an RV that's sold for $31,000 for a seller in California and a buyer in Missouri. And again, using that full end-to-end suite of services. So it kind of speaks to the opportunity that we have in vehicles. I think the other reason we're excited by it is because of the synergies and overlap we see with our parts and accessories business. Since we are going after this collectible car market, it's really congruent with those that want to restore, fix up older and collectible cars. And it tends to be enthusiasts that are into parts and accessories are also really into these collectible vehicles. So we think there's really nice synergies from both the buyer and the seller base there. Peggy, maybe you want to touch a little bit on the higher ASP of vehicles and the impact of that on take rate? Peggy Alford: Sure. Absolutely. So we're really excited about this long-term opportunity in vehicles and what secure purchase unlocks. Vehicle volume has seen significant growth quarter-over-quarter since we launched early this year. But the contribution to total volume is still very modest as we expected. We estimate that Caramel's effective take rate will fall to the low to mid-single-digit range when including both the buy side and the sell-side monetization. But the revenue contribution also so far this year has been immaterial. And so I don't expect that it would have any material impact to your models for the rest of this year or next year. Jamie Iannone: And look, on the ads attribution change, we think the new halo attribution better aligns the value of our CPA ads with the velocity that we provide to sellers. And I think it helps better calibrate the return on ad spend levels between CPA and CPC. You're right, Michael, this is something that we released back in Germany in February of this year, expanded in the June time frame to other key markets across the European region. And then we announced today, we plan to roll that to U.S. and Canada in the new year. And this was really based on the learnings that we saw from other markets where those learnings said that what we saw from sellers was they can certainly adjust and adopt their bids as a result of these changes. But the net effect of the attribution change was positive for our ads monetization in Germany. And importantly, we're very focused on the ROAS levels for our sellers, and our ROAS levels remain healthy for our sellers, and they continue to adopt our CPA ads. So that's why we've extended it now to the U.S. and Canadian markets. Operator: Your next question will come from Tom Champion with Piper Sandler. Thomas Champion: Jamie, it looks like engaged buyers spend increased and your listings count has made tremendous progress over the last couple of years. I think it was $2.4 billion this quarter. And I guess the question is, when do you think this better inventory and maybe personalization features translate into more active buyers and enthusiast buyers? I'd be curious your view on that. And then maybe just any update for us on the Facebook Marketplace partnership. Jamie Iannone: Yes. Look, on the buyer side, our trailing 12-month active buyers grew by 1% to 134 million in Q3. As you say, top of the funnel is important for us, but we are very focused on driving active buyers to become enthusiast buyers. And what we're seeing there is that we've seen consistent, albeit gradual improvements in our year-over-year growth rate for enthusiasts over the past three years. We've seen GMV per enthusiast buyer grow. In Q3, it was over $3,200 annually and continue to grow year-over-year. And what we also see is despite the fact that we're in a challenging environment -- macro environment in Europe, and that's part of our buyer growth, we really don't see our enthusiast buyers churn on the marketplace. If anything, because of the macro, they may move to mid- values. But our mid-value buyers, which is the cohort just below enthusiasts have been growing year-over-year every quarter since the beginning of 2024. So we're continuing to invest in full funnel marketing across the board. We think that, obviously, that has a longer payback for buyers than just pure kind of lower funnel spend, but we think it's the right mix of marketing that we're doing across the board. As it relates to Facebook Marketplace, we continue to be optimistic about the long-term potential of our partnership there. Both companies are working together to optimize the experience. And during Q3, we continued to scale that test and improve the integrated checkout experience, which was important for us to kind of get that right. And we believe it's great for our seller community because as we expose their listings to Facebook scaled audience, that's great for Facebook Marketplace users as they discover the breadth and obviously great for our sellers on the platform. So we're going to continue to scale that test and work on every piece of the funnel. Every time we've worked on it, we've seen pretty significant and great improvements, which has been great to see. Operator: Your next question will come from Andrew Boone with Citizens. Andrew Boone: I wanted to ask about one of the pieces you gave for 2026 in terms of the narrowing of revenue and GMV, and it sounds like some pressure on advertising. Can you guys just unpack that and help us understand kind of what exactly that means? And then magical listings has really made the seller process easier. Can you guys just help us understand how that manifests back into GMV? What happens on the sell side as you guys do get that long tail of listings? And how do you guys really optimize that? Jamie Iannone: Yes. So let me start with the magical listings point, and then we'll talk a little bit about the advertising of the pieces. So what we see with magical listings is really kind of an unlock of more inventory when sellers are starting to use it. So it helps them spend less time creating listings and more time growing their business. So over 10 million sellers have used our magical listings tool. I think we're up to over 300 million items have been augmented, leveraging AI. And so it's really about driving more velocity in selling and driving our overall CSAT experience in selling. Think about that as listing completion rates, listings per lister, et cetera, which all help us perform really well. And we're not just focusing on the listing experience, right? It's we're helping them create better pictures to help them sell more. We're actually using AI to figure out if you're putting a promoted offsite together, how do we -- which pictures do we use and how to alter all of that to kind of help you drive sell-through, et cetera. And what's great about eBay is we have a large base of C2C sellers, and they're bringing really unique items on the platform. And so if you look at the average household, we think they have $3,000 to $4,000 of items that could be on eBay and less than 20% of that is on eBay today. So it's really about unlocking all of that inventory by making it so easy with magical listings. I think on advertising, the comments we were making were more about Q4 versus Q3, where we saw strong ad growth in Q3 due to our strong volume growth and ads adoption, and we expect our 1P ads to normalize to the low to mid-teens growth in Q4 was the comment that we're making about advertising. But when you look at the ROAS that we're providing to sellers, when you look at the experience that we're providing, we feel really good about the trajectory of our advertising portfolio and opportunities. Peggy Alford: And then, Andrew, in terms of your question around the narrowing of GMV versus revenue that we commented on in 2026, we do expect the gap between GMV and revenue growth to be relatively narrow in 2026, and this is driven from our continued healthy growth in first-party advertising, which is partially offset by two things: one, fewer imports into the U.S. by CBT sellers, which slightly pressures our advertising and financial services monetization. And then we are seeing -- we expect to see a higher mix of GMV from our emerging businesses like vehicles and eBay Live that have a lower average take rate. So that's what's driving that. Jamie Iannone: Operator, can we do one last question, please? Operator: Yes. Your final question will come from Ygal Arounian with Citi. Ygal Arounian: I guess just to look at the 2026 guidance, maybe a little bit more closely and the commentary on positive GMV growth. And Pat, you gave the kind of 3 points of headwind impact. Can you maybe elaborate a little bit more on what positive means and kind of where you feel like you fall in that trajectory. We've spent the better part of an hour talking about a lot of the improvements you guys have made. Jamie, you've called a lot of the growth durable. So I think just helping investors kind of feel sort of frame where we land in that positive. I know it's early. And then on the de minimis impacts, Clearly, that's gotten bigger. Any way to frame in a little bit more detail what you're seeing there? Peggy Alford: Sure. So we are early in our planning process, which is why we sort of provided only high-level remarks on our preliminary commentary for next year. We have the holiday ahead of us, and so it would be premature to talk too much about how we're thinking about it specifically. We do expect our strategic initiatives to remain the core driver of our growth, namely, as we've talked about, focused categories, geographic initiatives, horizontal innovation, we're super excited about what we know eBay Live and vehicles will contribute given the incremental investments and focus that we had this year. We've pointed out some of the lapping dynamics that we're expecting. Some of those are, as you were asking, related to the tariff announcements where we do expect to see a full annualized amount from the one month we saw in Q3 and the full quarter that we'll have in Q4. And our expectations in terms of that 1 point was really annualizing a similar trend to what we're currently seeing. Jamie Iannone: Yes. And on your question on de minimis, Ygal, so we did observe breakage related to tariffs in Q3, particularly after de minimis exemption was removed for the rest of the world in late August. So that subjected a significant amount of imports to tariffs for the first time. And sellers in Japan and Canada were amongst the most impacted. What we've really focused on is supporting our customers, which is why we're accelerating our product road map for cross-border shipping services. So we talked earlier about eBay International Shipping in Canada. That's our third largest corridor into the U.S. and really giving them a solution similar to what we brought to U.S. sellers. And that's launched and is performing well. We're extending SpeedPAK, which we've talked about for China, then we extended it Japan. We're expanding SpeedPAK to our German sellers. And these tools help sellers manage the friction and the complexity associated with the changes while providing buyers price transparency. So, overall, we feel confident our marketplace is well suited to help sellers and buyers navigate these challenges. Peggy talked about some of the lapping dynamics for next year from that. But one of the benefits we have is our diversified supply of domestic and cross-border inventory is an advantage in this environment, while also our non-new in-season used and refurbished inventory can help consumers find value as well. Operator: Thank you for joining. This concludes today's call. You may now disconnect.
Operator: Good afternoon. My name is Alicia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Rogers Corporation Third Quarter 2025 Earnings Conference Call. I will now turn the call over to your host, Mr. Steve Haymore, Senior Director of Investor Relations. Mr. Haymore, you may begin. Stephen Haymore: Good afternoon, and welcome to the Rogers Corporation Third Quarter 2025 Earnings Conference Call. The slides for today's call can be found in the Investors section of our website, along with the news release that was issued earlier today. Please turn to Slide 2. Before we begin, I would like to note that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in Rogers' operations and environment. These uncertainties include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement made today. Please turn to Slide 3. The discussions during this conference call will reference certain financial measures that were not prepared in accordance with U.S. generally accepted accounting principles. A reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which are available on our Investor Relations website. With me today are Ali El-Haj, Interim President and CEO; and Laura Russell, Senior Vice President and CFO. I'll now turn the call over to Ali. Ali El-Haj: Thanks, Steve. Good afternoon, everyone, and thank you for joining us today. I'll begin on Slide 4 with the key messages for the quarter. First, since taking on this role in mid-July, I have engaged extensively meeting with Rogers' employees and customers in Asia, Europe and the United States. These meetings and discussions have reinforced Rogers' core strengths and the key growth opportunities ahead. They have also shown the areas where we must improve to achieve renewed growth and sustainable operating performance. To capitalize on these opportunities and to deliver greater returns to shareholders, we are executing on a plan with several critical focus areas. I will cover these in detail and share the progress we have made thus far. Turning to our Q3 results. Our sales, gross margins and adjusted EPS results were all at the upper end of the guidance and exceeded Street consensus. Sales increased by 6.5% from prior quarter, led by improvements in portable electronics, industrial, aerospace and defense end markets. Compared to the prior year, sales increased by 2.7%. Q3 results benefited from delivering on cost and expense reduction actions. For the fourth quarter, we expect sales and earnings to improve versus the prior year, while typical seasonal factors will lead to a sequential decline. With expense reduction actions completed, adjusted EBITDA margin should improve around 300 basis points versus the prior year. Laura will cover both the Q3 financials and fourth quarter outlook in more detail. On Slide 5, I will discuss the critical initiatives we are advancing in the near and midterm. First, we are committed to improving Roger's top line growth potential. To achieve this, we are intensifying our customer focus with actions underway to better anticipate their needs and improve service levels. As we work to delight our customers, we will leverage our global manufacturing capabilities to increase our competitiveness and market share in each region. We have recently expanded this capability as we have started production in the new curamik facility in China. With a localized supply chain and a regionally competitive cost structure, we are positioned to compete effectively. Delivering innovative new products is also key to achieving our growth objectives. There are compelling opportunities in the technology pipeline and significant future potential applications. In the coming quarters, Rogers will be introducing new products in all business units, targeting new and adjacent market segments. The next critical priority is to maintain a lean and efficient cost structure. Expense reduction actions and footprint optimization efforts that were started in recent quarters are taking hold, improving EBITDA margins and cash flow. We are making significant progress on the previously announced restructuring of curamik operations in Germany. Cost savings from this initiative will begin in the fourth quarter with $13 million of annualized savings targeted by late 2026. We will continue to evaluate our global footprint and make refinements as needed. This may include selective investments to support growth opportunities that meet certain return criteria. These investments will be carefully balanced with vigilant cost control. Operational excellence will remain a top priority, focused on creating a more flexible and dynamic organization. Actions already completed include changes made to the commercial, R&D and operations organizational structure in both business units. These changes were implemented to increase the speed of execution, improve accountability and simplify how we operate. We already are seeing results with significant reduced lead times, some by as much as 60% while reducing inventories and improving working capital. Our revised operating model will continue to drive these types of improvements. As we reshape our structure into a customer-centric organization, we expect to see more consistent performance and improved returns to shareholders. Lastly, we are also intensely focused on critical initiatives to grow and strengthen Rogers over the long term. While these objectives are not part of today's discussion, we will share our plans at the appropriate time. On Slide 6, we'll discuss our sales for the third quarter by end market. Beginning with industrial markets, sales were higher versus the prior quarter in both AES and EMS business units. In Q3, the improvement was broad-based with sales increasing across all regions. This marks the third consecutive quarter of higher industrial sales and on a year-to-date basis, we have continued to show growth. Aerospace and Defense sales also improved sequentially. EMS sales increased driven by stronger commercial aerospace demand in the North American market. AES defense sales remained strong and were in line with the prior quarter. On a year-to-date basis, total A&D sales have increased at low double-digit rate. EV and HEV sales were relatively unchanged versus the prior quarter. AES sales increased from improved power substrate demand. Year-to-date, sales remained well below the prior year. We anticipate further growth in this market, supported by the recent curamik expansion in China and the recovery in demand from the Western power module manufacturers. As anticipated, ADAS sales decreased sequentially. The sales decline tracked lower light vehicle production in Q3. Year-to-date sales remained solidly ahead of 2024. Lastly, portable electronics was the largest driver of the sequential improvement in revenue. The double-digit increase versus the prior quarter was in line with expected seasonal patterns. I will now turn it over to Laura to discuss our Q3 financial performance and Q4 outlook. Laura Russell: Thank you, Ali. Starting on Slide 7, I'll begin with a summary of our third quarter financials. Q3 results improved meaningfully from the prior quarter with all financial metrics at the top end of guidance. Sales increased across most end markets with the largest increase in portable electronics and industrial. AES revenues increased by 5.2% and EMS revenues were 8.7% higher on a quarter-on-quarter basis. GAAP EPS of $0.48 improved significantly from the prior quarter, mainly due to lower restructuring-related expenses. Adjusted earnings per share in Q3 increased to $0.90 from $0.34 in Q2, a result of the improvement in sales and gross margin and reductions in G&A expenses. Turning to Slide 8. Q3 adjusted EBITDA was $37.2 million or 17.2% of sales. The 540 basis point improvement from the prior quarter was driven by multiple factors. First, gross margin increased 190 basis points to 33.5% due to higher volumes, favorable product mix and reductions in manufacturing costs. Late in the third quarter, we started production in our curamik facility in China. Cost for the initial factory ramp had only a slight impact on Q3 margin. The impact of tariffs on gross margin was minor in Q3. This was a result of continued mitigation efforts and the agreement between the U.S. and China to delay tariff rate increases. Next, adjusted operating expense, excluding stock-based compensation, decreased by $2.5 million quarter-on-quarter. The lower OpEx resulted from reductions in professional services and global workforce restructuring. Lastly, other income improved $2.6 million due to favorable quarter-over-quarter changes in foreign currency transaction. Continuing to Slide 9, I'll discuss cash utilization for the quarter. Cash at the end of Q3 was $168 million, an increase of $10.6 million from the end of the second quarter. Cash provided by operations was $20.9 million and improved due to higher sales and operating income. In addition, we improved working capital, particularly inventory through continued focus. Uses of cash in the quarter included share repurchases of $10 million and capital expenditures of $7.7 million. For the full year, we forecast capital expenditures in the range of $30 million to $40 million. Returning capital to shareholders will remain a priority. Our current view is that share repurchases in Q4 will exceed Q3 levels. Following our purchases in Q3, we have approximately $66 million remaining on our existing share repurchase program. Next, on Slide 10, I'll review our guidance for the fourth quarter. Beginning with sales, we expect Q4 revenues to be between $190 million and $205 million. The midpoint of the range is a 3% increase in sales year-over-year and a 9% decline quarter-over-quarter. The guidance reflects the normal sequential decline in portable electronics sales from Q3 to Q4 and slower order patterns across most end markets as customers manage year-end inventory. We are guiding gross margin in the range of 30% to 32%. The midpoint of this range is 110 basis points lower than the prior year with an 80 basis point headwind from the ramp of our curamik factory in China. Compared to the prior quarter, gross margin is 250 basis points lower due to volume and mix. We expect adjusted operating expenses to decrease from third quarter levels, primarily from lower start-up costs, which have moved into gross margin following the start of production at the curamik facility. EPS is projected to range from breakeven to earnings of $0.40. The adjusted EPS range is $0.40 to $0.80 of earnings. We expect adjusted EBITDA margin between 13.5% and 16.5%, a roughly 300 basis point improvement versus the prior year at the midpoint of the range. The margin and EPS guidance assumes that tariff policies in place today remain unchanged for the quarter. Adjustments to arrive at our non-GAAP EPS and adjusted EBITDA are mainly comprised of restructuring costs related to the curamik actions in Germany. As communicated last quarter, the restructuring costs associated with this action will be incurred from Q4 of 2025 to Q3 of 2026. We anticipate savings, albeit small to start in late Q4 of '25. The program is still anticipated to deliver $13 million of annual run rate savings. Lastly, we project our non-GAAP full year tax rate to be approximately 35%. The higher expected tax rate is mainly due to certain loss jurisdictions where no tax benefits can be realized. I will now turn the call back over to Ali. Ali El-Haj: Thanks, Laura. In summary, there is a clear focus on the key initiatives to grow the top line, improve the cost structure and further operational excellence. Combined with a renewed customer focus and new product introductions, we see significant opportunity to improve Rogers' performance over the near and long term. That concludes our prepared remarks. I will now turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities. Dan Moore: I'll start with the top line and just kind of general revenue trends. Guidance for Q4 implies 2% to 3% growth at the midpoint year-on-year. Just talk about the confidence in demand continuing to build in those key end markets that you called out like industrial, aerospace and defense and some of your larger end markets. And as we look out to the first half of '26, would you expect similar, if not improved year-on-year growth, particularly given some of the easier comps that we have in the first half of the year? Ali El-Haj: Dan, it's Ali. Look, we're confident in the range that we've given you based on what we see today. Absent macroeconomics change, we're very confident with the range that we've given you for Q4. So we expect the market to continue strong for us in all activities -- the only one that we -- all market segments. The only one we're probably still hesitant is the EV market and how far can it recover for us. That's the only concern. But that's baked into the forecast that we -- or the guidance that we provided. As for the first 6 months of 2026, we actually have high confidence in better performance and continued growth in all business segments. Dan Moore: Very helpful. And maybe for Laura, the gross margin recovered to 33.5% this quarter. Obviously, mix helps. It's a seasonally stronger quarter. But as we look out, 2 questions. One, the 80 basis point headwind in Q4, how should we think about that kind of dissipating as we move into the first half of next year? And two, what in your mind is sort of a baseline for gross margins on an annualized basis? And what could an upside scenario look like? And I'll jump back in queue with any follow-ups. Laura Russell: Okay. Sounds good. So let me address the first half of your question, Dan. So the 80 basis points headwind that we're going to face in the fourth quarter associated to the ramp of the curamik facility in China is pretty typical of what we would anticipate as we begin production in that facility. I think as Ali mentioned in the prepared remarks, we have activities ongoing with many customers, and we're looking to qualify and ramp those customers into full manufacturing production volumes, which will facilitate us getting ahead of that headwind and turn into return from that facility, which correlates with the investment we undertook to build out our regional capability and capacity and allow us to be far better positioned to compete locally in that market. So what I would anticipate is it will take time to fully ramp the capacity through 2026, not necessarily because of our readiness, but because of the time it takes to qualify the customers' product and their solution directly from our factory. So those activities are ongoing. And we would anticipate as we reach the back end of next year to not be facing the same extent of headwind to the margin from that operation. In terms of thinking about the potential for the business and the margin optimized, Ali spoke about the initiatives and the objectives that we have. A lot of them will crystallize and improve financial results as we embed the new operator model and deliver improved operational effectiveness and grow the top line. I spoke previously about our current investments and the capacity being in place. So now we're turning our attention to optimizing that capacity and utilizing it to serve the demand and the potential that we see. Operator: Our next question comes from the line of Craig Ellis with B. Riley Securities. Craig Ellis: Laura, I'll just start on the theme that Daniel is on and just take the cost and margin dynamics a step further perhaps. So my sense from your characterization as you walk through some of the slides and the cost savings, which I think are targeted at $25 million this year with a $32 million run rate, and then we've got $13 million coming from the German facility next year. Is that there may be other cost benefits that could be executed against beyond things that are in progress and the German facility benefit, one. Is that correct? And two, how material could those things be? And when could they start to be things that would be actionable as we look at where profitability and cash conversion can ultimately go for the business? Laura Russell: Okay. So let me start, and Ali can add additional comment as he sees fit. So in terms of the plans that we've already outlined, Craig, and where we're at in executing those. The $25 million savings in $25 million that I've spoken to, you can see that crystallizing in the P&L at the moment based on the guide that we've given. If you look on a year-on-year basis, if you look at the OpEx in totality, we were roughly $210 million last year. And with our guidance, we're probably about $18 million to $20 million below that in our update for 2025. So you can see that coming to fruition. From a full year basis -- and sorry, just to give clarity, that's because of the 70% of the $25 million is in OpEx and the residual is in gross margin. If you look on an annualized basis, as you stated, that should be more like $32 million benefit across both P&L geographies in '26. And in addition to that, as we announced last quarter and as you correctly commented, the restructuring in Germany has commenced. The program is largely on track, and that's set to deliver $13 million on an annualized run rate basis. Just to remind you, that $13 million, though is a COGS saving, not an OpEx saving. We won't see that fully materialize until later into 2026, just as we go through the ramp down of the capacity and the ramp-up in servicing some of those customers in the new geography in China. So that's what we have there. In terms of incremental opportunity beyond that, what I would tell you is you hear us talk about efficiency in the operating model, and we will look to optimize the financial performance of the business month-to-month, and that's exactly the discipline that we have, but with an increased intensity of that discipline with the processes and the approach that is now being deployed. So with that, we will evaluate the business and the market opportunities as they present themselves and make appropriate investments or savings as is needed. In terms of defined plans at the moment, it's the ones that we've already shared, and I've just walked through just now. Craig Ellis: That's very helpful. And I think the execution on cost and other things have been quite notable over the last 3 to 4 quarters, Laura. So it will be nice to see those continue. Ali, I'll turn my second question to you. You noted in your prepared remarks that the industrial end market, which is our biggest, was an area of strength. My question is, as you look at the dynamics in that end market, what is it that drove that strength? And as you think about growth in that large end market, what are the opportunities specifically to drive growth? And do you think that we're at a point where supply chain inventories are no longer a headwind to that business? Ali El-Haj: Yes, thanks. I'll answer the question kind of backwards from inventory and supply chain issues, I think that's way behind us now. So that's all kind of cleared up. I think we're looking forward and the potential for growth. So we have 3 elements that we're targeting or we're working on. One is we're capturing more market share from products and customers that we already have and customers that we didn't have in the past. So increasing market share, this is key for us. And again, this is for assets that we have. So we can utilize these assets. We have the capacity to supply these type of products. In addition to that, and this is significantly important, I think our customers started to see our improvement in response and service and for their demand and need. So we're seeing a lot more demand and a lot more of these volumes shifted back to us. The third element is introduction of new products. So as I indicated, we would be launching. We actually started this in Q4 of this year going forward, several new products that will allow us to even penetrate markets that we have not participated in, in the past. So I think all those 3 elements were really given us a lot more confidence that we will continue to grow the top line. Craig Ellis: That's very helpful. And if I could just ask a clarification on the heels of those 3 drivers, Ali. As you've interacted with the internal team, as you've interacted with partners and customers, do you feel like pricing is at the right level for the high value that Rogers products bring to market? Or is there opportunity to do things tactically with pricing so that more of the functional value that Rogers provides come home to the top line and down to the bottom line? Ali El-Haj: I think the simple answer is a combination of both. So I think Rogers brand name and quality and commands obviously a premium pricing. In certain markets, certain applications, that's been a key for us. However, there's other markets and areas where really the market commands the pricing. And in this case, what we're doing internally is we need to make sure we're focused on the cost structure that we have today to be able to compete effectively in these markets and be able to realize the margins and the returns that we expect to get. Laura Russell: Just one point of clarification just before we jump off, Craig. Naturally, what I was discussing in the OpEx bridges was adjusted OpEx. Operator: Our next question comes from the line of David Silver with Freedom Capital Markets. David Silver: First question would be for Ali. And I took note in your opening remarks that your first task, I guess, upon becoming interim CEO was to visit with a number of your key customers, I guess, you mentioned globally. So I guess your company has gone through an extended -- or the industry has gone through an extended period of kind of softer demand. There's been inventory issues. There's been more recently tariff issues. Would you say that the relationships with your key customers remain as strong as they were, let's say, 18 months ago? Or due to some of those changes, does Rogers need to take maybe some further steps to even more closely align with your key customers and collaboration partners in order to meet your goals? So what is the status of the relationships over an extended period of reduced demand? And then the significant steps you've taken thus far to reduce costs and tighten your alignment, are there further steps tactically or strategically that you need to undertake? Ali El-Haj: Yes. Thank you for the question. I think, again, I think the relationship with our customers is very strong. I think it's solid. There's a lot of history here behind some of those customers, especially the key customers. I think my objective was really to develop some deeper understanding of the needs, listen to their voice and understand their needs, expectations from Rogers and making sure we're really paying attention to that and addressing those issues. So this communication really improved our understanding of their expectations. That could have been, in some cases, maybe because of outside factors, whether it's supply chain interruptions, raw materials that we went through in the past 3, 4 years. And obviously, that caused some hiccups and that or some -- I would say, minor disruption and caused some pain to some of those customers. So I think we -- this understanding really now is very clear. Our understanding of their needs is very clear. And we aligned the organization itself internally to make sure we address those issues day in and day out across the whole spectrum throughout the whole organization, not just the sales of the R&D, but when it comes to service, and we've mentioned some of the improvements we've made internally, cutting lead time to 60 in some plants even higher than that. So we're responsive. We're being more responsive. We think now -- we expect by the end of 2026, hopefully to be the benchmark in the industry when it comes to the service level and quality and these type of activities. With regard to the second half of your question, continuous improvements never stop. So this is going to be an ongoing effort to continue to work on our operations and continue to improve our processes, whether it's in the manufacturing processes or, again, the customer service area, the sales area, the development processes. We're looking to reduce our development time in engineering significantly to be able to introduce products faster and because we need to be, again, expecting the demand and need of the customers and be up there and upfront and be there when they need us. Not react and supply them stuff beyond or delaying their expectations and delaying their introductions. So these are things we continue to focus on. A lot of it is in our -- within our control, and therefore, we -- I'm very confident we're going to get these things accomplished. David Silver: Okay. I did want to maybe ask a question about your philosophy about share buybacks and returning cash to shareholders in general. But the funds, I guess, over the past few quarters, including the current one, I mean, the funds allocated to buybacks have increased significantly over, let's say, the trend over the past several years. And I think Laura indicated there'll be further repurchase activity in the fourth quarter. Just philosophically, is this a decision by management to act opportunistically because of maybe where the share price was earlier this year? Or would you say it's more programmatic and share repurchases are likely to continue at a higher level than has been the typical levels over the past several years? Laura Russell: David, so let me start with that. So yes, it would be fair to say that it's been somewhat opportunistic. It's an indication of our belief in our potential with the share repurchases that we had undertaken this year when our stock price was where it was. We did do a further $10 million in Q3, and I had indicated in our call that we would likely do a little more than that in the fourth quarter. What I think is critical, though, is you asked about the philosophy around share buyback. And really for us, it's about looking for optimizing returns to our shareholders as part of our capital allocation structure. And what we had seen through '25 is whilst we were still active in evaluating M&A and potential opportunities, there hasn't been presented opportunity or target that met our investment and return criteria. And we had already explained we were largely through the organic investments that we saw for expanding the company in its existing structure with its existing technologies. So that's what resulted in the pivot to the share repurchase activity. Now as with every quarter, we'll continue to evaluate the investment potential and seeking to optimize those returns, and we'll balance what we do on a go-forward basis between all 3 legs of those the capital allocation structure. Operator: [Operator Instructions] Our next question comes from the line of Daniel Moore with CJS Securities. Dan Moore: First couple of questions, more high level looking out to next year. But just in terms of Q4, you came in at the top end of the range this quarter. Guidance for Q4 again implies a pretty wide range. Just talk about the puts and takes that could cause you to come in toward the lower or higher of that range this quarter. Ali El-Haj: Do you want to take that? Laura Russell: So Dan, it's Laura. Let me start. So we guided based on our current visibility. And we stated in the prepared remarks, really, what we typically experience and what we've incorporated is the slowdown in portable electronics into the fourth quarter versus the third and the customer management of inventories. Now we may see some change in that inventory management. We may see some -- we've got a substantial exposure in the industrial space. If we see those indices shift and increased investments, then we have capability to respond to demand as it comes in. And if we go the other way and there's any weakness, which is not anticipated based on the guide, then we would manage the way we do week-to-week, month-to-month on our activity. So at the moment, with the visibility we have, the guidance is as it stands. Operator: [Operator Instructions] Our next question comes from the line of Craig Ellis with B. Riley Securities. Craig Ellis: I was hoping to go back and just get a real long-term perspective on what the view is with the China curamik facility, both with respect to the diversity of customers that you think you can have in that facility? How you're thinking about being able to ramp up that facility beyond the very near-term gating factors like the specific customer and program costs that would start product? But what are the strategies the company has to engage with customers and grow both domestics and internationals that might need manufacturing autos there? And then anything else that would help us form an insightful view on what you think is possible over the next 2 to 3 years with that facility? Ali El-Haj: Yes. Okay, Craig. I think, obviously, we did not build this plant. So we were engaging with customers before we started the facility and started building the facility and restructuring. So from a customer activities and potential, it's all available to us is there. So I can assure you that we already have several programs that were being sourced and committed by some of our customers. So what we're going through is what we indicated earlier. We have some qualification that product qualification, process qualification that we're going through with our customers. And that's probably the gating item here. As some of these things get approved, they will launch because the demand is there. We -- and it's multiple customers, some existing customers and a few additional newer customers and newer applications for us. So the future for the curamik facility in China is very bright as we see it today. We expect significant growth in the facility and in the overall curamik business. So we still believe that the growth there is very solid, and we can forecast it. Craig Ellis: And to follow up on one of the points that you made and understand it more deeply, if the gating factor near term is just the quals that we're doing, whether it be product or process, what are the levers that the company has to maximize the speed at which that can happen, whether it be how you're staffing the facility, the shifts that may be running or just technical things that need to be done? Just any further color there would be helpful. Ali El-Haj: Yes. I mean the facility is already staffed for the current volume and for the expected forecasted volume for the next quarter. With regard to the expertise and experts and all the staffing that we need the support function, the functions, they're already available and it's already staffed. I think some of the issues that I've mentioned is these type of qualification is really at the customer's end. We've done all the work internally for most customers. And now the next phase is their own qualification of the product itself. And we're trying to assist some of those customers actually doing some testing for them to speed up that process. So I think overall, we believe we're on track to hit the numbers that we are forecasting for 2026. Operator: Thank you. There are no further questions at this time. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, and welcome to the Third Quarter 2025 Pitney Bowes, Inc. Earnings Conference Call. Joining us today are Chief Executive Officer, Kurt Wolf; Chief Financial Officer, Paul Evans; and Director, Investor Relations, Alex Brown. [Operator Instructions]. Alex Brown: Good afternoon, and thank you for joining us. Included in today's presentation are forward-looking statements about future business and financial performance. Forward-looking statements involve risks, along with uncertainties that could cause actual results to be materially different from our projections. More information about these items can be found in our earnings press release, our 2024 Form 10-K and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update forward-looking statements as a result of new information or developments. Also included in today's presentation are non-GAAP measures, specifically EBIT, EBITDA, EPS and free cash flow, all on adjusted basis. You can find reconciliations for these items to the appropriate GAAP measures in the tables attached to our press release. We have also provided a slide presentation and a spreadsheet with historical segment information on our Investor Relations website. With that, I'd like to turn the call over to our CEO, Kurt Wolf. Kurt Wolf: Thank you, Alex, and thanks to everybody who is joining today's call. I trust that everybody has had a chance to review our press release and my letter. That said, I'd like to touch on a few key points before going to Q&A. We reported continued profitability improvements for the quarter. However, we expect the year to come in around the low end of our range for revenue, EBIT and free cash flow. To be clear, this is primarily due to issues with forecasting and has nothing to do with operational factors, which have, in fact, been more positive than negative during the quarter. With respect to the forecasting issues, these are problems that have long plagued the company, and I'm working closely with Paul and his team to fix our forecasting process. Moving to our strategic review, we are making significant progress. We continue to enhance our talent, structure and processes to support future growth of the business. Additionally, we are compiling and evaluating a set of profitable growth opportunities. What we are learning in the strategic review is giving increased optimism about the outlook for the business, which supports our decision to spend an additional $161 million on share repurchases during the quarter. In summary, we are still tripping up on past mistakes, but are aggressively attacking and fixing issues as they arise, making us a stronger company. For this reason, my optimism about the future of Pitney Bowes only continues to grow stronger. With that, let's open the call for questions. Operator: [Operator Instructions]. Our first question comes from the line of Kartik Mehta with Northcoast Research. Kartik Mehta: Kurt, just wanted to get a little bit more insight into SendTech. Obviously, the revenue declines are decelerating, which is a positive. And you've talked about, obviously, the IMI migration as you move past that. As you look at that business, what do you anticipate the trajectory over the next 12, 18 months for that business? Kurt Wolf: With respect to SendTech, as you did mention, the IMI migration, we're largely getting past that. You can see that in the results this quarter. We do expect that should continue to be a benefit in Q4. By Q1, it should be fully lapped. So I think by and large, the impact of the difficult comps from the IMI migration are largely behind us. So the revenue decline we saw in Q3 probably is a realistic look of where things stand for now. And the question becomes, I'm incredibly excited to have Todd Everett join the company from the Board. He has a strong background in the shipping space. He's an incredible operator. He's excellent at operating Newgistics before it was sold to Pitney Bowes. I think he's done a lot of great work already. Happy to answer more about the work he's doing, but he's evaluating opportunities to accelerate growth, but also -- but again, one of the big focus is profitable growth going forward. So the outlook for various parts of the business may be a little different than previously discussed. One of the big areas I would highlight is we've been so focused on our shipping solutions, that so much attention has gone there that we've probably underinvested and opportunities exist within the mailing business. So I don't want to speak on Todd's behalf, but I think there are some things that we could be doing given our position in the market to help decelerate the decline of the postal business. Again, we're in no -- we have no illusions about the fact that the space is declining, but I think there's things we can do to slow that decline. Kartik Mehta: And then, Kurt, in your letter, you talked about the Presort business. It seems like some of the smaller competitors might be having some issues. I'm wondering your ability to continue to consolidate that particular business. Are there opportunities? Or is it just better to go get the business on your own and just win the market share? Kurt Wolf: I'd say we're pursuing an all-the-above strategy. And for some context, July of 2024, there was a significant increase in the work share discount. So profitability across the industry took -- became significantly improved starting in Q3 of last year. So as we continue to talk to potential acquisition targets, given the trajectory of their business, those conversations largely died out. And one of the reasons we do talk about some of the issues we're seeing, we won't get into too many details, but there are signs of financial issues with some of these companies. But we are all of a sudden getting callbacks from companies that 6 months ago, a year ago, we were saying they had no interest in selling. So there's definitely more interest given the way that pricing competition heated up and has depressed margins for a lot of these players as well as for us. Kartik Mehta: And then just one last question. Maybe just on a free cash flow standpoint, I think you maintained your guidance. So I think that would imply a pretty big fourth quarter free cash flow quarter. Just if you could just walk through how you're getting to that or maybe what some of the puts and takes are for that? Paul Evans: Yes. This is Paul. Look, I mean, where we're sort of coalescing around is around the $330 million as we sort of stress tested our forecast for Q4, it will come in plus or minus 1% of that. The quarter ended midweek. And obviously, there were payments that came in shortly thereafter the quarter happened. We had a very strong pickup in the first part of this quarter and so that gives us confidence. I mean we still got work to do, but we have confidence that will sort of around the [indiscernible] Operator: And our next question is from Anthony Lebiedzinski with Sidoti. Anthony Lebiedzinski: First, just wondering if you guys could maybe just comment -- just curious about the cadence of revenue as you went from July through September, -- were there any variation? I know, Kurt, you talked about the -- some flaws in your forecasting. So just wondering if there was any big variations from month-to-month as you went through the quarter in both of your segments. Kurt Wolf: Yes. So Anthony, I appreciate the question. No, there's been nothing really that stood out from a month-to-month variance. What really -- the first indication we had is what we're seeing internally, the business is operating well. As an example, within Presort, I believe we've not lost a single customer since June, and we've been picking up businesses -- our business. So as we were progressing through the quarter, it did become a point of question of how are we operating well and not getting the financial results we were looking at. At that point, Paul and I got heavily involved, started to dig into the processes involved with forecasting, identified some process issues, some -- you're an analyst, you do forecasting yourself. There's just a lot that goes into it, particularly when you're at a company. We have access to tremendous amounts of data. Just understanding how we were processing data, assumptions we are making, et cetera. So we've -- so that sort of is what brought it up. It wasn't any sort of monthly variation. It just was the fact that the business is performing well and the financials weren't going as expected relative to budget. So when the operations are doing as well as you expect and the financials aren't quite as strong as you expect, there's clearly an issue with our forecasting. And I can assure you, Paul and I are very serious about this. We both stepped in. This has been a problem that's plagued the company for far too long during '22 and '23. It was something that I talked quite publicly about the problems of forecasting, and it's something that I've now been able to come to understand what the issues are, and we are taking this very seriously. We brought in outside help on it, and we're doing a lot internally to fix this once and for all so that we can be much more accurate in our forecasting. And again, this isn't just about providing guidance. This is we need to make significant investment decisions, business decisions. And if we don't have incredibly accurate data, we're going to end up making worse decisions. So it's unfortunate that we had this issue with our forecasting, but it's emblematic of what we're doing within the organization. We continue to identify issues. We aggressively get after them, fix them, and it makes us a better company for it. So it's frustrating to once again not be able to give great news on the forecasting front like we might have hoped for, but I think we're a better business as we continue to uncover these issues. Anthony Lebiedzinski: That makes a lot of sense. And then turning to Presort. It sounds like you have been able to win back some previously lost clients. So with that in mind, when would it be reasonable to assume that Presort gets back to sales growth on a year-over-year basis? Paul Evans: So Anthony, I'll take that question. So I think that assumption right there, and that's one thing that Kurt and I really dug into numbers and we looked at the budget that was the basis of our forecast. The one, it wasn't anticipated that how our competitors would use the sort of, if I can call it a premium on the rate case to sort of go take share from us, and they bought that share. And then obviously, how long does it take to get that back. And so that's -- well, it will come back to us. It hasn't come back to us yet, but we're aggressively going after it. So there's a lapse in time, you lose it, they get with somebody else for a while. We go back in, what can we do better and then there's a bidding opportunity. And so -- and we're close on some to take it back. So I think I'm optimistic about the volumes for Presort next year. Anthony Lebiedzinski: Okay. That's good to hear. And then thinking about the new cost cuts, the $50 million to $60 million that you talked about, will that -- will those be mostly through corporate unallocated? Or will that flow through the different segments? Just maybe help us understand how to model those cost cuts. Paul Evans: Sure. I mean it's across the company. So some of them are in the -- for your model in the G&A level, some sort of hit higher up. But we went across all Kurt's leaders looked at that. And so it was really a management-led effort to refine our costs. And through that, we identified some very good opportunities. Look, we'll get to the point where we're always going to look to drive cost out of our business that every healthy company should do that. And this one, I'm new to the role. Kurt is relatively new to the role. He's got a whole new -- relatively speaking, new leadership team. So we challenged everybody as operators to look at what you have and what do we really need really going forward. And so that's what you're seeing here. And these benefits should be all realized by the end of '26. Anthony Lebiedzinski: Okay. Got it. Okay. And then lastly, just actually just returning quickly to Presort. Given the competitive dynamics there, it sounds like there are some struggling operators. Would those be opportunities perhaps for acquisitions for you? Or do you just want to focus on getting back to sales growth at Presort before you start looking at potential acquisitions? Kurt Wolf: No. Anthony, these acquisitions are so accretive that we're always looking at them. And by the way, as I said, that's sort of one of the signs that we're seeing that the pricing is really affecting players in the market is the fact that 9 months ago, none of these players -- none of the players had any interest in selling, and we're starting to get inbound calls from people that are looking to potentially sell their business. So it's -- and we're always in the market to make these acquisitions. They just drop to the bottom line. And again, it's one of the frustrations over the volume that we did lose. This is a high fixed cost business in the short term. So losing the volumes that we did, the amount of the profitability that we lost by not retaining those customers was pretty dramatic. So bringing in these new -- if we do make acquisitions, the degree to which revenue drops to the bottom line, particularly given that we now have a little of excess capacity in our facilities is just incredibly high. So we're absolutely in the market to make acquisitions. Operator: And our next question comes from the line of Aaron Kimson with Citizens... Unknown Analyst: Kurt, you mentioned in the letter that you recently completed your review of the leadership team. Obviously, there have been a lot of changes at the executive and Board level since you took the reins in May. Are you comfortable with the leaders you have in place now? And then if we think a level down about your direct, direct, do you have any thoughts on when the business may have the continuity you desire and be operating more of a BAU state? Kurt Wolf: Absolutely. Yes, Aaron, welcome to the call, and thank you for joining. Yes, as far as the leadership team goes, I'm incredibly happy with the -- as Paul mentioned, I have 7 direct reports. incredibly happy with the team we have. It's the right people. Those who are bought into the level of accountability and drive for excellence that we expect of everybody at this organization. Anybody who wasn't bought into that's no longer with the company, at least within the executive team and everybody who is here is 100% bought in. And as you can imagine, anything starts from the top down. So we have the right leadership team. That leadership team -- and by the way, that informed the $50 million to $60 million in cost cuts after I was -- as I work through this process myself, Paul and the rest of the leadership team did the same within their organization. And I think it's really important to highlight that previous cost cuts were an effort by -- largely driven by outside consultants to say, here's an opportunity to reduce costs. This wasn't an effort to reduce cost. This was an effort to get better as a business. This is leaders that are restructuring their organizations I could go division by division, but almost every corporate function and almost -- and business unit has changed their organizational structure to better meet the needs of the business. Within that, they've addressed what processes -- they're addressing what processes don't we need to do and how can we be better on a go-forward basis. So that's really what has driven the $50 million to $60 million of cost cuts. It was not the pursuit of cost cuts per se, but just the -- this effort being pushed down the organization. And again, I feel incredibly fortunate to have the leadership team that I do that's doing such an excellent job of it. I think we have stability within the leadership team. And as they're working with their group, I think stability is developing the next years down. And I would say just as a general comment about Pitney Bowes, I maybe say this too much, but I can't emphasize enough as a shareholder how happy everybody should be with the employees that represent the company that you're an investor in. We've made a lot of changes in the last 18 months, a lot of cost cuts, a lot of challenge to these employees. And everybody shows up with a good attitude every day. Everybody asks what more they can do to help this company. So I know there's been a lot of change. But what I would say is I don't think there's any change needed in terms of the bulk of the employees at the company. We have a great employee base, do a great job. So I think they provide stability even as we've been changing some of the leadership. Unknown Analyst: That's really helpful. And then as a follow-up, can you dig a bit further into the misalignment of incentives in GFS and how you're approaching the realignment and future of that or? Kurt Wolf: Yes, absolutely. And yes, so GFS is not its own business unit. It was a loosely organ -- is like I don't even know what you want to call it. It was a part of our structure. And things financial would go through GFS. So you'd have situations and things like this would come up where we would -- so as SendTech would try to sell a meter, GFS would ultimately have approval over the actual credit, the -- because we're leasing these meters, if we were offering them purchase power for revolving credit to use that meter, that was all through GFS. And so what could end up happening is if GFS' attitude was we don't want any credit loss, and SendTech saying this is an incredibly lucrative deal. You had 2 peers essentially looking at each other in a standoff saying we're not willing to -- they created issues. So what we've done is SendTech, ultimately, GFS was reporting through SendTech financially. So Todd now owns SendTech. -- all the credit decision, if something is going on to the SendTech balance sheet, for lack of a better word, the approval of that, it's a business decision by Todd that he can evaluate what's the opportunity in the sale and what's the credit risk before those 2 decisions were differentiated. So it led to incredibly low credit losses in the past, but it also led to a lot of failed sales that would have been profitable. And it's led to a lot of a lot of difficulty in the sales process. So what should be a very seamless customer experience became incredibly difficult going through 2 different organizations that were focused on different aspects of a deal. So it was just -- it was unworkable. It just was really incredibly inefficient. So hopefully, that gives you just one example of a problem that would arise. Paul Evans: Yes. Aaron, if I could say what it's really -- and somebody pointed this out to me, it's analogous to we were selling the car and also the gas. And so we were okay to sell the car. But then when it came to sell them the gas, the other side said, we don't think they're creditworthy to sell them gas. And that really hit home with me. And so obviously, that inefficiency, that decision now that rests in Todd's world. It doesn't mean that we're going to lower standards that we want to take on excess counterparty credit risk. We won't do that. We'll still be rigor, but we're not going to let this misalignment of interest stop us from servicing a customer. Kurt Wolf: And not to over harp on this point, but at one point, and this is after we were already trying to fix the problem. I received an e-mail from a customer that had bought multiple meters from us that was complaining that they could not use their meter because they weren't getting approved for the use of purchase power. So I mean it just doesn't make -- it just was really -- and that's what I mean in terms of this opportunity in mailing. We have the best product. We have the best services. We have -- we're peerless in every way, but we are creating a nightmare for our customers. And again, that's what I'm driving at is a lot of this restructuring we're doing is trying to get better as a business and the $50 million to $60 million of savings is a side benefit. Operator: And our next question comes from the line of Matthew Swope with Baird. Matthew Swope: Could I go back to Presort? And Kurt, I think you alluded to it, but I think we all maybe underestimated the decline this quarter there. And to see a $17 million decline in revenue drive a $13 million decline in EBITDA and EBIT. I know you talked about fixed cost absorption. But can you talk about sort of how that incremental margin or decremental margin maybe in this case works? Paul Evans: So okay. So here's what happens. I mean, once you overcome your fixed cost in that business is high-volume business, and you recognize that your labor has a capacity, you can sort of sweat them. Any additional throughput you have from that really is just profit in large part, it just falls to the bottom line. So a decline in that sort of -- that part of the stack will sort of have a direct impact to your EBIT. So it's a very -- certain part of it is a very high contribution margin business. Once you've overcome your cost, then you're really into the land of super high-margin work. Kurt Wolf: Yes. And Matthew, just another couple of points on that. If you look at our Q3 of 2024 compared to our Q2 of 2024, so sequential, not year-over-year, you can see that impact. The price increase, I believe, hit July 17, maybe in 2024. So almost all Q3 of 2024 had this higher price. And you can look at it, our revenue was up $19.2 million I'm sorry, it was up $19.5 million and EBIT was up $19.2 million. It's essentially -- that was coming -- I guess that was coming through as price. But bottom line, I guess we've seen it on the opposite side with volumes where, again, as these volumes come through -- to use an example, Debbie's system is optimized for a certain level of -- so the rent we pay, the equipment we buy, all of those things are pretty much fixed. As we optimize our system, if we're running 100% volume versus 90%, you still have the same labor force on the work -- on the floor. So maybe there's a small incremental increase in electrical costs or what not or maybe the equipment is going to break down a little faster if you're running it more. But in the end of the day, that lost volume, our contribution margin is incredibly high on volumes. Obviously, as you get to certain volumes, you have to add fixed costs. But at this point, given that we're not fully utilizing our system, it heavily drops to the bottom line. Matthew Swope: So that comment on price from last July, Kurt, makes a lot of sense. It feels like this was as much volume driven as price though. Could you talk -- maybe if I ask the question in a different way. If the 11% revenue decline, are you able to just roughly break that into price and volume? Paul Evans: We certainly know what it is. Yes. I mean, look, we had a big loss in volume relative to our budget. And so that, for me, explains most of the story, what's going on. And obviously, we'll see some reversion of that volume in our next year numbers. But it's really more about the volume and how that incremental volume, what that meant to the bottom line. I mean what -- where our mind is on this as we looked is how did our competitors use that rate case, the new funds associated with that rate case. They used it to go out and bid share, and we didn't use it to bid share. And so because of that, we lost volume. We are the low-cost provider. So now what we're doing is, okay, fine. We'll use our position as the low-cost provider to go back and win back that lost volume. Matthew Swope: So when you talk about the key drivers, obviously, you guys have talked extensively about the prior rigid pricing strategy. What about the comment about broader market decline? What is that piece of the key driver? Paul Evans: I mean there is a decline in the space. But from decline, you can grow through decline. You do it 2 ways. You can bid share and you can buy share. But through that, you need to make sure that you're the low-cost provider, which we believe we are. Matthew Swope: I see. So the market decline is just sort of the standard secular pressure that you face in the business. Paul Evans: Yes that is. But you know we believe we can grow through that... Matthew Swope: Right. And you guys clearly have done so for many years. Paul Evans: Yes, we've done that for many years. We've done it through a lot of acquisitions. And as Kurt mentioned, while our competitors, our smaller competitors were enjoying the benefits of the rate case. And so they weren't reaching out to us. Now that sort of worked itself through the system and now they're sort of calling back again. So one of the reasons why we've upsized our revolver. So as those opportunities present themselves, we can move quickly. Matthew Swope: Great. Can I switch to the capital allocation part of Kurt's letter. One question, Paul, maybe for you. You guys are pretty quickly after the Q2 earnings interaction, you guys did a convertible bond. Could you talk a little bit about the philosophy of doing that convert and sort of where that fits into your capital structure? Paul Evans: Yes. We wanted to -- it was another market that was open to us, very attractive effective yield on that. That will sort of yield some additional benefits to us. It's known in the market that it will come along with coverage. So we will pick up coverage from a number of firms, but that's not the reason we did it. I mean it's -- the stated coupon is 1.5%. Think back to the time where we had a stated coupon of over 10% on some of our debt. So an attractive opportunity for us in a market that wasn't previously open to us. Matthew Swope: Do you see yourself doing more in the convert area? Paul Evans: Not sure yet. I mean, obviously, after this week, I'll be with Alex in New York, and we'll go and meet with all our lenders. And so we'll see. What we're blessed with is lots of options today. And so we'll see. We'll evaluate it, but we don't know for sure. Matthew Swope: And then also on the debt front, you bought back another $12 million of your 2027, I know, and had an interesting comment about just being in a position to retire that 2027 issue in full at par in March of next year when they become -- when the call price drops. Is that the plan that you would just use effectively cash on hand to deal with the 2027 maturity? Paul Evans: That's one option to us. We might do it that way. We might do a smaller refinancing. We just -- again, we'll lock down what's our plan in the coming month or so. And then just... We have the liquidity. If we wanted to take it out, we could take it out. Matthew Swope: Right. And as you continue to sort of weigh debt versus the shareholder cash out, whether it be dividend or share buybacks, how are you -- now that you've been here for a few months or in the seat for a few months, how do you think about giving to shareholders versus reducing your overall debt? Paul Evans: I look at it on an implied return on investment. Given where our stock is trading, it's a very attractive investment to do that. I mean that's in part why we continue to -- we increased the size of the facility from $400 million to $500 million that we still like that. Obviously, we're value buyers on our debt. And if it hits our bid, we'll buy. Obviously, we know it's going to go to par in a couple of months. So that will open up opportunities for us. So look, I'm looking at that. I'm looking at that. I'm also looking at what is our maintenance CapEx, which is very manageable for us. If there was an actionable acquisition in front of us, we would evaluate that relative to share buybacks. or debt buybacks. But that's not there right now. So with that, our best course of action is to continue to buy back our shares and also where it's economic, we'll buy back our debt. Kurt Wolf: And Matt, just to be clear, with respect to capital allocation, we're always going to be incredibly opportunistic. One of the things we're pushing as an organization is to be nimble in everything that we do. So we'll evaluate whether the debt market is available, what sort of pricing. We'll look at where our stock price is. Paul mentioned acquisitions. There -- any acquisition we do is almost certainly going to be pretty small in size. So that's not going to be a major use of capital, but we still want to consider that as part of capital allocation. So I would just keep that in mind as we move forward that we're always going to look at how best to maximize that. And currently, one thing that I will say is we believe we can carry a lot more debt based on our outlook for the business than the market does, but we are very cognizant that the market sets -- the market drives everything. So I think the market is comfortable with about a 3.0 leverage ratio that's written into our current covenants. And if that's where the market -- the debt market is for us, then we want to make sure that we're getting below that 3.0 from time to time to reset our covenants, but also just to keep the debt markets comfortable with our level of leverage. But again, we have very strong conviction longer term, we can carry heavier debt. But until the market agrees with us, we're going to make sure that we meet the market's expectations with respect to our debt. Operator: And our next question comes from the line of Justin Dopierala with Domo Capital Management. Justin Dopierala: Most of my questions have been answered. I just have a couple. I haven't had a chance to work through all those huge share repurchase numbers you guys have. I'm just wondering, do you have an idea or can you give an approximation of where we stand today as of shares outstanding? Paul Evans: About approximately $160 million. Justin Dopierala: Perfect. And then, I mean, lastly, to me, this is a cash flow story. There kind of seems to be an impression in the market that this year's cash flow is sort of a onetime event fueled by the over $100 million you freed up with the Pitney Bowes Bank receivables purchase program, even though that really shouldn't have any impact on free cash flow. Can you confirm this and also confirm there haven't been any material onetime impacts to free cash flow in 2025 that wouldn't be unrepeatable for 2026? Kurt Wolf: Yes. Justin, so to tick those off, with respect to the receivable purchase program, that does not impact cash flow. It just frees up what used to be restricted cash, makes it unrestricted. So no, our free cash flow forecast is not impacted by that. With respect to any sort of onetime items, Tax assets has come up is something we've talked about. As we look at it, the degree to which we've been able to take advantage of our deferred tax assets, we expect to be able to do for another couple of years. So I don't think that's in the -- at some point, we will -- won't have the same benefit. But for years to come, perhaps 2, 3 years, we expect to be able to recognize the same cash benefit from our tax asset. And then with respect to other onetime items, I don't know if Paul has this number handy, I'm trying to look for it. Working capital is a significant use of cash this year based on our business, I think it's going to be a much larger use of cash this year than it normally would be. So if you were to normalize our working capital in the current year, our free cash flow would actually be a fair bit higher. And just looking at it, $205 working capital please? Okay. So I'm being told that year-to-date, working capital has been a use of $205 million. That will somewhat reverse in Q4. I believe Q4 of last year, we had free cash flow of about $145 million. I'm not saying we'll be exactly there. I guess, based on our guidance, I think it may actually be -- I think we're expecting a higher level of free cash flow in this Q4, but that will be some reversal of that use of cash. So bottom line, if anything, onetime items are actually restraining our free cash flow this year due to working capital as opposed to the opposite. Justin Dopierala: Got it. So then I mean, based on that and the other things you've announced, the cost savings, et cetera, I mean, it sounds like free cash flow for 2026 should really be greater than 2025 then? Kurt Wolf: We're not giving guidance for 2026. I would just say, everybody on this call is pretty proficient with Excel. If you look at where we are, you have some sense of where revenue should be, some sense of how that flows through the income statement. Look at the $50 million to $60 million of cost out, and Paul can correct me on this. It should all be done by the end of 2026. The vast majority is being implemented currently and should be done by the end of 2025. So I think the run rate in 2025 is going to be awfully high. So there'll be a significant improvement. I will say just full transparency, there's obviously offsets to that. So I think when you look at merit increases, you look at benefits, some other factors, there's maybe $15 million to $20 million that we're anticipating in additional costs just cost of living adjustments, et cetera. But still, that's a significant cost reduction. And as you say, we haven't modeled it out yet, but this is an unusually high use of working capital this year. So I'll let you draw your own conclusion. But based on all that, I would say that where you're coming out makes a lot of sense to me. Operator: I'll now hand the call back over to Chief Executive Officer, Kurt Wolfe, for any closing remarks. Kurt Wolf: Yes. Thank you, everybody, for being on this call. And I just want to make one last comment. I know I say it a lot, and I can't -- but I can't say it enough. As an investor in this company, I hope everybody appreciates the employee base that we have at this company. As I said already, we've gone through a lot of changes at this company. This last round of taking out another $50 million to $60 million of costs. It impacts a lot of people and a lot of lives. And the employee base, like I said, it's impressive. People show up every day ready to work, asking how they can be of help. And just as an investor, hopefully, you have some confidence in the leadership team. But as investors, I hope you appreciate just how special workforce we have here at Pitney Bowes. It's -- the position we have in our markets, the products we have, the services we have is something special, but the employees we have at this company is as well. So I hope everybody appreciates that. And just a special thank you to our employee base for everything they do for us. So thank you all. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Good day, and welcome to Udemy's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Walsh, Vice President, Investor Relations. Please go ahead. Dennis Walsh: Thank you. Joining me today are Udemy's Chief Executive Officer, Hugo Sarrazin; and Chief Financial Officer, Sarah Blanchard. During this conference call, we will make forward-looking statements within the meaning of federal securities laws. These statements involve assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated. For a complete discussion of risks associated with these forward-looking statements, we encourage you to refer to our most recent Form 10-K and 10-Q filings with the Securities and Exchange Commission. Our forward-looking statements are based upon information currently available to us. We caution you to not place undue reliance on forward-looking statements, and we do not undertake and expressly disclaim any duty or obligation to update or alter our forward-looking statements, except as required by applicable law. During this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements, which are prepared in accordance with U.S. generally accepted accounting principles referred to by the SEC as non-GAAP financial measures. We believe that these non-GAAP financial measures support management and investors in evaluating our performance and comparing period-to-period results of operations in a more meaningful and consistent manner. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release. These reconciliations, together with additional supplemental information, are available on the Investor Relations section of our website. A replay of today's call will also be posted to the website. With that, I will now turn the call over to Hugo. Hugo Sarrazin: Thank you, Dennis. I'm proud of the Udemy team for making solid progress during the quarter on our priority to accelerate subscription revenue growth across the entire business. As a result, consolidated subscription revenue grew 8% year-over-year and now makes up 74% of total. We are building a more durable business that delivers predictable and recurring revenue that creates more value for all stakeholders. For Q3, we beat our revenue guidance and delivered on our 15th consecutive quarter of better-than-expected adjusted EBITDA. Our team continues to execute with discipline while we make investment in our future growth. Udemy Business segment revenue increased 5% year-over-year, and we generated $7 million of net new ARR. These results exceeded our expectation and signal our underlying strength of our enterprise business. In our Consumer segment, we surpassed our full-year paid subscribers target and revenue from subscription increased an impressive 43% year-over-year. When people subscribe instead of just purchasing one course, they engage more, learn more and realize better career outcomes. Bottom line, subscription customers are our best customers. That's why growing that piece of our business faster is our top priority, and we are seeing strong momentum across both segments. Our market position is built on a unique strategic foundation of 2 businesses, each independently compelling and highly complementary. We combine the depth and stickiness of enterprise relationships with breadth and innovation velocity of a global consumer marketplace. On the enterprise side, companies are heavily invested in AI transformation. However, they are struggling to demonstrate ROI because many haven't developed the core workforce capabilities required to extract value from their investments. On the consumer side, we're addressing a different but complementary need. Individual learners must become AI native and require comprehensive support that leads to career advancement. In order to meet the needs of both organizations and individuals, a skill acceleration platform must deliver measurable outcomes. There are 4 critical pillars of Udemy's platform, which bring the best of AI and humans together to deliver impactful results. These include: first, skill acquisition through course collection tailored for specific role. That's the traditional Udemy value prop. Skill mastery through hands-on practice using lab, workspace and role play experiences. Third, skill validation through assessment and certification; and fourth, skill amplification through human connection and expert guidance. Our integrated approach is transforming learning from a onetime event into a continuous skill building engine that delivers strong ROI and learner outcomes. Our platform features AI learning path, AI assistant, AI-generated assessment, AI-assisted content creation and MCP capabilities. Udemy enables organizations to build their own content and custom path, develop their own AI Role Plays and deliver just-in-time reskilling through integration with their existing LLM and their LMS and their LXP system, creating stickiness. We are in the midst of the most important workforce evolution in generation with nearly 60% of global professionals needing new skills by 2030. Udemy is aiming to be the natural extension to traditional education, bridging the gap from what a learner already knows to the new skills the market demands. While LLMs excel at answering questions, Udemy excels at changing behaviors and building skills that drive real impact. We do this through structured learning journeys with measurable progress, human expertise and community support that learner cannot get from AI alone. We are building an enterprise-grade workflow integration that embeds seamlessly into how organization actually operates that translates into business outcome and career development. Our comprehensive platform also enables organizations to manage their talent development strategies, track progress against their strategies and validate company-wide skill proficiency with proprietary data to support meaningful outcomes. For consumers, we are embedding personalized learning experiences into subscription offerings to support career transformations. We will enable skill acquisition through engaging experiences and validation through assessments and other services that lead to mastery and ultimately better career outcomes. The future of work requires continuous skill development and AI makes that need more urgent, not less relevant. We are empowering all customers to stay ahead of rapidly evolving skills demand through adaptive just-in-time learning. We are positioning Udemy to be an essential lifelong learning solution for professionals that drive career advancement with the structure, support and validation that LLMs alone cannot deliver. What is uniquely powerful about our platform is the combination of creating a more human-centric experience of our more than 85,000 expert instructors with AI. Instructors leverage our AI to develop assessment, labs and role play that adapts in real time as each person is progressing. Innovations like our Role Play technology are opening entirely new markets in sales enablement and customer support by allowing them to build custom training experiences. Our AI can create realistic and bespoke practice environments tailored to our customers' business. This can include practicing a company sales methodology, rehearsing difficult client conversation or working through unique compliance scenario. Building on our proven success in skill acquisition and skill mastery, we are evolving the platform to deliver even more robust and personalized experiences that amplify skills development. This is about human connection that delivers through learning comprehension and retention. Instructors can now offer live individual coaching sessions to millions of learners around the world. Soon, we will be launching virtual instructor-led training to allow learners to participate in structured cohort-based experiences. At the same time, this gives instructors the ability to engage with groups of learners simultaneously. These offerings strengthen the stickiness of our platform by creating meaningful engagement for both instructors and learners. They also ensure learners receive the guidance and support that transform knowledge into real-world capabilities. One example of our 4 pillars in practice is Centific, a leader in advanced AI solution. Centific is leveraging Udemy to build workforce fluent in collaboration with AI system. By aligning training and strategic technologies like Snowflake, Microsoft and NVIDIA with business priorities, Centific significantly accelerated value creation. The results are impressive. Centific reduced AI project onboarding time by 20%, increase AI-driven innovation by 40% and enable content creation to 70% faster with generative AI. This skill-based approach underscores Centific's commitment to continuous learning, operational efficiency and sustainable competitive advantage. We're evolving our consumer business from selling courses to enabling careers. Our subscription model creates ongoing relationship we're invested in the learner success, not just course completion. This aligns our business model with learner outcome. To do this effectively, we are launching career-focused subscription offering that validates learner with 2 specific outcomes: first, certification journey; and second, career journey. Let me start first with certification journeys, which will help people prepare for professional exam with personalized learning path, practice tests and exam vouchers in order to achieve universally recognized skill validation. When learners embark on the CompTIA certification journey, which we launched in August, the average revenue per learner increased by 4x. Building on this success, we are partnering with Pearson to create a seamless certification journey for learners. On career journeys, we will structure path for job readiness that integrates all 4 pillars through curated courses, hands-on project and assessment tied to specific roles. Many of these will be co-branded with partners, directly connecting best skills people learn to career growth and higher earning potential. The majority of Udemy's learner come to the platform to advance their career. Our partnership with Indeed is already proving the strength of this alignment with learners showing materially higher consumer subscription start conversion rates. We are seeing an average monthly conversion rate of Indeed job seeker to subscription that's 16x better than the Udemy average. From our career and certification journeys to our comprehensive platform capability, everything we're building is designed with one clear goal in mind, supporting the complex needs of our customers and the [indiscernible] workforce. While AI democratize access to information, Udemy democratize access to career transformation. We are the platform where ambition meets achievement that combines human support with structured learning that delivers validated skill mastery. Whether it is an individual professional seeking to advance their career or an enterprise looking to future-proof their talent, Udemy bridges that critical gap between where skills are today and where they need to be tomorrow. In closing, we are leveraging AI to strengthen Udemy's competitive position and expand our market opportunity. The future of work requires continuous learning and Udemy is building the infrastructure to power that transformation. The opportunity ahead of us is immense, and I'm incredibly excited about what we'll accomplish together. With that, I'll turn it over to Sarah. Sarah Blanchard: Thanks, Hugo. I'll cover the key financial highlights first and then our outlook. We have a complete set of financial tables available on our Investor Relations website. As we move down the P&L, note that all financial metrics other than revenue are non-GAAP, unless stated otherwise. Our Q3 results demonstrate that our transformation is on track and that we're seeing great momentum across the business. I'm proud of the financial discipline the team has shown as we've made strategic investments, building a strong foundation for future growth. Net new ARR is increasing. Total subscription revenue is growing as a percentage of overall revenue, and we continue to deliver meaningful additional adjusted EBITDA margin. Diving into the specifics, third quarter revenue of $196 million landed above the high end of our guidance range. As you know, we've pivoted to becoming subscription first, and it's delivering better-than-expected results. As this becomes a larger portion of our revenue, we will be providing greater transparency into the metric going forward. For the third quarter, we delivered $144 million of consolidated subscription revenue, representing an 8% increase year-over-year. Subscription revenue now accounts for 74% of our total revenue, up 600 basis points from last year. This fundamental shift in revenue quality is the foundation that sets us up for accelerated growth. Udemy Business delivered $133 million in revenue, up 5% year-over-year. We generated $7 million in net new ARR during the quarter, ending with a total of $527 million in ARR. We expect to see net new ARR increase again in the fourth quarter and land in the high-single digits. Udemy Business pipeline heading into Q4 and 2026 remains robust. The deal size opportunity and strategic importance of reskilling initiatives continue to grow. We're seeing particular strength in technology, manufacturing and financial services sectors. These industries are rapidly implementing AI solutions, which is driving urgent upskilling needs. Our total net dollar retention rate was 93%, while net dollar retention for large customers was 97%. There are 2 headwinds that were anticipated in this metric. First, we are still seeing some pressure from downsells from COVID era contracts as we work through the rest of those this year. Second, we have been working through previously announced go-to-market team transitions, and that work is now behind us. In addition, as we shared last quarter, we have brought on an outside organization to efficiently address SMB churn. We continue to see stability in gross dollar retention. And given the early signals that indicate our go-to-market optimization is on track, we are optimistic that net dollar retention will stabilize in the fourth quarter. On the Consumer side, the segment generated $63 million in revenue this quarter. We ended the third quarter with nearly 295,000 paid subscribers, exceeding our year-end target of 250,000. Revenue from subscriptions was up 43% year-over-year and now accounts for 19% of the segment's revenue. This is a 400-basis-point increase from the prior quarter. Our strategic pivot to subscription products is strongly supported by unit economics. Today, our Transactional business operates at about a onetime LTV to CAC ratio. In contrast, our subscription products currently deliver an LTV to CAC that is well above 3x. Given the compelling unit economics and strong demand signals we are seeing, we're accelerating our pivot to a subscription-first approach. Not only is this a more financially sound business model, it also allows us to deliver a fundamentally better value to learners as it encourages continuous engagement that is essential for achieving meaningful outcomes. Moving on, our total gross margin also continued to improve. It was 67% in Q3, up from 64% in the prior year. This 300-basis-point improvement demonstrates the inherent leverage in our business model as we scale our higher-margin revenue streams. Operating expenses were $112 million or 57% of revenue, a 400-basis-point improvement compared to the third quarter of 2024, reflecting our continued focus on operational efficiency. On the bottom line, we delivered GAAP net income of approximately $2 million. This is a meaningful improvement from a loss of $25 million in Q3 2024. Adjusted EBITDA was $24 million or 12% margin compared to 6% in the prior year. This 600-basis-point improvement reflects execution on our strategy, the continued shift upmarket, evolution of our revenue mix and our ongoing operational discipline. Our balance sheet remains strong with $372 million in cash and marketable securities at the end of the quarter. Free cash flow generation was $12 million or 6% of revenue. We expect our cash generation to continue to improve as our subscription revenue base scales and provides enhanced working capital dynamics. Also, we bought back 4 million shares under our new $50 million stock repurchase program. Now for our outlook. As we execute on our strategic pivot, we expect our consolidated subscription revenue for 2025 will grow in the high-single digits year-over-year. As mentioned, we are accelerating our consumer subscription-first approach due to compelling early signals, which is creating a short-term headwind for the Consumer segment's revenue growth. For the quarter, we expect total revenue of $191 million to $194 million. This brings our full year 2025 range to $787 million to $790 million. The midpoint of the full year guidance implies Udemy Business revenue will increase approximately 6% year-over-year, an improvement from our prior guidance, while Consumer revenue will decline about 9%. On the bottom line, Q4 adjusted EBITDA is expected to be $18 million to $20 million or 9% margin at the midpoint. We are, therefore, raising our full year 2025 adjusted EBITDA guidance to a range of $92 million to $94 million or 12% margin at the midpoint. Looking ahead to 2026, while we are not ready to issue formal guidance, we'd like to provide some directional insight on how our strategy will impact our outlook for next year. Ultimately, with our pivot to accelerate recurring revenue, we believe the consolidated subscription revenue growth in 2026 will be closer to double digits and will account for approximately 3/4 of total revenue. The momentum in Consumer subscriptions is strong, so we are accelerating that push. This means we are intentionally reducing Transactional core sales in favor of recurring subscription revenue, which will slow near-term segment growth. In addition, as we direct more customers toward annual subscription products, a meaningful portion of that revenue will be deferred to future periods. We believe this short-term impact is the right trade-off for building a more predictable, higher-value business that better serves our learners' long-term success. Finally, we are updating our profitability targets to reflect increased strategic investments in our transformation. At the same time, we are focused on maintaining strong cash generation and operational discipline. We have been significantly increasing adjusted EBITDA margin over the past 3 years and believe we have achieved a margin that is sustainable and provides the right balance between a strong bottom line and reinvesting in growth. We are on track to deliver more than $90 million in adjusted EBITDA this year and expect to deliver at least that amount in 2026 even with the additional investments. In summary, Q3 demonstrates the progress we're making in our strategic pivot towards higher quality, more predictable recurring revenue streams. We continue to execute a transformation that will create significant value for all stakeholders. The underlying fundamentals of our business are strengthening, and we have the flexibility to invest in strategic opportunities that will drive our future growth and ability to capture the massive AI sales opportunity ahead. So with that, we'll open up the call for your questions. Moderator? Operator: [Operator Instructions] And your first question today will come from Ryan MacDonald with Needham. Ryan MacDonald: Congrats on a nice quarter. Sarah, maybe -- and Hugo, maybe to start in the Consumer segment. Can you just put a little more color on to sort of what the initiatives you're taking as you're accelerating the transition to consumer subscription? How are you looking to incentivize existing Transactional customers to convert to the subscription? And then any update or are you still focused on finding other revenue -- ways to monetize that consumer revenue stream in terms of like advertising, I think that was talked about last quarter as well. But maybe just updates on that consumer segment strategy a bit more. Hugo Sarrazin: Perfect. Ryan, thank you for the question. As stated, we're really pleased with the 43% year-over-year growth of subscription. It is pretty comprehensive. Ranjit and team are really looking at where we are gathering customers. So changing the strategy from acquisition to -- all the way to retention. We're changing call to action. We're changing the positioning when we bring potential customers to the website, what they see, how they see. We've changed the way the shopping cart is optimized. We've changed the ways we are reactivating existing customers. We're expanding the number of established. So you get the idea, like a lot of things that are classic digital marketing strategy are being used to transform the efficiency of the engine end-to-end. So that's kind of one part of the answer. The second, we've pushed to diversify the sources of customer. The Indeed partnership is a really, really interesting example. We are capturing people at the moment of need. That's why we're seeing the conversion be so great. We think with the economy where it is, there's going to be a lot of transition, and that will play very, very nicely, and there's more partnerships to be announced. On the ad programs, we're very pleased with the progress to date. We're in 170 countries. As we discussed last time, we -- in our first step, we went for the freemium courses and inserted ads in the video. And now we're in the process of optimizing that. We're going to move to Phase 2 very soon, where we're going to monetize different parts of the experience. And then next year, we'll be into the sponsorship, which we've alluded to. So a lot of good progress on that. There is also really good news on our desire to create subscription that are targeted to specific outcome. And I'll just lean in on the one with certification. It is really, really exciting in August when we launched the CompTIA example partnership. It's the first one. We've mentioned 4x the kind of monetization versus the nonintegrated offer. We're about to do something similar with Pearson across more certification opportunity, and we think that's going to continue to accelerate this transition. Ryan MacDonald: Excellent. Appreciate the color there. Maybe a follow-up on Udemy Business. I know there was a lot of excitement last quarter in terms of the state of the net new pipeline. It sounds like there's still that excitement there while you're managing through sort of the renewal process with some of the COVID contracts. Can you just provide an update on how you're feeling about sort of the balance of net new pipeline progression as we're heading into Q4 and into next year here and how the rate of renewal is trending on those renewals relative to your expectations in fourth quarter thus far? Sarah Blanchard: Thanks for the question, Ryan. I'll take that one. So on net dollar retention, we saw what was expected in the third quarter as we continue to move through. Really, we're getting to the tail end of these COVID area contracts or era contracts. And so we are seeing stable gross dollar retention, which we have seen quarter after quarter after quarter. That is great. We are seeing that pipeline build continue. And importantly, what we're seeing is the percent of that pipe that is expansion deals within our existing customers, that has meaningfully improved over the past quarter, and that continues. So we do still have that pressure from some of these COVID contracts, but we're getting to the back of that. We have a lot of confidence in the fourth quarter and seeing that stabilization of net dollar retention as expected. We've got the new approach that our customer success team has brought into our customers to make sure that we're doing those implementations right, that we are aligning their outcomes that they're looking for with their business priorities with our implementation. And we also announced that on the SMB side, we are working now with an outside business process optimization firm. And so I would say we've made progress across all fronts. We're happy with where we are. And as we look into next year, the go-to-market team transition is complete. We have the new approach in place. The BPO will be fully ramped. We will work through the COVID deals. And so we're optimistic for next year. Operator: And your next question today will come from Yi Fu Lee with Cantor Fitzgerald. Yi Lee: Congrats on the productive 3Q and strong pace Consumer subscriber acceleration. Hugo, maybe if I could kind of start with you on a macro high-level question. Can you kind of comment on the L&D budgets you are seeing in the field? We see all the innovations Udemy is upgraded across the platform. But at the beginning of the prepared remarks, you mentioned organization invested heavily into AI, but ROI has not materialized yet. So how has this dynamic impact Udemy and other AdTech peers? Like I guess the question I'm asking is what needs to happen to sort of cross the chasm to double down for both Enterprise and Consumer spending to accelerate this? And I also have a follow-up for Sarah later. Hugo Sarrazin: Okay. Thank you for the question. You heard me the last 2 quarters, I love to be in the field. I love to go in all our territories, spend a lot of time with customers. And I'm back from last week at unleashed, went across Europe. It's an interesting dichotomy. It is a moment in time where the L&D teams are being asked to do more, all this AI transformation. They're asked to respond to a lot of uncertainty. And at the same time, they're being told to do with less. So there is pressure. There's real pressure. This is a group that's very anxious. And at the same time, I like what is happening because we have a solution, an end-to-end solution that is broader than others. We do the technical stuff and we do the nontechnical stuff. We have a catalog that is way broader. And then we do things like the mastery with AI Role Play, we do the things with assessment and validations. We got more to offer. So our ROI is better. And therefore, when they need to consolidate, we -- those are -- our win rate goes up. So I am liking that dynamic macro. It's going to help us in general. The second thing I'll say is we've been on this go-to-market transformation to move upmarket. As part of that, there are some bullets under the heading. One of them is more value engineering so that we pitch the ROI case. The second is you need to pursue economic buyers in L&D and outside of L&D. And we've done a lot of training around that. And what we're seeing and one of the reasons we have more $100,000 deals than in the past, and you see it in the economic buyer data that we have is we're now also doing a good job outside of L&D. So we're diversifying, and that's really good. And I'll give you -- just to bring this to life, an example from Europe, a leading retailer, 6 vendors, 6 L&D vendors. They did a consolidation, and we increased our number of seats 3x. Yi Lee: Could you give us more color on like what are the type of L&D vendors you're consolidating? And when you say outside of L&D budget, right, who are you taking -- like are these like the business lines you're taking the budgets from, the extra budget, please? Hugo Sarrazin: Yes. So let me hit the second one. It is IT leader, engineering leader. It is marketing leader, it is sales leader, it is enablement leader. It's all of the above. So we need to have conversation with people who have business issue and be able to articulate our value in terms of the business outcome. So let me kind of give you an example. When we talk to a sales leader, we can say by taking the following sets of learning paths and learning program on Udemy, your ramp to have a salesperson productive is shortened in half, and this is how much it's worth to you. Or when we call a call center is you've got attrition, you've got all these people that you need to train up on new accounts and on new policies, we can speed the time it takes for you to have these agents be more productive or we can reduce the average handle time. That's what I mean by going outside of L&D, it's real business cases. Yi Lee: That makes sense. Thank you for the extra color, Hugo, on that. Let me move on to just Sarah before I pass on the call. Sarah, on the economics financial side, should we -- like obviously outperforming on the GAAP net income, EBITDA, free cash flow profitability. So should -- like Sarah, going forward, should we get used to this trend like growing at a profitable growth rate? And the second part of the question, Sarah, is like you've mentioned -- and you sound very confident net new ARR, we're going to return to high-single digit, the final quarter. What gives you confidence? I think you kind of hit on it from the last caller. Can you reiterate like what are the things that give you confidence that like by year-end, it's going to reaccelerate and it's even better in 2026? And that's it for me. Sarah Blanchard: Yes. Thanks for the questions. So let's start with our bottom line. We have continued to outperform on the bottom line. That's a huge testament to the partnership across the business and really driving operational discipline. And as we look into 2026, it's a great moment. You heard Hugo talking about these companies are really undergoing these AI transformations. L&D leaders are under pressure, but business leaders are under pressure to ensure that their teams are adopting AI. And so we are going to invest on the back of that. We will deliver -- we're on pace to deliver about $93 million for 2025. We will deliver more than that next year, but we are investing in really further differentiating our offering in the world of AI and LLMs. And so you can expect to continue to see a robust road map and some really exciting things coming out from us that will allow us to continue delivering growth on both UB and consumer subscriptions. From a net new ARR perspective, we delivered 2 in the first quarter. We delivered 1 in the second quarter. We delivered 7 this quarter, a huge testament to the work to transform that go-to-market team. Very, very happy with the progress that team has made. We continue to see our pipeline grow, the pipeline for $100,000-plus deals grow. Our deal sizes are up. And so when we look into next year, that really gives us the confidence that we're through that transformation and that we're bringing some really exciting capabilities to market at a time when the market is looking for them. Hugo Sarrazin: Yi Fu, I want to just -- I didn't answer your question. When we do consolidation play from who and how does it look? So there are 2 types of vendors we consolidate. Often, there's smaller vendors that are local and niche. And then the real play, and that's how you get the example I gave you, 3x increase in seats is when we take out our major competitors. Because we're both technical and nontechnical, we have a good value proposition against the folks who are purely or mostly technical. And vice versa, we have a good value proposition vis-a-vis people who are mostly business or more broad, and we can come in and offer more specific technical expertise. And by the way, in the world of AI, this is a super, super, super, super important point. And all the leaders I've spoken to tell me versions of this. We've gone beyond turning ChatGPT and Claude and Copilot on and doing a bunch of experiments. They want to scale. And the only way you scale is if you can package the technical training around AI, and we have 4,000 classes, it's more than anybody else with the adaptive skills. And if you combine the 2, you can scale. If you're only doing prompt engineering and the very specific technical things, you're going to remain in purgatory hell of these little pilots. Operator: And your next question today will come from Josh Baer with Morgan Stanley. Josh Baer: Congrats on some really strong subscription revenue numbers. I wanted to ask on the EBITDA side. We have seen really strong performance this year, guidance raised for the year. But when thinking about '26 now, we're kind of anchored toward where you're going to end up for this year. Not too long ago, we were looking for $130 million to $150 million. So a big change there. I was hoping you could provide any sort of context or a bridge. Just wondering how much is from the transition to consumer subscription like within the Consumer, some impacts from that versus other top line headwinds versus increased investments? And then the follow-up would be where specifically are those investments going? Sarah Blanchard: Yes. Great question. Thanks, Josh. So a lot has happened in the past, let's say, 12 months that puts us in a place where we are laying out next year being more EBITDA than we're delivering this year, but really shifting away from the continued very significant margin expansion quarter after quarter after quarter to doing some more investments. We have a new CEO, we have a new strategy, and we've gone through a go-to-market team transition. So there's a lot within that 2026 expectation of the bottom line. You're right that we do have some headwinds that we're speaking about because we've pivoted very quickly to subscriptions first. And because it's going so well, we're accelerating that. And that is a few points of growth on the consumer side that we're giving up. But what we expect to see is towards the middle of next year, that inflection point where the subscription revenue growth will start to outpace that decline we're seeing on the Transactional side. But we did -- that did impact our top line, that subscription-first and the go-to-market team transition. When it comes to our investment priorities, like I said, really further differentiating in a world now that is AI and LLM and it's very different than it was 18 months ago and 24 months ago, as we all know. And some of those things that we are looking to invest in, first is this platform that we're talking about that's end-to-end delivering skills acquisition, mastery and validation and allowing organizations to monitor the progress of their teams across the skills that they need to hit their business priorities, deliver even more ROI and create that stickiness. We're investing in the personalization engine that you heard us talking about. We have AI tools and role playing assessments, and there's more that we can do to really bring to life this personalized journey to help individuals hit their career goals, get their certifications and then amplify that with the human plus AI. So bringing our instructors across the globe close to the learners, allowing not only better learning outcomes, but those instructors to monetize in new ways across our platform. And the last thing I'll say is you've heard us talking about partnerships over the last few quarters, investing in building out that ecosystem on both the Udemy Business side and the Udemy Consumer side. Hugo, anything you'd want to add on the partnership side? Hugo Sarrazin: Thank you, Sarah. In general, I'll make a point before I go on the partnership. We also are making a deliberate EBITDA versus growth trade-off right now. We see a very big market opportunity around reskilling the whole workforce. We need to be playing offense, and we need to be growing the business really fast. So that's just kind of a macro theme. And we're using the opportunity to build our moat, and our moat as this platform end-to-end in a way that no other online catalog has today, and we think it's really, really important to do that. And to do that, we'll need some investment. We've done some already. We'll do more. In terms of partnership, there's some really exciting stuff that's happening. You've heard me mention Pearson, which helps deliver some of these end-to-end validation as part of the platform and some of these new subscription. We have things with Workera around assessment, Glean around enterprise AI. We've also done a partnership to expand the reach of our offering with Emtrain. We offer compliance now. So we become a one-stop shop on some of the things. And in some cases, it creates a nice defensive play for us. So we're tweaking, adapting. We're going to be smart about it. And that's why we're signaling that no less than is what you heard, and we're being smart about it. Operator: And your next question today will come from Stephen Sheldon with William Blair. Stephen Sheldon: Just want to start within Udemy Business and just a clarification. Just wanted to clarify the fourth quarter ARR comments that you made, Sarah, for the high-single digit increase. I'm assuming based upon a prior answer that that's a sequential ARR dollar increase? Or was that a year-over-year growth expectation? Sarah Blanchard: That's right. That's net new ARR, so sequential dollar increase. Stephen Sheldon: Okay. Perfect. And then on Consumer, yes, great to see the traction on subscription. So just wanted to ask how long it might take before you see overall consumer revenue stabilization and a return to growth. I guess based on a prior answer, it sounded like you could potentially hit that inflection in 2026 in Consumer where subscription revenue more than offsets the non-sub revenue. Or was that more, I guess, more for the total company, including UB? I guess just high level, when could we expect a potential return to consumer revenue growth overall? Is that next year? Is it still a couple of years out? Just any detail there? Sarah Blanchard: Yes. So we are expecting to see the decrease in Transactional be overtaken by the increase in subscription mid next year sometime. We have -- there's -- we're still optimizing as we are building out the subscription-first. You heard Hugo talk about all the things we're doing on the subscription side of things. And so that is impacting. But again, the unit economics of that business are so much more compelling. And in addition to that, the learner journey and the experience for those learners is going to be so much stickier as we really look to build this continuous skill building engine in this companion for our learners, and that's the trade-off we're making. Stephen Sheldon: And so would that imply a return to consumer growth at some point next year? Sarah Blanchard: We're not ready to put an exact date on that yet, but we'll be getting close. Operator: And your next question today will come from Jason Tilchen with Canaccord Genuity. Jason Tilchen: I'm wondering, in the deck, you referenced the hundreds of enterprise customers that have started adopting the AI Role Plays. Hoping you could just talk a little bit about both some of the unique use cases where this is being deployed and also how this is translating into greater wallet share at some of these customers. Hugo Sarrazin: Yes. Why don't I get us started? The imagination of people never seems to amaze me. It's kind of like my starting point. We have more than 10,000 Role Plays. I don't claim to say that these are all unique. There's a lot of overlap. We've also provided the ability for Enterprise to build their own unique Role Play. Some of them will be variation of the out-of-the-box ones. So let me give you a couple of examples. The first one is performance reviews, practice difficult conversation during performance reviews. There's the out-of-the-box version or if you're PepsiCo, you can load the policy document of PepsiCo and the role play will be done in a way that is consistent with the language used and the grid used at PepsiCo. So that counts us too, just to help with the 10,000. We have example where you have -- I'll give you an example of a consulting company that is building with their own internal LLM, their decks, their customer-facing PowerPoint documents, and they're loading that up in AI Role Play to do a practice in advance of going to a customer. So again, very, very specific, very in the moment, very valuable to them to have a rehearsal in advance of a difficult or challenging customer. So that's the range of things. I keep going, but I'll answer the second part of your question. Right now, what we have done is we've made this available to our customer as part of these different offerings. We will, next year, have a tiered offer where we're going to monetize different behavior. I'm not going to go into too much what it is, but you can imagine typical SaaS model where there's a minimum that you can do without more and then you get to pay if you use it more. It's going to allow us to monetize this more with the usage and the value that the customer is going to get. The last thing I'll say is we are building specific version of AI Role Play that can be offered stand-alone, targeted at different non-L&D buyers because it is solving a very specific use case. The pricing of that will be matched to the value that is being delivered to that economic buyer. Jason Tilchen: Great. That's really helpful. And one quick follow-up for Sarah. In terms of the increased investments that you referenced, I just want to make sure I sort of understand it. Is this primarily focused on product? Or are there any other areas where there will be some incremental investments as we head into next year? Sarah Blanchard: Yes, it's a great question. It's primarily focused on product. There will be some investments on the partnership side, although those do tail in comparison to the product investments. Operator: [Operator Instructions] And your next question today will come from Nafeesa Gupta with Bank of America. Nafeesa Gupta: My first question is with this focus on subscriptions and UB, but there is also a lower revenue share for instructors in both of them and which will further go down to 15% next year. So are you seeing any kind of increased churn amongst instructors because of your focus on these 2? Hugo Sarrazin: Yes. Thank you for the question. Our strategy is very, very, very focused on human plus AI. So we remain committed to the instructor community. We've engaged them in very constructive conversation. They understand that the world around them is also changing. They're feeling it from their business point of view. What we're doing is a few things. One, we're working with them to create new sources of revenue monetization. Some of it is taking stuff that they do off platform and moving it to Udemy. That's why you heard reference to one-on-one coaching, some of the cohort work. Those are going to be done at a different revenue share than the one that you referenced. So that's kind of one thing. The second thing is we've introduced a new production hub, a series of tools and services to make their lives easier in this AI world where they can kind of participate and get some efficiencies, and we have more to come on that front. And then there's a few other conversations. They're very active. They're very clear about their needs, their desire, and we want to grow the business with them. Nafeesa Gupta: Got it. I have a follow-up. So any thoughts on acquiring traffic through AI platforms? I mean, a couple of your competitors and peers are integrating with large platforms to acquire more traffic. Any thoughts you have on that? Hugo Sarrazin: Yes, great question. Thank you. Well, let me first say, this is a validation of our strategy. We were very excited to see that move. For 2 quarters in a row, we've been very clear that an online catalog is not sufficient in this world, and we were moving to these different ways of competing, which included AI and then being an AI platform. We've initially focused on the B2B space, which is plays to our strength where we already have moat, and that's why we've introduced the MCP. The good news is given that we've got all the MCP, we've got the ability if we want to on the Consumer side to also be part of ChatGPT or Perplexity or Claude. But we need to step back a bit and think about what is happening. Every technology evolution, whether it's the Internet, mobile, social, introduced not only a set of new technology, new protocols, but a new set of distribution platform. For search, it was Google, for mobile, it was Apple, which created the Apple Store. And we need to kind of make sure that we are very thoughtful in how we're going to play. Nobody remembers who was the first one on the Apple Store, not relevant. There will be choices. And what we're focused on is on building a really, really, really distinctive experience on that chat consumer experience that plays to our consumer strategy. And again, we're very happy. We're growing 43% year-over-year. We're focused on careers and certification. We're linking this to job outcomes. And we want to make sure that beyond top of the funnel name recognition and branding, which we are clear on the monetization. And right now, nobody has a monetization answer. So we don't feel the rush to kind of put ourselves in the middle of that. Operator: And your next question today will come from Devin Au with KeyBanc Capital Markets. Devin Au: Maybe just one quick one on UB. The commentary around the large customer pipeline sounded encouraging. I think you mentioned the pipeline for that segment is up quarter-over-quarter. But when I look at kind of the net add for that customer segment, it has stepped down quite a bit from last quarter. Is that just like a timing thing, perhaps maybe deals shifting out? Or did you see perhaps increased churn? Maybe just help us reconcile the strong commentary versus the step down in net add. Sarah Blanchard: Yes, it's a great question. And I did also mention that the portion of that pipeline growing is on the expansion side. And so there's a combination of adding new logos and expansion. And we are so excited when we continue to build on the value that we're already delivering with existing customers. And so what you're seeing there is the expansion dynamic that's happening. Hugo Sarrazin: And the consolidation. Operator: And your final question today is a follow-up from Yi Fu Lee of Cantor Fitzgerald. Yi Lee: Hugo and Sarah, just one quick follow-up on the -- when you mentioned subscription online learner outcome, that 2 products, right? I know it's still new, you're still going through it, certification journey and career journey. Can you tease us a little bit more like what are you thinking in terms of like partnership with like educational institution, university, et cetera? Are you going with like, let's say, partnership with like leading institutions like in America, et cetera? And in the career journey, are you partnership with like large tech firms like, let's just say, Google, Microsoft of the world for the certification? Just want to get some understanding on that. I know it's still new. Hugo Sarrazin: Yes. So let me take that. On certification, the big unlock is historically, players like Udemy have worked on certification prep. And you get millions of people getting into our platform to do certification prep. Then the process of getting certified was a different process, a disconnected process. And what we are now doing is we're connecting the 2 in a very, very, very tight way. And we're embedding it in the process of taking a class to kind of bring you along and encourage you to get to that certification. So instead of having 1 out of 10 learners really completing, we have a much higher number. And this is a big pain point, not only on the Consumer side, but on the Enterprise. The number of L&D leaders who have told me, it's great. I get all these wonderful numbers that XYZ did the certification prep, but I have no data to confirm. And you would think the learner, the employees would be incented to tell their employer that they completed an AWS architect certification. It doesn't happen all the time. So we're closing the loop, and we're validating the outcome. This is what they wanted to see. So that's an example of why we're kind of like trying to align ourselves more closely to close the loop and make it clear. On the career outcome, in the past, we would create quasi-bundle and others do the same of like these are the classes that you need to take to become a data scientist. That's cool, interesting. But now if we can link it to the coaching you need to be able to become a great data scientist. If we introduce you to a community of other peers, if we link you to jobs offered from different sources to get to the outcome that you're looking, we can more credibly say that our product has a better ROI. That's the direction of travel. And that's why we think also we're going to create some moat in a very, very, very interesting way because we're helping solve people's problem. And at this moment in time, you're seeing all these new grads that are finishing university, not getting jobs. We're seeing a lot of them come to our platform almost as a finishing school. They're like they're building their portfolio of projects. And they're getting the coaching that they need to get the outcomes that they're hoping, which is a job and be part of the workforce, where do you want to be that solution. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Hugo Sarrazin for any closing remarks. Hugo Sarrazin: I just want to say thank you, and see you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.