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Operator: Ladies and gentlemen, thank you for standing by, and welcome to Uxin's Earnings Conference Call for the quarter ended September 30, 2025. [Operator Instructions] Today's conference call is being recorded. I would now like to turn the call over to your host. Please go ahead. Unknown Executive: Thank you, operator. Hello, everyone. Welcome to Uxin's earnings conference call for the third quarter ended September 30, 2025. On the call with me today, we have D.K., our Founder and CEO; and John Lin, our CFO. D.K. will review business operations and company highlights, followed by John, who will discuss financials and guidance. Before we proceed, I would like to remind you that this call may contain forward-looking statements, which are inherently subject to risks and uncertainties. Now with that, I'll turn the call over to our CEO, D.K. Please go ahead, sir. Dai Kun (Founder, Chairman & CEO): [interpreted] Hello, everyone. In the third quarter of 2025, we continue to build strong growth momentum. Retail transaction volume reached 14,020 units, representing a 134% year-over-year increase and marking the sixth consecutive quarter of year-over-year growth above 130%. Despite a significant expansion in inventory, our inventory turnover remained at around 30 days. Customer satisfaction also remained at an industry-leading level; our Net Promoter Score (NPS) was 67 this quarter, sustaining a level of 65 or above for 6 consecutive quarters. At the same time, profitability continued to improve with gross margin increasing to 7.5%, the highest level we have achieved in the past 3 years. The expansion of our superstore network has also continued to progress. Earlier this week, our Jinan Superstore officially commenced operations. Together with the Wuhan and Zhengzhou Superstores that opened earlier this year, we have now completed all 3 new superstore openings planned for 2025. Our Wuhan Superstore is expected to reach nearly 1,800 retail units in December with a local market share approaching 10%. Meanwhile, our Zhengzhou Superstore is already expected to achieve approximately 900 retail units in December with market share nearing 5%. With these additions, we now have 5 superstores in operation. In addition, we have announced strategic partnerships with local governments in Tianjin, Guangzhou, and Yinchuan to jointly invest in and operate new superstores. Each project is designed to support a capacity of more than 3,000 vehicles. We plan to open 4 to 6 additional superstores in 2026, marking a transition into a phase of accelerated nationwide expansion. We believe Uxin has established a clear path to scaling, driven by more precise pricing, higher customer satisfaction, and superior operating efficiency. Our machine learning-based pricing system ensures each vehicle is competitively priced in real time, and our fully integrated factory-logistics-retail model enables end-to-end control. For the fourth quarter, we expect retail transaction volume to exceed 18,500 units, representing year-over-year growth of more than 110%. For the full year 2025, we expect to surpass 50,000 units, reflecting growth of more than 130%. With that, I'll turn the call over to our CFO, John. Feng Lin (CFO): [interpreted] Thank you, D.K. In the third quarter, retail revenue totaled RMB 820 million, up 84% year-over-year. The Average Selling Price (ASP) for retail vehicles was RMB 58,000, compared to RMB 59,000 in the prior quarter and RMB 74,000 in the same period last year. While ASP declined as we shifted toward a more affordable inventory mix, the strong growth in transaction volume more than offset this. We expect ASP to remain relatively steady in the near term. Turning to our wholesale business, transaction volume was 1,884 units, an 81% increase year-over-year. Total revenue for the quarter reached RMB 879 million, representing a 77% increase year-over-year. Gross margin for the quarter was 7.5%, up from 7% a year ago and 5.2% in the prior quarter. This improvement was primarily attributable to the easing of price competition in the new car segment and the Wuhan Superstore moving beyond its start-up phase. Adjusted EBITDA loss narrowed significantly to RMB 5.3 million, a 43% reduction year-over-year. Looking ahead to the fourth quarter of 2025, total revenue is expected to exceed RMB 1.15 billion. We are now ready to begin the Q&A session. Wenjie Dai (SWS Research): [interpreted] Congratulations on the 3-year high in gross margin. How does management view the sustainability of this level, and what factors could drive further improvement? Unknown Executive: [interpreted] There are two main drivers: first, new car pricing has stabilized; second, the profitability of the Wuhan Superstore has improved significantly. Looking ahead, we believe there is still substantial room for expansion. Policies aimed at reducing excessive competition should keep prices stable. Additionally, our data-driven pricing capabilities are reducing errors and loss-making vehicles. Finally, value-added services have significant penetration upside. Our long-term target gross margin is around 10%, and our existing Xi'an and Hefei stores are already approaching this. Fei Dai (TF Securities): [interpreted] Following the opening of Zhengzhou, ramp-up seems faster than Wuhan. What initiatives drove this? Also, how long do you expect new superstores to take to reach stable operations? Unknown Executive: [interpreted] Zhengzhou benefited directly from what we learned in Wuhan regarding construction, inventory build, and sales ramp-up. Furthermore, our larger pool of transaction data has improved our pricing capability. For a standard new superstore with a 3,000-vehicle capacity, we expect it to reach breakeven in about 9 months. We expect inventory to reach planned capacity in 18 to 24 months, at which point profitability should reach a mature level. Fei Dai (TF Securities): [interpreted] Carvana recently surpassed $100 billion in market cap. Could you comment on the similarities and differences between their model and Uxin’s? Unknown Executive: [interpreted] The biggest difference is the sales channel; Carvana is online-only, while Uxin uses offline superstores for over 70% of sales. In China, cars represent a larger share of household assets, so consumers prefer in-store experiences and test drives. Similarities include the own-inventory model with self-operated reconditioning and a focus on precise pricing for high turnover. Carvana sells 500,000 units annually; we sell 50,000. We are confident we can reach Carvana's current volume within 4 to 5 years by sustaining over 100% year-over-year growth. Operator: This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks. Unknown Executive: Thank you all for participating. We look forward to reporting to you soon. Operator: The conference has now concluded. Thank you for attending. You may now disconnect.
Operator: Good afternoon. Thank you for holding. Your conference will begin in just a couple of Please remain on the line. Your conference will begin very shortly. Greetings, and welcome to Altigen Communications, Inc.'s Fourth Quarter and Fiscal Year 2025 Results Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Gary Stone, CFO at Altigen Communications, Inc. Gary, you may begin. Gary Stone: Thank you, Paul. Good afternoon, everyone, and welcome to Altigen Communications, Inc.'s earnings call for the fourth quarter fiscal 2025. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer, Joe Hamblin, Chief Digital and Transformation Officer, and I am Gary Stone, Chief Financial Officer. Earlier today, we issued an earnings release reporting financial results for the period ended September 30, 2025. This release can be found on our IR website at www.altigen.com. We have also arranged a replay of this call, which may be accessed by phone. This replay will be available approximately one hour after this call's completion and remain in effect for ninety days. The call can also be accessed from the investor relations section of our website. Before we begin our formal remarks, we need to remind everyone that today's call may contain forward-looking information regarding future events and the future financial performance of the company. We wish to caution you that such expectations and/or beliefs are just predictions and actual results may differ materially due to certain risks and uncertainties that pertain to our business. We refer you to the financial disclosures filed periodically by the company with the OTCQB over-the-counter market, specifically the company's audited annual report for the fiscal year ended September 30, 2024, and the most recent unaudited quarterly report for the quarter ending June 30, 2025, as well as the safe harbor statement in the press release the company issued today. We do expect our audited financial report for fiscal year '25 to be filed by the end of this month. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Altigen Communications, Inc. assumes no obligation to revise any forward-looking information contained in today's call. In addition, during today's call, we will also be referring to certain non-GAAP financial measures such as adjusted EBITDA. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of our results. With that, I'll turn the call over to Altigen Communications, Inc.'s CEO, Jerry Fleming, for opening remarks. Jerry? Jerry Fleming: Thank you, Gary, and good afternoon, everyone. Thanks for joining us on today's call. I'll begin today with an overview of Altigen Communications, Inc.'s performance and strategic progress during fiscal year 2025. Following my remarks, Joe Hamblin will provide additional insights into our operating execution, after which Gary will return to review our financial results for the fourth quarter and the full fiscal year. Earlier today, we reported our fiscal fourth quarter and full year fiscal 2025 results. I'm pleased to share that we have delivered our sixth consecutive profitable quarter, culminating in full-year profitability for fiscal 2025, which we view as a meaningful milestone that underscores the progress of our business transformation. For the fourth quarter, revenue totaled $3.5 million with net income of $254,000. Looking at full-year performance, fiscal 2025 revenue was $13.9 million, representing a 2% increase over fiscal 2024. While cloud revenue declined modestly by 3%, this was more than offset by the 15% growth in our services business, which was driven by higher consulting revenues and increased deployment services revenue related to our new cloud solutions. Compared to the fiscal year 2024, net income before taxes increased by more than $1.3 million year-over-year, resulting in earnings of $0.03 per share for fiscal 2025. Our long-term objective remains clear: to build shareholder value by protecting and extending the lifetime value of our customer base through modern cloud solutions while accelerating growth through AI-enabled solutions and services. I'll now review our progress against this, beginning with the actions we've taken to modernize our cloud solutions portfolio. As we previously communicated, we experienced some revenue pressure as a result of the declining competitive position of certain legacy PBX and contact center offerings. This trend was anticipated and understood, and we proactively initiated a comprehensive effort to transition away from those platforms in favor of more scalable, future-ready modern technologies. Over some period of time, we conducted a thorough evaluation of all available alternatives, carefully assessing multiple technology providers against our criteria, including performance, scalability, cost structure, and long-term strategic alignment. These efforts culminated in the introduction of all-new best-in-class white-label UCaaS and CCaaS solutions during fiscal 2025. Our technology platforms have been validated, in our opinion, through the early market traction and growing customer momentum since their launch earlier this year, reinforcing our confidence that these investments position Altigen Communications, Inc. very well for improved competitiveness and long-term value creation. Specifically, for our core engaged teams contact center, which we essentially launched right about this time last year, we deployed six customers representing 240 agents during the year, with billing for those customers commencing at various points throughout the fiscal year. We've since contracted with an additional five customers representing another 238 agents, which will begin contributing revenue upon completion of their respective deployments. Combined, these 11 customers represent 470 agents, and we expect them to generate approximately $75,000 a month in recurring revenue. For our 60 customers representing 1,600 users from our legacy MaxCS cloud platform during fiscal 2025, we've since contracted an additional 50 customers representing about 1,400 users that will commence billing once their deployments have been completed. In addition, we have another 100 customers representing about 2,500 users on our legacy Max Cloud platform that we plan to migrate to the Max Cloud GC platform over the next six months or so. Now, these migrations do not immediately increase revenue since these customers are already on a monthly cloud recurring revenue plan. However, we do expect the benefits of these migrations to include a significant extension of the customer's lifetime value, to materially reduce churn, and to lower our long-term support cost. Looking ahead, we'll also be targeting the several hundred remaining MaxCS on-premises customers, which represent about 4,000 users, in an effort to convert them to MaxCloud UC. As we convert these on-premises customers that are lower revenue customers to MaxCloud GC, we do expect to see new monthly incremental revenues. Our ability to enhance our solutions portfolio with the new Cloud UC and core Engage platforms is a direct reflection of the build versus buy strategy that we've adopted. In other words, we build solutions where we can deliver differentiated intellectual property, most notably in AI-powered applications. Conversely, in highly competitive categories such as UCaaS and CCaaS, we believe value is best created through white-label partnerships and/or selective acquisitions rather than duplicating commoditized platforms. This approach has been instrumental in reducing our operating expenses while transitioning our fixed development cost to a more scalable variable cost model. It's also enabled us to reallocate capital we were previously spending on development resources toward the development of new innovative AI-powered solutions. Turning to our strategic partnership with Fiserv, we are continuing to advance multiple new initiatives, including a next-generation AI-powered cloud IVR solution, an AI-enabled customer experience analytics platform, and now our core engaged contact center service contact center as a service platform. These solutions, as a reminder, are all brought to market by Fiserv under the Fiserv brand. As such, Altigen Communications, Inc. is not in control of the product launch timelines. Instead, our responsibility is to develop the solutions, work with Fiserv to get them certified under the Fiserv brand, and to support the Fiserv sales effort once those products are launched. With a $20 billion company like Fiserv, it takes time to get the necessary approvals and associate sign-offs completed. However, the wait will be worth it in the end as we continue to progress toward product launch. Moving to our consulting services division, we continue to expand our relationship with the Connecticut Department of Transportation, which includes the addition of new AI-focused initiatives. The engagements with CT DOT not only contribute to near-term revenue but also generate valuable domain expertise that directly helps our software-based AI solutions. The knowledge we continue to gain from AI projects on the consulting side is fully transferred to the AI solutions on the software side of our business. Now, the AI market, as many of you know, is literally flooded with vendors, most of them focusing on building next-generation AI platforms. Our unique approach is that we don't build the AI platforms. We build business solutions that utilize those platforms. Keep in mind our typical target midsize enterprise customer does not have deep AI expertise on staff to build their own AI solutions. So our model is to provide that expertise in the form of packaged AI solutions and services, which allows those customers to deploy Altigen Communications, Inc. AI solutions without the need to invest in expensive technical resources. By all accounts, this is the model preferred by midsize organizations. I'll leave you with this thought. Our business transformation efforts are beginning to show results. We've significantly upgraded our technical talent, streamlined our internal business systems, reduced our operating expenses, and introduced all-new leading-edge UCaaS and CCaaS solutions. We believe these efforts position Altigen Communications, Inc. to drive sustainable profitability, improve customer retention, and long-term customer value. With that, I'll turn the call over to Joe Hamblin for additional details on our progress. Joe? Joe Hamblin: Thank you, Jerry. Good afternoon, everyone. The past eighteen months, we've executed a comprehensive transformation of Altigen Communications, Inc., rebuilding nearly every aspect of the company's operating model, technology stacks, and go-to-market foundation. This was a deliberate reset designed to stabilize the business and restore profitability and position Altigen Communications, Inc. for scalable growth. From an operational standpoint, we focused first on simplification and discipline. We modernized internal systems, outsourced non-core functions such as accounts payable and receivable, consolidated vendors, and introduced greater automation across finance, provisioning, and service delivery. As a result, we've eliminated approximately $1.5 million in annualized operating expense, materially improving our cost structure while increasing our ability to execute our velocity's execution. In parallel, we addressed the most critical issues impacting our long-term competitiveness: our legacy product portfolio. During fiscal 2025, we replaced an aging PBX platform and an overly complex contact center solution with modern cloud-native offerings. MaxCloud UC was introduced to preserve and grow our legacy customer base while Core Engage to help us accelerate the growth of our Microsoft Teams practice. Using the deliberate buy versus build strategy allowed us to rapidly transform our product portfolio. This approach also enables Altigen Communications, Inc. to provide differentiation by building solutions where we can add tangible value, particularly in the AI and analytics space. This strategy has fundamentally changed our operating leverage. Our UCaaS and CCaaS platforms now operate on a largely fixed cost model, enabling margin expansion as subscribers' values grow. This is important as it has allowed us to redeploy capital and talent away from maintaining legacy software towards higher value innovation. With the foundation in place, fiscal 2025 marked the completion of our transition year from a transformation to growth moving forward. To further sharpen execution as we enter the next phase, we have a plan that will align the company functionally around our four primary revenue streams: the MaxUC platform, our Microsoft Teams practice, IVR, and our Altigen Consulting Services practice. This functional alignment will improve focus and accountability across both sales and operations, ensuring that product strategy, delivery, and go-to-market efforts are tightly coordinated within each business line. We believe the structure will improve sales effectiveness, accelerate decision-making, and better support scalable growth. To further support our go-to-market efforts, we began a full relaunch of the Altigen Communications, Inc. brand. We engaged a new digital marketing firm to rebuild our digital presence, modernize messaging, and improve demand generation. At the same time, this also includes SEO, remake, targeted pay-per-click campaigns, new core engaged product content, and a specific vertical outreach program. Our initial focus is on approximately 1,700 regional banks and credit unions, each with over $500 million in assets, where we already have strong domain credibility and footprint with our IDR platform and the Fiserv relationship. Both Jerry and I have stated product innovation remains centered around AI-driven differentiation. On the solution side, we have completed the development of several AI-enabled offerings that extend the value of our existing footprint. Our conversational AI front end for the IVR, now in customer preview, modernizes how callers interact with financial institutions using natural language, reducing containment costs while improving the customer experience. We've also completed the development of Core Insights, our next-generation customer engagement analytics platform. Core Insights uniquely combines the IVR transaction data with the customer demographics data to deliver actionable insights into customer behavior, intent, and service patterns. This platform enables banks and credit unions to better predict customer needs, personalize engagement, and identify new cross-selling opportunities. The customer preview program will begin in 2026. To support expansion into larger enterprises and regulated industries, we've also initiated a SOC 2 Type 2 certification program, with the expectation of completing it here in January 2026. This is a critical milestone for us and will enable us to pursue larger, more complex opportunities across financial services, public sector, and enterprise markets. On the service side of the business, our Altigen Consulting Services division continues to perform at a high level, anchored by our long-standing partnership with the Connecticut Department of Transportation. In fiscal 2025, this relationship expanded further with new AI-focused initiatives, reinforcing Altigen Communications, Inc.'s role not just as a technology provider but also as a trusted transformation partner. We are now leveraging the success to open doors with other state departments of transportation and enterprise organizations. Earlier this year, we presented alongside the Connecticut Department of Transportation at the AIDC conference in Pennsylvania, which has already resulted in follow-up engagements with several states. We continue our outreach campaign by participating in the Oklahoma State Expo, and we were also at the iHEAP conference this past October. We have plans to participate in several new events in 2026 as the opportunities present themselves. Strategically, we also signed a partnership with a leading agentic AI platform provider. This partnership allows us to provide a scalable, highly secure enterprise-grade AI solution. This partnership also creates a dual revenue opportunity for us: recurring platform revenue combined with high-margin professional services that align directly with our AI-first strategy. So in summary, Altigen Communications, Inc. today is a very different company than we were two years ago. We've stabilized the business, modernized our platforms, simplified operations, and restored ourselves to profitability. With that foundation firmly in place, fiscal 2026 will be about execution, scaling our customer base, accelerating revenue growth, and expanding margins through disciplined growth. With that, I'll turn the call over to Gary Stone to review our financial results and for more details. Go ahead, Gary. Gary Stone: Great. Thanks, Joe. Okay. For our February, which is July to September, we reported total revenue of $3.5 million with GAAP net income of $254,000 or $0.01 per share. This compares to the prior quarter's revenue of $3.7 million with GAAP net income of $2.1 million and $0.08 per share. Recall that in Q4 of last year, we recorded a $1.8 million deferred tax benefit. This year, it was only $300,000. For our 2025 fiscal year, we reported total revenue of $13.9 million compared to $13.6 million last year. Total cloud services for fiscal 2025 was approximately $6.9 million, down slightly from the $7.1 million last year. Meanwhile, our services and other revenue increased 8% to $7 million from $6.5 million in the prior year. Gross margin for the year was 63% compared to 62% in the same period last year. GAAP operating expenses for the year totaled $8.1 million, reflecting a 7% decrease from $8.7 million in the same period last year. GAAP net income for the full fiscal year 2025 was $738,000 or $0.03 per diluted share compared to the GAAP net income of $1.56 million or $0.06 diluted share in the prior year, which included that deferred tax benefit I mentioned earlier. So apples to apples, excluding the tax impact, our net income for fiscal year '25 is $1.03 million compared to a loss of $279,000 from last year, a favorable difference of $1.3 million. Earlier this quarter, or last quarter rather, the U.S. District Court in Utah ruled in favor of Altigen Communications, Inc. in the lawsuit with Intermountain Technology. In light of this favorable court ruling, we reduced our accrued liability by half to $372,000. Further reductions in the accrued liability may occur as we get more clarity on the full extent of the damages and legal fees that Altigen Communications, Inc. will be entitled to recover. Looking at our liquidity, we closed out the year with $2.75 million in cash and cash equivalents, up from $2.6 million last September and down from the $3.5 million in the prior quarter. As you recall, last quarter was a lot higher than we expected due to a large customer who paid ahead of schedule. Working capital was $2.9 million compared to $2.1 million in the previous year, reflecting a 38% increase and I should add a multiyear high. Our EBITDA adjusted for legal, severance, and other one-time costs was $1.6 million compared to $500,000 in the prior year. So in conclusion, we've made great progress this year, and we're very excited about our future. So now let me turn the call back over to Jerry Fleming for our closing remarks. Jerry? Jerry Fleming: Jerry, you're on mute. Operator: Oh, thanks for the instructions. Sorry about that. Jerry Fleming: The progress we're making is tangible and accelerating. Our investments in modernizing our platforms, improving our cost structure, and expanding our growth initiatives will enable us to deliver on our 2020 vision, which is 20% top-line growth with 20% to the bottom line, building long-term shareholder value. I'll now hand the call back to the operator for a Q&A session. Operator? Operator: Thank you. At this time, we will be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Again, please press star 1 on your phone at this time. And please hold while we poll for questions. And the first question today is coming from Alan Markham from Van Clemens. Alan, your line is live. Alan Markham: Yes. Thanks for taking my call. So it sounds like you've rebuilt a lot of your structures and you know, guiding towards the future. Can you forecast a point during '26, maybe in the half or even before that when you'll see a measurable or a material difference in your revenue growth? Jerry Fleming: We will. I think, Alan, we'll be able to as we particularly as we get some of these customers migrated over to the cloud that I discussed earlier. And once we have some more visibility to when those customers are billing, then we'll have then we'll be able to be in a position where be able to, let's say, offer some predictions really in terms of what we expect our revenue to be. Right now, it's really hard to say because a lot of it is we have customers that are in various stages of deployment. And, we're not 100% certain. We're not in control of those deployment timelines as the customer. But you know, as we get those in production, we'll have a lot more visibility going forward. Alan Markham: Okay. Thanks. Just to follow-up on that. So in the case of just to use Fiserv as an example, and you you'd mentioned you can't control when they launch that product. So I guess when they do flip that switch, that could possibly noticeably change what you know, what Altigen Communications, Inc. earns from that from that company. Jerry Fleming: Yeah. Dramatically. And that's one of our frustrations that we don't control that. Of course, they're Fiserv customers, so these solutions are sold under their brand. But, yes, we're working hard to get access or to get their approval and get their marketing folks to launch the product. But when they do, we mentioned three of them that we have, as they start kicking in, you know, we'll see a significant uptick in revenue from Fiserv. Just can't tell you when sitting here today. Alan Markham: Thanks for taking my questions. Operator: You're welcome. Thank you. The next question is coming from Mike Schattinger. Mike is a private investor. Mike, your line is live. Mike Schattinger: Yes. Can you tell me whether or us whether you expect this quarter to be like sort of the low watermark for revenue and do you expect it to ramp from here without getting into, like, you know, specifics of how much? Or I'm just trying to understand. It hit the bottom. Jerry Fleming: Yeah. That's a fair question, Mike. Yeah. I think so. You know, there can always be anomalies that mess things up a little bit here or there, but the most important thing our most important things, I guess, we did, and Joe certainly expounded on that, was revamping our legacy platforms. Which were causing way too much churn because they had lost their, really, their competitive nature. And having the new solutions that are now ramping and gaining market acceptance and gaining customers as I was talking about. Yeah. I think we're that has stopped the downside. And now we can start looking at upside from here. So, yes, we do expect this it should get better from here is the expectation. Mike Schattinger: Okay. So we should sort of expect a ramp from here maybe with some variability quarter to quarter. Gary Stone: The trademark. Like, sort of on a sequential basis. Taking holiday shopping. Generally trending upward is our expectations, Mike. Mike Schattinger: Okay. Alright. And you said something towards the end of the prepared remarks of targeting. I wanna say, like, it was something like 20% top line or and 20% bottom line. Did I hear that right? Jerry Fleming: Mhmm. Right. By 2028. So, yeah, they're we're looking to ramp our you know, in a a little bit hard to say how we'll do each year, but, to achieve that as a as a as a goal to continue, 20% top line and 20% to the bottom line, you know, are our you know, sort of our marching orders, if you will, internally, and what we're what we're shooting to achieve. Mike Schattinger: But you but did you just say by 2028 or or starting next year? Gary Stone: 02/2010 tech AI By twenty twenty eight. I don't think we get them. Jerry Fleming: We might get there in 2027. But Okay. Just with the cloud revenues, we I can't guarantee that. But, by 2028, we wanna be you know, certainly this one. In that position. Mike Schattinger: Okay. Those are all my questions. Thank you. Gary Stone: Yep. You're welcome. No problem. Operator: Thank you. And that does conclude today's Q and A session and also concludes today's conference. You may disconnect your lines at this time and thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Scholastic Reports Second Quarter Fiscal Year 2026 Results. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Jeffrey Mathews, Executive Vice President and Chief Growth Officer. Hello, and welcome, everyone, to Scholastic's fiscal 2026 second quarter earnings call. Today on the call, I'm joined by Peter Warwick, our President and Chief Executive Officer, and Haji Glover, our Chief Financial Officer and Executive Vice President. Jeffrey Mathews: As usual, we posted the accompanying investor presentation on our IR website at investors.scholastic.com, which you may download now if you've not already done so. We would like to point out that certain statements made today will be forward-looking. These forward-looking statements, by their nature, are subject to various risks and uncertainties, and actual results may differ materially from those currently anticipated. In addition, we'll be discussing some non-GAAP financial measures as defined in Regulation G. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the company's earnings release and the company financial tables filed this afternoon on a Form 8-K. This earnings release has also been posted to our Investor Relations website. We encourage you to review the disclaimers in the release and investor presentation and review the risk factors disclosed in the company's annual and quarterly reports filed with the SEC. Should you have any questions after today's call, please send them directly to our IR email address, investor_relations@scholastic.com. And now I'd like to turn the call over to Peter to begin this afternoon's presentation. Thank you, Jeff. Afternoon, everyone. Peter Warwick: Scholastic performed strongly in our important back-to-school season. We delivered 13% adjusted EBITDA growth in the second quarter and have affirmed our FY 2026 earnings guidance after adjustments for the sale leasebacks that we closed yesterday, which were not assumed in our original guidance. I'll discuss this further in a moment, as will Haji, who'll provide the adjusted view based on these highly accretive transactions. In quarter two, we also sustained our momentum with key strategic and financial initiatives, achieving major goals in our transformation to a more growth-focused, shareholder-oriented company. Before discussing quarter two results, I want to take a moment to review Scholastic's journey over the last four years. Since the start of fiscal 2022, I've had the privilege of working with our new board chair, Yola Lochese, to remake Scholastic with a singular purpose: realizing the power of our unmatched brand, IP, channels, and balance sheet for long-term growth and value creation. While significant opportunity and work remain, I'm proud of the progress that we've made. So first, we've refreshed our board and leadership team. We've added seven new independent directors with deep expertise in education, digital media, and capital allocation. We've also appointed new leaders in each of our major segments and in key corporate functions, including chief financial officer. These changes ensure the board has the experience and perspectives needed to maximize Scholastic's long-term opportunity and value while bringing innovative thinking, sharper strategic focus, operating discipline, and renewed accountability to our management. Second, we've reorganized and reengineered our core businesses and overhead functions to better align with Scholastic's long-term growth opportunities, improve execution of our plan, and unlock operational efficiencies. We unified our children's book group, bringing together our publishing and proprietary distribution channels to fully capitalize on Scholastic's scale as the world's largest and only vertically integrated children's book publisher and distributor. We restructured Education Solutions to focus our product portfolio, strengthen go-to-market capabilities, and reset our cost structure. We've also reorganized our international segment. At the same time, we've significantly reduced costs in our shared services and overhead functions by eliminating redundancies, improving processes, and reducing our real estate footprint. Third, we've invested and expanded into highly strategic growth opportunities. The acquisition and integration of Nine Storey Media Group further differentiates Scholastic as a global children's media book and IP company with the ability to reach kids and families where they are today—on screens as well as on the page. In addition, we've significantly scaled models and channels to tap new sources of corporate, philanthropic, and state and local government funding for literacy, generating over $300 million in revenue for our books and literacy solutions since fiscal 2022. And fourth, we've implemented a disciplined and shareholder-focused approach to capital allocation. Since fiscal 2022, we have returned almost $500 million to shareholders through share repurchases and dividends, reducing our share count by approximately 25%. At the same time, as we have invested in the opportunities that I've just described. Peter Warwick: This month, we crossed another major milestone with the closing of two successful sale leasebacks that have unlocked more than $400 million in net proceeds from our major non-operating real estate assets. As a first step to deploy this incremental liquidity, our board has increased our open market share repurchase authorization to $150 million. Haji will speak later in the call about the financial impact of these highly accretive transactions and uses of proceeds. I want to be clear that the board and I are absolutely committed to deploying this incremental cash in ways that create value for our shareholders, and our top opportunity is returning it efficiently to shareholders. In summary, carefully executed comprehensive changes over the past four years position Scholastic's organization, strategy, and finances to better realize the value of its unique strengths that were built over the past century. That is our brand, our IP, and our channels by growing profitably, delivering impact and value for our customers, and driving returns for our owners. As we enter 2026, we remain focused on continuing this work. Turning now to the second quarter results. The performance of our children's book publishing and distribution segment demonstrates the strength of Scholastic's proprietary school-based channels and the power of our major global franchises. School book fairs delivered another strong back-to-school season and remain a cornerstone of Scholastic's reach and engagement with kids. Growth across key performance metrics, fair counts, revenue per fair, and e-wallet usage, and lower cancellations underscore the unique strength and relevance of this beloved event-focused channel, its ability to spark excitement among students, families, and educators. We continue to execute on initiatives to profitably grow fairs, expanding the addressable market, improving selling and marketing effectiveness, introducing new fair formats, and advancing merchandising with strategic pricing optimization. These efforts are contributing to revenue per fair growth. We expect these positive trends to continue into the spring season as we build on the strong engagement we saw in the first half. In book clubs, our smaller school channel, softer results reflect the continued evolution of classroom and teacher engagement patterns. We remain focused on key strategies improving teacher engagement and increasing student participation to ensure clubs remain an accessible entry point into reading for kids and families. Trade publishing delivered another strong quarter, underscoring the power of Scholastic's global franchises and our continued ability to bring compelling new content to readers across channels. Dave Pilkey's Dog Man, Big Jim believes, the fourteenth book in the global phenomenon, debuted as the number one best-selling title across adult and children's categories in the US on November 11 and has already sold over 2 million copies in print. The book currently holds the number one spot on the New York Times graphic books and manga bestseller list, where titles from the series hold three of the top five positions. And per Surcana Bukscan, nine out of the top 10 kids' graphic novels in November were Scholastic titles. This spring, Pilkey's universe is expanding into the growing category of children's manga with Captain Underpants, the first epic manga illustrated by the acclaimed manga artist Motojiro. The new title and series capitalize on longstanding leadership in graphic novels and our role in helping children discover and deepen their love of reading. A new edition of Sunrise on the Reaping sustained momentum of the latest title in the Hunger Games series, which has sold almost 5 million copies since its March release, with anticipation building ahead of a film release next fall. Similarly, sales of the Harry Potter series benefited from the new interactive illustrated edition of the Goblet of Fire, with fans gushing on social media about a new upcoming Harry Potter series on HBO currently expected in spring 2027. The Wings of Fire series also delivered a breakout moment with Dark Stalker, the first prequel, which became an instant bestseller. We're excited to build on this momentum with the sixteenth Wings of Fire book, the hybrid prints, in March, the first new installment in four years, and then later this month with the graphic novel edition of the ninth book in the series, Talons of Power. Our consistently high-performing series highlights Scholastic's unique ability to build enduring children's stories, characters, and franchises that grow with readers and extend across formats, channels, and generations. We're moving forward to realize the strategic potential of the newly combined children's book group, which unifies editorial, marketing, distribution, and merchandising to reach more kids through a programmatic and coordinated approach. As an example of what's now uniquely possible at Scholastic with this integrated approach, we just announced a comprehensive branding, publishing, and distribution partnership with Mark Rober. The former NASA engineer whose highly popular CrunchLab's brand and YouTube channel reached more than 70 million subscribers, mostly kids. We look forward to sharing more about this partnership on future calls. In Scholastic Entertainment, we continue to strengthen our position as a leading producer of high-quality children's content, expanding the reach and value of our IP. During the quarter, we began production on three premium animated series with major media partners, an encouraging sign of improving green light activity, which we expect to continue to build into next year and to contribute to growth. We also see momentum across our development slate, with a major project based on a long-standing Scholastic brand slated to launch in fiscal 2027. We hope to be able to announce more details of this soon. Our digital channels, particularly YouTube and Scholastic TV, also continued to scale, meeting kids where they are and expanding the discoverability and value of Scholastic IP. Across YouTube channels, engagement remains strong. As kids and families discover and consume more and more stories on platforms. Since its September launch, Paris and Pups, a new animated series in partnership with Paris Hilton, has surpassed over 23 million views across all channels on the platform, with steady weekly engagement as new episodes debut. We expect the potential of this franchise engagement to continue to grow ahead of the fall 2026 launch of a global tie-in publishing program, and of Playmates toys, as well as emerging opportunities for long-form content. One of the clearest proof points of our 360-degree strategy has been data on the impact of the iconic Scholastic red bar and branding. Since updating our YouTube channels at the August, with the Scholastic brand identity, we have seen an immediate lift in visibility and audience engagement and now have more than 253 million views and over 2 million subscribers across all Scholastic channels. These results reinforce that the Scholastic red bar continues to be a meaningful differentiator of quality and reliability as families navigate an increasingly crowded digital landscape. September's launch of Scholastic TV, our first Scholastic branded streaming platform, has further demonstrated the power of our trusted brand and content. The app provides a curated, kid-friendly destination for our shows. Early performance has been extremely strong, with over 350,000 downloads, 3.5 million views, and over 64 million minutes watched to date. This momentum reinforces Scholastic Entertainment's outlook as an increasingly meaningful contributor to Scholastic's long-term earnings driven by both production revenue and our expanding digital footprint. Now, turning to Scholastic Education, where the strategic value of our reading, learning, and literacy offerings not only align with Scholastic's core strengths but are essential to helping kids read and learn, which is at the center of mission and brand. As we discussed last quarter, we continued to navigate a challenging funding environment again in the second quarter, as delayed federal disbursements and slower district decision cycles impacted near-term sales across the industry. That said, we've made meaningful progress focusing our product portfolio and refining our go-to-market approach. In quarter two, our state and local literacy partnership continued to perform solidly. Sales to schools and districts accelerated quarter over quarter. Our magazines have outperformed other categories, reflecting their strong value on cost customer loyalty. We're also beginning to see growth in the sales pipeline for our second half. With our actions to restructure the organization and improve, we were able to offset most of the impact of lower sales again last quarter. Looking ahead, especially to our important spring selling season, we remain cautiously optimistic that better execution, new products, like knowledge library, and spring disbursements of some federal funds will stabilize the top line while we benefit from lower costs. As I've said on prior calls, despite a challenging near-term environment, we remain very optimistic about the long-term strategic value and opportunity presented by this business. In our international segment, we saw a strong performance across global markets from key franchises, including Dogman. We continue to see opportunities in emerging markets, like India and in other Asian countries, and to capitalize on the growing demand for materials for English as a second language. Under refreshed leadership, the team remains focused on improving margins and positioning the business for long-term growth. In summary, as we enter 2026, we're operating from a position of strength. The closing of our sale leaseback transactions and the resulting $400 million in liquidity reflect our commitment to disciplined shareholder-focused capital allocation. Combined with continued momentum across our core businesses and progress on our strategic initiatives, we believe Scholastic is well-positioned to accelerate profitability, deliver long-term growth, and deepen our impact on children, families, and educators while creating lasting value for our shareholders. Thank you. I'll now turn the call over to Haji. Thank you, Peter. Haji Glover: And good afternoon, everyone. As usual, I will refer to our adjusted results for the second quarter, excluding one-time items unless otherwise indicated. Please refer to our press release tables and SEC filings for a complete discussion of one-time items. As Peter discussed earlier, second-quarter results were solid, reflecting strength in book fairs and momentum across our major global franchises. As a reminder, the second quarter represents one of Scholastic's seasonally more profitable periods, as kids return to school, and our school-based channels ramp up again. Beginning with our consolidated financial results. In the second quarter, revenues increased 1% to $551.1 million. Operating income improved to $95 million from $78.9 million in the prior year period, reflecting the company's cost-saving initiatives. Adjusted EBITDA was $122.5 million, a significant improvement from $108.7 million a year ago. Net income was $66.3 million compared to $52 million in the prior year period. On a per diluted share basis, adjusted earnings increased to $2.57 compared to $1.82 last year. Turning to our segment results. In the Children's Book Publishing and Distribution, revenues for the second quarter increased 4% to $380.9 million, reflecting strong performance in book fairs and the strength of our major global franchises in trade. Segment adjusted operating profit improved to $108.8 million from $102.1 million in the prior year period. Book sale revenues were $242 million in the quarter, an increase of 5% driven by higher fair count and increased revenue per fair. We continue to expect higher fair count and revenue per fair to contribute to revenue growth in our booked fairs business this fiscal year. Haji Glover: Book clubs revenue were $28.5 million in the quarter, compared to $33.2 million a year ago, reflecting lower teacher sponsors. As a reminder, clubs is our smaller school-based channel. We anticipate these trends continuing in the spring season. In our trade publishing division, revenues were $110.4 million in the second quarter, an increase of 7%. These results reflect strong performance of new publishing releases across our major global franchises, led by the fourteenth Dog Man title, which published in November, as Peter discussed. We remain optimistic about sustained momentum across our major global franchise and continue to expect trade to be in line with the prior year on a full-year basis. As a reminder, this year's publishing schedule is weighted more towards Q2 compared to last fiscal year, which benefited from major Dog Man and Hunger Games releases in Q3 and in Q4. Turning to our entertainment segment. Revenues decreased by $1.7 million to $15.1 million compared to $16.8 million in the prior year, primarily driven by fewer episode deliveries in line with expectations. As Peter discussed, we remain encouraged by recent green light momentum, and our position for renewed growth in 2026 and in fiscal 2027, particularly reflecting revenue recognition typical of media development and production. Segment adjusted operating loss was $3.6 million, an improvement of $300,000 from the prior year quarter. Turning to Scholastic Education. Segment revenues were $62.2 million in the second quarter versus $71.2 million in the prior year period, reflecting lower spending on supplemental curriculum products. Segment adjusted operating loss was $1.3 million in the second quarter, compared to a loss of $500,000 in the prior year period, reflecting lower gross profit mostly offset by cost reductions from reorganization initiatives and ongoing cost management. As Peter discussed, we continue to experience near-term funding volatility in the segment, though expect year-over-year declines to moderate in the second half based on an improving sales pipeline, new products, and improved execution. Ahead of expected market recovery, we continue to target improved profitability in the second half of the year. International segment revenues were $89.5 million in the second quarter, up from $86.7 million a year ago. Excluding the $500,000 year-over-year impact of favorable foreign currency exchange, segment revenues were up $3.3 million, primarily driven by the new Dogman title as well as new additions across other major franchises. Segment adjusted operating income improved to $12.8 million compared to $7.1 million in the prior year period, reflecting higher revenues and operational efficiencies. We continue to expect modest declines in revenues and profitability in this segment following strong trade performance in fiscal 2025, as I just discussed. Unallocated overhead costs decreased by $4.2 million to $21.7 million in the second quarter, primarily driven by lower employee expenses from cost reduction initiatives. Now turning to cash flow in the balance sheet. As a reminder, our free cash flow and net debt at the quarter end do not reflect the cash proceeds from the sale leaseback transactions, which closed in our third quarter, and that I will discuss momentarily. In the quarter, net cash provided by operating activities was $73.2 million compared to $71.2 million in the prior year period, primarily related to lower operating expenditures and timing of payments, partially offset by higher severance-related payments as part of the cost-saving initiatives. Free cash flow in the second quarter was $59.2 million compared to $42.4 million in the prior year period, reflecting lower payments of film-related obligations and higher cash flows from operations in the current period. At the quarter end, the company had borrowings of $235 million under its unsecured revolving credit facility. Net debt was $186.6 million compared to net debt of $136.6 million at the end of fiscal 2025, primarily driven by operational working capital needs. Consistent with our capital allocation priorities, we continue to return excess cash to shareholders. Through our regular dividend, the company distributed $5.1 million in the second quarter. As announced earlier today, we closed two sale leaseback transactions of our owned real estate in New York City and our Jefferson City distribution centers. We expect the net cash proceeds of over $400 million to be used in line with our capital allocation priorities, which includes share repurchases. As Peter noted, our top priority is returning incremental cash to shareholders, something we've demonstrated a strong track record of doing over the last four years. Our first step to return excess capital to shareholders is reflected in the Board's decision to expand our open market share repurchase authorization to $150 million. The company expects to continue purchasing shares from time to time as conditions allow, on the open market or negotiating private transactions for the foreseeable future. Beyond initially paying down the credit facility and moving forward with our current $150 million open market repurchase authorization, we are exploring additional means to efficiently return excess cash to shareholders and to return to moderate leverage levels, consistent with our recent levels, while preserving a strong and flexible balance sheet. Now for our outlook for the remainder of the year. Looking ahead to the second half of the year, we anticipate revenue growth in school reading events and entertainment divisions, partly offset by modestly lower year-over-year revenues in trade and in international versus a strong prior year comparison when the publishing schedule benefited from major releases in 2025. Reflecting strength in the children's book group, partially offset by lower sales in education solutions, in 2026, we now expect fiscal 2026 revenues to be level with or slightly above the prior year. More broadly, we remain focused on driving favorable operating margins as we benefit from our lower cost structure. As for the impact of tariffs, we are closely following changes in policy and continue to expect approximately $10 million of incremental tariff expense in our cost of product this fiscal year. On a full-year basis, we have affirmed our outlook for fiscal 2026 adjusted EBITDA and free cash flow. Before the impact of the sale leaseback transactions, which closed in our third quarter. Adjusting for partial year impact, of the highly accretive transactions, our outlook for adjusted EBITDA is now $146 to $156 million, which includes a partial year impact of approximately $14 million. In our smaller third quarter, we anticipate a higher seasonal operating loss followed by profitable gains in Q4. For our fiscal 2026 free cash flow outlook, which was previously $30 million to $40 million, we now forecast free cash flow to exceed $430 million, reflecting the proceeds from the sale of our real estate assets. Please see today's earnings presentation for reconciliation of the estimated partial year and pro forma full-year impact of the sale leaseback transaction on the company's guidance. Thank you for your time today. I'll now hand the call back to Peter for his final remarks. Peter Warwick: Thank you, Haji. In fiscal 2026, Scholastic continues to make good progress, building on the momentum we've generated since fiscal 2022 to reinforce our foundations for growth, value, and shareholder returns. As I said at the start of the call, we've refreshed our board and leadership team. We've reorganized and reengineered our core businesses and functions while advancing strategic growth opportunities. And we've carefully allocated capital with a view toward driving shareholder returns, including returning nearly $500 million to our shareholders. We're optimistic about the outlook for our portfolio of businesses for the remainder of the year and over the long term. We also have a very attractive opportunity to repurchase shares using proceeds from our successful sale leaseback transactions, beginning with a $150 million open market authorization. We look forward to updating you on additional actions as we implement them. I'd like to close by thanking Scholastic's employees for their dedication and passion serving kids and customers as well as our shareholders for their continued support. Thank you all very much. Let me now turn the call over to Jeff. Jeffrey Mathews: Thank you, Peter. With that, we will open the call for questions. Operator? Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. And our first question comes from Brendan Michael McCarthy with Sidoti and Company. You may proceed. Brendan Michael McCarthy: Great. Good afternoon, everybody. Appreciate you taking my questions here. And congratulations on the quarter and the real estate transaction closing. Peter Warwick: Yes. Thank you, Brendan. Yep. Just just wanna start on the use of proceeds. Can you provide any color or timing around how we can think about that $80 million increase in the buyback authorization? I know it looks like historically, you've taken out about 8% of shares outstanding on a fiscal year basis. What might that look like going forward? Peter Warwick: Well, I mean, we the first what we've what we've announced is the first step. I mean, because of the, you know, the the very successful and highly accretive sale leaseback transaction. The first thing which we have done and which the board has authorized is to increase our, you know, off market share buyback. That's the first that's the first step. Let me hand over to Haji. He can talk a little bit more about about, you know, how we're thinking about it going forward. Haji Glover: Yeah. Thanks, Peter. So roughly, what we're seeing right now is that we have, you know, sell the share repurchase program that we currently have will allow us to get into the market soon to continue to focus on returning cash to shareholders. As we mentioned in the in the call, over the last four years, we did over $500 million return to our shareholders. We're gonna continue to do that thing. We definitely feel that our shares are undervalued right now, so we're definitely gonna go into the market. And we're we're contemplating things with our board to figure out other ways of doing things to help, you know, bring more money to our shareholders. Brendan Michael McCarthy: Hopefully, that answers your question. Yeah. That's helpful. Thanks, Haji. Thanks, Peter. And and Haji, I believe you mentioned you you are targeting paying down a a large portion of the credit facility. Haji Glover: Yeah. I mean, the census yeah. Exactly. Since it is an open line of credit for us, we can pay that down. We have to it's repriced every month, so we'll we'll probably most likely pay that down. And then if we need it, we'll definitely continue to do what we need to do in an organization from a short-term repayment. Our goal is to return to more moderate levels of of debt or moderate levels of leverage. Like we've done over the last few years. Brendan Michael McCarthy: And as far as the, you know, debt to EBITDA target, what is what's the moderate level of leverage? Haji Glover: I mean, historically, we've been right around one and three quarters. Roughly. Brendan Michael McCarthy: Okay. Got it. That's helpful. And and on the new guidance, specifically the top line revenue, can you walk us through the changes there so that obviously excludes the rental income at this point? Are there are there any other changes baked into that lower revenue number? Yes. And Peter mentioned this early on and has Haji Glover: is a part of the discussion today. We're seeing the education business continuing to deal with the the softness because of funding. While we also know that in the second half, we're gonna see some uplift based on funds being released in the second half and our sales the education group. pipeline is starting to be a lot better. But that was one of the reasons, we saw this office from We still expect to see growth in fares, to help offset that as we are are looking at our fare count We're projecting to do 92,000 fares this year compared to almost 90 last year. And then also, RPF continues to be strong. But that those are the things that are causing us to deal with the second half. Brendan Michael McCarthy: Uptick. Haji Glover: In our numbers. Brendan Michael McCarthy: Bunch of puts and takes. And yep. Understood. And and regarding trade channel sales, yeah, obviously, a really strong year for content last fiscal year. Tough comparison this year. Is it still expected to be, you know, flat to moderately lower for fiscal 'twenty six trade channel sales? Yeah. Trade channel sales, absolutely, is gonna be in line with last year, as we anticipated. We we did as you know, last year, we had the launch of the DogMen in Q3. Haji Glover: Versus this year in Q2. And on top of that, we did have the Hunger Games in Q4 last year. So but, ultimately, we're still getting in the nice tailwinds from all of those major franchises as you can see from our results, in the first half of the year. Brendan Michael McCarthy: Absolutely. Absolutely. And and looking at book fairs, were you surprised at all to see, you know, the strong results there? Or are you seeing anything regarding consumer spending that might give you pause for the rest of the year? Haji Glover: Yeah. I'm a turn that over to Peter, if you don't mind. Peter Warwick: No. It's been, I mean, really, it's the the the trends that we that we saw last year are are really pretty much, continuing, which is to say that book book fair bookings are good. Cancellations are down. And, you know, revenue per fare is up. What we're seeing is that in some of the fares, that there, as we saw last year, that there's a a somewhat smaller number of kids who are actually buying. But those kids that are buying are buying significantly more, and that's what's that's what's driving up the revenue per fare. So I think that's the and we're not seeing anything that's in any way different, actually, from from from what we saw from what we saw last year. We're assuming that that is some sort of reflect of the overall economy here, but I'm but, thankfully, you know, we we've been able to manage that pretty well through just being, I think, very effective, very efficient. We've got great book selection and and those and and and marketing and those kinds of things. So we're actually the the Book Fair people are feeling pretty good about the spring. So, you know, that that that that's very encouraging. Brendan Michael McCarthy: That's good. Thanks, Peter. And moving to education solutions. Yeah. Obviously, it's been a tough year so far for that segment. But it looks like despite the revenue decline, think I saw segment adjusted EBITDA was about flat year over year in the second quarter. Peter Warwick: Yeah. Brendan Michael McCarthy: You've obviously, you know, done well taking costs out of that business. And do you do you still see, you know, much room much more room there to to take you know, cost out of that segment? Peter Warwick: Well, we've taken we've taken significant costs out, which really is reflect reflective of what the current state of the of the of the market is. What we now need to be able to do is to, prepare for regrowing that business to the size that it has been, in the past. That's something which almost all educational publishers and especially those who are involved in supplementary publishing like ourselves are are are having to do. I mean, I think we've done a we've we've done a really good job, I think, in in in very quickly adjusting to to what we can do. And I think as the market recovers, what it means is that, you know, more of the more cents per dollar is actually gonna land on our bottom line. Brendan Michael McCarthy: That makes sense. And, yeah, with one yeah. The first the fall season of of the school year, you know, behind us is there. Yeah. Are you more optimistic heading into the into the spring season How how can we kinda think about that education situation? I'm I'm I'm more I'm more Peter Warwick: optimistic in the sense that I think we've stabilized the business. We've got it right sized. We can see that, you know, that we're dealing with a tough situation just like everybody else as well. But, I mean, the quarter four is a and and and the spring tends to be time when there's significant spending ahead of summer for summer reading, and for, you know, materials for the next academic year. So, you know, our our whole approach has been to get this behind us, deal with this thing as quickly as possible. That we can get to a good situation so that as as the season you know, just the the the the the seasonal market, I with purchasing in the spring. And as we hope there's more opportunities, more federal funding being dispersed as well, we expect in the spring that we'll be able to benefit from that We'll see that our overall educational, as it were, sales are going to be more second half loaded than we originally anticipated in our first budget. And that, you know, we'll, we've got ourselves in a good position to build and grow and move forward as the market improves. I think the stronger margins is something which are you know, which which which is really good for us at the moment. That's great. Really appreciate Brendan Michael McCarthy: the detail, Peter and Haji. That's all for me. Alright. Thanks, Brenda. Thanks. Cheers. Operator: Thank you. Our next question comes from Drew Crum with B. Riley Securities. You may proceed. Drew Crum: Okay, thanks. Good afternoon, everyone. I want to go back to the question on uses of cash. I think addressed this on several occasions in your preamble. Is a top priority in terms of deploying the cache. Can you address how dividends play into that I don't think you guys have paid a special dividend through the years and the quarterly dividend payout has been relatively flat over the last several years. So I just want to get some additional color around that. And then I a follow-up. Haji Glover: Yeah. Our goal is to return capital as efficiently as possible. And as you mentioned, the dividend, yeah, we have been consistent with our dividend payout, which is about $0.20 per share over the last few years. On average quarter, that's about $5 million or around an average of $20 million per year. We we're continuing to build and and during more value from the organization. But, ultimately, it's about, you know, investing in our shares. Drew Crum: Okay. And then, Hygiene, just looking at the second half guidance, if I back out the SLB guidance, transactions, it would suggest at least using the midpoint of the ranges would suggest that adjusted EBITDA declines year on year. Just wanna make sure that's correct. And if so, what is driving the decline? Haji Glover: No. I think I I don't think there's a good decline. If you adjust prior year FY '25 with the numbers, you would you'll still you will still show growth. Okay. Okay. Provided that we provided that in the press release. Drew Crum: Okay. Got it. Okay. Thank you. No. No problem. Haji Glover: Thank you. Operator: And this concludes our Q and A. I will pass the call back to management for any closing remarks. Peter Warwick: Well, thank you very much, operator. And look, I'd just like like to thank our employees and shareholders as well as our authors, illustrators, educators, all those who are essential to to our our success. And, of course, all of us here wish you all a very happy and healthy holiday season. Goodbye. Thank you. Ladies and gentlemen, this concludes Operator: today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon, and welcome to the Mission Produce Fiscal Fourth Quarter 2025 Conference Call. Participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead. Jeff Sonnek: Thank you. Today's presentation will be hosted by Steve Barnard, Chief Executive Officer; John Pawlowski, President and Chief Operating Officer; and Bryan Giles, Chief Financial Officer. Steve Barnard: The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on the Investor Relations section of investors.missionproduce.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. And with that, I'd now like to turn the call over to Steve Barnard, CEO. Steve Barnard: Thank you, Jeff. I'd like to start the call by addressing the leadership transition news that we announced concurrent with today's earnings results. We've been focused on succession planning for several years now, and the time is right to implement that plan. Effective at our annual meeting in April, our President and Chief Operating Officer, John Pawlowski, will assume the role of Chief Executive Officer, and I will transition to Executive Chairman of the Board. Let me be clear though. This company is the culmination of my life's work. And I am very excited about this next chapter of Mission's story. In my new role, I'll continue to support John and the leadership team while working closely with our board to drive the business forward. Over the past four decades, we've built Mission into the global leader in avocados, and John's immediate impact on harnessing our potential is being felt across our entire organization. His decades of experience in the global food industry make him the ideal leader to guide Mission through its next phase of growth. With two consecutive years of exceptional financial performance, the successful completion of our major capital investment cycle, and a balance sheet that positions us to capitalize on future opportunities, there's no better time for this succession. I'd like to thank our entire organization for their support and focus over the years as we've reshaped the industry and raised the bar on customer service. With that, I'll turn it over to John to discuss the results. John Pawlowski: Thanks, Steve, for your confidence and partnership. I want to start by saying how honored I am to have the opportunity to lead this organization. When I stepped into this role, I had high expectations. But what I've experienced over the past twenty months has surpassed them in every way. The depth of operational capability, the strength of our global relationships, and the caliber of our team are truly remarkable. And this quarter, this year, showcased exactly why that matters. Steve and the team built something special over the past forty years. And I don't take lightly the responsibility of carrying that forward. But I also couldn't be more excited about where we are headed. The foundation is strong, the team is executing at a high level, and the opportunities in front of us are significant. Now let me turn to our results. Because fiscal 2025 was a defining year for Mission Produce. We delivered record revenue of $1.39 billion, growing 13% on top of a strong 2024. Driving that was a 7% volume growth to achieve a record 691 million pounds of avocados sold through our marketing and distribution business. We also delivered record adjusted EBITDA in the fourth quarter, capping off a two-year period in which we generated more than $180 million of operating cash flow. These results didn't happen by accident. They reflect the power of our integrated global platform, and most importantly, the exceptional execution of our team. What truly sets Mission apart is our ability to execute on a truly global stage. We are a connected global team that can adjust and pivot in real time to seize opportunities, creating a genuine differentiator for our company. Throughout the year, our commercial team demonstrated remarkable agility. We managed demand and supply shifts throughout the Peruvian season seamlessly across our U.S. and European operations. This coordination allowed our team in the United Kingdom to grow revenue by over 60% in 2025, while also enhancing our sales efforts in Southern Europe. These efforts combined to drive a 40% increase in European volumes sold, creating a foothold that enables us to cultivate deeper relationships and positions us for long-term growth in that region. We leveraged our entire platform—our global sourcing network, our distribution infrastructure, our forward positioning, and our category management tools—to drive the best possible outcomes for our customers, maximize the value of fruit across all channels, and deliver quality products to global consumers. We are a volume-centric business. Volume and per-unit margins are the metrics we manage to. They represent areas that we can exert control over and are what underpin our ability to drive strong financial performance. While we can't control the fluidity of industry pricing, our commercial and sales teams are continuously harnessing our data to provide our customers with value-added insights to drive category growth in support of our broader efforts to drive per capita consumption globally. No matter the noise in the market, whether it's tariff uncertainty, pricing volatility, or supply disruptions, this team has repeatedly demonstrated the ability to execute for our customers. That's what I'm most proud of this year. Let me walk through how this played out across our segments. First, our 7% avocado volume growth for the full year and 13% in the fourth quarter alone. The North American market was stable with modest growth. But where we really saw momentum was with greater international penetration. Europe and Asia both delivered strong volume growth in the quarter and for the full year. Importantly, we wouldn't have been able to capture that growth without our Peruvian product leverage. Having that supply consistently gave us the ability to build programs with large retailers and reinforces footholds in growth markets that will serve as a foundation to drive greater household penetration for years to come. Our international farming segment had an outstanding year as well. Our Peruvian orchards returned to normal growing conditions after last year's weather challenges, and we more than doubled our exportable avocado production for the season, selling approximately 105 million pounds compared to 43 million pounds in the previous harvest season. The team's ability to program our own fruit across multiple global regions, balancing customer commitments, market dynamics, and value optimization in real time, is a core differentiator. Our Peruvian production provides consistency of supply, quality control, and the flexibility to direct fruit where it creates the most value. That's vertical integration at work. In blueberries, we saw higher volumes as new plantings came into production across our expanded acreage in Peru. We continue to see tremendous long-term potential in this category, as consumer preferences shift towards healthy, convenient snacking options. Our blueberry strategy is focused on filling in the seasonal calendar and maximizing the productivity of our Peruvian assets. We are approaching the completion of our multiyear expansion efforts and now have approximately 700 hectares in production, focused on premium varietals that deliver superior flavor profiles and extended shelf life. Yields on newer acreage will take time to mature, but the volumes are building and position us well for growth in the years ahead. I also want to touch briefly on our mango business. We continue to make meaningful progress. We managed supply and demand dynamics well this year and grew our market share to 5.2%, up approximately 150 basis points for the full year. That's real traction in a category where we see significant long-term potential. Our goals for mangoes are centered on building the domestic market. We seek to grow consumer awareness and drive household penetration. In fact, household penetration is approaching 40%, up from just 35% three years ago. We are confident that our innovation, consumer engagement, and customer programming are driving these results. This is the same playbook we employed with avocados and is the reason we are building out our sourcing capabilities in mangoes. Consumer engagement and supply consistency go hand in hand. It's the dual focus that's setting the stage for stronger growth as we look out towards the horizon. Beyond the commercial execution, I want to highlight the foundational work we've done over the past twenty months to strengthen our organization. We focused specifically on three areas. First, we've deepened our focus on culture and collaboration. This starts with fostering a more connected global team, sharing ideas, aligning our priorities, and working together to solve problems. That connectivity has shown up in our results day in and day out. Second, we've invested in data and tools. We're building systems that give our commercial teams better access to information in the U.S. and abroad to inform faster, smarter decision-making alongside our customers. And finally, we've built a more disciplined process around our cadence of decision-making. We're being more proactive and more structured in how we drive the business forward. These are not flashy initiatives, but they compound over time and are vitally important to achieving the results that we know our shareholders expect. Looking ahead, we see significant runway for growth. In North America, there's meaningful opportunity both in growing overall avocado consumption and in taking share from competitors. Per capita consumption continues to climb, and we're well-positioned to lead category growth with our customers. Internationally, we're building real penetration. The growth we achieved in Europe and Asia this year wasn't a one-time event. It was the result of deliberate investment and execution that we will build upon in future years. Complementing this growth is an internal focus on driving enhanced free cash flow in the years ahead. We enter fiscal 2026 having largely completed our heavy capital investment cycle. With investments in growth infrastructure in place, CapEx is expected to step down and mark the beginning of a more modest cycle of spend. Combined with a healthy balance sheet and a team that knows how to execute, we have real flexibility to create value for shareholders in the years ahead. With that, I'll turn it over to Bryan for the financial details. Bryan Giles: Thank you, John, and good afternoon to everyone on the call. Fiscal 2025 fourth quarter revenue totaled $319 million, which was down 10% from prior year figures that were elevated by a high sales pricing environment for avocados. We experienced a 27% decrease in average per unit avocado sales prices during the period, which masked the 13% volume growth that was achieved. The volume and price dynamics resulted from higher industry supply, both from greater availability of Mexican fruit driven by a larger crop in the current harvest season and from higher Peruvian avocado production driven by more favorable weather conditions in the current year. Gross profit was $55.7 million in 2025, essentially flat with the prior year, while our gross margin increased 180 basis points to 17.5% compared to the same period last year. While I will address gross profit movement in our segment discussion, the increase in margin percentage was primarily driven by lower avocado per unit pricing compared to last year. As a reminder, profitability in our marketing and distribution segment is managed on a per unit basis, which can lead to volatility in margin percentage when sales prices fluctuate. SG&A expense increased by $500,000 or 2% compared to the same period last year. The increase was primarily due to higher general operating costs, including performance-based stock compensation expense. SG&A growth was tempered by lower statutory profit-sharing expense within Peru and Mexico operations. Adjusted net income for the quarter was $22.2 million or $0.31 per diluted share, compared to $19.6 million or $0.28 per diluted share last year. Beyond the operating performance, we benefited from a reduction in interest expense, down $400,000 or 15% in the quarter, reflecting our continued focus on maintaining our healthy balance sheet through debt reduction and the resultant lower rates we incur on outstanding borrowings. We also realized a 55% increase in equity method income to $1.7 million driven by strong performance from our joint venture investment in Henry Avocado Corporation, which experienced robust results this period. Adjusted EBITDA increased 12% to a record $41.4 million compared to $36.9 million last year, driven by increased avocado production in our International Farming segment and higher overall volumes sold in our marketing and distribution segment. Total segment sales decreased 15% to $271.9 million, driven by the pricing dynamics I described. As mentioned, we manage this business primarily to volume and per unit margins, leveraging our global platform and sourcing network to optimize per unit margin performance regardless of the pricing environment. On that basis, the segment performed very well. Segment adjusted EBITDA increased 11% to $28.3 million, reflecting the impact of higher avocado and mango volumes sold supported by solid management of per unit margins. We are proud to achieve solid EBITDA growth despite comping against the prior year period where per unit margins significantly exceeded our historical averages. Our international farming segment delivered another quarter of strong results. Total segment sales increased 97% to $59.7 million, and segment adjusted EBITDA more than tripled to $8.4 million. This was driven by a recovery in yields at our owned avocado orchards in Peru, leading to sales of owned production during the quarter that were greater than three times prior year figures. While average per unit sales prices were lower compared to prior year, the effect of the higher yields on per unit production costs far outweighed the impact on our financial results. Steve Barnard: Separate from farming production, John Pawlowski: we also continue to benefit from improved utilization of our facility infrastructure through providing a higher volume of avocado packing and cooling services to third parties. In blueberries, net sales increased 16% to $36.5 million, primarily due to higher volume produced on our farms as a result of our expanded total acreage. Segment adjusted EBITDA decreased to $4.7 million compared to $8.6 million last year as a result of lower per unit margins. While our volumes were higher due to new acreage coming into production, overall yield per hectare for the 2025/2026 harvest season is anticipated to be lower than prior year, which drove up our per unit cost. This is part of the natural maturation process for newer acreage, and we expect yields and per unit cost to improve over time as these farms mature. Shifting to our balance sheet and cash flow. Cash and cash equivalents were $64.8 million as of October 31, 2025. For the full year, we generated $88.6 million in operating cash flow, bringing our two-year cumulative total to more than $180 million. This strong cash generation, combined with our disciplined focus on debt reduction, has strengthened our balance sheet considerably. We reduced long-term debt by approximately $18 million during fiscal 2025, and our interest expense for the full year declined by $3.2 million or 25% compared to the prior year. A direct benefit of that debt reduction and the lower rates I mentioned previously. Our net leverage as of fiscal year-end is very healthy at well below one times EBITDA. Capital expenditures were $51.4 million for the year, in line with our expectations. As we've discussed, we are now exiting our heavy capital investment cycle, and for fiscal 2026, we expect capital expenditures to step down to approximately $40 million. This setup positions us for accelerated free cash flow generation going forward. Now let me provide some context on our near-term outlook. For 2026, avocado industry volumes are expected to increase by approximately 10% versus the prior year period, driven by a larger Mexican crop in the current harvest season. Pricing is expected to be lower year over year by approximately 25% compared to the $1.75 per pound average experienced in 2025, driven by higher supply conditions from the larger Mexican crop. Further, while we expect some sequential margin compression in the first quarter due to the current sourcing environment, this is consistent with typical seasonality patterns. For blueberries, the harvest season in Peru will peak during the first quarter. We expect volume increases from our own farms as new acreage comes into production, which should translate to higher revenue as average sales prices are expected to be flat to slightly higher. Profitability will continue to be weighed on by higher unit costs resulting from lower projected yields per hectare in the current harvest season. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and the number one on your telephone keypad. You may press star and the number two if you would like to remove your question from the queue. For any participants using speaker equipment, before pressing your star keys. Our first question comes from Mark Smith with Lake Street Capital. You may proceed with your question. Mark Smith: First question for me, I was curious about your outlook for mangoes. You've had fantastic growth here the last several years. Kind of curious where we are in that cycle, and any insights you can give us into potential growth here, this next fiscal year. John Pawlowski: Really, the glide path on the mango side is going to be similar to last year's glide path, right, where continuing to pursue market share penetration. We're continuing to try and push our global sourcing initiatives in regards to access to the right fruit at the right time. We feel like we've not only gained nice penetration with new customer base last year but the opportunities continue to be in front of us. And cross-selling where we're already doing our avocados. And providing programs to some of those players out there that either aren't happy with or are open to new players in that space, helping them program things out and provide category insights. So the glide path you saw in '24 and '25, I would say, is consistent with the glide path that we're pushing and pursuing in '26. Mark Smith: Excellent. And then I wanted to ask about the cash flow story. Obviously, really attractive here, especially as you guys reach the end of kind of an investment cycle. I'm curious about the biggest risk in kind of accomplishing this free cash flow growth. Bryan Giles: You know, I'm hey, Mark. This is Bryan. You know, when we look, you know, we've delivered two consecutive years of very strong operating cash performance, and that's driven off the operating results of the business. I do think we benefited some this year by the lower pricing environment we saw at the end of the year, and that did help to boost operating cash a bit. But I think in general, it's strong operating performance of the business that's driving that. On the CapEx side, you know, as we look at free cash flow, we've been communicating for a number of years now that we, you know, we were going through a cycle, and we expected meaningful step downs. We've set a kind of a target for $40 million of capital spend for the upcoming year. We believe that that is still leaving us ample room to make growth CapEx investments at those levels. So I think that there is still flexibility in that number, and you will see future year periods where the spend will be lower than that. Still. So, I mean, I think we feel comfortable that we've got the business set up to a point where, you know, we can generate meaningful cash flow, and we can do it potentially at lower levels than where we're at today if by chance there was a year where, you know, there were weather or crop conditions that had a negative impact on the business. Mark Smith: Okay. And as we think about capital allocation with lower CapEx maybe invested this year, leverage now under 1x. How should we think about the use of cash going forward? And are there other places from buybacks or anything else where you guys may put cash to work? Bryan Giles: I mean, you know, I think that, you know, when we look at today, our priority is growth. And I think that with the strong performance we've had the last few years, it's provided us with a tremendous amount of flexibility as we look forward. You know, I think that we're always looking for potential opportunities, whether it comes from growth in our existing categories or expanding geographic reach or potentially even bolting on adjacent ones. But our primary focus is doing things that are going to create the most shareholder value. You know? So at this point, I think we feel very comfortable with where our leverage ratio is. We've done a really good job over the last couple of years paying down debt. I think certainly that that affords us now the opportunity to kind of look at a number of different options as we go forward. As you saw this year, we did share buybacks, so history will tell you that we're comfortable doing that. And, yeah, we will continue to look for other ways to, again, maximize that value to shareholders as we go forward with a strong cash position. Mark Smith: Okay. And the last one for me, if I can squeeze one more in here, is just, you know, with the changes in management coming up and congratulations, John, by the way, on the move here. Should we look for any changes in strategy because it sounds like it's really just kind of steady as she goes. John Pawlowski: Yeah. Thanks, Mark. I would offer that, you know, me and Steve have been working really closely together over the last, you know, my entire time here, specifically over the last year on understanding where this boat is and what's the right direction for this boat and how comfortable do we feel with, you know, the team steering that boat. And we're collectively very excited about the organization's direction right now and the team that's helping steer it. Super proud of the results that we've been able to generate and do it consistently for, you know, in a year like '25 where things kind of worked out the way that we had planned even though, you know, there's a lot of work that goes into making a plan actually work. And then in '24 where things weren't exactly to plan, but the team was able to deliver consistently. That being said, to Bryan's point, you know, we're really in an interesting reflection point based on the CapEx that's been spent over the last ten years to generate the infrastructure that's supporting the model that we're so proud of. And I would offer that the commercial outlook from a growth perspective over the next five to ten years is one that we are keenly focused on right now and trying to understand exactly how to deploy that capital appropriately and to line up the right investments to look at organically growing over the next five to ten years and also considering inorganic opportunities as they present themselves. So I think you'll hear more from me on that over the coming months. But the idea is we're really excited with where we are but really want to accelerate how we grow and how we attack some of the global challenges we see ahead of us. We are prepared to do that from a cash position standpoint and are working on how to do that together. Mark Smith: Excellent. Thank you, guys. Steve Barnard: Thanks, Mark. Operator: Our next question comes from Puran Sharma Stephens. You may proceed with your question. Puran Sharma Stephens: Thanks for the question, and congrats on the strong quarter. And then also congrats on the leadership transition here. Maybe just wanted to start off with CapEx. You kind of just talked about it. Mentioned we can still make growth CapEx in that $40 million for next year. Are you able to give us a sense as to how much of that 40 could potentially be growth CapEx? Bryan Giles: Yeah. Yeah, Corinne. I mean, we don't, I mean, there's a lot of things that we do that it's kind of a gray line between whether it's growth or maintenance. I think, you know, we've invested significantly in farming operations that are still fairly young at this point. There's maintenance associated, you know, with keeping them up and running, but there's also still new acreage that's being put in the ground and acreage that's being maintained that isn't yet in production. That I think we'd consider to be growth-oriented. I think on the commercial side of our business, when we look at it, you know, I think, you know, the last few years, there's been investments associated with, you know, certainly investments that we've made associated with growing the business in the UK. I think as we look at Europe going forward, there could certainly be opportunities there as well. And certainly, though, I think we're happy with the footprint that we have in North America today. Maybe needs to add some additional capacity as volume continues to grow over time. But if I had to ballpark it, Corinne, I'd say roughly $20 million of the spend that we have in the coming year is for maintenance, and roughly $20 million of it is geared towards growth. And I don't think that that's kind of an unreasonable mix as we look at years going forward in terms of what the maintenance CapEx requirements are. Puran Sharma Stephens: Okay. Thank you. I appreciate that color there. And maybe just wanted to ask about, I mean, you mentioned key areas of growth. Looks like you were able to reach Europe and Asia this quarter. I did want to ask you that your core infrastructure is built out, including, you know, the UK packing house, Laredo, and some other investments that you have including Guatemala. Where do you see the most upside from growing into your footprint? Are there specific regions or facilities that you'd like to call out? I know you did mention Europe and Asia. But was just seeing if we could get a little bit more granularity here. John Pawlowski: Yeah. Hi, Puran. This is John. Good to hear your voice. I would offer two kind of highlights there. Number one, we did call out, I think I made it in my comments that there's white space when we think about the opportunity to grow into the existing market share franchise here in the United States. We feel that this particular market is one where we have a right to play in a deeper level than we're playing today. And feel that the infrastructure that we built can both support that in meaningful ways with minimal CapEx required to support that type of a move and offering leverage on those assets. The second piece is when you think about our Peruvian production and the Peruvian fruit, there's an opportunity to explore and dive deeper into the European marketplace. And that is high on our list of thinking about how to penetrate and understanding exactly how we want those investments to flow that support both of those things coming together. On top of that, as the Guatemalan fruit comes online over the next two to three years, both of those locations play into operational efficiencies and overhead absorption as we draw into the business. Puran Sharma Stephens: Great. Appreciate that color, John. And maybe if I could just ask about the household penetration goals. I think in the past, you've mentioned that avocados are maybe closer to 70%. And that you wanted to target penetration of maybe other mature fruits that approach about 80 to 90%. Given we're kind of entering a lower pricing environment, you know, how long do you think it takes to get to that level of the other more mature fruits? And then how does being in a lower pricing environment help accelerate that process? John Pawlowski: Yeah. Bryce. Hi, Bryce. That's a good question and you're pulling back on some of the conversations we've had in the past, which thanks. I mean, I wish I had a crystal ball and could tell you exactly how long it's going to take. Right? But these things go in cycles, right, where you have markets that create opportunities with an abundance of fruit or more fruit than is typical, or you have markets where fruit is a little bit tighter. And we're in a cycle here in the next, at least the way we're thinking about 2026, where you're going to have more fruit than is traditionally available during the course of the year. And so these times provide some of the headwinds that, you know, Bryan mentioned in regards to, you know, pricing being a little compressed during that time. But the tailwind there becomes an opportunity to move a lot of fruit. And to run promotions and be strategic with retailers on how to think about household penetration and consumer engagement. If you go back the last fifteen years, you'll see it play out where you had lower-priced environments. Where you had jumps in household penetration, and then the years after that where you had higher-priced environments, lower fruit, you maintained a lot of that household penetration and you kept those consumers engaged with that fruit even at slightly elevated prices. So we're moving into that cycle where we're going to have, at least we believe we're going to have, there's no perfection here, higher availability of fruit, going to be running a lot more promotions over the next twelve months. And yes, you're right. We're in that 70% range on household penetration. I would love to see that, you know, 73, 75% achieved over the next couple of years if we stay in a consistent place with availability of fruits. That to me becomes a two to three-year goal to get to that point. But and which even gives us more tailwinds in the future in regards to thinking about the years after that to think about getting to those 80 numbers, which some of the other categories hold. Hopefully, that helps. Puran Sharma Stephens: No. That's very helpful. I appreciate the color there. Congrats on the quarter again. Steve, congrats on moving to chairman of the board. And John, congrats on the move as well. Looking forward to working with you. Steve Barnard: Thanks, Puran. We're looking forward to it. John Pawlowski: Thanks, Puran. Operator: At this time, there are no further questions. I'd like to end the question and answer session and turn the conference call back over to management for any closing remarks. Steve Barnard: Ladies and gentlemen, that concludes our conference call today. We thank you for attending. You may now disconnect your lines. Operator: Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your lines.
Operator: Afternoon, and welcome to the BlackBerry third quarter fiscal year 2026 results conference call. My name is Nick, and I will be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing star, zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Martha Gonder, Director of Investor Relations, BlackBerry. Please go ahead, ma'am. Martha Gonder: Thank you, Nick. Good afternoon, everyone, and welcome to BlackBerry's third quarter fiscal year 2026 Earnings Conference Call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via web in the investor information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions applicable to US and Canadian securities laws. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the company's annual filings and MD&A. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today, and the company has no intention and undertakes no obligation to update or revise any of them, except as required by law. As is customary, during the call, John and Tim will reference non-GAAP in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, sedar+, and blackberry.com websites. And with that, let me now turn the call over to John. John Giamatteo: Thanks, Martha. And thanks to everyone for joining today's call. Q3 was another quarter of solid results adding to our track record of consistently meeting or beating guidance. Once again, we delivered across the three core metrics of revenue, profitability, and cash. Total company revenue came in at $141.8 million, above the high end of our guidance range. Q3 was another strong quarter of profitability, with adjusted EBITDA beating guidance, and it was also our third consecutive quarter of achieving GAAP profitability. Adjusted EBITDA for the total company was $28.7 million, which represents a 20% margin. GAAP net income improved by $24.2 million year over year to $13.7 million in Q3, and non-GAAP EPS exceeded guidance at positive 5¢. Conversion of profitability into cash was also strong. Operating cash flow was $17.9 million, up three times year over year, reflecting strong execution and disciplined cost management. Moving on to the results from our divisions. QNX delivered an all-time record for quarterly revenue at $68.7 million. This represents 10% year-over-year growth, beating expectations and finishing at the high end of the guidance range. Revenue was driven primarily by solid growth in royalties, with development seat and professional services revenue also growing both sequentially and year over year. During the quarter, we were excited to announce John Wall's appointment as president of QNX. In our opinion, nobody knows the embedded software space, both the technology and the market, quite like John. He has a very strong reputation with customers and partners and within the company. QNX has tremendous opportunities for multiyear growth, and driving our key initiatives to harness those opportunities will be John's number one priority moving forward. We saw more design win momentum in Q3, exceeding our internal targets, and the pipeline of design wins in Q4 continues to grow. This design win growth demonstrates the progress we're making with the initiatives to drive deeper into automotive and wider into the general embedded space. In the quarter, we secured a number of major automotive design wins with top European and Asian OEMs for ADAS and cockpit domains, all being developed on the latest version of the QNX platform SDP8. The number of customers using SDP8 continues to grow each quarter, with many leading OEMs now developing on it. We continue to see traction with other new products as well. We're securing new wins for both QNX Sound and QNX Cabin as OEMs recognize the strategic benefit of these products and time to market for reducing their bill of materials. This was the second quarter in a row that QNX Sound was chosen by a leading Chinese OEM, with this quarter's win being deployed in their luxury EV range. We've also secured another multiyear contract for our cloud-based QNX Cabin product with a top five global automaker based in Europe. A potential needle mover for ASP per vehicle is the vehicle software platform that we're co-developing with leading middleware provider, Vector. Development is progressing well, and the second early access version is scheduled for release by January. Early discussions with a number of OEMs are progressing, and we're targeting significantly higher pricing per vehicle compared to the core RTOS. Once we've secured some wins, we'll provide more color on the potential upside from this product. And finally, for auto, earlier this week, we announced that leading technology market analyst Counterpoint Research has determined that QNX is now powering more than 275 million vehicles on the road. This is a 20 million increase year over year and clearly demonstrates how significant a player we are in the space. In the non-automotive general embedded space, we continue to drive across our target verticals of industrial automation, medical instrumentation, and robotics. Let me provide some additional color on a couple of in-quarter wins with industrial automation companies. The first was with one of our longtime customers, Bentley, Nevada, an industry leader in online condition monitoring used for wind turbines and other applications, who has adopted SDP8. Additionally, two leading industrial automation OEMs, one North American and one European, have also adopted SDP8 to be used in a variety of their applications from robotics to manufacturing production. We also had an exciting development in the aerospace and defense vertical with NASA, who are adding QNX SDP8 to their supported operating systems. Earlier this year, we launched QNX General Embedded Development Platform, or GEDP as we call it, which is a subscription-based solution tailor-made for OEMs in GEM verticals. GEDP aims to accelerate the time to market for developers of embedded systems. And feedback from our customers so far has been extremely positive as they can leverage this platform for all supported versions of QNX across their portfolio. In the quarter, we saw a number of new design wins from customers for GEDP. So in summary, Q3 was another great quarter for QNX. In fact, an all-time record quarter. Moving now to secure communications. In Q3, we delivered revenue of $67 million, beating the top end of guidance and consensus. This was a great achievement for the division as we were faced with a U.S. government shutdown for a portion of the quarter. These strong results were in large part driven by better-than-expected renewals of UEM and navigation of the U.S. government shutdown. As a percentage of revenue for the last twelve months, UEM remains just over half of the secure communications totals, with SecuSmart at slightly more than ad hoc for the remainder. Key metrics for the division remain solid, with annual recurring revenue, or ARR, increasing $3 million sequentially to $216 million, and dollar-based net retention rate, or DBNRR, was at 92%. SecuSmart revenue grew sequentially but was lower year over year due to a tough compare as a result of the strong upgrade cycle from the German government in Q3 of the prior fiscal year. Ad hoc, despite having the most exposure of the three product groups to the U.S. federal government shutdown, delivered year-over-year and sequential revenue growth. Earlier this year, we achieved FedRAMP high certification, becoming the only critical events management solution provider to achieve this stringent level of security, directly enabling significant U.S. government expansions this quarter, including both the U.S. Navy and the Department of Justice. Ad hoc continues to grow outside of North America as well, securing new wins with the National University of Malaysia, Australia's Department of Foreign Affairs and Trade, and key UK energy infrastructure provider, Scottish and Southern Energy. For UEM, in addition to the continued trend for reduced customer churn, we had some significant expansion deals for this product in the quarter. One of these expansion deals included an eight-figure multiyear renewal with the Dutch government. Other strong renewals included the Scottish Police Service and the UK Ministry of Defense, as well as a number of financial services companies. As we mentioned in Q2, BlackBerry UEM became the first solution to be certified by Germany's Federal Office for Information Security, or BSI. And in Q3, we closed our first deal that was enabled by this very demanding security certification. Targeted investment in certifications like BSI for UEM and FedRAMP High for ad hoc are strengthening our portfolio's position at the heart of government secure communication strategies. Overall, this was another solid quarter of performance for our secure communications division. This has been a year of stabilization, with improvements in renewal rates and our ability to close new business. Finally, licensing revenue was $6.1 million, which was in line with expectations. And with that, let me now turn the call over to Tim for more color on our financials. Tim Foote: Thank you, John, and good afternoon, everyone. As John mentioned, we continue to drive strong, reliable results across the board that either meet or beat expectations. For the total company, revenue in the quarter topped the high end of the guidance range at $141.8 million. Total company adjusted gross margins remained relatively flat at 78% and increased three percentage points sequentially as a result of a favorable revenue mix and continued optimization of our cost of sales profile. Adjusted operating expenses were $85.4 million, up 7% year over year as we continue to deploy capital to strategically invest for growth in our QNX business. Total company adjusted EBITDA continues to be strong at 20% of revenue or $28.7 million. Adjusted net income for Q3 was $26.8 million, and GAAP net income was $13.7 million. This is the third quarter in a row that we've delivered positive GAAP net income and the seventh consecutive quarter of sequential improvement. In fact, Q3 had the strongest level of quarterly GAAP net income at any time since 2022, almost four years ago. Adjusted EPS for the quarter beat the top end of guidance at positive $0.05. QNX had its best-ever quarter of revenue, achieving $68.7 million, up 10% year over year and 9% sequentially. QNX gross margins expanded by one percentage point sequentially and were down two percentage points year over year to 84%. We did not have the P&L benefit of grant funding in Q3 from Canada's Strategic Innovation Fund like we did in the first quarters of the fiscal year. Even without this benefit, adjusted EBITDA was a very solid 24% of revenue and hit the top end of guidance at $16.4 million. Secure communications revenue exceeded the top end of guidance for the quarter at $67 million. Gross margin was one percentage point lower year over year and higher sequentially at 72% as a result of leverage and revenue mix. Better-than-expected revenue also drove leverage to the bottom line. Adjusted EBITDA in the quarter was $17.3 million, up 10 percentage points sequentially to a strong 26% margin. Finally, our licensing division delivered results in line with guidance. Revenue was $6.1 million and adjusted EBITDA of $5.3 million. Adjusted corporate operating costs, excluding amortization, came in at $10.3 million in Q3, broadly in line with guidance. This was another good quarter for conversion of profitability into cash. Operating cash flow was $17.9 million, a significant improvement from $3.4 million in Q2 and up over 200% year over year. Free cash flow was $17 million in the quarter. Our balance sheet remains solid with total cash and investments up $111 million year over year and $14 million to $377.5 million. We are deploying BlackBerry's capital to drive growth and shareholder value. We continue to invest organically, especially in our QNX business, supporting the key initiatives that John outlined earlier to go deeper into auto and wider into target verticals. Notwithstanding this increased investment, we continue to deliver positive operating and free cash flow, further increasing our net cash position. So in addition to organic investment, we are also continuing to take advantage of what we believe to be an undervalued share price and repurchase shares through our buyback program. In Q3, we ordered the repurchase of $5 million or 1.2 million shares at an average price per share of $4.13. A portion of these shares settled just after the quarter end on December 1, so it won't show in this quarter's 10-Q filing. All of the shares have been canceled, bringing the total number of shares bought back this fiscal year to 8.8 million. We have therefore more than offset potential dilution from our long-term incentive and employee share purchase plans. Turning now to financial outlook for the fourth fiscal quarter and the full fiscal year. We expect revenue for QNX in Q4 to be in the range of $71 to $77 million. Having just delivered an all-time record in Q3 for quarterly revenue, we expect to set another new record in Q4. For adjusted EBITDA, we expect QNX to be in the range of $17 to $23 million. We are maintaining our full-year revenue guidance at the midpoint while also narrowing the range to $262 to $266 million. For full-year adjusted EBITDA, we're raising the bottom end of our and the midpoint of our guidance such that the range is now $67 to $73 million. As QNX continues to deliver a combination of double-digit growth and strong profit margins. For secure communications, we're increasing the expected revenue for Q4, such that it's now in the range of $61 to $65 million, and for adjusted EBITDA to be between $11 and $15 million. For the third quarter in a row, we are raising our full-year revenue guidance for secure communications, such that the high end of the range we provided last quarter is now the low end of the range, such as now between $247 to $251 million. We're also raising our guidance for adjusted EBITDA, which is now expected to be between $47 and $51 million. For licensing, we reiterate our prior guidance for revenue to be approximately $6 million and adjusted EBITDA to be approximately $5 million per quarter. For the full fiscal year, we're holding revenue guidance at approximately $24 million and adjusted EBITDA at approximately $20 million. We continue to expect adjusted corporate OpEx, excluding amortization, to be approximately $40 million for the full fiscal year. At the total company level, we expect revenue for Q4 to be in the range of $138 to $148 million and adjusted EBITDA to be between $22 million and $32 million. For the full fiscal year 2026, we are raising the guidance midpoint for the total company revenue by $6 million, with a range now between $531 and $541 million, and raising guidance for adjusted EBITDA at the midpoint by $7.5 million to be in the range of $94 to $104 million. For context, when including Cylance, adjusted EBITDA from continuing and discontinued operations for the prior year was $39.3 million. For non-GAAP EPS, we expect it to be between $0.03 and $0.05 in the fourth quarter and to now be between $0.14 and $0.16 for the full fiscal year. Moving on to our cash flow outlook. We expect another sequential increase in operating cash flow for Q4, within the range of a solid $40 million to $45 million. This increase means that for the full fiscal year, we're again raising our guidance and expect to generate between $43 and $48 million in operating cash flow. This does not include the additional $38 million of cash from the second tranche of proceeds from the sale of Cylance to Arctic Wolf that we expect to receive in Q4, which is classified separately as cash flows from investing activities. Therefore, we expect to generate in excess of $80 million of cash in Q4, further strengthening our already solid balance sheet. With that, let me now turn the call back to John. John Giamatteo: Thanks for that, Tim. And before we move to Q&A, let me quickly summarize what has been another strong quarter for BlackBerry. We continue to consistently deliver reliable results across the three core metrics of revenue, profitability, and cash at both the company and divisional levels. QNX delivered its best-ever revenue quarter and a solid adjusted EBITDA of 24%, all while continuing to invest for long-term growth. In addition to these strong financial results, QNX also hit the milestone of powering 275 million vehicles on the road. Secure communications exceeded revenue expectations and demonstrated significant leverage in the model with a 26% adjusted EBITDA margin. To put this in perspective, this time last year, the cybersecurity division had an EBITDA margin of only 9%. Overall, both divisions helped drive another quarter of GAAP profitability and cash generation. So with that, let's now move to Q&A. And Nick, if you could please open up the lines. Operator: Thank you. We will now begin the question and answer session. One on your telephone keypad. Please make sure your line is unmuted. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We request that you limit yourself to one question and one follow-up. And the first question today will come from Kingsley Crane with Canaccord Genuity. Please go ahead. Kingsley Crane: Hi. Thanks, and congrats on a really nice quarter. So we've talked about the GEM opportunity naturally requiring more investment in the near term as you work towards gaining critical mass in key end markets. And, again, really nice wins in the quarter in that segment. But as you think about fiscal 2027, where do you think you need to invest more within that space? Like, what's working? What needs more help? Thanks. John Giamatteo: Yeah, Kingsley. So I think on that one, I think from a product perspective, we're in really good shape. I think the GEDP platform that we talked about is a really good leverage point for us to bring value to our customers. So I think you'll probably see us continue to invest in go-to-market activities. More feet on the street. It's a broader market. Partnerships with distributors and other technology providers that maybe can help bring us to market a little bit faster. So these are probably the areas that we'll continue to invest in as we go into the next fiscal year. Kingsley Crane: Okay. Great. And then the follow-up would be on this luxury China EV win. We're really encouraged by that. What ultimately allowed you to win that deal? Do you think it was cost savings, weight savings, superior software functionality, and then you know, to what extent could this be a blueprint for more success in China? Thanks. John Giamatteo: I think it's honestly, I think it's all of the above. I think it's cost savings, it's weight savings, it's the performance of the product itself. I would say the Chinese market tends to be very price sensitive. So I think the amount of money that they can save leveraging our technology and what that does to their overall BOM is a compelling value proposition. So that probably swayed a little bit more. But the broader value proposition itself is very, very sound. Pardon the pun. But I think the actual savings is probably the lead one on that. Operator: And the next question will come from Luke Junk with Baird. Please go ahead. Hi, good afternoon. Thanks for taking the question. Luke Junk: John, maybe if we could start just in terms of getting to the vehicle award, just if you could talk about the gates you're advancing through right now to get you closer to that outcome? And then as we look forward a couple of weeks to CES, should we expect to hear more about this at CES as well? John Giamatteo: Yes. Yes, Luke, great question. I'll tell you, it's an area that has got a lot of focus right now inside the company. And from a technology perspective, bringing QNX SDP8, the middleware, together and the integration, the connective tissue, making that a seamless kind of product we could bring to our customers. It's a lot of collaboration with our partner, Vector, to really bring that. So I think the product itself is really sound. It's just a matter of the integration with our partner and then bringing that to the marketplace. So a lot of good progress that's moving in this regard. But we're pleased with the progress, and you'll hear more about it. Luke Junk: Okay. And then wanted to your answer about the luxury China EV win. In terms of the cost sensitivity, I mean, certainly that's a well-known factor in the China market. And I'm just wondering in terms of system design or things that are sort of you can bring to the table from a QNX standpoint to put BOM into a more compelling position? Like just what are some of the key areas that you can enable for a Chinese OEM in that respect, John? Thank you. John Giamatteo: Yes. I think, certainly, the cost savings and the time to market capabilities are something that's compelling. But one thing we do think is gonna start getting more traction in the Chinese market is safety secure safety solutions. I think, in the past, they've kind of used some basic technologies. And because they've had some high-profile safety issues, we're excited about the opportunities that could be there for us, for us SDP8 and bringing kind of the core RTOS to the table. Sometimes you get in with maybe sound or cabin or different things like that, and maybe drag along kind of the core product in some ways. But it's I think it's a testament to the broad portfolio of the platform. You might lead with sound and get your foot in the door and then bring the RTOS along. More times than not, it's the other way around. Because that's the meat and potatoes from the operating system level. So we're working every single angle in the Chinese market, but I think they are a little more acutely aware and concerned with the need for having an SDV platform that has safety certifications. Probably more so than they had been in the past. Operator: The next question will come from Todd Coupland with CIBC. Please go ahead. Great. Thanks. Good evening, everyone. Todd Coupland: I wanted to start with QNX. 15% growth last quarter, 10% this quarter guide implies 15% growth. How should we think about the trend in this business, given that fluctuating growth rate as we're thinking about fiscal 2027? Thanks a lot. Tim Foote: Yeah. Great question, Todd. So ultimately, we'll give the guide for fiscal 2027 at the end of Q4. So in ninety days' time. Hey. Look. Double-digit growth has been very solid, and ultimately, we're gonna be giving the backlog number as well in Q4, which will be a good lead indicator of where we're moving. On the backlog, we're actually feeling pretty good as John mentioned in his prepared remarks that after a difficult start, we've actually accelerated pretty well and we've got some really good momentum now as we head into Q4. And conversion of that backlog into revenue, which will start starting FY '27, is gonna really drive that business forward. And what we saw in Q3 was strong royalties and royalties driven by some of these new programs that we've been winning over the last couple of years now starting to come online. So, yeah, it's an exciting time, and some of the growth accelerators such as going up the stack, things like sound and cabin that we've mentioned. And we're starting to see traction from those two. So I'm gonna put a pin in it. And say come back in ninety days, and we'll give you more information on next year. But we feel very positive about the momentum that we've got in this business. Todd Coupland: Great. Thanks, Tim. And then just on SecureCom, you know, the business is trending, you know, probably about half of the decline rates you've been projecting the last couple quarters. Is this the new normal? And, again, similar type of mindset as we think about fiscal 2027. Could this business actually turn into a growth segment with defense spending trending positive and the other segments doing better? So just talk about how we should think about that. Thanks. John Giamatteo: Great. Great question, Todd. That's a really good question. We're actually, you know, right now, as you would imagine, just modeling out next year, taking a look at the pipeline and do tend to be a little lumpy, you know, sometimes in this space. So, you know, I don't think one quarter necessarily translates into but I will say we have a really strong pipeline within SecureComps, one of the stronger pipelines that we've had in a long time. So that bodes well for us probably like Tim said, before. It's next quarter, we'll give guidance for the next fiscal year. But it was a solid quarter. Honest with you, we were happy we navigated the US government shutdown the way that we did. We're a little spooked by that as the quarter was going on, but I think that turned out to be a pretty good result for us in the end. And now it's just a matter of converting the pipeline that we've got in front of us to tee up a really solid fiscal year '27. So we'll come back to you with more insights into that, but certainly pleased with the way that business is performing. Todd Coupland: Great. Thanks for the color. Operator: The next question will come from Trip Chowdhry with Global Equities Research. Please go ahead. Trip Chowdhry: Thank you. Congratulations on a very solid quarter. I have two quick questions. The first regarding the government shutdown, do you think now everything is normal? Or do you think, like, most more than half of the quarter was in shutdown? You think the remaining half made up of the first half? That's the first question. Second question, very refreshing to hear your win in the robotic space. I was wondering if you can put some more color about what kind of robots may be using your technology and any color on the demand side also? That's all for me. John Giamatteo: Thanks, Trip. I'll cover a little bit on government. And we'll cover a little bit on robotics. Trip, just give you some color on it. But, you know, as far as government's concerned, it's been a really interesting year. Like, you know, we started the year with Liberation Day and the uncertainty that that brought. That in some ways created some opportunities and also created some headwinds. We also had in the government space the, you know, the continuing resolutions at one point, then a full-on shutdown at one point. I think the good thing I think what we learned from this experience, remember, Doge was another one. How much how was that gonna impact our business? But one of the learnings that I think we took away from the last six or nine months on the secure comp side is what we do in terms of mission-critical critical events management, mission-critical you know, SecuSuite, encrypted voice data and video. Mission-critical, you know, UEM and, the security that that provides. These mission-critical when it comes time for you know, to take a look at what they're gonna cut, what they're we found they're a little bit hesitant to really take a hatchet to mission-critical types of software solutions. So we were a little concerned about the timing with the in Q3 with, with the US federal government in particular because everything shut down. Their procurements then had a backlog of contracts that they had to process. But I think we were fortunate enough to kinda work through that where it really impact the quarter as much as we initially thought it was gonna be. So there's a lot of different dynamics with the governments. But I have to say, I think we've been successfully navigating a lot of the waves there in some of the changes that's gone on. We'll come back to you, Trip, with more details on robotics and medical instrumentation and industrial automation and the kind give you more colors on the wins. Sometimes we're a little bit some of our customers are a little hesitant to share too much information about the use case and the design win. There's, you know, for confidentiality and different reasons. But, you know, in the robotics space, when we think of humanoids robotics, we think of, you know, the more technology that's going into this vertical. There's more compute power. There's more performance that's required. And that's a sweet spot for QNX. So regardless of the type of robotics, if you need high compute and you need high performance, SDP8 is the solution for them to look at. So we'll bring that a little bit more to life, I think, in the future. Actually, we'll have some demos at the booth where we at CES this year to show it a little bit more. But hopefully, that gives you a little bit more color on robotics and we'll be sure to share some more in the future. Trip Chowdhry: Yes. That's perfect. Thank you so much, and happy holidays. John Giamatteo: Thanks, Trip. Thanks, Trip. Operator: The next question will come from Paul Treiber with RBC Capital Markets. Please go ahead. Paul Treiber: Thanks for taking the questions and good afternoon. You made an interesting comment on the pricing opportunity for the vehicle software platform. You just speak to what you see as a potential ROI or the cost savings that the automakers would benefit from that? And then also, could you speak to the economic, like maybe the split between QNX and Vector or maybe your ability to capture a disproportionate share of the pricing there? Tim Foote: Yeah. Sure. Hi, Paul. So ultimately, what we're providing here and remember this, this has been a pull from the OEMs have come to us and asked if we can help in this area because if we look back over the last couple of years, the OEMs have been very ambitious in terms of trying to write all the code from the OS up to the application layer and really found that to be quite a challenge. So in terms of cost savings, having us do it much more efficiently and actually being able to produce a product that they can get into market is a big advantage for them. We're taking off their hands, off their plate, a load of software integration currently they have a heck of a lot of internal resource working on. So they can divert that resource to the application layer, which is where they're really going to differentiate their brand from other players. So, yeah, we're doing a lot of heavy lifting for them and like I say, this is a pull come to us and say, can you do this for us? In terms of the economics, we're not gonna give, like, the absolute, like, details here, but clearly a portion of the pie is coming from Vector. A significant portion I should add is coming from us, and there will be a split now. We are going to be the billing entities, so we'll take the revenue and the vector portion would obviously be passed on through cost of sales. Paul Treiber: And the second question is just on the Canadian federal government. The budget was out in November and there's a number of new investment initiatives. Just remind us again of the size of your Secure Commerce business for the Canadian government? And then what do you see as the opportunity and what's the strategy to try to expand further with the Canadian government? John Giamatteo: Yes, yes. Great question, Paul. A lot of actually, momentum that we have right now with the Canadian government, especially their, you know, by Canada kind of solution, looking to do more with Canadian providers. We do have a comprehensive relationship with them today around UEM. They use that widely throughout the organization. And we're having really good productive discussions with them about SecuSmart and Ad Hoc and other parts of the portfolio as well. So stay tuned. We've got a lot of activity going on. We've got a multiyear agreement with them today. That's very UEM centric. And as we look to try to expand into SecuSmart, SecuSuite product and the ad hoc portfolio, we're finding, you know, some really good discussions with them right now, particularly as they ramp up their spending on defense. So critical events management is something that is widely deployed in the entire US government. We're hoping we could bring that same value proposition to the Canadian government as they ramp up their defense spending over the next few years. So, we'll keep you posted on it, but be rest assured, there's a lot of activity going on right now with the Canadian government. Operator: This will conclude our question and answer session. I would like to turn the call back over to John Giamatteo, CEO of BlackBerry, for closing remarks. John Giamatteo: Terrific. Thanks, Nick. Before we end the call, I just wanted to flag that we'll be starting off the New Year at CES in Las Vegas. We'll be hosting an investor briefing on January 7 at 11 AM Pacific Time to discuss some of the highlights from the show. You can access the live webcast in the investor information section at blackberry.com. And if you're at the event, please stop by to see some of the exciting new exhibits that our QNX team will have on show. So thanks, everyone, for joining the call today. And I'd like to wish all of you a happy and safe holiday season. See you next time. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good day. And welcome to the FedEx Second Quarter Fiscal 2026 Earnings Call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to FedEx Vice President of Investor Relations, Jenifer Hollander. Good afternoon, and welcome to FedEx Corporation's Second Quarter Earnings Conference Call. Jenifer Hollander: The second quarter earnings release, Form 10-Q, and stock book are on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website. During our Q&A session, callers will be limited to one question to allow us to accommodate all those who would like to participate. Certain statements in this conference call may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Today's presentation also includes certain non-GAAP financial measures. Please refer to investors.fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Raj Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and John Dietrich, Executive Vice President and CFO. Now I will turn the call over to Raj. Raj Subramaniam: Thank you, Jenifer. We have only one week left in peak season, and I want to extend my sincere thank you to our frontline workers, pilots, and all of team FedEx as we approach the finish line. These individuals are out there working hard to deliver a successful peak for our customers, and making every FedEx experience outstanding. Before I turn to our Q2 results, I also want to acknowledge that our thoughts and prayers remain with those at UPS along with the families and community affected by the recent tragedy. We are working closely with Boeing, and FAA to ensure the safety of our own MD-11 fleet which we will discuss later on the call. Now let's review our performance in the quarter. In Q2, we provided excellent service to our customers, won new business in high-value verticals, and delivered strong results. High single-digit revenue growth, margin expansion, and high teens adjusted EPS growth. Quite remarkably, we did this while navigating multiple external headwinds, including the unexpected grounding of our MD-11 fleet, nationwide air traffic constraints, weakness in the industrial economy, and, of course, the impact of global trade policy changes. We're extremely pleased with our Q2 performance, especially in the face of these challenges. It's a direct effect of the rigor we have embedded into our culture over the past several years and the resulting transformation from network to auto Tricolor, and structural cost reductions, all enabled by data and technology. We're demonstrating the resilience and flexibility we have built into our network and our ongoing efforts to reduce structural costs are leading to significant improvements in profitability. We remain on track to spin off FedEx Freight on 06/01/2026 as a separately listed public company with the best value proposition in the industry. We recently appointed Marshall Witt as CFO of FedEx Freight. Marshall brings significant and external public company experience having served as a CFO of TD SYNNEX for the past twelve years. He also has deep industry and company expertise from his fifteen years previously working at FedEx Freight, primarily within the finance organization. FedEx Freight's entire executive leadership team is now in place and the team is moving quickly to prepare for the separation. Our conviction in the potential value that will be unlocked from this spin-off is stronger than ever. Turning to our consolidated Q2 results, revenue was up 7% year over year, driven by yield and volume strength across our US domestic package services. We achieved our targeted transformation-related savings and grew adjusted operating income by 17%. Federal Express Corporation or FEC delivered another quarter of strong operating leverage. On an 8% year-over-year increase in FEC revenue, we grew adjusted operating income by 24% and expanded adjusted operating margin by 100 basis points. Nearly half of our revenue growth was driven by B2B services, an important enabler of increased profitability. And this marked our fifth consecutive quarter of year-over-year adjusted operating margin expansion at FEC. In line with ongoing LTL industry trends, freight results remain pressured, driven primarily by lower volumes, partially offset by higher weight, and revenue per shipment. This is the result of our sustained focus on maintaining strong revenue quality. Given the strength of our Q2 results, and our updated assumptions for the second half, we are raising our adjusted EPS outlook to $17.80 to $19.00, well in any environment reflecting the progress of Execute for network, organizational and digital transformation efforts. This quarter truly showcased the importance of network integration and optimization, along with the power of a resilient industrial network. Both shifting global trade patterns and the unexpected grounding of our MD-11 fleet required significant changes to our network which we implemented swiftly and successfully. To that end, let me provide a quick update on how we flex our network during the quarter. From a global trade perspective, we reduced our Purple Tail Transpacific Asia bond capacity by about 25% year over year. We also decreased our third-party or whitetail capacity by nearly 35%. We continue to shift some of our capacity to the Asia to Europe lane, and importantly, these flights typically have an attractive B2B mix of over 75% with high load factors. When we grounded our MD-11 fleet, our focus was always on safety above all making sure our planes would be inspected and as safe as possible. We're also focused on helping our customers and providing technical support to the regulators. Of the 34 MD-11s we own, 25 were in operation at the time of the groundings. Our network planning team immediately implemented contingencies, prioritizing protecting our customer commitments, and stabilizing the network. We revised our number schedule quickly condensing our planning process to three days. And the actions we took included trucking more volume in the United States and stuff of flying, given 18 of our MD-11 flights were US domestic, shifting volume to other types of aircraft within our FedEx-owned fleet, adding capacity via third-party lift, and adjusting the timing of maintenance for our remaining fleet while staying compliant with regulatory guidelines. As a result, we were able to mitigate the operational and financial impacts of the MD-11 groundings, which ultimately pressured our Q2 adjusted operating income by about $25 million. For the final week of peak, we have additional contingencies in place. We lost about 4% of our global cargo capacity before mitigating actions during our busiest season. As a result, our cross-functional teams are working around the clock to minimize any service disruption. And looking beyond peak, we are extremely focused on maintaining high service levels with the benefit of more time to plan. We'll keep you posted on the expected timing of the MD-11 return to service. Network transformation remains a key priority for us. In support of this ongoing transformation in October, we named Cavalpreet as Executive Vice President of Planning, Engineering, and Transformation. Kowal is known for creating high-performance cultures. With nearly thirty years of institutional and industry expertise, a depth of operational and engineering knowledge will support further progress towards our global integrated network. For the past five years, she served as our Asia Pacific regional president. Kowal has a proven track record of relentlessly unlocking efficiencies and driving improved bottom-line results. And I am confident she will thrive in her new role. This global centralized planning and engineering marks an important shift in how we deploy our assets to reduce inefficiencies and increase profitability. Additionally, it provides enhanced oversight of our ongoing drive Tricolor, and network two dot o efforts. We now have about 24% of our eligible average daily volume flowing through 355 network2.o optimized facilities. Additionally, we have closed more than 150 facilities. We also continue to prioritize improving our operations and performance in Europe where the team is making good progress with significant opportunity ahead. We remain focused on driving growth in international and B2B segments which is helping to offset the headwinds created by global trade policy changes. Our European operations teams have done an outstanding job absorbing the growth through improvements in surface hub station, and on-road productivity supported by sustained improvement in net service levels. Data and technology play a foundational role in our transformation, and we are scaling AI adoption across the company to all our 500,000 plus employees. The reality is that AI is becoming an integral part of all business functions from the back office to the frontline. And we want to ensure that every employee is equipped to thrive in this new era. We recently launched a global AI program to help our teams innovate faster, serve customers better, and solve challenges more effectively than ever before. Importantly, we are customizing the curriculum to be directly relevant to each team member's specific role experience level, and existing AI fluency. We also continue to explore new approaches that leverage our real-world operational data platform. We are actively pursuing opportunities to bring digital solutions to the market, starting with logistics intelligence insights. Our recently announced strategic collaboration with ServiceNow marks an important milestone designed to make life easier for those who manage complex sourcing and procurement operations. Through this collaboration, we are giving businesses a single system that anticipates, adapts, and acts before they experience supply chain disruptions. And by integrating into ServiceNow procurement and supply chain solutions, we are beginning to monetize the proprietary insights that only FedEx can provide. Enterprises need access to real-world logistics intelligence to power their AI systems and workflows. And this partnership demonstrates market demand for what we have built. In closing, I want to recognize our team for delivering another strong quarter while navigating a very difficult operating environment. Our ability to grow adjusted earnings per share 19% year over year despite multiple headwinds speaks to the benefits of our transformation, and the strength of our industrial network. I look forward to sharing more information on our strategic initiatives and our medium-term financial outlook at our February Investor Day. I hope to see many of you there. Now over to you, Brie. Thank you, Raj. Brie Carere: First, I want to commend our commercial and operations teams for the job they are doing to support our customers during peak. Successfully picking up 25 million packages on Cyber Monday requires extensive collaboration and agility. Our Q2 performance is a function of momentum we have been building over the past year. Managing key performance indicators to ensure a focus on high-quality revenue growth. The team's hard work and strong execution in Q2 led to a 7% year-over-year revenue growth across the enterprise, BZ, BZ, BZ. At FEC, revenue was up 8% driven by 12% US domestic package revenue growth with strength across all services. 2%. Pressured by lower average daily shipments. We grew average daily domestic volume by 6%. Our recent B2B healthcare win supported robust growth in The United States priority and deferred express services. The onboarding of our new Amazon business, which is focused on large and heavyweight shipments, is also going well. As expected, international export volumes declined, driven again by lower volumes on the China to US lane. Raj mentioned how we're shifting some capacity to the Asia Europe lane, which along with strong growth on the intra-Asia lane is providing a partial offset. Additionally, we continued to grow U.S. International outbound revenue, which further offered another offset and, of course, it has high flow through. At FedEx Freight, weakness in the industrial economy again weighed on our average daily shipments, which were down 4%. This dynamic remains consistent with broader LTL industry trends. Importantly, our growing FedEx freight team positions us well for the eventual recovery. We now have more than 85% of our planned LTL sales force in place, and we expect to have the full team in place by June. And, of course, this is 400 salespeople. We are also very encouraged by our Q2 service quality metrics at freight. With claims and damage performance at some of the best levels in company history. And on-time service is at the highest level since Q3 of fiscal year 2021. Across the enterprise, our strong yield performance this quarter demonstrates the benefits of our efforts to prioritize high-value shipments, the strength of our value proposition, and the continued improvement in the pricing environment. At FEC, US domestic package yield was up over five driven by the strength across all services. International export package yield grew 3%, driven by revenue quality action, higher weight per shipment tied to the de minimis change, plus favorable currency. At FedEx Freight, revenue per shipment increased 2% driven by higher weight per shipment and revenue per 100 weight. Demonstrating our sustained commitment to maintaining industry-leading yield. Now let me share a few highlights on our commercial priorities. As part of our B2B focus, we have developed vertical strategies each with dedicated leadership, and resources in our targeted growth areas. That B2B contributed to nearly half our revenue growth this quarter, this strategy is working. It is helping us sustain and win new business in priority areas like healthcare and automotive. For example, this quarter, we won incremental B2B business from BMW. This win is a result of our global reliability and scale, our strong service for time-critical aftermarket and production deliveries, and our collaborative shipping tool. Further, technology companies are investing extraordinary amounts of CapEx in global data center infrastructure over the next several years. As such, we have formalized our work in creating a data center and infrastructure vertical team. This will better support existing customers and also help us acquire new high-tech customers. I am confident our dedicated sales and solutions team will enable FedEx leadership in the high-value market with significant growth ahead. We are very pleased with how our digital tools are supporting revenue growth while creating better outcomes for our customers and their customers. Wayfair is a great example of how we're using these tools to help our customers improve their shipment-related communication, and support their customer service teams. By using our premium integrated visibility tool, Wayfair is increasing their net promoter score reducing where is my order calls, otherwise known as WSMO calls, and decreasing outages with their tracking data. Turning to our revenue outlook for fiscal year 2026. We now expect 5% to 6% consolidated revenue growth this fiscal year supported by sustained U.S. Domestic yield and volume growth. We expect second-half international export ADV to remain pressured due to the global trade environment with a partial offset from yield. At FEC, the midpoint of our range now implies a 7% revenue growth year over year. Supported by peak trends and our revenue quality actions. Peak ADV is trending in line with our expectation of a modest year-over-year increase. Peak-related demand surcharges at FEC are achieving strong capture, and we expect a year-over-year increase in this surcharge revenue. In light of the recent MD-11 groundings, we have made targeted adjustments to protect network integrity and service reliability. On December 1, we implemented a fuel surcharge adjustment to partially mitigate the added cost required to maintaining high-quality service for our customers. And we expect strong cap of our general rate increase of 5.9%, which goes into effect next month. At FedEx Freight, due to the continued pressure on shipments, we now expect fiscal year 2026 revenue to be approximately flat to slightly down on a year-over-year basis. Yield growth will provide an offset to a low single-digit percentage decline in shipments. In closing, we have a great strategy in place to capture high-value growth with our unmatched industrial network. And our Q2 results demonstrate that this strategy is absolutely working. Our team is doing an exceptional job this peak season. Thank you, team, for delivering the Purple Promise during the holiday season and, of course, all year round. Now with that, I'll turn it over to John. John Dietrich: Thank you, Brie. I'll start by saying that I'm very proud of the team for executing on our strategies to drive margin expansion and operating income growth in Q2. And we achieved these results despite multiple headwinds. Like Raj and Brie, I'm also very grateful for the dedication of our team members who are delivering on the Purple Promise every day especially during this peak season. Turning to our financial results. On a consolidated basis, in the second quarter, we delivered $4.82 in adjusted earnings per share, up 19% year over year. Consolidated revenue grew by 7% which supported 60 basis points of adjusted margin expansion. And 17% adjusted operating income growth. As Brie mentioned, our yield management and strong commercial execution resulted in higher revenue growth from US domestic package services which was the primary driver of our year-over-year adjusted operating income improvement. We grew adjusted operating income by $231 million despite the headwind from global trade policy changes, higher variable incentive compensation accruals, weaker than expected LTL results, a $30 million headwind from the expiration of the postal service contract, and a $25 million impact from the grounding of our MD-11 fleet. At FEC, we grew adjusted operating income by $306 million up 24% and expanded adjusted operating margin by 100 basis points. This was driven by higher yields, continued cost reduction efforts, and increased U.S. Domestic package volume. These drivers were partially offset by higher wage and purchase transportation rates, and the headwinds I previously mentioned. At FedEx Freight, we continue to experience a challenging market environment consistent with trends across the LTL sector. FedEx Freight adjusted operating income declined by $70 million and adjusted operating margin contracted three percentage points. Q2 was weaker than we originally anticipated driven by lower average daily shipments. Additionally, we experienced a $25 million headwind to adjusted operating income as our sales force hiring and other separation expenses accelerated in Q2. That said, I'm encouraged that yields inflected positive in the quarter demonstrating FedEx Freight's disciplined strategy. We remain confident that FedEx Freight is well positioned to see strong incremental margins when demand returns. We remain committed to prudent capital allocation and maximizing stockholder returns. During the quarter, we opportunistically purchased nearly $300 million worth of stock which alongside our increased dividend payout demonstrates our commitment to returning cash to stockholders. We have $1.3 billion remaining under our 2024 stock repurchase authorization and subject to business and market conditions, we'll continue to evaluate repurchasing additional shares during the remainder of FY '26. CapEx year to date is $1.4 billion driven by continued investments to maintain our fleet of aircraft and vehicles network 2.o related facility enhancements, and hub modernization. We continue to target $4.5 billion in annual CapEx for FY '26. Given the healthy status of our pension plan, we are further reducing our expected pension cash contribution. We now anticipate making $275 million in voluntary pension contributions to our US qualified plans in fiscal 2026. Compared to our prior forecast of up to $400 million. Moving to our FY '26 adjusted EPS outlook. I want to note that our outlook is based on information known to us today in our business trends from the first half of the fiscal year. Though the global operating environment remains fluid, our year-to-date results demonstrate our operating leverage and proven ability to successfully drive premium revenue growth. As a result, we now expect to deliver adjusted EPS of $17.8 to $19. This compares to our prior range of $17.20 to $19 and reflects a range of potential scenarios for the back half of the year. At the midpoint of our range, we now anticipate a 7% increase in FEC revenue with adjusted op margin up slightly. Also at the midpoint, we expect revenue for FedEx Freight to be down slightly with margin down year over year. And our expected FY '26 effective tax rate remains approximately 25%. I also want to take a moment to walk through what is implied in our second-half outlook at the adjusted EPS midpoint of $18.4. We expect continued FEC revenue momentum on a year-over-year basis in the fiscal second half. We also expect to benefit from strong operational execution and ongoing efficiency initiatives. At the same time, we anticipate somewhat more limited flow through in the second half versus the first half due to several discrete items challenging comparability year over year. First, variable incentive compensation accruals. For context, in FY '25, we paid variable incentive compensation well below target levels. Given strong year-to-date performance, we have embedded a higher accrual for this performance-based pay in our revised outlook. This is important compensation that our people are earning due to their strong execution in a challenged environment. Second, given the sustained weak LTL industry trends, we've lowered our FedEx freight expectations for the second half of the year. And third, we expect meaningful headwinds in the second half from our MD-eleven groundings primarily in Q3. Taken together, these items represent roughly a $600 million year-over-year headwind to adjusted operating income in the second half. For the full year, they represent nearly a $900 million headwind. Our revised FY '26 adjusted operating income bridge shows the year-over-year elements embedded in our full-year outlook in one midpoint scenario. Resulting in adjusted operating income of $6.2 billion up $200 million versus our prior outlook. Of course, this is just one scenario and the assumptions at the midpoint may vary as the environment changes. In this scenario, for FEC volume-related revenue, net of variable cost, we now expect a $500 million tailwind. This marks a $100 million improvement compared to what we shared in September. This is driven largely by US domestic package services offset by a material headwind from reduced international export demand. With respect to FEC yield, we now expect a $3 billion tailwind. This marks a $700 million improvement compared to what we shared in September. And demonstrates our commitment to revenue quality and pricing traction. Our bridge includes partial offsets to these tailwinds, most remain unchanged from what we shared in September except for the FedEx freight headwind. We now expect a $300 million decline in adjusted operating income at FedEx Freight compared to the $100 million expectation we shared in September. Additionally, we added a bar to reflect the variable incentive compensation headwind I mentioned earlier. As I mentioned last quarter, embedded in our assumptions is the $1 billion in headwind to adjusted operating profit from the global trade environment offset by $1 billion in transformation-related savings. We're pleased with our year-to-date cost reduction progress and are on track to achieve the billion dollars savings target. With regard to Q3 adjusted EPS, we now anticipate adjusted EPS to be sequentially lower than Q2. For further context, we expect Q3 revenue to be essentially in line with Q2 with slight increases sequentially in operating expense due to increased peak demand and higher cost due to the MD-11 grounding. And as a reminder, we are lapping a third quarter that was unusually strong seasonally. We expect Q4 to be our strongest adjusted EPS quarter of this fiscal year these directional trends are consistent with the patterns we typically experience. Before turning to Q&A, I want to provide an update on our spin-off of FedEx Freight, which is on track for 06/01/2026. As previously mentioned, we submitted our confidential form 10 to the SEC as well as a request for a private letter ruling on the tax treatment of the transaction to the IRS. These were important milestones as we move toward the tax-efficient spin-off. We expect the form 10 which will provide more details on our go-forward strategy and financials, to be available to the public in January. As a further update, upon the spin-off of FedEx Freight, FedEx Corp intends to retain up to 19.9% of FedEx Freight's outstanding shares. To preserve the tax-free nature of the spin-off, we expect to monetize these shares within a timeframe permitted by the IRS. Additionally, FedEx Freight will be hosting an Investor Day in New York City on April 8. John Smith and his team look forward to unveiling for you FedEx Freight's forward-looking strategy to unlock significant stockholder value in the years ahead. And as Raj noted, also look forward to seeing you in Memphis at our FedEx Corporation Investor Day in February. With that, let's open it up for questions. Operator: We will now begin the question and answer session. To ask a question, if you are using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. Brandon Oglenski: Our first question today is from Brandon Oglenski with Barclays. Please go ahead. Hey, good evening everyone and thanks for taking the question. Johnny, you just covered a lot in guidance there, and I'm sure we'll have plenty of questions on it. But I guess longer term, it looks like you guys are definitely capturing incremental volume sharing your domestic US business, the package business that is. And seeing quite a bit of pricing upside too. So I wondered if you can talk to some of the dynamics there on both B2C and B2B and maybe if there's more to come on yield gains. Thank you. Brie Carere: Hi, Brandon. It's Brie. I'm happy to answer the question. So from a volume and a market share perspective, yes, we are very pleased with the profitable market share. And, again, from an FEC perspective, we were really pleased with the flow through in the quarter. The incremental margin expansion of 100 basis points at FEC is something we're really proud of. And that was driven by a couple of things. One, continued focus on B2B. We've been building this strategy for over a year. We've been very focused on our KPIs and our metrics within the sales organization. We made a pivot to our sales compensation model as well to make sure that that is balanced from a B2B and a B2C perspective. And then, also, as you heard, we were really really pleased with our overall rate discipline and the capture on surcharges. So our goal is to continue to push on this, continue to acquire new B2B market share, and we're really pleased with the underlying momentum. Jonathan Chappell: The next question is from Jonathan Chappell with Evercore ISI. Please go ahead. Thank you and good afternoon. Brie, I wanted to stick with that topic. The B2B over half the revenue growth in 2Q, I'm just wondering if there's any way to break down how much of that is completely new volume business, how much of that is related to kind of yield and some of the surcharges you're initiatives you're putting in? And should we think about that as being kind of similar magnitude of overall growth as you think about the guide for the back half of the year? Brie Carere: Jonathan. Great question. So overall, from a trend perspective, and I just want to be clear, was nearly half. It wasn't over half. Still very pleased with that metric. Let me be clear about that as well. But we expect that to be pretty consistent throughout the year from Q1 through Q4. To your question on acquisition, I will really say that the quarter had multiple things going. From a B2B perspective, yes, we did acquire new B2B. We also did a great job from a share of wallet, and I should note that also it was the strongest quarter that we had seen from a small business B2B perspective. So it really was the combination of all three combined with our revenue quality strategy. I don't think it was any one of those things. Richa Harnain: The next question is from Richa Harnain with Deutsche Bank. Please go ahead. Hey, thank you. So I wanted to ask about service, more specifically, the cost of service. Recently you shared plans regarding management's annual cash incentive and you added a service component to that, which you know, speaks to the significance you place on service as you work through your network two dot transformation. We would think that comes with additional cost. So, you know, how much do you estimate you're carrying today in terms of those additional costs? And what's worked into the outlook? And how should we think about those costs trickling off? I'm sure, for instance, Canada is being run much more efficiently now than when you started your integration efforts. So how long did it take for that to become fully efficient? Raj Subramaniam: Okay, Richa. Let me answer that question. In fact, let me answer two components of it. One, you started talking about Daniel incentive compensation. And to add to the points that were made earlier, in our prepared remarks, you know, as last year, our AIC payouts were well below target. This year, we have included the service component. And we anticipated several headwinds. And despite that, the team is doing an incredible job of performing in this quarter. So while it's a financial headwind for this for the year, it's absolutely the right thing to do. As our team is going above and beyond the call of duty and delivering on that purple promise. So that's on the AIC. Your question was really around the network two point o and the cost. Listen. First of all, we are not going to compromise on our service good services good quality. Good quality is actually less waste. And, you know, we are very pleased with the progress that we are making there. And, obviously, we have made very good progress in Canada as well. You can typically in the market roughly three to six months. Where we get the efficiency back, and that's all dialed in into our forecast both for the short and long term in network to auto. Thank you again for the question, Richa. Chris Wetherbee: The next question is from Chris Wetherbee with Wells Fargo. Please go ahead. Yes, hi. I wanted to ask a little bit about the LTL the freight business. As you think about some of the I guess, maybe we're curious about potential duplicative costs as you guys get prepared for the spin. Is there a sense of how much or maybe the incremental on the further decline from $100 million to $300 million on the EBIT decline comes from that? I guess, trying to get a sense that there are some temporary costs associated with the spin to stuff come out? Is it really more of a function of what's happening in the broader market? Obviously, are a little bit weaker. Yield's little bit under pressure, too. John Dietrich: Yeah. Thanks, Chris. I'll take that. As I mentioned in my remarks, we had $25 million in this quarter. We are anticipating of the $300 million, $100 million of that is the result of the separation cost that is a combination of the acceleration of the Salesforce hiring, which Brie mentioned is going extremely well. As well as IT and other costs, all in the spirit of accelerating, which we're seeing some of the results in the improved performance. So thank you. Brian Ossenbeck: The next question is from Brian Ossenbeck with JPMorgan. Please go ahead. Hey, good evening. Thanks for taking the question. Maybe first, John, just to clarify the costs you're talking about, are those separate from the spin-off costs which are included or excluded rather from the EPS guide. And then just wanted to hear a little bit more about the MD-11 process, getting them back up to speed. It seems like it'll take a little while, but it also seems like there's an incremental step up in terms of a headwind into the third fiscal quarter. Is that more or less because of the peak season? Think we're expecting that to tail off a little bit, but it seems like it's actually increasing. So additional thoughts around that would be helpful. Thank you. John Dietrich: Yeah. Thanks, Brian. I'll cover the first part. Those are separate costs that I identified than the $600 million. These were included in our reportable earnings. So with regard to the MD-11, yeah, our current outlook reflects that those aircraft will return to service in the fourth quarter. We do have some incremental costs in the third quarter, particularly in December, as I noted, $25 million was in November, but in December, we'll have significantly higher costs incurred on the MD-11 at the peak season and it's an expensive time of year to be getting outsourced lift to begin with, let alone, when you have fleet grounded. So I would say of the remaining $150 million a substantial part of that $175 million will be in the third quarter. Raj Subramaniam: And let me just add one more point on this thing, Brian. Our first priority and will always be safety above all. That's the principle which we have built. We are working hand in hand with the authorities on the protocol to get these aircraft back in flight. I was there with the MD-11 hangar just on Tuesday night. We have a phenomenal set of aircraft technicians who are working on it. And we, you know, we're waiting for the right protocol to get it released. And the timing that John talked about. Thank you. Scott Group: The next question is from Scott Group with Wolfe Research. Please go ahead. Hey, thanks. John, just want to follow-up on that $600 million headwind you talked about in the back half of the year. I think you gave there's three pieces to it. Any way you can sort of break down that $600 million into the three buckets you laid out and maybe how much of that's in Q3? And then maybe just along with that, like, I know you said earnings would be lower in Q3, but any sort of magnitude? I don't know. Maybe the way to think about it, you think earnings are flat, higher, lower year over year? Maybe that'll be helpful if you give a little bit more. Thank you. John Dietrich: Yeah. Thanks, Scott. So of the $900 million we incurred $300 million of in the first half of the year. To your question, for the second half of the year, we've embedded the remaining $600 million in our outlook with about $160 million of that due to expected continued softness in the LTL business. Up to a total of about $175 million for the MD-11 grounding. And the remainder for the majority of which we expect in Q3. About $265 million for increased variable compensation. Increased variable compensation. So with regard to your question on Q3, I'm not going to give Q3 guidance. But what I can tell you is that the Q3 adjusted EPS will be sequentially lower than Q2. We expect revenue sequentially to be essentially in line with Q2. Slight increases as well in operating expense on a sequential basis due to the increased peak demand, some of the increased volumes. Talking about, and higher cost due to the MD-11 grounding. I think an important reminder too is we'll be lapping a third quarter that was unusually strong seasonally. We had a lot of drive benefits in the third quarter of last year. We also expect Q4 to be our strongest adjusted EPS quarter for the fiscal year. And directionally, that's consistent with the patterns that we've typically experienced. Thomas Wadewitz: The next question is from Thomas Wadewitz with UBS. Please go ahead. Yes. Thank you. So wanted to get your sense of you know, I think what we've seen in the past over time is that FedEx can, as they're developing momentum a couple of quarters into margin improvement, they you know, you do tend to run into this refilling of the incentive comp bucket, and that, you know, that tends to be a headwind for a period of time. Seems like sometimes that, you know, that can be, like, the network two point o savings come in or I guess just how do we kind of think about that and then relative to just the progress on your FEC margin, which has been good for, I think you said five quarters in a row, and it seems like you're maybe pausing. Admittedly for a couple reasons. But just kind of how do we think about broader margin improvement? And is this kind of a couple quarter headwind on refilling the incentive comp, or is this something that you know, might carry into kinda, you know, next year as well? Raj Subramaniam: Well, thank you, Tom, for the question. Let me lead off, and if John wants to add to it, he can. As we are looking at FY '26, we're basically, you know, catching back up where we should have, you know, where comparing it to last year. I think, that is not a headwind that we'll have going forward into fiscal 2027. So that's that hopefully answers that question. The second part of it is we are very, very pleased with the underlying momentum that we have in our business. This is now working. The transformation that we have on our network transformation, our organizational transformation, our digital transformation, all are working. Our commercial teams are executing at a high level as you can see the results. So we are pleased with the underlying momentum and the flow through. There are certain things that are happening, you know, peculiarly for this, you know, there are incremental headwinds for this next three to six months. But on an ongoing basis, you know, we are very pleased with the ongoing momentum here. Jordan Alliger: The next question is from Jordan Alliger with Goldman Sachs. Please go ahead. Yes, hi. Just a question. The bridge to the midpoint is very helpful. I'm just sort of curious, though. You know, the $19 are at the high end. Is there a way you could frame up you know, what would push it? Is that mostly tied to volumes looking better, the LTL environment looking better, more acceleration in B2B? Like, how do we think about framing to the north of the midpoint? Thanks. John Dietrich: Yeah. Hey, Jordan. I guess my quick response is all of the above. We're not gonna really speculate as to all the factors that could go into it. You know, obviously, if revenue is stronger, and our cost environment is better than we're anticipating, you're gonna find yourself in the upward end of the range. So there are so many variables in placement. We feel comfortable with the assumptions we've laid out. That we're gonna be within the range. And focused on being as far into the range as we possibly can. Thank you. Bascome Majors: The next question is from Bascome Majors with Susquehanna. Please go ahead. Thanks for taking my questions. The domestic parcel growth rates have been really solid for several quarters in a row now. And as we get, you know, an indication from the guidance is that you expect that to continue. You know, as we get further in the next year and UPS potentially gets some competitive advantages back with the relationship with the postal service. And you know, potentially, maybe some contractual competition three years past the new Teamsters deal and some of the share shift that happened there. Do you think that you know, growth is something that we can maintain at a high level into fiscal 2027? Or could those potentially be headwinds that we should consider tapering the rate? Thank you. Brie Carere: Thanks for the question, Bascome. I do not believe that a relationship between our two competitors is a competitive threat. As we've talked about, our focus right now is high-value segments. B2B, home delivery, ground commercial. These are not services that could be serviced by the post office. And so if that does materialize, I do not see it as a threat to our primary growth strategy. We have a stronger value proposition and, we're very focused on continuing to take profitable market share. Ken Hoexter: The next question is from Ken Hoexter with Bank of America. Please go ahead. Hey, good afternoon. Just on the simplify that freight, John, I guess you've mentioned it a few times, the $300 million impact if you pull out the $100 million in ongoing costs, is that the leftover $200 million is that due to weakening demand? And I'm wondering what your view is of the competitive environment there. And then the $152 million in spin costs, is there anything you can maybe detail or break out what's going into that? Is that just continued? Is that ongoing cost? I just want to understand what's one-time, what's if any, and what is ongoing. Thanks. John Dietrich: Yeah. Ken, I'll start, with the numbers. And basically say the $200 million is the result of lower ADV and pressure on the business that's consistent with the LTL industry. Yeah. With regard to the $152 million those are spin-off preparation costs. So those that's why those are in our adjusted, and those are one-time costs. Thank you. Raj Subramaniam: And, again, if I just add one more point to it on a broader basis. Obviously, this is our performance is in line with our industry at this point, and this is cyclical in nature. It's very difficult to predict when the turn would come. However, we are beginning to see some level of industry consolidation especially in the truckload business. And it while it takes a while, to translate in the LTL, that process seems to have begun. Reed C.: The next question is from Reed C. with Stephens. Please go ahead. Hey, guys. Thanks for taking my question. I want to follow-up real quick on that last answer about consolidation. Does that mean consolidation of LTL carriers, you seem to think will be on the horizon? And then also, in that $200 million that you talked about, there is definitely some LTL industry softness. But I was wondering if any of that is from a understandable, rationalization of volume as you try to maybe take out some less profitable freight before spending that off on its own. Just if any of that is creating some noise in those shipment numbers. Thank you. Raj Subramaniam: I'll start off, and then John can answer the second part. And when I just want to make sure you the what I said was consolidation of capacity in the truckload business. And we can see a reduction of capacity starting to happen. And that will ultimately translate into benefit for the LTL sector. Though it may take a little time. John? John Dietrich: Yeah. And if I could talk, you know, we're actually seeing a bit of positive inflection in the yield, the first increase in yield that we've seen in several quarters. So we're encouraged by that and it also reflects the discipline on the pricing environment in our LTL business. J. Bruce Chan: The next question is from J. Bruce Chan with Stifel. Please go ahead. Hey, good evening, everyone. So kudos to your network planning folks. Certainly, plenty to keep them busy, including you know, what might be an imminent supreme court ruling on the tariffs. Wondering, you know, if we see a decision against the administration whether you view that as a tailwind to trade activity next calendar year, especially maybe in the context of your $1 billion headwind estimate? And I know that's a big question, but, you all are very plugged into Washington. So any perspective there would be very helpful. Raj Subramaniam: Well, Bruce, first of all, thank you for the comments on the network. I mean, these teams have done just an absolutely remarkable job and continue to do so. It's very, very early to answer any question regarding what might or might not happen on the tariff front. You know, any international volume increase, obviously, is beneficial. But we're not counting on any such thing in our outlook. Obviously, we are seeing significant shifts in trade and supply chain patterns and the fact that we have a scaled network in every part of the world stands to our advantage. Because we are able to market signals from the bottom up and we are able to act very quickly and with precision. And that's what is helping us very much. As far as how the environment on global trade changes and how that might impact our volumes at this point? It's very early to comment. And we will update you as the months go by here. Stephanie Moore: The next question is Stephanie Moore with Jefferies. Please go ahead. Hi, good evening. Thank you. I wanted to circle back on peak season. Maybe you could provide a little bit more color on what you've seen thus far. I know you said it's tracked in line, but I think there's been a lot of commentary at a high level that we've seen talking about a k-shape recovery and also some crushing just around the strength of peak season. You also commented a little bit about maybe small business or B2B. So any additional color you can provide on peak season would be great. Thanks. Brie Carere: Hi, Stephanie. It's Brie. So I am really pleased with how we're doing from a peak perspective, both from a planning as well as an execution. Right now, we are basically running right on our forecast for peak. What we had predicted was a mid-single-digit year-over-year growth on ADV. That is absolutely the case. We do have an extra operating day, and so when total volume, you're gonna see a high single-digit growth. From a peak period. From a forecast perspective, as I mentioned, it is basically in line. What we are seeing, however, especially early in peak, is actually our base and our small and medium businesses are slightly ahead of forecast. And our larger retailers are slightly below. Which obviously, from a revenue quality perspective, is a good thing from a result perspective. From a trend throughout peak, what we did see is that right after Black Friday, we had very strong. The second week was a little bit softer. But we have seen building momentum, in the last week. Time in transit is two days. Scott and John are doing a remarkable job of running the network. In addition to that, as you know, we have a market share leader in large package, and the team has done a brilliant job of keeping the port cities clear. They've pulled that volume into kind of the middle of the country. Bypassing some sorts and hubs, which is really important. So right now, we feel really good about peak. I do not want to underestimate that we have still six days to go. We have a lot of work to do. The team is ready as Raj just talked about. I cannot say enough about the incredible airline work, but the team does need to next week without the MD-11. We're very focused on that, and they have demonstrated that this is definitely gonna be a strong peak and could not be more pleased. Ariel Rosa: The next question is from Ariel Rosa with Citigroup. Please go ahead. Good evening. Nice job on the quarter here. Good to see the progress. I'm curious, in the slides, mentioned that you have 24% of volume flowing through Network two point zero automated facilities. I think I'm remembering that correctly. I just want to understand, what does that mean in terms of the margin profile for facilities or kind of the cost structure per package on those facilities versus legacy facilities? And how should we think about the timeline or the pace for that to continue to ramp and kind of going to Tom's question, does that just mean looking at kind of potentially structurally higher margins going forward? Thanks. John Dietrich: Yeah. Thanks, Ariel. And we intend to talk a lot more about this at our upcoming Investor Day. But we also have said previously with regard to network2.o benefits we expect to see the tangible results of that later in FY 2027. So I would say not a material impact financially, but great contribution from an operational efficiency standpoint that Brie was talking about earlier. Conor Cunningham: The next question is from Conor Cunningham with Melius Research. Please go ahead. Hi, everyone. I was just curious if you could talk a little bit about the healthcare and small and medium-sized business markets and then just talk about the opportunity set that you have from here. And then, Raj, you've talked a little bit in the past around just the tech pipeline or the potential there just given the CapEx that's being spent on from the AI players? Just curious on how FedEx kind of fits into that puzzle, if at all. Thank you. Brie Carere: Hi, Conor. It's Brie. So sure. I'll start first from a healthcare and an SMB perspective. As we mentioned several calls ago, we had a phenomenal build last year from a healthcare perspective. We have, I think, the best digital portfolio from a healthcare segment perspective. What do I mean by that? We can give our healthcare customers customized visibility, and they can set their own business rules for intervention and monitoring, which is really important. All customers are important, but patients obviously require that next level of service. As I just talked about some of the service performance, that means that we can actually intervene, reroute, and adjust for healthcare customers at a level of precision that I just believe is unmatched in the network. So we are continuing to onboard healthcare with that tool. We also rolled out a new quality program, which is really important to the pharma segment. That is sort of early days. That actually requires with each one of our pharma customers for us to work with their quality team build out a custom SOP, prove we can execute that to be able to win share of wallet, and that is going quite well. So that will continue, I believe, as the ability to take share. And then from there, we're continuing to expand our cold chain capabilities. Right now, we've got great cold chain in a reactive place. And what do I mean by that? Most of our customers are packing out their shipments. And so we use cold chain predominantly to intervene and ice something or refreeze something if there is a delay in the system. We're moving to end-to-end cold chain. So that's sort of the next wave. Great momentum here in The United States. We're taking these capabilities to Europe and to Asia. So think we've got a long runway. We've got between $9 and $10 billion of healthcare in our base. The market is $70 billion. So this is, you know, a long-term strategy, but the team continues to every quarter. From an SMB perspective, we are, I think, the easiest to do business in The United States. We just had the best quarter in SMB share and performance that I have seen in several years, a huge shout out to both our sales and marketing team. And, again, you know, we're gonna keep chipping away at this, and I believe our value proposition, we'll continue to take share. And then finally, on the data center, well, it's not as big an opportunity as healthcare healthcare is $70 billion. The data center market's probably between $7 and $8 billion. It is rapidly growing. I think global CapEx is predicted to be, like, $550 billion in a market that is moving that quickly, there is opportunity. This market expects precision. I don't know anybody who does precision better than we do. So, yes, we're winning now, but I think there's a long road ahead of more opportunity. David Vernon: The next question is from David Vernon with Bernstein. Please go ahead. Hey, good afternoon and thanks for taking the question. So John, coming back to the question on the Network two point zero stuff, right? I think you guys had mentioned before you were looking at 40% of the volume by the end of FY 2026 running in an integrated facility. I'm trying to sort of reconcile that with the idea that margins are just gonna be up a little. I have thought the idea was that when you get the integration, done, they're you're gonna be running at a higher level of productivity, that would flow through the margin. But I think I heard you maybe say that the financial impact maybe wasn't as great. I'm just trying to kinda get my head around that. Raj Subramaniam: Let me just give you the latest and greatest on what we on Network two point zero. As we said, we are right now 24% of the volume pre-peak the time next peak rolls on, we'll be around 65%. And that's the plan, and that's what we're executing against. The end of the day, when we are finished with it, we're targeting around a 30% footprint reduction by the end of fiscal year 2027. And those represent with along with one FedEx $2 billion in cost savings. And we see the majority of those savings skewed towards '27. I don't know, John, if you want anything more to add. John Dietrich: No. I would just add with regard to our transformational cost savings, targets for this year, there are elements of Network two point zero included in those. And that's what I want to elaborate further on at investor day. I don't want to say there's no savings. It's all part and parcel. We'll go into much more detail on our strategic initiatives, including network dot o when we see you in February. Jeff Kaufman: The next question is from Jeff Kaufman with Vertical Research. Please go ahead. Thank you very much. A lot of my questions have been answered, but let me ask one for John here. John, thank you for explaining the headwinds on the incremental second-half outlook. I want to ask about the non-GAAP add backs. You had a nice chart in the release showing about $720 million net this year. You know, $600 million from the spend, $310 million from business optimization. You still have about $450 million of that to go and two quarters to do it. Can you give us an idea of kind of how that's gonna weigh? Like, did you not do as much network two point o integration because of peak season this quarter and you're gonna do more in the fiscal third quarter. Kind of how should we think about the flow of those expenses? John Dietrich: Yeah. I think the overwhelming majority of them are gonna be tied to freight our freight separation. We also have, a much smaller portion with regard to the change in our calendar fiscal year. And, also, finally, much smaller portion with the ongoing business optimization that has been in play for the last couple of years. So but freight separation is the overwhelming majority. Operator: This concludes our question and answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks. Raj Subramaniam: Well, thank you, operator. Before we go, I want to acknowledge how proud and humbled we are by the Memphis Shelby County Airport Authority's decision today to rename the Memphis International Airport in honor of our founder, Frederick W. Smith. It's a fitting tribute to the man who launched FedEx a company that revolutionized the airport, the city of Memphis, the way the world works. We look forward to soon operating our largest hub out of Frederick W. Smith, International Airport. And finally, a big thank you to team FedEx for your outstanding work in Q2 and throughout this peak season with just one more week to go. Happy holidays, everyone. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Afternoon, and welcome to the BlackBerry third quarter fiscal year 2026 results conference call. My name is Nick, and I will be your conference moderator for today's call. During the presentation, all participants will be in a listen-only mode. We will be facilitating a brief question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing star, zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's call over to Martha Gonder, Director of Investor Relations, BlackBerry. Please go ahead, ma'am. Martha Gonder: Thank you, Nick. Good afternoon, everyone, and welcome to BlackBerry's third quarter fiscal year 2026 Earnings Conference Call. Joining me on today's call is BlackBerry's Chief Executive Officer, John Giamatteo, and Chief Financial Officer, Tim Foote. After I read our cautionary note regarding forward-looking statements, John will provide a business update and Tim will review the financial results. We will then open the call for a brief Q&A session. This call is available to the general public via call-in numbers and via web in the investor information section at blackberry.com. A replay will also be available on the blackberry.com website. Some of the statements we'll be making today constitute forward-looking statements and are made pursuant to the Safe Harbor provisions applicable to US and Canadian securities laws. We'll indicate forward-looking statements by using words such as expect, will, should, model, intend, believe, and similar expressions. Forward-looking statements are based on estimates and assumptions made by the company in light of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant. Many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. These factors include the risk factors that are discussed in the company's annual filings and MD&A. You should not place undue reliance on the company's forward-looking statements. Any forward-looking statements are made only as of today, and the company has no intention and undertakes no obligation to update or revise any of them, except as required by law. As is customary, during the call, John and Tim will reference non-GAAP in their summary of our quarterly results. For a reconciliation between our GAAP and non-GAAP numbers, please see the earnings press release published earlier today, which is available on the EDGAR, sedar+, and blackberry.com websites. And with that, let me now turn the call over to John. John Giamatteo: Thanks, Martha. And thanks to everyone for joining today's call. Q3 was another quarter of solid results adding to our track record of consistently meeting or beating guidance. Once again, we delivered across the three core metrics of revenue, profitability, and cash. Total company revenue came in at $141.8 million, above the high end of our guidance range. Q3 was another strong quarter of profitability, with adjusted EBITDA beating guidance, and it was also our third consecutive quarter of achieving GAAP profitability. Adjusted EBITDA for the total company was $28.7 million, which represents a 20% margin. GAAP net income improved by $24.2 million year over year to $13.7 million in Q3, and non-GAAP EPS exceeded guidance at positive 5¢. Conversion of profitability into cash was also strong. Operating cash flow was $17.9 million, up three times year over year, reflecting strong execution and disciplined cost management. Moving on to the results from our divisions. QNX delivered an all-time record for quarterly revenue at $68.7 million. This represents 10% year-over-year growth, beating expectations and finishing at the high end of the guidance range. Revenue was driven primarily by solid growth in royalties, with development seat and professional services revenue also growing both sequentially and year over year. During the quarter, we were excited to announce John Wall's appointment as president of QNX. In our opinion, nobody knows the embedded software space, both the technology and the market, quite like John. He has a very strong reputation with customers and partners and within the company. QNX has tremendous opportunities for multiyear growth, and driving our key initiatives to harness those opportunities will be John's number one priority moving forward. We saw more design win momentum in Q3, exceeding our internal targets, and the pipeline of design wins in Q4 continues to grow. This design win growth demonstrates the progress we're making with the initiatives to drive deeper into automotive and wider into the general embedded space. In the quarter, we secured a number of major automotive design wins with top European and Asian OEMs for ADAS and cockpit domains, all being developed on the latest version of the QNX platform SDP8. The number of customers using SDP8 continues to grow each quarter, with many leading OEMs now developing on it. We continue to see traction with other new products as well. We're securing new wins for both QNX Sound and QNX Cabin as OEMs recognize the strategic benefit of these products and time to market for reducing their bill of materials. This was the second quarter in a row that QNX Sound was chosen by a leading Chinese OEM, with this quarter's win being deployed in their luxury EV range. We've also secured another multiyear contract for our cloud-based QNX Cabin product with a top five global automaker based in Europe. A potential needle mover for ASP per vehicle is the vehicle software platform that we're co-developing with leading middleware provider, Vector. Development is progressing well, and the second early access version is scheduled for release by January. Early discussions with a number of OEMs are progressing, and we're targeting significantly higher pricing per vehicle compared to the core RTOS. Once we've secured some wins, we'll provide more color on the potential upside from this product. And finally, for auto, earlier this week, we announced that leading technology market analyst Counterpoint Research has determined that QNX is now powering more than 275 million vehicles on the road. This is a 20 million increase year over year and clearly demonstrates how significant a player we are in the space. In the non-automotive general embedded space, we continue to drive across our target verticals of industrial automation, medical instrumentation, and robotics. Let me provide some additional color on a couple of in-quarter wins with industrial automation companies. The first was with one of our longtime customers, Bentley, Nevada, an industry leader in online condition monitoring used for wind turbines and other applications, who has adopted SDP8. Additionally, two leading industrial automation OEMs, one North American and one European, have also adopted SDP8 to be used in a variety of their applications from robotics to manufacturing production. We also had an exciting development in the aerospace and defense vertical with NASA, who are adding QNX SDP8 to their supported operating systems. Earlier this year, we launched QNX General Embedded Development Platform, or GEDP as we call it, which is a subscription-based solution tailor-made for OEMs in GEM verticals. GEDP aims to accelerate the time to market for developers of embedded systems. And feedback from our customers so far has been extremely positive as they can leverage this platform for all supported versions of QNX across their portfolio. In the quarter, we saw a number of new design wins from customers for GEDP. So in summary, Q3 was another great quarter for QNX. In fact, an all-time record quarter. Moving now to secure communications. In Q3, we delivered revenue of $67 million, beating the top end of guidance and consensus. This was a great achievement for the division as we were faced with a U.S. government shutdown for a portion of the quarter. These strong results were in large part driven by better-than-expected renewals of UEM and navigation of the U.S. government shutdown. As a percentage of revenue for the last twelve months, UEM remains just over half of the secure communications totals, with SecuSmart at slightly more than ad hoc for the remainder. Key metrics for the division remain solid, with annual recurring revenue, or ARR, increasing $3 million sequentially to $216 million, and dollar-based net retention rate, or DBNRR, was at 92%. SecuSmart revenue grew sequentially but was lower year over year due to a tough compare as a result of the strong upgrade cycle from the German government in Q3 of the prior fiscal year. Ad hoc, despite having the most exposure of the three product groups to the U.S. federal government shutdown, delivered year-over-year and sequential revenue growth. Earlier this year, we achieved FedRAMP high certification, becoming the only critical events management solution provider to achieve this stringent level of security, directly enabling significant U.S. government expansions this quarter, including both the U.S. Navy and the Department of Justice. Ad hoc continues to grow outside of North America as well, securing new wins with the National University of Malaysia, Australia's Department of Foreign Affairs and Trade, and key UK energy infrastructure provider, Scottish and Southern Energy. For UEM, in addition to the continued trend for reduced customer churn, we had some significant expansion deals for this product in the quarter. One of these expansion deals included an eight-figure multiyear renewal with the Dutch government. Other strong renewals included the Scottish Police Service and the UK Ministry of Defense, as well as a number of financial services companies. As we mentioned in Q2, BlackBerry UEM became the first solution to be certified by Germany's Federal Office for Information Security, or BSI. And in Q3, we closed our first deal that was enabled by this very demanding security certification. Targeted investment in certifications like BSI for UEM and FedRAMP High for ad hoc are strengthening our portfolio's position at the heart of government secure communication strategies. Overall, this was another solid quarter of performance for our secure communications division. This has been a year of stabilization, with improvements in renewal rates and our ability to close new business. Finally, licensing revenue was $6.1 million, which was in line with expectations. And with that, let me now turn the call over to Tim for more color on our financials. Tim Foote: Thank you, John, and good afternoon, everyone. As John mentioned, we continue to drive strong, reliable results across the board that either meet or beat expectations. For the total company, revenue in the quarter topped the high end of the guidance range at $141.8 million. Total company adjusted gross margins remained relatively flat at 78% and increased three percentage points sequentially as a result of a favorable revenue mix and continued optimization of our cost of sales profile. Adjusted operating expenses were $85.4 million, up 7% year over year as we continue to deploy capital to strategically invest for growth in our QNX business. Total company adjusted EBITDA continues to be strong at 20% of revenue or $28.7 million. Adjusted net income for Q3 was $26.8 million, and GAAP net income was $13.7 million. This is the third quarter in a row that we've delivered positive GAAP net income and the seventh consecutive quarter of sequential improvement. In fact, Q3 had the strongest level of quarterly GAAP net income at any time since 2022, almost four years ago. Adjusted EPS for the quarter beat the top end of guidance at positive $0.05. QNX had its best-ever quarter of revenue, achieving $68.7 million, up 10% year over year and 9% sequentially. QNX gross margins expanded by one percentage point sequentially and were down two percentage points year over year to 84%. We did not have the P&L benefit of grant funding in Q3 from Canada's Strategic Innovation Fund like we did in the first quarters of the fiscal year. Even without this benefit, adjusted EBITDA was a very solid 24% of revenue and hit the top end of guidance at $16.4 million. Secure communications revenue exceeded the top end of guidance for the quarter at $67 million. Gross margin was one percentage point lower year over year and higher sequentially at 72% as a result of leverage and revenue mix. Better-than-expected revenue also drove leverage to the bottom line. Adjusted EBITDA in the quarter was $17.3 million, up 10 percentage points sequentially to a strong 26% margin. Finally, our licensing division delivered results in line with guidance. Revenue was $6.1 million and adjusted EBITDA of $5.3 million. Adjusted corporate operating costs, excluding amortization, came in at $10.3 million in Q3, broadly in line with guidance. This was another good quarter for conversion of profitability into cash. Operating cash flow was $17.9 million, a significant improvement from $3.4 million in Q2 and up over 200% year over year. Free cash flow was $17 million in the quarter. Our balance sheet remains solid with total cash and investments up $111 million year over year and $14 million to $377.5 million. We are deploying BlackBerry's capital to drive growth and shareholder value. We continue to invest organically, especially in our QNX business, supporting the key initiatives that John outlined earlier to go deeper into auto and wider into target verticals. Notwithstanding this increased investment, we continue to deliver positive operating and free cash flow, further increasing our net cash position. So in addition to organic investment, we are also continuing to take advantage of what we believe to be an undervalued share price and repurchase shares through our buyback program. In Q3, we ordered the repurchase of $5 million or 1.2 million shares at an average price per share of $4.13. A portion of these shares settled just after the quarter end on December 1, so it won't show in this quarter's 10-Q filing. All of the shares have been canceled, bringing the total number of shares bought back this fiscal year to 8.8 million. We have therefore more than offset potential dilution from our long-term incentive and employee share purchase plans. Turning now to financial outlook for the fourth fiscal quarter and the full fiscal year. We expect revenue for QNX in Q4 to be in the range of $71 to $77 million. Having just delivered an all-time record in Q3 for quarterly revenue, we expect to set another new record in Q4. For adjusted EBITDA, we expect QNX to be in the range of $17 to $23 million. We are maintaining our full-year revenue guidance at the midpoint while also narrowing the range to $262 to $266 million. For full-year adjusted EBITDA, we're raising the bottom end of our and the midpoint of our guidance such that the range is now $67 to $73 million. As QNX continues to deliver a combination of double-digit growth and strong profit margins. For secure communications, we're increasing the expected revenue for Q4, such that it's now in the range of $61 to $65 million, and for adjusted EBITDA to be between $11 and $15 million. For the third quarter in a row, we are raising our full-year revenue guidance for secure communications, such that the high end of the range we provided last quarter is now the low end of the range, such as now between $247 to $251 million. We're also raising our guidance for adjusted EBITDA, which is now expected to be between $47 and $51 million. For licensing, we reiterate our prior guidance for revenue to be approximately $6 million and adjusted EBITDA to be approximately $5 million per quarter. For the full fiscal year, we're holding revenue guidance at approximately $24 million and adjusted EBITDA at approximately $20 million. We continue to expect adjusted corporate OpEx, excluding amortization, to be approximately $40 million for the full fiscal year. At the total company level, we expect revenue for Q4 to be in the range of $138 to $148 million and adjusted EBITDA to be between $22 million and $32 million. For the full fiscal year 2026, we are raising the guidance midpoint for the total company revenue by $6 million, with a range now between $531 and $541 million, and raising guidance for adjusted EBITDA at the midpoint by $7.5 million to be in the range of $94 to $104 million. For context, when including Cylance, adjusted EBITDA from continuing and discontinued operations for the prior year was $39.3 million. For non-GAAP EPS, we expect it to be between $0.03 and $0.05 in the fourth quarter and to now be between $0.14 and $0.16 for the full fiscal year. Moving on to our cash flow outlook. We expect another sequential increase in operating cash flow for Q4, within the range of a solid $40 million to $45 million. This increase means that for the full fiscal year, we're again raising our guidance and expect to generate between $43 and $48 million in operating cash flow. This does not include the additional $38 million of cash from the second tranche of proceeds from the sale of Cylance to Arctic Wolf that we expect to receive in Q4, which is classified separately as cash flows from investing activities. Therefore, we expect to generate in excess of $80 million of cash in Q4, further strengthening our already solid balance sheet. With that, let me now turn the call back to John. John Giamatteo: Thanks for that, Tim. And before we move to Q&A, let me quickly summarize what has been another strong quarter for BlackBerry. We continue to consistently deliver reliable results across the three core metrics of revenue, profitability, and cash at both the company and divisional levels. QNX delivered its best-ever revenue quarter and a solid adjusted EBITDA of 24%, all while continuing to invest for long-term growth. In addition to these strong financial results, QNX also hit the milestone of powering 275 million vehicles on the road. Secure communications exceeded revenue expectations and demonstrated significant leverage in the model with a 26% adjusted EBITDA margin. To put this in perspective, this time last year, the cybersecurity division had an EBITDA margin of only 9%. Overall, both divisions helped drive another quarter of GAAP profitability and cash generation. So with that, let's now move to Q&A. And Nick, if you could please open up the lines. Operator: Thank you. We will now begin the question and answer session. One on your telephone keypad. Please make sure your line is unmuted. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We request that you limit yourself to one question and one follow-up. And the first question today will come from Kingsley Crane with Canaccord Genuity. Please go ahead. Kingsley Crane: Hi. Thanks, and congrats on a really nice quarter. So we've talked about the GEM opportunity naturally requiring more investment in the near term as you work towards gaining critical mass in key end markets. And, again, really nice wins in the quarter in that segment. But as you think about fiscal 2027, where do you think you need to invest more within that space? Like, what's working? What needs more help? Thanks. John Giamatteo: Yeah, Kingsley. So I think on that one, I think from a product perspective, we're in really good shape. I think the GEDP platform that we talked about is a really good leverage point for us to bring value to our customers. So I think you'll probably see us continue to invest in go-to-market activities. More feet on the street. It's a broader market. Partnerships with distributors and other technology providers that maybe can help bring us to market a little bit faster. So these are probably the areas that we'll continue to invest in as we go into the next fiscal year. Kingsley Crane: Okay. Great. And then the follow-up would be on this luxury China EV win. We're really encouraged by that. What ultimately allowed you to win that deal? Do you think it was cost savings, weight savings, superior software functionality, and then you know, to what extent could this be a blueprint for more success in China? Thanks. John Giamatteo: I think it's honestly, I think it's all of the above. I think it's cost savings, it's weight savings, it's the performance of the product itself. I would say the Chinese market tends to be very price sensitive. So I think the amount of money that they can save leveraging our technology and what that does to their overall BOM is a compelling value proposition. So that probably swayed a little bit more. But the broader value proposition itself is very, very sound. Pardon the pun. But I think the actual savings is probably the lead one on that. Operator: And the next question will come from Luke Junk with Baird. Please go ahead. Hi, good afternoon. Thanks for taking the question. Luke Junk: John, maybe if we could start just in terms of getting to the vehicle award, just if you could talk about the gates you're advancing through right now to get you closer to that outcome? And then as we look forward a couple of weeks to CES, should we expect to hear more about this at CES as well? John Giamatteo: Yes. Yes, Luke, great question. I'll tell you, it's an area that has got a lot of focus right now inside the company. And from a technology perspective, bringing QNX SDP8, the middleware, together and the integration, the connective tissue, making that a seamless kind of product we could bring to our customers. It's a lot of collaboration with our partner, Vector, to really bring that. So I think the product itself is really sound. It's just a matter of the integration with our partner and then bringing that to the marketplace. So a lot of good progress that's moving in this regard. But we're pleased with the progress, and you'll hear more about it. Luke Junk: Okay. And then wanted to your answer about the luxury China EV win. In terms of the cost sensitivity, I mean, certainly that's a well-known factor in the China market. And I'm just wondering in terms of system design or things that are sort of you can bring to the table from a QNX standpoint to put BOM into a more compelling position? Like just what are some of the key areas that you can enable for a Chinese OEM in that respect, John? Thank you. John Giamatteo: Yes. I think, certainly, the cost savings and the time to market capabilities are something that's compelling. But one thing we do think is gonna start getting more traction in the Chinese market is safety secure safety solutions. I think, in the past, they've kind of used some basic technologies. And because they've had some high-profile safety issues, we're excited about the opportunities that could be there for us, for us SDP8 and bringing kind of the core RTOS to the table. Sometimes you get in with maybe sound or cabin or different things like that, and maybe drag along kind of the core product in some ways. But it's I think it's a testament to the broad portfolio of the platform. You might lead with sound and get your foot in the door and then bring the RTOS along. More times than not, it's the other way around. Because that's the meat and potatoes from the operating system level. So we're working every single angle in the Chinese market, but I think they are a little more acutely aware and concerned with the need for having an SDV platform that has safety certifications. Probably more so than they had been in the past. Operator: The next question will come from Todd Coupland with CIBC. Please go ahead. Great. Thanks. Good evening, everyone. Todd Coupland: I wanted to start with QNX. 15% growth last quarter, 10% this quarter guide implies 15% growth. How should we think about the trend in this business, given that fluctuating growth rate as we're thinking about fiscal 2027? Thanks a lot. Tim Foote: Yeah. Great question, Todd. So ultimately, we'll give the guide for fiscal 2027 at the end of Q4. So in ninety days' time. Hey. Look. Double-digit growth has been very solid, and ultimately, we're gonna be giving the backlog number as well in Q4, which will be a good lead indicator of where we're moving. On the backlog, we're actually feeling pretty good as John mentioned in his prepared remarks that after a difficult start, we've actually accelerated pretty well and we've got some really good momentum now as we head into Q4. And conversion of that backlog into revenue, which will start starting FY '27, is gonna really drive that business forward. And what we saw in Q3 was strong royalties and royalties driven by some of these new programs that we've been winning over the last couple of years now starting to come online. So, yeah, it's an exciting time, and some of the growth accelerators such as going up the stack, things like sound and cabin that we've mentioned. And we're starting to see traction from those two. So I'm gonna put a pin in it. And say come back in ninety days, and we'll give you more information on next year. But we feel very positive about the momentum that we've got in this business. Todd Coupland: Great. Thanks, Tim. And then just on SecureCom, you know, the business is trending, you know, probably about half of the decline rates you've been projecting the last couple quarters. Is this the new normal? And, again, similar type of mindset as we think about fiscal 2027. Could this business actually turn into a growth segment with defense spending trending positive and the other segments doing better? So just talk about how we should think about that. Thanks. John Giamatteo: Great. Great question, Todd. That's a really good question. We're actually, you know, right now, as you would imagine, just modeling out next year, taking a look at the pipeline and do tend to be a little lumpy, you know, sometimes in this space. So, you know, I don't think one quarter necessarily translates into but I will say we have a really strong pipeline within SecureComps, one of the stronger pipelines that we've had in a long time. So that bodes well for us probably like Tim said, before. It's next quarter, we'll give guidance for the next fiscal year. But it was a solid quarter. Honest with you, we were happy we navigated the US government shutdown the way that we did. We're a little spooked by that as the quarter was going on, but I think that turned out to be a pretty good result for us in the end. And now it's just a matter of converting the pipeline that we've got in front of us to tee up a really solid fiscal year '27. So we'll come back to you with more insights into that, but certainly pleased with the way that business is performing. Todd Coupland: Great. Thanks for the color. Operator: The next question will come from Trip Chowdhry with Global Equities Research. Please go ahead. Trip Chowdhry: Thank you. Congratulations on a very solid quarter. I have two quick questions. The first regarding the government shutdown, do you think now everything is normal? Or do you think, like, most more than half of the quarter was in shutdown? You think the remaining half made up of the first half? That's the first question. Second question, very refreshing to hear your win in the robotic space. I was wondering if you can put some more color about what kind of robots may be using your technology and any color on the demand side also? That's all for me. John Giamatteo: Thanks, Trip. I'll cover a little bit on government. And we'll cover a little bit on robotics. Trip, just give you some color on it. But, you know, as far as government's concerned, it's been a really interesting year. Like, you know, we started the year with Liberation Day and the uncertainty that that brought. That in some ways created some opportunities and also created some headwinds. We also had in the government space the, you know, the continuing resolutions at one point, then a full-on shutdown at one point. I think the good thing I think what we learned from this experience, remember, Doge was another one. How much how was that gonna impact our business? But one of the learnings that I think we took away from the last six or nine months on the secure comp side is what we do in terms of mission-critical critical events management, mission-critical you know, SecuSuite, encrypted voice data and video. Mission-critical, you know, UEM and, the security that that provides. These mission-critical when it comes time for you know, to take a look at what they're gonna cut, what they're we found they're a little bit hesitant to really take a hatchet to mission-critical types of software solutions. So we were a little concerned about the timing with the in Q3 with, with the US federal government in particular because everything shut down. Their procurements then had a backlog of contracts that they had to process. But I think we were fortunate enough to kinda work through that where it really impact the quarter as much as we initially thought it was gonna be. So there's a lot of different dynamics with the governments. But I have to say, I think we've been successfully navigating a lot of the waves there in some of the changes that's gone on. We'll come back to you, Trip, with more details on robotics and medical instrumentation and industrial automation and the kind give you more colors on the wins. Sometimes we're a little bit some of our customers are a little hesitant to share too much information about the use case and the design win. There's, you know, for confidentiality and different reasons. But, you know, in the robotics space, when we think of humanoids robotics, we think of, you know, the more technology that's going into this vertical. There's more compute power. There's more performance that's required. And that's a sweet spot for QNX. So regardless of the type of robotics, if you need high compute and you need high performance, SDP8 is the solution for them to look at. So we'll bring that a little bit more to life, I think, in the future. Actually, we'll have some demos at the booth where we at CES this year to show it a little bit more. But hopefully, that gives you a little bit more color on robotics and we'll be sure to share some more in the future. Trip Chowdhry: Yes. That's perfect. Thank you so much, and happy holidays. John Giamatteo: Thanks, Trip. Thanks, Trip. Operator: The next question will come from Paul Treiber with RBC Capital Markets. Please go ahead. Paul Treiber: Thanks for taking the questions and good afternoon. You made an interesting comment on the pricing opportunity for the vehicle software platform. You just speak to what you see as a potential ROI or the cost savings that the automakers would benefit from that? And then also, could you speak to the economic, like maybe the split between QNX and Vector or maybe your ability to capture a disproportionate share of the pricing there? Tim Foote: Yeah. Sure. Hi, Paul. So ultimately, what we're providing here and remember this, this has been a pull from the OEMs have come to us and asked if we can help in this area because if we look back over the last couple of years, the OEMs have been very ambitious in terms of trying to write all the code from the OS up to the application layer and really found that to be quite a challenge. So in terms of cost savings, having us do it much more efficiently and actually being able to produce a product that they can get into market is a big advantage for them. We're taking off their hands, off their plate, a load of software integration currently they have a heck of a lot of internal resource working on. So they can divert that resource to the application layer, which is where they're really going to differentiate their brand from other players. So, yeah, we're doing a lot of heavy lifting for them and like I say, this is a pull come to us and say, can you do this for us? In terms of the economics, we're not gonna give, like, the absolute, like, details here, but clearly a portion of the pie is coming from Vector. A significant portion I should add is coming from us, and there will be a split now. We are going to be the billing entities, so we'll take the revenue and the vector portion would obviously be passed on through cost of sales. Paul Treiber: And the second question is just on the Canadian federal government. The budget was out in November and there's a number of new investment initiatives. Just remind us again of the size of your Secure Commerce business for the Canadian government? And then what do you see as the opportunity and what's the strategy to try to expand further with the Canadian government? John Giamatteo: Yes, yes. Great question, Paul. A lot of actually, momentum that we have right now with the Canadian government, especially their, you know, by Canada kind of solution, looking to do more with Canadian providers. We do have a comprehensive relationship with them today around UEM. They use that widely throughout the organization. And we're having really good productive discussions with them about SecuSmart and Ad Hoc and other parts of the portfolio as well. So stay tuned. We've got a lot of activity going on. We've got a multiyear agreement with them today. That's very UEM centric. And as we look to try to expand into SecuSmart, SecuSuite product and the ad hoc portfolio, we're finding, you know, some really good discussions with them right now, particularly as they ramp up their spending on defense. So critical events management is something that is widely deployed in the entire US government. We're hoping we could bring that same value proposition to the Canadian government as they ramp up their defense spending over the next few years. So, we'll keep you posted on it, but be rest assured, there's a lot of activity going on right now with the Canadian government. Operator: This will conclude our question and answer session. I would like to turn the call back over to John Giamatteo, CEO of BlackBerry, for closing remarks. John Giamatteo: Terrific. Thanks, Nick. Before we end the call, I just wanted to flag that we'll be starting off the New Year at CES in Las Vegas. We'll be hosting an investor briefing on January 7 at 11 AM Pacific Time to discuss some of the highlights from the show. You can access the live webcast in the investor information section at blackberry.com. And if you're at the event, please stop by to see some of the exciting new exhibits that our QNX team will have on show. So thanks, everyone, for joining the call today. And I'd like to wish all of you a happy and safe holiday season. See you next time. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the KB Home 2025 Fourth Quarter Conference Call. All participants are in a listen-only mode. Following the company's opening remarks, we will open the lines for questions. This conference call is being recorded, and a replay will be accessible on the KB Home website until January 18, 2026. I will now turn the call over to Jill Peters, Senior Vice President, Investor Relations. Thank you, Jill. You may now begin. Jill Peters: Good afternoon, everyone, and thank you for joining us today to review our results for the fourth quarter and full year of fiscal 2025. On the call are Jeff Mezger, Chairman and Chief Executive Officer; Rob McGibney, President and Chief Operating Officer; Rob Dillard, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to various factors, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, an explanation and/or reconciliation of the non-GAAP measures of adjusted housing gross profit margin, adjusted net income, and adjusted diluted earnings per share, as well as any other non-GAAP measure referenced during today's discussion, to its most directly comparable GAAP measure, can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com. And finally, please note all figures are based on our fiscal November 30 year-end, and all comparisons are on a year-over-year basis unless otherwise stated. And with that, here is Jeff Mezger. Jeff Mezger: Thank you, Jill, and good afternoon, everyone. We are pleased to share our results for our 2025 fourth quarter and fiscal year. It was a year that tested consumers' resilience as they faced various economic and geopolitical issues. Yet through it all, they continue to demonstrate a desire to own a home. We helped nearly 13,000 individuals and families achieve the dream of homeownership while maintaining our industry-leading customer satisfaction ratings. With total revenues of over $6.2 billion and nearly $430 million in net income, we produced a 10% increase in our book value per share. We further strengthened our financial flexibility with the recent expansion of our new $1.2 billion revolving credit facility and the extension of our term loan. Through our balanced approach to capital allocation, we rewarded our shareholders with a healthy return of capital totaling more than $600 million in fiscal 2025, including dividends. We continue to lead our peer group in the cumulative amount of capital returned to our shareholders over the past four and a half years as a percentage of market capitalization. In 2025, we repurchased 13% of our outstanding shares at an average price below our current book value. We believe this is an excellent use of our cash and accretive to both our earnings and book value per share. As for the details of our fourth quarter results, we produced total revenues of just under $1.7 billion and adjusted diluted earnings per share of $1.92. We returned about $115 million in cash to our shareholders, including the repurchase of 1.6 million shares. We remain optimistic about the housing market, as we believe favorable demographics will be a key driver supporting higher demand over time, together with the structural undersupply of homes. Near-term conditions continue to reflect underlying demand for homes supported by population household formation, job, and wage growth. However, low consumer confidence, affordability concerns, and elevated mortgage rates continue to constrain the pool of actionable buyers. Consumers are demonstrating their interest in buying a home, reflected in our website visits, leads, and traffic to our communities. They're just taking much longer to make their home buying decisions. We produced 2,414 net orders in the fourth quarter, maintaining a consistent approach to pricing by offering transparent and affordable prices rather than inflated prices masked by heavy incentives. This remains the foundation of our competitive position, as it allows us to advertise our compelling pricing directly on our website. It is also how we build trust with our customers. We were disciplined in not taking overly aggressive steps to capture sales during the seasonally slower fourth quarter. By doing so, we believe we are positioned to achieve better margins on these sales in our 2026 first quarter than we would otherwise have produced. Before I turn the call over to Rob McGibney, I will make a comment on the approach we are taking with respect to our guidance for fiscal 2026. As detailed in today's press release, we are providing our outlook for fiscal 2026 deliveries and housing revenues. We expect to have greater visibility on both operating and gross margins as we get into the spring selling season and plan to provide our projections for these metrics when we report our 2026 first quarter results in March. Let me pause here for a moment and ask Rob to provide more details on our sales, as well as an operational update. Rob McGibney: Thank you, Jeff. Consistent with our operational success throughout fiscal 2025, our divisions continued to execute well in the fourth quarter, maintaining high customer satisfaction levels, further improving build times, lowering direct costs, and balancing pace and price to optimize each asset. Traffic in our communities was steady during the fourth quarter, and at 18%, our cancellation rate was stable, supporting net orders at an average absorption pace of three per month per community. This pace was in line with our average fourth-quarter pace of the past two years. As we look ahead to the full year 2026, although we begin the year with a lower backlog than we have carried in some time, the fundamentals of our operating model and the improvements we have made over the last few years provide a clear and, we believe, achievable path to meeting our delivery objectives. Our beginning backlog represents 27% of the midpoint of our full-year delivery target, compared to 34% at the start of 2025. While this is a smaller starting position, it must be viewed in the context of our significantly faster build times and our expectation of expanding our community count with new community openings. We have become more efficient in building homes, with build times improving roughly 20% year over year in the fourth quarter. We achieved our company-wide target of 120 days or better from home start to completion on built-to-order homes during the quarter, with several divisions averaging fewer than 100 days in November. Our faster build times allow us to extend sales much deeper into the year and still achieve delivery of the home. At quarter-end, we had 271 active communities, up 5% as compared to the prior year period. In our 2026 first quarter, we are planning to open between 35 and 40 new communities and expect to hit a high watermark for community count during our second quarter, at the height of the spring selling season. With this broader base of communities, we are very well positioned to capture the typical seasonal lift in demand during this period. Our new communities typically generate strong early demand, benefiting from the newness and excitement of grand openings and supported by our disciplined community opening process. Importantly, these new communities are expected to generate favorable gross margins supported by a sales mix that is predominantly built to order. As we have discussed, we are focused on returning our built-to-order homes to a higher percentage of our total deliveries, from 57% in Q4 2025 to our historical 70% or higher. While we always have some inventory homes available for those buyers that need a quicker move-in date, the superior margins we generate on BTO homes will allow us to realize greater value from our communities. Our gross margins on BTO homes are trending three to five percentage points higher than on inventory sales, and we began to see a shift toward more BTO sales during November, an encouraging trend that has continued into December. We remain focused on selling our BTO homes, and as these sales become deliveries over the course of fiscal 2026, we expect to achieve a favorable trajectory in our gross margins. We are aligning our starts with our BTO sales and started 1,827 homes in our fourth quarter. Our divisions, together with our national purchasing team, are doing an outstanding job in driving costs lower. These efforts, combined with our value engineering and studio simplification initiatives, contributed to direct costs that were about 4% lower sequentially and 6% lower year over year on our homes started during the fourth quarter, helping to offset the impact of higher land costs. Before I wrap up, I will review the credit profile of our buyers who finance their mortgage through our joint venture, KBHS Home Loans. Our capture rate was high, with 80% of our buyers who financed their homes in the fourth quarter using KBHS. Higher capture rates help us manage our backlog more effectively and provide more certainty in closing dates, which benefits our company as well as our buyers. In addition, we see higher customer satisfaction levels from buyers who use our joint venture versus other lenders. The average cash down payment moved up slightly, both sequentially and year over year, to 17%, equating to nearly $80,000. On average, the household income of customers who use KBHS was about $130,000, and they had a FICO score of 743. Even with over one-half of our customers purchasing their first home, we are still attracting buyers with strong credit profiles who can qualify for their mortgage while making a significant down payment or paying in cash. 10% of our deliveries in the fourth quarter were to all-cash buyers. In conclusion, we remain firmly committed to delivering high customer satisfaction and strong operational execution to drive our results. We believe our portfolio of communities, products, and pricing are well aligned with the needs of today's buyers, and with improved build times, an expanded community footprint, and stronger operational consistency, we are confident in our ability to achieve our fiscal 2026 delivery objectives. With that, I will turn the call back over to Jeff. Jeff Mezger: Thanks, Rob. With respect to our lot position, we owned or controlled roughly 65,000 lots at year-end, 43% of which were controlled. Our footprint is focused on markets that we believe are positioned for long-term economic and demographic growth. As our newest divisions in Seattle, Boise, and Charlotte continue to mature, their contribution to our results is becoming more meaningful. In addition, we see an opportunity to expand our share in all of our core markets over time. We remain selective with our land positions across our business, and as part of our regular review of land purchases in our pipeline, we canceled contracts to purchase approximately 3,500 lots, representing about 20 communities, in the fourth quarter, which no longer met our underwriting criteria. Our lot pipeline is healthy, providing us with the flexibility to be patient in adding to our controlled lot count until we find opportunities with better terms that will provide higher returns. One of the key benefits of our build-to-order approach is that it provides visibility into the need and timing for replacement communities based on each community's sales pace, local market dynamics, and expected sellout date, which is beneficial in our effort to be capital efficient. We're also developing lots in smaller phases wherever possible and balancing development with our starts pace to manage our inventory of finished lots. Our business generates healthy cash flow, and we remain consistent in our balanced approach toward allocating it. We are achieving our priorities of positioning our business for future growth, managing our leverage within our targeted range, and rewarding our shareholders through share repurchases and our quarterly cash dividend. We are maintaining our land investments at a level that will support our current growth projections, investing $665 million in land acquisition and development in the fourth quarter, with about two-thirds of our investment going toward developing the land we already own. With nearly $430 million in net income generated for the year, lower land acquisition and development spend, and the improvement in our build times unlocking cash, we returned more than $600 million in capital to our shareholders in fiscal 2025. This includes approximately $540 million in share repurchases at an average price of $57.37 per share. At these levels, the repurchases are an excellent use of capital and will enhance both our future earnings per share and our return on equity. In closing, I want to thank the entire KB Home team for their commitment to serving our homebuyers. We believe we have the most talented and experienced operators in the business, who are driven to produce results. Our divisions executed well this past year despite challenging market conditions and controlled the controllable, achieving a significant reduction in build times, lowering direct costs, and opening a meaningful number of new communities. In fiscal 2025, we returned the highest level of capital to our shareholders in a single year in our company's history. We plan to continue our share repurchase program in fiscal 2026, with between $50 million and $100 million of repurchases planned for our first quarter. As we begin the new year, we do so with a balance sheet that is stronger than it has ever been and with added financial flexibility. We believe we are well positioned for the spring selling season with our expected community count growth and have confidence that our renewed focus on built-to-order sales will generate higher margins as the year progresses. Our objectives for fiscal 2026 are centered on continuing to deliver outstanding service to our homebuyers, driving higher shareholder value, and we look forward to updating you as the year unfolds. Now I will turn the call over to Rob Dillard for the financial review. Rob Dillard: Thanks, Jeff. I'm pleased to report on the fourth quarter and full year 2025 results. As Jeff and Rob said, we continue to manage the business with discipline, with a focus on optimizing every asset by pricing to the market, maintaining a healthy pace, and delivering our built-to-order advantage. This strategy has led to relatively consistent results in a constrained market in 2025. In 2025, we exceeded the midpoint of our guidance range, with total revenues of $1.69 billion and housing revenues of $1.68 billion, a 15% decrease. We delivered 3,619 homes, which exceeded the midpoint of our implied guidance, largely due to reduced average build times in our 268 average communities for the quarter. The average selling price declined 7% to $466,000 due to regional and product mix and general market conditions. Housing gross profit margin was 17%, and adjusted housing gross profit margin, which excluded $13.7 million of inventory-related charges, was 17.8%. Adjusted housing gross profit margin was 310 basis points lower due to pricing pressure, negative operating leverage, higher relative land costs, regional mix, and product mix, which was pronounced due to the age and price of incremental volume versus guidance. This margin pressure was again partially offset by lower direct construction costs per unit. SG&A expense as a percent of housing revenues was 10%. The SG&A expense ratio was 9.1% when adjusted for the $16 million of accelerated equity-based compensation expense. This expense reflects a change in policy for the vesting of certain long-term incentive awards. This affected only the timing of expense recognition, and there was not an increase in the total compensation cost of these rewards. Homebuilding operating income for the fourth quarter decreased to $117 million, or 6.9% of homebuilding revenues, and homebuilding operating income excluding the inventory-related charges and the accelerated equity-based compensation expense was $147 million, or 8.7% of homebuilding revenues. Net income was $102 million, or $1.55 per diluted share, benefiting from a 13% reduction in our weighted average diluted shares outstanding. Adjusted net income, which excludes the inventory-related charges, the accelerated equity-based compensation expense, and approximately $1 million for early extinguishment of debt, was $126 million, or $1.92 per diluted share. For the full year 2025, we delivered 12,902 homes and generated $6.24 billion of total revenues. Housing revenues were down 10% to $6.21 billion. Diluted earnings per share was $6.15, and book value per share increased 10% to $61.75. Turning now to our guidance. Our guidance for the first quarter and full year 2026 is based on our belief that we're well positioned for the present operating environment through our strategy of providing customers the best buying experience and the best value by delivering a personalized built-to-order home. In 2026, we expect to generate housing revenues between $1.05 billion and $1.15 billion based on expected deliveries of between 2,300 and 2,500 homes. Housing gross profit margin, assuming no inventory-related charges, is expected to be between 15.4% and 16% for 2026. Margins are expected to be affected primarily by negative operating leverage and typical seasonality in the quarter, but we also expect continued margin trend impacts of pricing pressure and higher lot costs, as well as some regional mix. We expect to continue to partially offset this margin pressure with lower direct construction costs per unit. We expect margins to improve throughout 2026 due to positive operating leverage and typical seasonality, as well as our strategy to shift the mix of homes sold and delivered to favorable built-to-order homes. We believe that we are well positioned to execute this mix shift in 2026, as we start the year with 271 communities, and we expect a considerable number of new community openings in the first half of 2026. The first quarter 2026 SG&A ratio is expected to be between 12.2% and 12.8%, due mainly to expected reduced operating leverage despite cost controls. This is our highest seasonal SG&A quarter, compared to 11% in 2025. We had solid results reducing both fixed costs and direct costs throughout 2025, and we expect this to continue in 2026. Our effective tax rate for the first quarter is expected to be approximately 19%. It's notable that we expect the tax rate to be lower only in 2026. We expect the tax rate to increase and end the year with an average of between 24% and 26% due to reduced energy credits, given the end of 45L credits in 2026. For the full year 2026, we expect housing revenues of between $5.1 billion and $6.1 billion based on between 11,000 and 12,500 deliveries. This full year's guidance is based on current market conditions and will be expanded to include our customary components as we gain an understanding of spring selling season market dynamics. Turning now to the balance sheet. We believe that we're well positioned with over $5.7 billion in inventory at the end of 2025. We owned or controlled over 64,000 lots, including 27,000 lots that we have the option to purchase. Our option lot position is 27% lower than a year ago due to our continued focus on only allocating capital to positions that align with our strategy and return expectations. We continue to invest selectively to augment our land position, and we invested over $665 million in land development and fees during the fourth quarter and over $2.6 billion in 2025. During the fourth quarter, we entered into a new credit facility to increase liquidity and improve covenants, and we amended our $360 million term loan to extend its maturity to 2029. We now have no debt maturities until June 2027. At quarter-end, we had total liquidity of $1.43 billion due to $229 million in cash and no cash borrowings on our $1.2 billion revolving credit facility. We continue to target a total debt-to-capital ratio in the neighborhood of 30% to support our strong BB positive credit rating, and we are pleased with our current 30.3% ratio. This strong balance sheet enables us to provide shareholders with a healthy dividend, which currently has an approximately 1.6% yield, as well as return capital to shareholders in the form of share repurchases. In the fourth quarter, we repurchased 1.6 million shares for a return of capital of $100 million. In 2025, we repurchased approximately 9.4 million shares, or 13% of our outstanding shares at the beginning of the year. We have now repurchased nearly 36% of our outstanding common stock since implementing our share buyback program in late 2021. Over the past four and a half years, we have returned over $1.9 billion to shareholders in the form of dividends and share repurchases. In the fourth quarter, our Board of Directors approved a new $1 billion share repurchase authorization to support our capital return strategy. We ended the year with $900 million available under this authorization. We expect to repurchase between $50 million and $100 million of our common stock in the first quarter. As we look ahead, our strategy is to enhance our results through continued discipline and a focus on higher-margin built-to-order homes. We believe that this operating strategy, when combined with our shareholder-focused capital strategy, will maximize shareholder value over the long term. With that, I'll now take your questions. John, would you please open the lines? Operator: Yes. Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. You may press star 2 to remove yourself from the queue. For anyone using speaker equipment, we ask that you please pick up your handset to provide optimum sound quality. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment, please, while we poll for questions. And the first question comes from the line of John Lovallo with UBS. Please proceed with your question. John Lovallo: Guys, thank you for taking my questions tonight. The first one is maybe just a little bit more philosophical. I mean, I understand the changes in the way you're providing the outlook relating to the full year deliveries and the gross margin, but there also seems to be a bit of conservatism, particularly in the gross margin guide, that maybe wasn't always the case. I mean, can you help me understand if there's been some change there and maybe instilling a little bit more conservatism into the outlook? And also, is there a chunk of spec that's going to be delivered in the first quarter that's going to negatively impact that margin? Rob Dillard: John, I can make a few comments and then pass it over to Rob Dillard. There is still some inventory that we have to clear as part of our transition to more built-to-order sales, and we have factored that into the guidance that we provided. One of the things that we touched on in our comments is that some of this inventory is aged in that it was built at much higher build costs. And as we've reacted to the market, we're lowering our costs on new deliveries, but we have to clear these older specs that have a higher cost basis. So it is impacting the margin. It's a short-term thing, but it's something we have to power through. But within our guide, I would say that it's just a guide. It's not conservative. It's not aggressive. It's just realistic. And if you think about it, one of the real drivers of the lesser margin in the quarter is the lost leverage because our revenue is down. And it's a fairly significant move sequentially from Q4 to Q1 due to the loss in revenue leverage. You got any other color, Rob, you wanna add? Rob Dillard: Yeah, those are the two main points there, John. I think that it's you can't express enough how important in Q1 the seasonality and the leverage is having an impact on that Q1 margin expectation. Typically, that's 100 to 150 basis points, and we think that we'll be near the top end of that, if not above it. There is a real opportunity for leverage as we get through the year, as Jeff said, and that the leverage in Q1, given kind of our conservatism on the delivery number, is creating some conservatism as you see it through the cycle of that guide. There also, as Jeff said, some with some product mix as we shift through some of the older specs that haven't had the benefit of the direct cost reductions. And we saw a bit of that also in Q4 as well, which I think was really the incremental units versus guide and a big part of the margin compression versus where we thought we were going to be. So we think that there's real opportunity as we go through the year, but we're really pegging where we expect to be in Q1 on those factors. John Lovallo: Okay. Yeah. That's really helpful. And maybe sticking to a similar topic, I don't recall you guys ever giving an adjusted EPS number before. And I'm curious about the thought process behind excluding the accelerated stock comp if it's really just timing-related and seemingly future quarters could benefit from less stock comp if the total amount is changing? And also, it seems a little bit unusual to exclude impairments from adjusted EPS. So just maybe your thoughts on that would be very helpful. Rob Dillard: Yeah, John. We just wanted to give you a like-for-like number because the timing on the equity expense is where it was. It was significant enough that we wanted to give you a like-for-like number that was relevant so that you could make comparisons and so that you could also make a comparison versus our guide. Operator: Thank you. And the next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question. Stephen Kim: Yeah. Thanks a lot, guys. Just to start off with, if we could, could we get the spec numbers, the finish, and the under-construction specs at the end of the quarter and also a clarification on your community count comment? You said 2Q was going to be the high watermark. Just want to make sure that we're clear that you're saying that the community count will actually be highest in 2Q, and then it will descend from there. Rob McGibney: In my community account, cadence and color? Okay. So, yeah, Steve, you know, as we're looking at the setup for the year, I mentioned in my prepared remarks, ended the quarter with 271. We're on an upward trajectory for that. We do expect to hit the peak for community count for the year, kinda right in the heart of the spring selling season, right in the middle of Q2, and be up from that 271. We're not pinpointing a number, but we think we'll be up, you know, somewhere between nine to 13 communities from that number by the time. And by the time we get right into the middle of that second quarter. So that's driving some of our assumptions and projections on the deliveries for the year. As far as the inventory levels, we've got about 1,700 homes in inventory right now across the company, and those are inventory that we're expecting to cover here over the next few months. Stephen Kim: Okay. That's total. Right? Total inventory, not necessarily finished inventory. Is that right? Like, just trying to get a sense of how much is finished and how much is under construction. Rob McGibney: Well, since we haven't been starting specs, you know, we've seen some of that shift out of the under-construction. So of the 1,700, we've got a little over a thousand that are at or near the finish stage. Stephen Kim: Okay. Gotcha. That's helpful. And then a general question about your community, I'm sorry, your shift to BTO. What you're describing is that you have a number of new communities that are going to be opening up, and that will really facilitate your transition to more BTO sales, which are also higher margin. And I guess, would it be helpful for me to understand what is it about a new community that necessarily makes it easier for you to make a shift in your BTO strategy? Because, you know, to a degree, I would think that most of your pretty much all of your communities initially designed around the BTO concept. And sort of market reality sort of kind of pushed you to do a little bit more spec than you would normally like. So that's my perception. Is that an incorrect perception? Do you actually have communities that, you know, you kinda just earmarked to be kinda spec communities and you're just not doing any of those as we go forward? Just if you can help me understand how the transition is facilitated by a new community opening up. Rob McGibney: Yeah. Let me go back up top and start with, you know, when we got into starting specs, it was largely driven by the supply chain crunch that we had in our cycle times that expanded big time, and it just made it difficult for a lot of reasons to sell BTO when it was taking, you know, 220 days, 240 days to deliver that home. So, yeah, that combined with virtually no inventory in the market, and then as we've worked through, you know, this process, it's been difficult to get off of that, and we drew a hard line in the sand earlier this year or in 2025. And, you know, as I look at it, I think a core strength of our company is the ability to sell the advantage of the built-to-order model. And frankly, we created an internal conflict with ourselves with those specs that we started. And, you know, in a lot of ways, we've been competing with ourselves to some extent. And with our BTO program, with our build times, we're now building in less than 120 days. So that competes much better with the timeline for resales and spec homes. And we're giving our customers the ability to lock the loan and leverage the one-time float down in the event that mortgage rates decline. So, you know, it's really what's driving the improvement is sharper alignment around our built-to-order model and just driving that discipline and consistency in how our teams position our value with a great base price and transparency and the ability to personalize. And, you know, our focus is really reinforcing the importance of selling the home through the customer's eyes, helping them understand the trade-offs and the cost certainty and the long-term value of getting what they want rather than, you know, pushing that spec solution. So, you know, I would characterize this as less of a change in strategy, just more stronger execution against a proven business model that we've operated with for a long time. And when our sales teams fully believe in and consistently sell the benefits of that built-to-order, the results follow. And with these new communities, we don't have specs to compete with at all, and we're quickly working through the specs in our existing communities where it's creating that competition. Operator: Thank you. Our next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question. Alan Ratner: Guys. Good afternoon. Thanks for all the detail. I wanted to follow up on the comments you made last quarter about trying to get towards more of a base price model as opposed to the kitchen sink incentive model that a lot of your competitors are operating with. And it seems like since then, if anything, the incentive environment has gotten even more competitive. I mean, we're seeing rate buy-downs advertised on a lot of builder websites, you know, 2%, 3%. So I'm just curious, you know, a, how has it been competing in this environment with your new strategy? And b, do you have an update on kind of what the actual base price adjustments that you've seen up to this point and what the expectation is going forward? Thank you. Rob McGibney: Yeah. So, you know, there's really not much to report on the price change front. I mean, overall, it was a relatively stable quarter for us in terms of pricing. And as Jeff said in the beginning, and we said last quarter, we've been disciplined and didn't chase volume during what was typically a lower demand environment and more inelastic. So, you know, not a lot of change on the price front. I, you know, expect that you've seen recently too, is that a function of maybe the overall inventory environment kind of improving across the industry? You know, we've heard from a lot of your spec-focused peers, like, they pulled back a lot on starts over the last handful of months. So are you actually seeing a little bit of relief on the spec competition side, or is it more, you know, something you're doing internally that's driven that recent mix shift? Jeff Mezger: Yeah. Alan, one of the things that got blurred with what Rob walked through on the supply chain crunch and then the inventory that we put in and others put in is you lose sight of the value in the build-to-order approach. And don't underestimate the benefit of many of our divisions now building in less than 100 days. Would you rather have a completed spec with a lot of incentives to move it, or do you want to build your own home and create your own value and close 30 days later or 45 days later? So what we're seeing is with our build times coming down, the value proposition of the personalized home at an attractive price is more compelling. So we don't think that our customers are competing with the specs. We focus on resale, and we offer a brand new home that's within range of the resale median. And they really value the personalization. So it's naturally coming back to us because we're prioritizing it and focusing on it much better than we did the last couple of years. Operator: Thank you. Our next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question. Rafe Jadrosich: Hi. Good evening. Thanks for taking my question. I just wanted to kind of follow up on some of the comments about BTO mix. I think you said 57% of deliveries were BTO in the fourth quarter. How should how are what are you expecting for the fiscal first quarter? And then what would that be for the full year kind of at the midpoint of guidance? Wondering sort of where the exit rate will be for the year compared to that 70% target you have? Rob McGibney: Yeah. That's a good question. I mean, in the first quarter, I expect that we are going to continue covering some of that inventory. So the ratio is going to be tilted more so towards probably that 57% to 60% range. Yeah. The exit rate, I think, is what's more important. And we're very focused on getting back to at least a 70/30 ratio. And we see that a great opportunity to drive that change with the new communities we've got coming with the onset of the spring selling season as we work the built-to-order model. And, you know, could go that route. We expect that we'll exit at that rate it'll be kind of a gradual progression to get there through the first couple of quarters of the year. Rafe Jadrosich: Great. So similar mix in fiscal first quarter versus the fourth quarter? Rob McGibney: Most likely, yes. Rafe Jadrosich: Right. And then just the fiscal the first quarter gross margin, the quarter-over-quarter decline, you spoke about the fixed cost deleverage and the amount that you're getting pressured there. But the decline is sort of greater than that. What are the other pieces to sort of bridge us to the first quarter decline? Rob McGibney: It's, you know, outside of the leverage piece, it's just largely driven by regional and product mix within our cities combined with some pricing pressure on moving the inventory. Yes. Jeff mentioned, we've got this tail of inventory that we're working through that has higher direct cost and a lower margin, and that's gonna, you know, that bled into the deliveries, and we'll continue in the short term. And overall, with the higher margin BTO sales becoming a large percentage of our deliveries and the improved leverage that we'll get on fixed as we move throughout 2026, we expect Q1 to be the bottom in margins, and we're gonna go up from there. Operator: Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. Mike Dahl: Hi, thanks for taking my questions. One more on the BTO dynamic. I guess, look, if you halt your spec starts, it's pretty easy to mathematically move your mix of BTO up. So I'm trying to understand, you know, in context, your order pace was light. So as you go into next year, you know, you have a view that you can kind of manage this transition and the demand will be there. What are you willing to tolerate on pace to force the issue versus just if you get into the spring selling season, the demand response isn't there, kind of pivoting back to spec, I guess. And anything you can give us on aside from just percentage mix. Maybe, like, some sales pace stats on, you know, on some of the newer communities that are more BTO versus some of the spec communities. Just looking for a little more color there. Jeff Mezger: Yeah. Mike, there's a few factors in the response. One, every community is a different story. And while Rob was sharing the mix shift we're seeing to BTO, it's not just on the brand new community. Some communities had little inventory and have sustained the mix, and others had more than they should have. We're slowly working through that. But it's working across the system. And I've shared on past calls with we keep walking through the optimize the asset approach. And for our company, it seems to you get the best returns if doing at least four a month on average per community. Our sales pace in the fourth quarter would seasonally adjust to four a month. So we were on the four a month pace in the quarter. As we look ahead into the spring selling season, our intent is to support our sales rate with built-to-order sales more so than forcing the inventory. And in part, we like it because we know what the margin is when we start the home. You can fool yourself with a spec start into thinking you're gonna make this margin, and then lo and behold, five months later, it's down four or five points. So we would rather pull the levers on a built-to-order approach in the spring per community and ensure that we hold to that four-month pace. Mike Dahl: Okay. Thanks, Jeff. My second question, look, I appreciate the dynamics at play with the margin between seasonality and the spec dynamic that you expect to work past as the year goes on. If we look at the 1Q operating margin guidance, it is low single digits, which if we think about normal distribution, there would presumably be some healthy number of communities that were kinda breakeven or below. So my question is really around your impairment process and testing. And I know there's a component that's probably duration and your projections about BTO. But, hypothetically, if you were to sustain these types of margins and kind of the mid-teens, what are the set of assumptions that would be required to make the charge? I mean, 14 million in charge is still kinda nominal this quarter. What would lead you to take kind of, I guess, for lack of a better word, much larger charges because it seems like this is getting closer to where some land might be impaired. Jeff Mezger: Mike, I'll say a few things and hand it to Rob Dillard. We've already shared the first quarter margins are the low watermark, and we expect improvement quarter over quarter as the year progresses from there. And it's a combination of better leverage as we grow revenue back and better margins as our community mix rotates around. I can say we've had the same impairment process for years and years. It's very rigorous. Every community is analyzed every quarter. And it starts with what's the margin in the community, and do you have a positive margin or not? And even at today's margin, there's a significant gap before any kind of major impairments would get triggered. And when you threw out that number on impairments, keep in mind half of it was abandonments on communities we elected not to go forward with. So it's not a reflection of a margin. It's a reflection of a community we decided not to close on. Don't you wanna say anything else? Rob Dillard: Yeah. I mean, just to concur with what Jeff said, I mean, the impairment process is incredibly rigorous, and it is community by community, and it's pretty much a constant process that we're evaluating these communities and understanding what the trends are within the communities and the returns and profitability of the communities. We have a certain number of communities that kind of hit excess scrutiny, and that list of communities is actually relatively limited. We did decide to take an impairment on two communities, one of which was relatively small as it was about to close out, and then the other one was a community in our central division, you know, in Colorado, which was associated with the same issue, which is a change in some of the requirements on housing, which changed the cost profile of those houses and led us to an impairment on those products. So we think that that's fully behind us now. So as we evaluate these impairments, there would have to be some kind of meaningful shift or a trigger that would change our perception of the community's profitability over time. And right now, we haven't seen that. And so I would also say that all of these profitability measures are fully loaded with, you know, corporate and everything else in there. And so that has an impact, and those are also costs that we're evaluating as we go forward. Operator: And the next question comes from the line of Trevor Allinson with Wolfe Research. Please proceed with your question. Trevor Allinson: Hi, good evening. Thank you for taking my questions. First question on the ASP implied by the midpoint of your 2026 revenue deliveries guidance. I believe the midpoint in '26 is above your 4Q '25 ASP. Is the expectation to be able to increase prices in fiscal '26? Or are there mix impacts driving that just trying to understand what should the base case be for pricing to move higher versus where it wasn't? In April? Jeff Mezger: Trevor, we're not assuming price. That is totally mixed. We have some very high-end communities and very good locations in California that are opening soon. In fact, one's already open. And they'll be delivering a pretty sizable number of homes in the third and fourth quarters. So our mix shift is gonna trigger a higher ASP as these higher-priced communities hit volume. Trevor Allinson: Okay. Makes sense. And then the second one is on returning cash to shareholders in 2026. You gave the guide for 1Q. Typically, it's a smaller quarter for you guys. So should we think that you continue to return capital to shareholders at a similar $50 million to $100 million rate post 1Q? Or how are you thinking about that beyond the first quarter? Thanks. Rob Dillard: Well, we've demonstrated with our activity that we're programmatic now with the share buyback program. And we typically are a little lighter in the first quarter because of the cash position we're in at the end of the year. And we wanna, you know, evaluate it as the spring comes. And it's a few factors that we evaluate, not just our cash and balance sheet, but is the stock price, and do we have a lot of opportunity to grow the company? And that's one of the key areas that we wanna continue to pursue as well. But I would say that as the quarters roll by, the $50 to $100 million a quarter is reasonable. Operator: Thank you. And our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question. Jade Rahmani: Thank you very much. You mentioned transparency on price and emphasizing pricing over incentives. Are you seeing other builders follow suit in cutting price, and are you worried at all that this could lead to price wars in many locations? Rob McGibney: I really haven't seen it. I mean, most of what we see is that those are trying to cover their spec inventory that they've got, and it's kind of the same game. You've got inventory. You've designed it, and it's out there. And it may not be exactly what people want, so they're just discounting that product and giving rate buy-downs and everything else. We see very little with our built-to-order focus, especially in the first-time buyer space. Jade Rahmani: And then on the option walk-away charges, you identified a pool of communities that you may not exercise additional options, and do you anticipate further charges through this year, 2026? Rob Dillard: You know, that's just a normal part of our land procurement process that we have, you know, options which are really just payments, you know, earnest money or what have you as we go through the process and execute due diligence, and sometimes we decide to proceed and sometimes we don't, and I think that we're holding the line with really stringent underwriting standards, and we're ensuring that we're sticking to our strategy. And that's kind of led to maybe what is more than typical kind of abandonment, but it's not something that's indicative of, you know, us of a low quality or anything like that. We're pretty pleased with how that's progressing and think that that's it's not a normal way thing that we expect to see in a really fulsome market, but it's a characteristic of this market. Operator: Our next question comes from the line of Sam Reid with Wells Fargo. Sam Reid: Yes. Thanks so much. Just curious where incentive loads landed in the fourth quarter as a percent of revenues? And any sense as to what's embedded in the first quarter? And then kind of a knock-on to that is talk through how you're incentivizing some of this aged inventory that you're selling through. Rob McGibney: So, yeah, I'm not sure I have a perfect answer for you on the incentive piece on Q4. I know that if any mortgage concessions that we did, it was right around 1%. When we look at our book of business and the inventory that we've got, that's really one of the few places where we're applying any of those incentives at all. So most of that's coming through that side of it. As we look out through the balance of the year, we projected we're gonna get even further away from that, and incentive usage should come down even more. Rob Dillard: Yeah. There's no, like, unusual incentives. Like, what you would read through our incentive disclosure is really more just the normal way incentive that we give, which is like closing cost assistance. And things like that. There's nothing unusual when that equates to just, you know, one or 2%. Typically. That helps. Sam Reid: And then this is perhaps more of a follow-up to some of the prior questions. But when you look at your range of delivery volume outcomes in '26, it's pretty wide. The question really is, is there a different assumption for spec versus build-to-order embedded at the high end of that delivery volume range versus the low end? And then, I mean, would it be fair to assume that the low end of that range is just a scenario where build-to-order doesn't come in as planned? We just love some context on that. Rob McGibney: Yeah. We're really focused on driving the built-to-order sales as we said. And the range is driven by, you know, we're in December right now. We've got the spring selling season in front of us. We've got a lot of communities open, but just don't have great visibility into what the spring might be. I'd say that the 2025 spring selling season was a disappointment, and we've baked our or we've made our prepared our plan and our strategy for the year around what I would consider a normal spring selling season with that community count growth maybe even slightly below average. You know, as we piece it all together, we're only counting on needing to drive about just slightly over four built-to-order sales per community in the first half of the year. And as we look at the past years, to get us to the midpoint of our delivery range. And when we look at past years, you know, it seems like that would be relatively easy to do. If we do better than that and we have a spring selling season like we saw a couple of years ago, then we'll probably hit the high end, but we just don't know yet. Operator: Thank you. And our final question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question. Andrew Azzi: Hi, guys. You have Andrew Azzi here on for Mike. Just wanted to drill down. I believe you guys said traffic was relatively stable within the quarter. Was there any meaningful difference in sales trends month to month, or is it more of the same? Rob McGibney: Well, month to month, I mean, September was our strongest month, and we see that almost every year. And then it ticks down in October and November. So this year followed that typical seasonal pattern that we did, that we saw. Traffic's held steady, and our conversion is actually improved a little. So we're focused on driving more traffic. It's just, you know, challenging to do in November and December. Andrew Azzi: Okay. I appreciate that. And then, you know, maybe within one Q's gross margin and even as we go throughout the year, are kind of your assumptions for construction costs and lot costs within your guide in 1Q and maybe your outlook for the year? Rob Dillard: Yeah. I mean, we're not expecting a meaningful change in construction or lot costs. I mean, we do feel really good that we've kind of bent the curve a little bit on unit costs. In the sense that direct construction costs and material costs we've been able to offset the lot cost inflation. And sequentially, the year-over-year change in lot cost has gone down pretty meaningfully from the third quarter to the fourth quarter. And so we feel like we're getting to a better position there in terms of being able to draw profitability off of our cost savings initiatives. But we don't have, like, a specific guide on lot cost change that we would give you at this point. Yeah. It's baked in. Operator: Thank you. Ladies and gentlemen, that does conclude the question and answer session. And that also concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
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