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Operator: Good day, and welcome to Uranium Energy Corp.'s Fiscal 2026 First Quarter Results Conference Call. Today's call will be hosted by Amir Adnani, President and CEO. Also joining for the Q&A session of today's call are Josephine Man, Chief Financial Officer; Scott Melbye, Executive Vice President; and Brent Berg, Senior Vice President of U.S. Operations. [Operator Instructions]. Please note this event is being recorded. Today's call will run approximately 15 minutes for prepared remarks followed by Q&A. [Operator Instructions]. I would now like to turn the conference over to Amir Adnani, President and CEO. Please go ahead. Amir Adnani: Thank you, operator, and good morning, everyone. Please note that a presentation accompanying this conference call is available on the Presentations page of our website. Some of the commentary on today's call will include forward-looking statements and I would direct everyone to review Slide 2 of the presentation, which includes important cautionary notes. All right. Let's get started. This quarter was an exciting step change for UEC with major production expansion initiatives and the introduction of a strategic new business line. The launch of United States Uranium Refining & Conversion Corp positions the company to become the only U.S. supplier with both Uranium and UF6 production capabilities. In parallel, we maintained low-cost in-situ recovery production and advanced our growth projects in Wyoming and South Texas, supporting higher output through the balance of fiscal 2026. These developments strengthen our platform as America's largest integrated nuclear fuel supplier aligned with U.S. policy. We continue to enjoy the backdrop of increasingly favorable macroeconomic and policy tailwinds and as such, have continued to increase our Uranium inventory ahead of the Section 232 decision. A year ago at this time, we had just resumed operations at Christensen Ranch. In only 12 months, we have delivered low-cost production at our first mine, are positioned for near-term production at our second mine Burke Hollow and are excited to have commenced development at our third mine, Ludeman. In the first quarter, we maintained low-cost production as we achieved a cash cost per pound of $29.90 based on 68,612 pounds of precipitated uranium and dried and drummed U308 produced. At our Irigaray central processing plant, upgrades were completed to support the transition to 24/7 operations including a full refurbishment of the yellowcake thickener and calciner. After quarter end, drying and packaging operations resumed on November 13, 2025, producing approximately 49,000 pounds of dried and drummed U308, subsequent to that date during the month of November. At Christensen Ranch, the focus has been on expanding ISR production capacity through the construction of 6 additional header houses in new well fields 11 and 12 and 10 extension. Further, we have commenced development at our Ludeman ISR project, the company's second satellite project in the Powder River Basin to our Irigaray hub-and-spoke operations. At Burke Hollow, we are nearing operational status, major construction milestones, including the ion-exchange plant and wellfield are substantially complete, setting the stage for initial operations at South Texas' newest ISR production facility and for Burke Hollow to become America's next producing uranium mine. These advancements position the company for higher production rates through the remainder of the fiscal year as new capacity comes online. Switching gears to our development assets. At Sweetwater, work is progressing under the FAST-41 permitting designation for the project. Planning of initial delineation drilling in the first wellfield area and assessment of the mill refurbishment plans were advanced. At Roughrider, a 34,000 meters core drilling program commenced in October 2025 to target conversion of inferred to indicated uranium resources to support the announced pre-feasibility study for the world-class high-grade Roughrider project in Saskatchewan, Canada and the prolific Athabasca Basin. And finally, the launch of United States Uranium Refining and Conversion Corp, positions UEC to provide end-to-end capabilities of the secure geopolitically-reliable source of uranium hexafluoride, supporting [indiscernible] enrichment. Moving to our financial highlights on Slide 5. Our balance sheet remains strong with $698 million in cash, inventory and equities at market prices and no debt. We completed a $234 million public offering to accelerate the growth of our new business line, while bolstering our balance sheet. Our uranium inventory stands had 1,356,000 U308 held at October 31, 2025, which excludes the additional 199,000 pounds of precipitated uranium and dried and drummed uranium concentrate at the Irigaray CPT produced since we restarted production. We also expect to purchase an additional 300,000 pounds through the end of this month from purchase contracts at below market rates of $37.05 per pound in addition to growing inventory from operations. By remaining 100% unhedged, we maintained full exposure ahead of the results of the U.S. Government's Section 232 investigation, while in a tightening global market with a structural supply deficit, positioning UEC to benefit from expected higher uranium prices. Our financial strength, coupled with the efficiency of our low-cost ISR operations enables us to ramp production responsively as market fundamentals and policy direction evolve. The current uranium price backdrop, underpinned by growing global nuclear demand and supportive U.S. policy provides a compelling setup for value creation. Importantly, the launch of UR&NC positions UEC to be the only vertically integrated American uranium producer. We are moving quickly. During the quarter, we commissioned the detailed feasibility study with Fluor and have begun hiring key technical and project personnel. Federal stakeholder discussions are ongoing and an extensive citing process has been commenced with potential host states and local governments. This initiative builds on UEC's existing uranium platform, advancing a fully American supply chain aligned with U.S. energy policy and defense needs. As a reminder, we are focused on four key pillars of production growth. The Powder River Basin hub-and-spoke operations anchored by our Irigaray Central Processing plant in Wyoming, the South Texas hub-and-spoke operations anchored by our Hobson CPP, the Sweetwater hub-and-spoke operations anchored by our Sweetwater plant in Wyoming and finally, the Roughrider project in Canada. We are actively advancing each of these growth pillars and have provided a detailed update on our quarterly news release. I will now focus on our operating activities in the Powder River Basin and South Texas. Moving to the next slide. We will start with the Powder River Basin hub-and-spoke operations. Since the resumption of operations as of October 31, 2025, accumulated production from Christensen Ranch was approximately 199,000 pounds of precipitated uranium and dried and drummed U308 at our Irigaray CPP. As part of the ongoing production ramp-up, UEC continue to develop new production areas at Christensen Ranch, mine development advanced with active well installation, piloting, casing and under-reading in wellfields 11 and 12 and delineation drilling in wellfield 8 and 10 extensions. Additionally, construction continued on 6 new header houses and wellfields 11, 12 and 10 extension. These new production areas will form the base for UEC's future production plans at Christensen Ranch. In parallel, process upgrades at our Irigaray CPP continued in the first quarter of fiscal 2026, including a full rebuild of 1 of 2 yellowcake thickeners, replacing the rig gearbox and motor along with the repair of replacement of multiple calciner components, together with the refurbishment completed at Christensen Ranch earlier in the year, these timely investments are expected to support higher production rates in addition to improved operational efficiency and performance. We are excited to announce that development plans have commenced at the Ludeman Satellite Project. This is a fully licensed and permitted project that will be constructed as a satellite ion-exchange plant sending uranium loaded resin to the Irigaray CPP for resin elution, precipitation, drying and packaging. Just 10 miles northeast of Glen Rock Wyoming, delineation drilling in the first production area at Ludeman commenced on November 19, 2025, with 200 holes planned. The delineation drilling will assist wellfield pattern design, Ludeman's SK 1300 compliant resources are 9.7 million pounds of measured and indicated and 1.3 million pounds of inferred uranium. 41 monitor wells are already installed for the production area and baseline water quality sampling is planned for these wells in Q4 fiscal '26. Engineering for the satellite plant is in progress using internal technical expertise with external engineering plan to commence in January 2026. Design and procurement of the ion-exchange vessels for the plant is also underway. Just as a reminder that in the Powder River Basin, the Irigaray CPP has a license capacity of 4 million pounds per year, surrounded by 17 satellite projects, 4 of which are fully permitted, including Christensen Ranch and Ludeman. Turning to South Texas. Construction of the Burke Hollow ion-exchange facility and first production area progressed on schedule during the quarter with key advances made across wellfield development and processing infrastructure. All large diameter tanks have been installed at the ion-exchange facility and testing of the disposal world was completed with the state regulatory agency in attendance. The utility provider completed the installation of 3-phase power into the project site, and all facilities have been energized. Well completion and mechanical integrity testing reports are underway following completion of construction. The company's workforce in South Texas has grown to 86 personnel in preparation for the startup of the Burke Hollow project. As we close out calendar 2025, the macro backdrop for uranium has never been dis-encouraging with strong bipartisan support for safe, clean, reliable nuclear energy. We see strong support from the U.S. Government including the recent designation of uranium as critical mineral. Big tech is a key component of new demand and with the largest hyperscalers continuing to invest heavily in the energy sector to secure the necessary power required for their massive data center investments. Overarching all of this is the fundamental supply deficit, which is expected to exceed 1.7 billion pounds by 2025 on a cumulative basis. As I've stated before, we have never seen a more positive policy environment for our industry. In summary, this quarter, UEC has neared an exciting inflection point of growing from a single asset producer towards diversified uranium production while becoming a U.S. origin supply chain from mine to conversion. UEC is uniquely positioned to meet the growing demand for secure domestic uranium supply. We're excited about the opportunities ahead and look forward to delivering further value to our shareholders. Before I turn it back to the operator, a couple of points. First, today's call is scheduled to conclude around noon Eastern. If we don't get to your question, please don't hesitate to reach out to our Investor Relations team, and we'll be happy to follow up directly. Second, please note that I'm joined today by Josephine Man, our Chief Financial Officer; Scott Melbye, our Executive Vice President; and Brent Berg, our Senior Vice President of U.S. Operations. Together, the four of us are backed by UEC team with more than 900 years of combined experience in the uranium industry. That depth of experience is what drives our daily execution across operations finance and strategy. With that, we'll open the call to questions. Operator, please go ahead. Operator: [Operator Instructions] The first question comes from Brian Lee with Goldman Sachs. Brian Lee: I just wanted to first start on the UR&C venture. I know you're making progress there, but just trying to understand a little bit better maybe the next set of milestones in the development of UR&C and maybe the timing of what you're expecting there through the first half of 2026? And then maybe where you'd like to be on that venture by the end of next year? And I had some questions around production as well. Amir Adnani: Okay. With respect to UR&C, we are moving as fast as possible and mobilizing various initiatives around siding study that is now progressing very well. State level discussions and meetings that we've had with stakeholders and state-level governments. We would like to -- and we'll provide more information on this, Brian, but the work has commenced on our feasibility study with Fluor and other consultants that we have involved in that. We really want to be in a position to deliver that inside 2026 calendar year and hopefully towards the midpoint of that. But again, that's the date that we'll be able to speak to with more confidence as we approach fiscal Q2 for UEC. In the meanwhile, we've been very pleased with the way team building has been coming around in terms of building our technical team and technical bench strength around this new initiative. So overall, kind of multiple parallel tracks all moving forward. And we'll have a lot more to share in our fiscal Q2 results when those come out. Brian Lee: Okay. Looking forward to it. And then just second question around production, a lot of moving pieces here. You have the upgrades at Irigaray, you're starting to move forward on Ludeman. Maybe as we zoom out, can you kind of give us a sense of what the production cadence is going to look like here into 2Q and then through the rest of the year? And maybe just specifically on Irigaray, the 49,000 pounds in less than 3 weeks, you sort of run rate that. It looks like it's 0.25 million pounds in a quarter potentially. Is that the right type of run rate that Irigaray is going to be running at now? And what does that mean for the cadence of production overall across the various sites through the rest of the year in the next couple of quarters? Amir Adnani: Thank you, Brian. Just to zoom out again and again for perspective. And as I mentioned during my prepared remarks, 12 months ago, we were sitting in a place where we were just starting to ramp up at Christensen Ranch. We now have 2 solid quarters of results, demonstrating the low cost that we're delivering at Christensen Ranch and Irigaray amongst the lowest in the U.S. We are talking about bringing online Burke Hollow very soon. 6 additional header houses at Christensen Ranch, and now Ludeman is in the development construction pipeline as well. So you're right, there are a lot of moving parts. Brian, as you recall, much of the production that's been reported has come since April of this year from header houses 10-7 and 10-8. And now there are 6 new header houses coming online, which will be most hopefully inside second fiscal quarter. And then with Burke Hollow coming online, most of the production from Burke Hollow really contributing towards fiscal Q3. So to answer your question on cadence, we would expect to see more of a step change in that cadence in fiscal Q3 and Q4 as we see a greater contribution of production coming in from Burke Hollow and from most of the 6 header houses that are currently under construction at Christensen Ranch. Operator: The next question comes from Heiko Ihle with H.C. Wainwright. Heiko Ihle: Just a couple of follow-ups here. With Irigaray, the plant upgrades, obviously, you're done now. I assume the answer is no, but this doesn't really have a ramp-up period, right? In other words, this goes from off to full capacity pretty much at the flip of a button, right? Amir Adnani: Yes, correct, Heiko. So most of that work is basically what we mentioned in the press release since coming online on November 13. So again, just to step back the refurbishment of the yellowcake thickener and calciner were sequential. And so as such, the equipment was offline for much of the quarter, while this repair and replacement of key components were underway. Once online on November 13, we were at steady state operations and had the steady-state operations had resumed basically with the drying and packaging throughput really nearing a rate of almost 1 million pounds per year. Let me just also allow Brent Berg, our Senior VP of Operations, step in on that. Go ahead, Brent. Brent Berg: Yes. Thanks, Amir. I would just add that similar to the refurbishment that was undertaken in fiscal '25 for Christensen Ranch with the ion-exchange plant, we felt that it was an opportune time to do those similar upgrades to the Irigaray central processing plant. And so the refurbishment to the calciner was really centered around increasing throughput of dried yellowcake. And all of the updates that we did were things that included components as recommended by the manufacturer to increase operational efficiency, that work has really led to continuous 24/7 operation and the ability to operate the plant at design capacity. Heiko Ihle: Fair enough. And then with Uranium Refining and Conversion URC, just a couple of follow-ups here. I mean, what would you say the major misconceptions in the market? I mean we've been getting a lot of questions on scalability and time to profitability even. How should analysts like myself show off how this thing can unlock shareholder value? And are there maybe any catalysts that are underappreciated by the market in your opinion? Amir Adnani: Thank you, Heiko. At a strategic level and at a positioning level, clearly, this is an opportunity in a new business line that highly differentiates UEC. There are simply no other companies in the U.S. that have end-to-end capabilities from uranium resources to mining to processing and now the planned refining and conversion that we have in place. So strategically speaking, it's a highly differentiated positioning for UEC to be a true supply chain provider. With respect to the way the financial analysis around that work. The best outcome there is when our feasibility study is completed and reported. And as I mentioned earlier, we're aiming for that to be hopefully around the midpoint of 2026 calendar year, but again, we will firm that up as we report fiscal Q2 results, but we are moving very rapidly. We're capitalized to be able to move rapidly. And of course, as you know, this is work that is building on the last couple of years of prior early work that we completed, that was the foundation of what allowed us to be in a position to announce this UR&C initiative in early September. So it was only early September that we formally announced it and in just 60 to 90 days, we're making incredibly fast progress. And look, this is a very essential piece of the overall value chain and the supply chain for nuclear fuel. This is a serious bottleneck, without another conversion facility in operation, this is the real kind of pinch point right now between connecting mining and enrichment. So it's very integral, and we're very excited by it. And I think, yes, you'll have hopefully much more information to be able to value and assess this by in the coming quarters. Operator: The next question comes from Katie Lachapelle with Canaccord Genuity. Katie Lachapelle: In your prepared remarks, you noted that you've made a positive development decision for the Ludeman project. Can you provide any guidance on the potential production time lines or operating rates that you expect for that wellfield? And then in addition to that, how are you now thinking about the sequencing of the various ISR wellfields in Wyoming? Amir Adnani: Thank you, Katie. I'll go first, and then I'll hand it to Brent Berg as well. So again, for context and as we zoom out, UEC has a very powerful position in the Powder River Basin in Wyoming and the Powder River Basin, have multi-decades of productive history for uranium mining, and we've assembled over the years of M&A and consolidation that we did, a platform that includes our central hub, that's the Irigaray central processing plant and 17 satellite projects. 4 of which are fully permitted and 2 that we're talking about now, Christensen Ranch, that's in operation and now Ludeman that we want to bring online next. So Katie, this is all speaking to the production ramp-up that obviously we have planned and that bench strength that we have and the sheer number of properties that we control, including fully permitted projects. So sequentially, you can see Christensen, obviously, is going to continue to grow. Ludeman, we've commenced the development work. And most likely, again, depending on market conditions, depending on the outcome of Section 232, we may even develop Reno Creek and more in parallel track. Again, we're taking our cues from the market. And when you're in a position where you're already operating, you're already permitted, you have the luxury to be able to make those decisions and respond accordingly. The Ludeman project is very well situated in terms of being just south of previously producing Smith Ranch mines that were in production for a very long time. And I'll let Brent maybe speak to some of the kind of accessibility issues and development plans that are currently underway at Ludeman. Go ahead, Brent. Brent Berg: Sure. Thanks, Amir. Katie, I would just add that at Christensen Ranch, header houses 10-7 and 10-8 accounted for a large percentage of 2025 mine production. And it really highlights the importance of these new mining areas as we continue to ramp up production with mine development now routine at the Christensen Ranch operation. We've continued that development in wellfields 11, 12 and 10 extension where we've got 6 header houses underway with case well installation, nearing completion and surface construction on schedule for start-up of additional fresh production in the coming year. Ludeman of course, is an attractive project for us being fully licensed and permitted and just down the road from our Irigaray central processing plant. And so we will develop that project just as we would our new wellfields at Christensen Ranch and we'll truck loaded rest into Irigaray, for processing, no different than we are doing at Christensen Ranch, but it's a little further out in the next next exciting phase of our development at UEC. Katie Lachapelle: Awesome. And then maybe just one quick follow-up. Just now you referenced the potential for the U.S. strategic uranium reserve as a potential outcome of the Section 232 investigation. Just wondering if you can provide any comments on expected time lines for that release? And then any additional key outcomes that you anticipate from the Section 232 investigation? Amir Adnani: Katie, I'm going to let Scott Melbye, our Executive VP comment on that. And for the benefit of the listeners, Scott is also the President of the uranium producers of America, that's our industry association in Washington, D.C. Go ahead, Scott. Scott Melbye: Great. Thanks, Amir. And Katie, we are optimistic about the potential for the strategic uranium reserve being really expanded over what was done in the first term. The report -- the 232 report has been submitted to the President. He has a statutory timeline to reply to that. Why are we so optimistic? Because none of those details have been released publicly, but we know we have a precedent from the previous 232 investigation. It was a remedy that President Trump chose to institute the first time around. I think the findings of import penetration hasn't changed over what were the conditions back then. In fact, the world has gotten more complicated with geopolitics. So we think the conclusion is the same, and we feel that, that's a remedy the President may go to. Secondly, we've also heard very supportive comments from Secretary Wright and Secretary Bergum, on the need for an expanded uranium reserve, public remarks that they've made in the last weeks and months. Three, I think it's safe to say this was in a very small way in the first term, a successful policy initiative. And speaking on behalf of UEC and I think the broader U.S. domestic industry, reinstituting the strategic reserve would result in advanced development activities at U.S. uranium operations. And then four, don't underestimate the defense needs for U.S. origin, un-obligated uranium for things like the naval propulsion program, if we're building more aircraft carriers and submarines as is President Trump's desire, we need more U.S-origin uranium. And I just direct people's attention to language in current National Defense Appropriations Act Legislation that's before Congress right now does direct Department of War and NSA to report on the status of our stockpiles of U.S-origin uranium and the adequacy of those stockpiles to move forward with further growth in our Naval Propulsion Programs. So we're optimistic we'll see like everyone else, what comes from that. But I think the legislative mandated timelines really kind of come around the end of the year. So we're hopeful we'll hear something in December. But if not, early January, we should hear the President's recommendations. Operator: The next question comes from Joseph Reagor with ROTH Capital Partners. Joseph Reagor: Most of mine are kind of follow-up to other people at this point. I guess first one, just as a follow-up on Section 232. Is it fair for us to assume that you guys are probably withhold for making any spot sales barring a jump in the stock price between now and the Section 232 readout? Amir Adnani: Go ahead, Scott. Scott Melbye: Yes. I mean we're quite content to build that strategic inventory. Of course, to have U.S-origin uranium available to sell into strategic reserve, is one objective. But two, we just believe that this market is in such a structural deficit today, and doesn't seem to be getting -- the gap isn't closing, if anything, with a doubling of nuclear generation now and production lagging. We're quite content to have these new pounds produced and our inventory to sell into stronger markets in the coming year. Joseph Reagor: Okay. Fair enough. And then over at Irigaray, one question I don't think it has been asked yet is, do you guys have a rough estimate of how many pounds of production were held back because of the upgrades during fiscal Q1? Amir Adnani: Joe, nothing was held back because we continue to keep material basically in circuit. So operations kept going, and we -- it was really just the final step of packaging the uranium, that did not occur. And the costs associated with that final step is extremely nominal. So really not that you've seen kind of from mid-November to end of November, things are -- things that have resumed post all those upgrades. It's finishing that final step. But otherwise, everything was working at the plant and supporting the feed that was coming in from Christensen. Brent, would you like to add to that? Brent Berg: Sure. Thanks, Amir. Maybe I'd just add that the upgrades that we did were sequential. So we first tackled the thickener in the precipitation circuit. And this is 1 of 2 storage vessels for storing precipitated yellowcake prior to drying and packaging. So we did a full replacement of the rig, the gearbox and the motor for the rig dry. And then with the calciner, we did a number of upgrades, including all the wear parts like bearings, sand seals. We replaced the rake arms with insulated components and new teeth to increase retention time in the dryer. And additionally, the drive the motor, the gearbox, the bevel pinion were all replaced, but -- as a result, drying and packaging is now running 24/7 two-shift operation and as it should. Joseph Reagor: Okay. One final thing, if I could. Do you guys have a budget, capital budget yet for Ludeman, or if not, when might we be getting them? Amir Adnani: Yes. Joe, we'll look to provide more feedback on that in the next quarter coming up or current quarter that we're in for fiscal. But at the same time, you can expect very similar development cost there, as we've seen with Christensen Ranch and that we're looking basically -- we're utilizing many of the same drilling companies or drilling rigs that we used at Christensen. So one of the key components of our development cost, which is drilling to delineate the wellfields and install the wells. That cost is quite consistent in terms of what we've seen so far. And also Ludeman is much more of an accessible project, that's closer to nearby town. And so we also feel we may have some benefit there in terms of development cost has been moved forward. But again, some good parallels and similarities with what you've seen out of Christensen Ranch exists with Ludeman. Operator: The next question comes from Justin Chan with SCP Resource Finance. Justin Chan: I guess as a follow-up to the questions on Christensen Ranch and Ludeman. So you've got the 6 header houses that are under construction. Do you plan to construct more over the next, let's say, the remainder of this fiscal year? Or will the Christensen Ranch be what you're planning there? And then the new header houses are at Ludeman? Yes. Can you just give us an update on that? And for Texas, can you give a sense of what the milestones are over the next, let's say, next quarter and then the quarter after that so we can judge progress? Amir Adnani: Yes, for sure. Brent, why don't you go ahead on Ludeman and Christensen Ranch? Brent Berg: Sure. Justin, thanks for the question. So at Christensen Ranch, of course, when you were at site, we toured the well development, wellfield development. And we're very much focused on mine unit 11 or wellfield 11 at that time. We've since started development in wellfield 12 as well as 10 extension. But we will continue on with further development and additional header houses at Christensen Ranch. So wellfields 10 extension as well as an extension to wellfield 8 are both quite large, and there are a number of header houses with associated with both. So we will -- you'll continue to see this pace as we progress. In terms of Burke Hollow. Construction is substantially complete. So what the team is very focused on right now is preoperational testing and commissioning of equipment, training key personnel and finalizing as-built drawings mechanical integrity tests and well completion reports. As far as next milestones, the wellfield at Burke Hollow will be brought online gradually and increasing the flow to the satellite ion-exchange plant chemicals, including oxygen, carbon dioxide and bicarbonate will be added to the initial production area to activate the uranium recovery process. And then as the grade increases in the feed to the plant, the uranium content loaded on the resin will subsequently increase. And of course, once that resin is loaded, it will be transported to -- in one of the new resin hauling trailers to Hobson for processing. So that's what I foresee the next few months looking like. Justin Chan: Got you. So at Burke Hollow, let's say, this time next quarter, you'll have solution into the wellfield. Presumably, it will be a target PH, and we'll start to get some information about grades and flow rates and stuff like that? Is that a good way of tracking over the next few months, what I might be asking you in 3 months' time? Brent Berg: Yes. Justin, I think that's exactly right. So as we start adding the chemical to the wellfield. We'll see the uranium grade respond as well as the PH and we'll get a lot better picture of what that production profile is going to look like as we ramp up Burke Hollow and send that uranium loaded resin to Hobson for process. Operator: The next question comes from Mohamad Sidibe with National Bank Financial. Mohamed Sidibe: Most of my ones have been answered. But maybe just on your UR&C, given the work that you're advancing in fiscal year 2026 ahead of the feasibility study, can you maybe provide us with a little bit of color on maybe the spend required to advance some of these initiatives specifically for fiscal year '26? Amir Adnani: Mo, just I heard your question. What was the required part you asked for -- the bandwidth required? Mohamed Sidibe: No, no, the spend. So just trying to understand how much spend to advance the feasibility study, the engineering work, advanced negotiations with host governments? Just to understand a little bit better the impact to your balance sheet use for fiscal year 2026 as you advance work on the conversion facility? Amir Adnani: Thank you for the question. Relative to the size of our balance sheet and relative to the current quarterly cash burn rate Mo, given the sort of study phase that we're at right now with UR&C, the requirements, the capital requirements are still very modest. In the coming quarter or 2, we'll be able to obviously speak to that with more estimates and especially as the feasibility study comes out. But certainly, I would say we are very sufficiently capitalized for the work that needs to happen there. And the current spending is very modest, again, because we're at that study stage and that work you would appreciate is -- is going to be like that. But ultimately, again, there is a serious kind of ramp-up in work and efforts coming and there will be another kind of step change in the work we're doing once the feasibility study is released once the siding work has been completed once site selection has been announced and sort of planned. So again, major milestones ahead. But between now and then, very adequately funded to continue to advance the work. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Amir Adnani: All right. Thank you for that. Thank you for everyone who participated in today's call. We really appreciate it. Again, as we said at the outset that this quarter represents a major step change for UEC both in terms of the strategic initiative that we have launched with our uranium the United States Uranium Refining and Conversion Corp. Again, this highly differentiates UEC as being the only company with U.S. origin supply chain from mine to conversion. The work that has been done in operations, again, we were just a year ago, just resuming at Christensen Ranch and came into this quarter as a single asset producer, and we've laid the groundwork during this quarter to become a multi-asset producer with Burke Hollow coming into production eminently and with Ludeman now in development and construction. The other area in terms of the operating results at Christensen Ranch, we're really pleased with demonstrating the continued low cost production profile that, that project carries between uranium recovered and processed, between Christensen Ranch and Irigaray plant. So again, all in all, a lot happening, a lot of significant progress. We're very excited by it all. But also to highlight that we remain in an incredibly strong balance sheet position. In fact, even stronger than before. We continue to be debt-free and with almost $700 million of cash, physical uranium and liquid assets. Finally, with 1.4 million pounds of uranium in inventory, not including the 199,000 pounds produced and not including another 300,000 pounds that we have the ability to purchase this month. We're sitting also in a very strong inventory position ahead of the Section 232 decision, and hopefully, that will be a positive catalyst as we believe it could be for our industry, particularly the U.S. uranium industry where UEC is the leading company in that space and the fastest-growing and largest U.S. uranium company. Thank you again for your time today and wishing everyone a pleasant December, Merry Christmas and happy holidays. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Daktronics Second Quarter FY '26 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsey Vetter. Please go ahead, ma'am. Lindsey Vetter: Thank you, Michelle. Good morning, everyone. Thank you for participating in our second quarter earnings conference call. During today's presentation, we will make forward-looking statements reflecting our expectations and plans about future financial performance and future business opportunities. These forward-looking statements reflect the company's expectations or beliefs about future events based on information currently available to us. Of course, actual results could differ. Please refer to Slide 2 of the presentation that accompanies today's call, our press release and our SEC filings for information on risk factors, uncertainties and expectations that could cause actual results to differ materially from these expectations. During this presentation, we will also refer to non-GAAP financial measures. You can find the reconciliation of each non-GAAP measure to the most directly comparable GAAP measure in the appendix to the company presentation slides, which can be found on the Investor Relations page of our website at www.daktronics.com. Our earnings release for the 2026 second quarter, which was furnished to the SEC on a Form 8-K this morning, also contain certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well a discussion of certain limitations when using non-GAAP financial measures are included in the earnings release, which has been posted separately to the Investor Relations page of our website. I'll turn the call over to Brad Wiemann, Daktronics Interim President and CEO. Bradley Wiemann: Well, thank you, Lindsey. And good morning, everyone. Thank you for joining our second quarter fiscal 2026 call. I'm joined on the call by Howard Atkins, Board member and acting Chief Financial Officer. We will review our fiscal 2026 second quarter results and accomplishments and then take your questions. Turning to our slide presentation on Slide 3. Here are the key messages from the second quarter. We delivered another quarter of solid results, driving revenue and profit expansion through exemplary execution through the first half of the year. The second quarter of each year is typically marked by a heavy slate of project completions and our team's performance with respect to manufacturing, installation and service execution was excellent, with overall efficient project production and delivery supporting our progressively strong results. During the quarter, we completed a number of large-scale installations, including Miami Freedom Park in Major League Soccer; Baltimore Orioles, Major League Baseball; Aramco Stadium in Saudi Arabia; Zayed Sports City, Abu Dhabi; Philly Airport; San Antonio Spurs; University of Buffalo Football; and a nice digital signage project in Cincinnati Convention Center. Our sales and marketing team secured large orders in our Live Events segment related to 3 Major League baseball stadiums and 3 Major League soccer arenas for recent project wins. We are 5 for 5 on large-scale Major League baseball project for fiscal year 2026. We also captured strong growth in our Transportation segment with good uptake of airport and intelligent transportation system projects domestically; and our International segment also drove double-digit growth. These efforts together produced 12% fiscal second quarter order growth from last year's across all business segments. Through our efforts, we delivered our third consecutive quarter of top line growth. We continue to improve our profitability in the quarter through both value-based pricing bounded by guardrails and a sharp focus on operational and cost efficiencies. These efforts produced our second quarter of driving operating income over $20 million. While tariff expenses continue to be dynamic and impactful, we are maintaining flexibility on being responsive to this changing environment. We ended the quarter with product backlog of $321 million, which grew 36% year-over-year, giving us a multi-quarter revenue runway for revenue growth. Turning to Slide 4. In our Live Events business, as I mentioned, we won 6 Major League sports projects this past quarter, 3 Major League baseball and 3 Major League soccer, driving 26.5% order growth from last year. As I mentioned, we are 5 for 5 on large Major League baseball projects in fiscal year '26. Additionally, we won several other stadium and arena display enhancements, as customers continue to expand their digital display footprint throughout the venue. We continue to enhance our product and service offerings to align with customer needs and desires such as our narrow pixel pitch product lines, advanced control system capabilities to engage fans and improved seamless control and management of display content from anywhere, giving venue operators greater flexibility and control over their digital assets. Pictured here is CHI Health in Omaha, Nebraska. In our Commercial business, growth in our on-premise advertising business remained strong and up double digit year-over-year. After a strong performance in the first quarter, as customers continue to successfully transition to next-generation fuel price products, which are short term in nature and offer quick deliveries and feature-rich enhancements. In our out-of-home business, our pipeline of opportunities is expanding as optimism and sentiment continue to rise with independent billboard operators, as we further develop our perception -- their perception of our value proposition through recognition of our brand strength, image quality, reliability, service responsiveness and reputation for innovation with the release of our new billboard product offerings. The outdoor spectaculars projects in city centers continues to be highly competitive and variable in available projects. However, our indoor spectacular projects sold through AV integrator channels are growing through narrow pixel pitch product line introductions with streamlined tools and services. We are seeing growth in the government and military space as well as out-of-home advertising in transportation centers. Orders in this segment decreased 5% year-over-year, primarily driven by fewer large projects awarded in the outdoor spectacular business during the quarter. Pictured here is Park Outdoors. This is their 50th install of a Daktronics digital billboard in Syracuse, New York. Transportation business orders grew 15% from last year, driven by increased demand in our Intelligent Transportation Systems and aviation, along with strong demand for whole matrix parking solutions. We were awarded a 5-year procurement contract from the Utah Department of Transportation for intelligent transportation message displays. Through focused marketing and partner network growth, we have also improved our brand position for indoor solutions, leading to quarter-over-quarter opportunity growth. Pictured here is Spokane International Airport parking application display. This is a nice combination of our strengths in roadways display -- roadway displays, airports and parking solutions. Our International business, which serves all the end markets of our domestic segments served outside of North America, is developing well as our efforts to realign our focus on key geographies over the past several quarters is paying off. Second quarter orders in this segment increased 23.6% from last year, with strong demand in the Middle East and European regions from advertising, stadium and transportation customers. We are also seeing strong uptake of our indoor solutions across multiple markets, especially government entities through growing AV integrator channel partners. Pictured here is a large digital billboard installed at the Metropolitan in Dubai, in partnership with Media247. In our High School Park & Recreation business, after a record first quarter, our second quarter orders were comparable with orders in the second quarter of last year. We have expanded our presence among the 30,000-some high schools in the U.S. and continue to win projects by leveraging our strong value propositions and market differentiators. We expect continued strong uptake of our leading solutions and adoption of professional services, particularly in curriculum development and sports marketing going forward. In the picture here, we have Dak Prescott being recognized for his generous contributions to his high school alma mater, Haughton High, Haughton, Louisiana, part of which included a Daktronics video system. Turning to Slide 5. We announced this morning that we are enhancing our global manufacturing footprint with the opening of a facility in Saltillo, Mexico, with a target for production operation in late April 2026. This location is strategic in that it offers a broadened network increasing the agility of our global production capacity, provides opportunity for growth in line with our growth projections, favorable trading relationship with the United States and trading relationships with key supplier countries. Overall, the new facility will complement our existing footprint and offer optionality as we optimize production going forward. Moving to Slide 6. Our commitment to innovation continues to drive market differentiation and value for our customers. In the second quarter, we've made significant progress in the following areas: delivering solutions that address evolving market demands. First, we expanded our narrow pixel pitch offering in the U.S. market with an additional 2.5 millimeter chip-on-board model. This new model is more robust and lighter weight than previous product offerings and delivers superior image quality at low skewing distances, making them ideal for high-end retail, corporate environments and venue applications where visual excellence is nonnegotiable. Second. We introduced our new billboard product series, a next-generation entry-level digital billboard designed and cost optimized for the out-of-home advertising market. This product brings enhanced performance and operational efficiency to outdoor applications, expanding our competitive positioning in the billboard space. Third. Sports venues are demanding easy-to-use integrated and mobile technology solutions, our new All Sport Lite mobile scoring app delivers a modern approach to entry-level scoreboard control. Designed for youth sports, practices and community events, it makes scoring simple and intuitive for everyone from coaches to volunteers. Last. We launched our Venus Control Suite Live, our cloud-hosted content management system, purpose-built for live event venues. This platform enables seamless control and management of display content from anywhere, giving venue operators greater flexibility and control over their digital assets. For the remainder of fiscal 2026, we have 3 significant product launches planned: A next-generation LED street furniture featuring our enhanced LED technology that targets the premium out-of-home advertising market and delivers improved visual performance and operational capabilities for urban environments. We are also developing a next-generation advanced indoor video display that incorporates customer and market feedback to offer improved visual experience, improved robustness and greater cost efficiency. We are also preparing for the launch of our specialized large-digit fuel price system, which expands our product line offering for high-rise signage for long-distance viewability. The photos shown here are an example of our indoor pixel pitch at a Major League soccer stadium, Sporting Kansas City's Children's Mercy Park, an 18,000-seat stadium designed specifically for soccer; and below that, a shot of our All Sport Lite mobile scoring app, which makes it easy and intuitive to run a Daktronics scoreboard with just a mobile device. Our progress down the innovation road map is on schedule. Turning to Slide 7. The implementation of our transformation plan remains on track and continues to deliver tangible benefits to the business and our reported results. Here is an update for the second quarter on initiatives and progress. The strategic price adjustments we have implemented align with our value selling approach allowing us to maintain our premium positioning while protecting margin in the current challenging environment. This initiative is on track, and results to date continue to show customer acceptance of our value propositions. The Software-as-a-Service product trial was launched successfully. This initiative was designed to help identify priority areas for a broader subscription management strategy that we continue to expand upon and will further develop over the next several quarters. The Software-as-a-Service initiative augments how we serve the market, developing recurring revenue subscription models and simplify customer engagement. Our disciplined approach of prioritizing high-growth international geographies and market segments as concentrating our resources where we see the strongest demand and best returns. Our digital transformation projects are improving our process efficiency, modernizing our technologies, driving data insights that improve decision-making and create value for our customers. We are overhauling our quoting platform to make it easier and more efficient for our customers to do business with us. Additionally, as part of our digital transformation, we are building out our AI experimentation road map and governance, upgrading our ERP system and making service platform enhancements. And as part of our strategic planning process, we are proactively aligning our operations and product designs with the evolution we anticipate in the underlying technologies that drive customer experience and demand. Actions that we have completed include the following drivers of cost benefits and customer experience: Achieving faster inventory turnover and improved inventory efficiency, enhancing our customer experience with our modernized service system launched in May, deploying AI-guided troubleshooting tools with our technical services team to speed resolution of customer issues, improving our input costs through leverage of our purchasing power, reducing product complexity and time to market and aggressively renegotiation of key supply contracts to secure better terms and pricing. Now I'll turn the call over to Howard Atkins, our acting Chief Financial Officer, to review our financials. Howard? Howard Atkins: Thank you, Brad, and good day, everyone. Thank you for your interest in Daktronics. The Daktronics team produced another solid quarter in the second quarter with double-digit year-over-year growth in new orders, in sales revenue and in operating income. This slide compares the second quarter with both last year's second quarter for the year-over-year comparison and also the first quarter of fiscal '26 for the sequential quarter results. Let's start with the bottom line net income. Daktronics second quarter '26 net income after tax was $17.5 million or $0.35 per fully diluted share. Last year's second quarter net income of $21.4 million included a $10.3 million fair value adjustment on the convertible note that has since been converted and also contained $2.8 million of consulting-related expenses associated with the business transformation initiatives. Adjusted net income a year ago, therefore, was $13.9 million after removing these nonrecurring expenses and noncash benefit. So our second quarter 2026 net income rose 25.4% on a fully adjusted basis. Our effective tax rate in the second quarter was 20% compared to an average statutory tax rate of 25%. Since we've had solid earnings so far this year, we're able, starting this year, to take advantage of the new tax laws that permit accelerated depreciation of R&D and other expenses. On a pretax basis, operating income for the quarter was $21.6 million compared with $15.8 million earned in the second quarter of 2025, which, if you remember, included $3.3 million of transformation-related consulting expenses. Our bottom line results were driven by revenue growth at the top end of our 7% to 10% target range, and our capture of the pricing benefit and structural cost savings from the implementation of our business transformation initiatives. Our gross profit margin was 27% in the second quarter and operating margin was 9.4%, both improved from last year and operating margin within striking distance of our target 10% to 12.5% range. These key margins are being driven by several factors. First, the impact of strong order growth, the backlog revenue tailwind we have generated off of 3 consecutive quarters and our efficient order to revenue conversion. Second. The benefit of fixed cost operating leverage as total revenue grows relative to fixed costs. Third. Of course, we've talked about value-based pricing initiatives, which are now built into our product and project pricing across the board. And finally, operating efficiencies, as Brad mentioned previously, up and down the supply chain from the business transformation work started late last year and other initiatives to reduce structural costs. These benefits, of course, were offset in part by the tariff expense we have this year that we didn't have last year. This year, we incurred $8.8 million of tariff expense gross in the second quarter compared with $1.5 million of tariff expense in the second quarter of fiscal '25. Let me now turn to Slide 9, which shows you our business segment revenue. One of our key objectives has been to diversify our revenue sources, making us less dependent on any one business segment and generating more organically recurring total income. This table shows you the contributions to our revenue growth from each of our business segments in the second quarter of this year and last year and sequentially from the first quarter of fiscal '26. It also shows you, all the way on the right, the gross profit margin earned by each business segment in the second quarter. There are a number of factors, of course, which drive revenue in each of the business segments in various ways, including, among other things, order growth, which, as you know, has been very strong; our value-based pricing initiatives; increases in the size and breadth of our sales and marketing teams; our ongoing focus on control systems, servicing and customer experience efforts; and of course, as Brad mentioned earlier, our leading edge in product innovation. We've had solid growth in either or both of the year-over-year and sequential revenue, as you can see in this table. The table also shows you as our mix has changed from the first quarter to the second quarter, if you remember, we had a higher concentration of HSPR revenue in the first quarter and a higher margin. As we go forward, as you'll see in a second, we're going to have a little bit greater concentration in Live Events. Let me now turn to the segment product backlog experience. In terms of order to revenue conversion, our product backlog stood at $321 million at midyear, up nearly 36% from a year ago. Now our product order to revenue conversion is a factor of a number of variables, including, for example, mix. As our mix changes, the product backlog can even take longer or shorter to come through. I just reported that our order mix in the second quarter, for example, was -- Live Events was about 35%, 36% of our order mix. But as you can see on this chart, Live Events will be currently -- is currently about half of our backlog mix. What that means is that as it's weighted towards Live Events, some of the major products will be -- that we've announced and Brad talked about earlier, will be expected to start converting through next spring. And converting that full backlog will take some time but also results in more predictable growth and better revenue recurrence, giving us a multi-quarter revenue runway. Another factor here is timing. As we've previously disclosed, the Tennessee Titans order, for example, that we took -- booked in the late last year, will only start up and -- won't start up until after the third quarter that we're in right now. So time when the orders start actually has an impact on this revenue conversion. And the third factor I'd point out would be holidays. As a technical matter, in the third quarter, as you may remember, our third quarter revenue and income patterns typically are seasonally low. We have, as you know, in the third quarter, the Thanksgiving holiday, the Christmas holiday and New Year's, all of which reduce the time in which orders actually do get converted to revenue. So that's the principal reason why we have this typically slower third quarter. Now I'll move to Slide 11, which discusses our inventory efficiency. One of the key initiatives undertaken as a result of our business transformation analysis late last calendar year has been a program of increasing the efficiency of our inventory management. This was an early win idea and the results have been very successful. This chart shows you our inventory to sales ratio over the past 5 quarters and indicates that as revenue has grown, we have successfully operated the company with leaner inventories. This has in turn improved our overall balance sheet strength, giving us a higher investable cash position and has also helped contain tariff costs on excess inventory. Let me now turn to our balance sheet. Balance sheet strength has been a hallmark of the company and will remain a hallmark of the company going forward. At the end of the second quarter with a net cash balance of $138.3 million, an increase of about 20% from the comparable quarter -- comparable year-end position of $115.5 million. The increase in our cash position, of course, is a consequence of our strong earnings as well as our working capital management, as I previously disclosed. As of today, the company can repurchase up to $25.7 million worth of shares, including $5.7 million of previously authorized unused share repurchase capacity plus an additional $20 million of share repurchase capacity just authorized by the Board. We also announced in an 8-K that in late November, we have converted our commercial bank back-up credit line from an asset-based facility to a cash flow facility, which reduces its cost and provides the company with additional financing flexibility if necessary. So all in all, as our cash balance has increased, the company is in a terrific position to optimize its capital position and invest for higher returns for our stakeholders and particularly for our shareholders. We have no borrowings, by the way, under our company's bank line of credit and none are contemplated. Let me now summarize our financial position and give you some ideas about the outlook. Again, we delivered a solid quarter of double-digit order revenue and income growth,, while maintaining strong levels of operating profitability. With the help of improved sales tools and processes and having more sales boots on the ground, we've built a strong backlog entering Q3 that gives us a good tailwind with a lot of capacity and potential revenue runway for the next few quarters and smoothing out our revenue generation over time. Our strengthened balance sheet offers us increased flexibility for capital optimization. Looking ahead, the third quarter of our fiscal years, as I mentioned earlier, are typically seasonally slower largely due to the fact, as I mentioned before, on the holidays, but we continue to target year-over-year revenue growth. We continue to invest in innovative products and services to extend our technology leadership. And our focus on increasing the contribution that our services suite makes to consolidated revenue creates more recurring and less capital-intensive revenue streams, which is additive to our return on invested capital. Finally, we've, again, strengthened the balance sheet and have increased our share repurchase capacity to minimize the dilution in shares and contribute to investor returns. We are planning an Investor Day in early April, and we'll provide you with more specifics as they become available. Now I'll turn the call back to Brad. Bradley Wiemann: All right. Thank you, Howard. Moving to Slide 14. The forward-looking plan that we created 3 quarters ago was designed to materially improve our sustainable growth, market penetration, overall profitability and return on invested capital that our business model delivers. To date, our efforts are successfully accruing margin benefits, and we are tracking overall toward our objectives of operating margins of 10% to 12%, operating it in the top quartile return on invested capital target of 17% to 20% and achieving a compound annual growth rate of 7% to 10% by fiscal year 2028. Our plan is in place. We are executing on it. We have work to do, and our team is committed to its success. Going forward, we will continue to implement improved financial planning protocols and incentive compensation plans that better align compensation with shareholder value and with annual operating performance, enhancing our ability to drive business results and compensate accordingly. Turning to Slide 15. As we look forward to the second half, our product backlog, as Howard mentioned, is $321 million, up 36% year-over-year, capturing demand and driving multi-quarter revenue tailwind. We have demonstrated our increased efficiency and revenue conversion and successful inventory, supply chain, manufacturing and cost management. Our pipeline of market opportunities is supporting our growth objectives. We are adding manufacturing capacity in Mexico and in Ireland to increase our flexibility and complement the 80% of product fulfillment currently completed in the U.S. We are staying responsive and flexible in a dynamic environment. We are focused on differentiated industry-leading product introductions and supporting growth through high-return product research and development, and we are executing our transformation plan with its benefits demonstrated in our results. We are on track with our road map and our 3-year growth, profitability and return targets. I want to thank the entire Daktronics team for their continued focus, strong performance, ingenuity and dedication. I'll now turn the call over to Andrew Siegel, Chairman of the Board, for some further remarks. Andrew Siegel: Brad, thank you, and thanks to you and Howard for leading the team to another strong quarter as we'll execute on our plan to drive growth and shareholder returns. Both of you talked about the outlook. So it's an appropriate time for me to introduce Ramesh Jayaraman, who officially starts work at Daktronics today and will assume the President and CEO role as of the start of the fourth quarter in February. The Board's most important job is to make sure the person running the company has the energy, ambition, skills, experience, character and talent to lead the team to achieving the company's potential. Clearly, the steps that Board has taken over the past 2 years demonstrate how much your Directors believe in and are committed to that potential. You saw last week's announcement, so I don't need to repeat any of that except to summarize that the Board selected Ramesh from among many highly qualified and interested candidates for this position because he is a transformational leader. He's a proven operator, he's a business grower, he's built distribution channels all over the world, he's a high-energy guy who sets the sights high and build teams that deliver. He knows our industry well through his time at Harman and at Bosch. He's managed P&Ls, our size and bigger, and he's driven growth organically and through M&A at higher than market growth rates. So although he just started today and isn't in a place to start answering questions just yet, we wanted to use this opportunity to have him begin to introduce himself to all of you with more to come over the next few months, including at the Investor Day. Welcome, Ramesh. Ramesh Jayaraman: Thank you, Andrew. Good morning, everyone. I just want to take this opportunity to introduce myself and say how honored and energized I'm to join Daktronics. I have known Daktronics for the past nearly 10 years of association in the AV industry. I'm excited to join Daktronics at this pivotal time as we continue the journey of transformation for sustainable and profitable growth. I'm looking forward to working with the very talented Daktronics team and serving the team as their CEO. I'll be officially starting in the CEO role from February 1. And my time between now and then will be to be on a look less and learn more, so I can hit the ground running in the fourth quarter. Thank you again for your interest in Daktronics, and I look forward to meeting you at the upcoming Investor Day in April. Brad, back to you. Bradley Wiemann: Okay. Thank you, Ramesh, and thank you, Andrew. I'll now turn the call back over to the operator for questions. Operator: [Operator Instructions] Our first question will come from the line of Aaron Spychalla with Craig-Hallum. Aaron Spychalla: First, I appreciate the continued disclosures in the presentation this quarter, especially on the backlog by segment. Can you just maybe talk about how you expect that to convert to revenue over the fiscal year and just kind of the margin profile in there? I know it can kind of vary by segment. And then just you talked a little bit about order conversion, just how does kind of book to ship how does that look if we kind of think about backlog plus that? Howard Atkins: Well, a lot of factors go into order to revenue conversion. The one that we try to highlight on this particular call is the idea, and we've talked about this before, that a higher percentage of our backlog is now in the Live Events segment. I mentioned statistically, our orders -- Live Events orders in the second quarter were 36% of our total orders, but in terms of the backlog, it's about 50%. So that gives you some idea of how the backlog is skewed a little bit more towards Live Events. And Live Events orders, as you may remember, are -- they typically don't start right away, so they're not standard orders. They're customized orders and they have different starting dates. We mentioned that the Titans order doesn't even start until after the third quarter, so that's not going to be revenue in the third quarter yet. And that the stadium orders that Brad has talked about, which are fantastic and give us a good -- great runway, those will be spread out over -- through the spring, actually. So it takes a while to get to orders sometimes, but the good news is that, that gives us more recurring revenue over a longer period of time and more predictable revenue over a period of time. So that's one big factor. I mentioned the seasonally slow third quarter. We'll have that again this year because we always have those holidays and same holidays occur every third quarter, and so that will be a factor. And then, of course, the remaining factor is our potential order growth. So on top of the chart, I want to make sure we're not misleading you by showing you that chart. That chart just speaks to the backlog conversion. Of course, we're going to get new orders every quarter, and that is also going to be converted to -- adding to revenue growth and revenue occurrence. So lots of factors, Aaron, go into this. The one that we try to highlight for you here is the distinction, if you will, between orders and when they will start occurring as it pertains to Live Events in particular. Bradley Wiemann: Yes. Maybe just to add on to that, Aaron. Our standard order business typically turns in weeks 4, 6, 8 weeks and our large project business has all those variables that Howard mentioned. So we have room in our third quarter yet to bring in orders and convert it to revenue in our standard order business. Aaron Spychalla: Understood. And then maybe can you just touch on the margins that you've been adding to backlog? And maybe just looking at like year-over-year the kind of margin improvements, any way to just, at a high level, roughly quantify the breakdown between some of the value-added pricing or operating efficiencies just kind of to get a better idea and really good performance, especially considering the tariff impact as well? Howard Atkins: Well, that is the story. Value-add pricing and the operating efficiencies coming off of the work that we've already done on structural cost savings have positively contributed to -- mostly to the operating margin. I focus your attention to that because our gross profit margin has a number of other factors connected to it that change from quarter-to-quarter. But the storyline here is that we got pretty close again to a 10% operating margin and that really is a value-based pricing, order growth, structural cost efficiencies coming off of the work that we did already last year, offset in part by the extra tariff. So -- and that's a big item because our extra tariff expense this year is almost another $8 million on the tariff expense that we had in the quarter of this year that we didn't have a year ago, and we -- our margin is still up from where it was a year ago. Aaron Spychalla: Yes. Understood. Yes, I was just trying to understand if you did kind of ex the tariff impact, it's almost 13% operating margin, up 400 basis points year-over-year. I was just trying to understand any kind of breakdown of what that split could be between value-added pricing and just maybe some breakdown of the operating initiatives. But maybe third on the Mexico plant, can you just talk about how much that expands capacity by maybe in percentage terms or dollar terms? Are there any kind of segments this is focused on, in particular, and it seems like there's some benefits to the business from a tariff perspective. Just how much investment might be needed for that plant? Bradley Wiemann: Yes. It's a small investment. We're leasing the facility in Mexico. We're putting some equipment in there. What we build and how we go about it is going to be determined over time, but this was complementary to our plants here in the U.S. as well. So we're able to bring product in, have it assembled, manufactured and brought into the States. It's a small operation at this time. We have room for growth if we need to do that, and that leads into that comment I made about optionality earlier today, optionality into the future about our overall production capacity and where it's at and how it plays into tariffs and all the other things that come our way. So it's a small operation at this time. Aaron Spychalla: No, I appreciate that. And then just maybe one last quick one. I appreciate again the slide on inventory management and just good to see the working capital management over the last year getting the cash conversion cycle down to kind of pre-COVID levels. Just how do you see that trending moving forward? How much more room for improvement do you see from those types of initiatives on working capital? Howard Atkins: I'd say it's going to remain a focus of the company, but we're pretty much where we try to get to as a result of the analysis that we did last year and basically pairing off excess inventory and putting in place the processes to keep it managed efficiently. So it'd be misleading to say it's going to improve a lot more from where it is right now. But as revenue grows, that's going to have a positive impact. Operator: [Operator Instructions] Our next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Congrats on the nice performance here, and welcome on board Ramesh. I'm curious, given the strong backlog growth that we saw, how should we think about the third quarter softening? Bradley Wiemann: Well, you mentioned it. We have a great backlog coming in. The softening, Howard talked about it as far as the holidays, we have fewer days, fewer available work days to convert inventory or convert our backlog over into revenue. So that's the primary thing. But we are sitting in a nice backlog, and we'll use the factories to the extent that we can and plan to have employees take some time off during the holidays. Anja Soderstrom: Okay. And then in terms of the capacity, I know you are adding the Mexico plant, how should we think about the capacity utilization in the U.S. and in the other facilities? Are you continue some production from there to Mexico or are you seeing the growth going into Mexico? Bradley Wiemann: No, this is really fitting into our growth objectives. So we -- that's the overall plan, the 7% to 10% that we talked about over the next 3 years. This is complementary to that. So we don't plan to move any work from the U.S. factories over to Mexico, and so this is part of our expansion plans. Anja Soderstrom: And how far is this expansion is going to bring in terms of revenue before you need to expand further? Or is there other way you could expand in terms of -- no, how much revenue can this footprint facilitate before you need to expand further? Bradley Wiemann: Yes. This is a small footprint that we're bringing in over there and about 80% of what we manufacture for our customers worldwide comes out of our U.S. factories. And that hasn't -- this isn't changing with that. So this is a part of our overall expansion plans of revenue, and it's a small footprint, like I mentioned. So I would still foresee us being around that 80% here in the U.S. So just making up part of that growth expansion. Operator: And I am showing no further questions at this time. And I would like to hand the conference back over to Brad Wiemann for closing remarks. Bradley Wiemann: Well, thank you, everyone, for joining the call today. And we will be appearing at the Sidoti conference in January. Have a wonderful holiday season, as we want our employees to do as well. And we look forward to speaking with you on our third conference call, our third quarter call. Have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Thank you for standing by, and welcome to Skillsoft's Third Quarter Fiscal 2026 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers present, there will be a question and answer session. Please note that today's call is being recorded and a replay of the call and webcast will be available shortly after the call concludes for a period of twelve months. I would now like to hand the conference over to your first speaker today, Stephen Poe, Investor Relations. Thank you. Please go ahead. Stephen Poe: Thank you, operator. Good day, and thank you for joining us to discuss our results for the third quarter ended October 31, 2025. Before we jump in, I want to remind you that today's call will contain forward-looking statements about the company's business outlook and our expectations that constitute forward-looking statements within the meaning of The U.S. Private Securities Litigation Reform of 1995, including statements concerning financial and business trends, our expected future business and financial performance, financial condition, and market outlook. These forward-looking statements and all statements that are not historical reflect management's current beliefs, expectations, and assumptions and therefore are subject to risks and uncertainties that could cause results to differ materially from the conclusions, forecasts, estimates, or projections in the forward-looking statements made today. For a discussion of the material risks and other important factors that could affect our actual results, we refer you to our most recent Form 10-Ks and other documents that we file with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements or information as of their respective dates. During the call, unless otherwise noted, all financial metrics we discuss other than revenue will be non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. For example, listeners should be cautioned that references to phrases such as adjusted EBITDA and free cash flow denote non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation or as a substitute for GAAP financial measures. A presentation of the most directly comparable financial measures determined in accordance with GAAP as well as the definitions, uses, and reconciliations of non-GAAP financial measures included in today's commentary to the most directly comparable GAAP financial measures is included in our earnings press release which has been furnished to the SEC on Form 8-K and is available at www.sec.gov and is also available on our website at www.skillsoft.com. Following today's prepared remarks, Ronald W. Hovsepian, Skillsoft's Executive Chair and Chief Executive Officer, and John Frederick, Skillsoft's Chief Financial Officer, will be available for Q&A. With that, it's my pleasure to turn the call over to Ron. Thanks, Stephen. Good afternoon and thank you for joining us. Ronald W. Hovsepian: We began our transformation in August 2024 with focused goals: reach revenue inflection, return to growth, and grow at or above the market while maintaining strong profitability and cash flow. We centered our strategy on the talent development market because it influences performance across almost every business function. This focus is delivering early results, with increasing DRR for enterprise customers, strengthening account health, and strong early interest in our platform. AI is accelerating change across industries and workforce readiness has become a top priority for boards and executive teams. Many organizations face delays in business transformation due to skills gaps that limit execution speed. This is why more than 70% of the CHROs cited skills visibility as a top three investment priority in a recent customer study. They need clear insight into skills and future requirements along with faster paths to close gaps supported by strong governance. Learners also expect personalized development and real-time support in the flow of work. Our next-generation Skillsoft Precipio platform directly addresses these needs by unifying content, blended learning, hands-on practice, and skills intelligence into one platform. This integrated approach helps customers act faster, reduce skills gaps, and accelerate transformation efforts. Our enterprise scale, product innovation, services expertise, and learning DNA give Skillsoft a clear advantage as organizations adopt skills supply chain models. This strategy positions Skillsoft for sustained growth and stronger customer value as the market shifts towards AI-driven skills management. In anticipation of this shift to AI-powered skill solutions, we spent FY '26 reshaping our go-to-market approach to ensure we can fully capture the opportunity ahead. We anchored this work in financial discipline with a leaner, more directed cost structure and capital allocation focused on return on invested capital. On marketing, we rebuilt the team with capabilities needed to support the platform transformation. While the hiring took longer than planned, the team is now in place, and we will introduce our exciting updated branding in '27. On sales, we invested in skilled subject matter experts so customers can connect our differentiated capabilities, particularly in AI simulations and enterprise skills management, to their workforce needs. Their engagement is already correlated to strong performance, with deals involving these specialists delivering a 105% dollar retention rate in the third quarter. We also recently realigned the sales coverage to focus on large customer enterprises who are deeper adopters of our advanced features and have demonstrated approximately 115% dollar retention rate in Q3. On product, we released the early version of our platform in September, signed four large enterprise customers, and expect general availability in '27. Initial customer response has been strong, and we remain confident in delivering our TDS commitments and positioning FY '27 and beyond for growth. In our annual planning process, we also saw meaningful momentum in our AI efforts, with customers adopting AI-driven simulations at scale, and our teams using AI for more than 50% of the design, curation, and production of content, contributing to headcount and vendor reductions reflected in the year-over-year operating expense improvement. Turning to our GK segment, our early priorities were to stabilize the business and expand our public sector presence. While we have secured meaningful new wins, including a European public sector award in France worth up to $25 million over four years, the financial performance of GK remains negative. In Q3, GK accounted for 73% of our revenue decline while representing only 22% of total revenue. Given these dynamics and in an effort to remain aligned with our company growth timeline and customer needs for multimodal learning, we have undertaken a full strategic review of the GK segment and concluded that a partnership-driven model is more appropriate than continued ownership. Therefore, we began pursuing a range of alternatives with the GK asset in Q3. Ideally, we want to maintain a two-way partnership where GK will continue to provide led training services to our customers, while Skillsoft provides content and platform capabilities in return. AI is not replacing learning platforms; it is increasing their strategic relevance. The World Economic Forum estimates 85 million roles will be displaced and 97 million new roles will emerge, underscoring that this shift is not only disruptive but a generational reskilling opportunity. Organizations now need trusted systems that curate knowledge, validate accuracy, measure outcomes, and integrate directly with their talent and skills frameworks. Over the past eighteen months, we have rebuilt our go-to-market model, strengthened our product roadmap, advanced our AI capabilities, reduced our operating expenses, and realigned our portfolio, including the action on GK, to match how the market now prefers to consume learning and ILT. By applying AI to elevate content creation, deliver personalized and multimodal learning experiences, and enable safe high-impact simulations, we are confident that Skillsoft is well-positioned to help enterprises navigate workforce transformation and accelerate their move towards true governed skills management in the years ahead. With that, let me now turn the call over to John to cover our financial results in more detail. John? John Frederick: Thank you, Ron, and good afternoon, everyone. As a reminder and as noted at the opening of the call, consistent with prior quarters, this section covers non-GAAP measures unless otherwise stated. At a high level, for the largest components of our business, the summary for the quarter is that the enterprise portion of Talent Development Solutions or TDS, which represents around 91% of TDS, was down slightly from a revenue perspective, reflecting customer churn from earlier in the year, but is largely on track. GK has struggled this year and in the quarter particularly as the market shifted to blended learning. GK had a considerable negative impact on revenue, earnings, and cash flow this year. While we made progress in some of the key initiatives around this business, we concluded in our annual planning cycle that it is better to partner with an IoT provider than to own that learning modality. Accordingly, we began a strategic review on that business. I'll talk in more detail about the implications of our decision to pursue options related to the GK business in just a few moments. Related to guidance, we're on track for TDS' component of the anticipated performance, but all on a consolidated company basis due to GK. Now turning to the results. Revenue per TDS was $100.8 million for the third quarter, down 2.1% year over year. Around 70% of the decline came from our B2C learner product, which represents around 9% of TDS revenue. The learner business utilizes a digital customer acquisition motion which continues to struggle to adapt to changes in organic search algorithms, hampering lead generation and customer acquisition. The larger portion of our business, enterprise solutions, was down approximately 1%, reflecting customer churn occurring earlier in the year. Global Knowledge revenue of $28.2 million in the quarter was down approximately $6 million or 17.6% year over year. Like the first half of the year, we continued to see softening demand reflecting a fundamental shift in the way the customers want to purchase instructor-led training. Customers are increasingly looking for end-to-end solutions which combine services with the delivery of IoT. The business was also impacted by spending reductions from the U.S. Government shutdown. Total revenue of $129 million in the third quarter was down $8.2 million or 6% year over year. Our TDS LTM dollar retention rate or DRR, as of the third quarter, was 99% and improved year over year from 98%, reflecting higher customer upgrades. Now I'll walk you through our expense measures, which taken as a whole, continue to see year-over-year improvements. Cost of revenue was $35.1 million in the third quarter or 27% of revenue, up 3.1% year over year, reflecting higher labs and certification spending and cloud-related costs resulting from higher customer utilization. We have changed the way we structure some of these third-party agreements to avoid these sorts of overruns in the future. Content and software development expenses of $13.7 million in the quarter or 11% of revenue were down approximately 2.4% year over year. These improvements largely reflected productivity gains from leveraging AI and sharper focus. Selling and marketing expenses of $35.2 million for the third quarter or 27% of revenue were down approximately 7.1% year over year, resulting from lower headcount demonstrating improved productivity as a result of our transformation efforts. General and administrative expenses were $17.1 million in the third quarter or 13% of revenue, down approximately 11.9% year over year, reflecting lower headcount and vendor spending, again, demonstrating improved productivity. Total operating expenses were $101 million in the third quarter, or 78% of revenue, and were down $4.3 million or 4.1% year over year. Adjusted EBITDA of $28 million was down about 12% compared to $31.9 million last year, with adjusted EBITDA margin as a percentage of revenue for the quarter at 21.7% compared to 23.3% last year. Operator: We estimate that GK contributed negative $3.3 million to EBITDA, driving most of the reduction. John Frederick: GAAP net loss was $41.3 million in the third quarter compared to a GAAP net loss of $23.6 million in the prior year period. The increase in GAAP net loss resulted primarily from a non-cash goodwill impairment loss of $20.8 million related to GK to reflect declines in the business. GAAP net loss per share was $4.74 compared to $2.86 loss per share in the prior year period. Adjusted net income of $14.3 million in the third quarter compared to adjusted net income of $11.3 million in the prior year. Adjusted net income per share of $1.65 for the third quarter compared to adjusted net income per share of $1.37 in the prior year. Moving to cash flow and balance sheet highlights. Free cash flow for the quarter was negative $23.6 million compared to a positive $4.1 million in the prior year period. About three-quarters of the cash utilization represented timing and reverses in Q4, with the remaining balance related to GK performance, which is permanent to the year. Drilling down on the timing portion of cash flow variance further, roughly half of that variance reflected timing of vendor payments, which will normalize in Q4. Within customer collections, we absorbed about $6 million of delayed cash receipts from the federal government shutdown, with those receivables being collected in Q4. Looking at the full-year outlook, you may recall that we originally expected free cash flow for the year to be in a range of $13 million to $18 million. While we've already seen delayed government-related receipts coming in during Q4, weakness in GK combined with costs associated with the evaluation of the strategic alternatives for that business will result in lower free cash flow for the fiscal year lower than originally anticipated. Operator: Based on current levels of working capital and John Frederick: our forecast of cash payments and disbursements in the fourth quarter, we expect positive free cash flow of between 0 and $5 million fiscal '26. Absent GK, our free cash flow guidance would have been unchanged from our previous guidance for the full year. GAAP cash, cash equivalents, and restricted cash were $77.5 million at quarter-end, traditionally our seasonal low point. Total gross debt on a GAAP basis, which includes our borrowing on our term loan and accounts receivables facility, was $578 million at the end of Q3, down slightly from approximately $581 million at the end of fiscal 2025, reflecting normal amortization. Total net debt, which includes borrowings on our term loan and accounts receivable facility, net of cash, cash equivalents, and restricted cash, was approximately $500 million, up from approximately $477 million at the end of fiscal '25, reflecting Q3 being our seasonal cash balance low point. Naturally, we expect cash to build during Q4 given normal seasonality. As mentioned earlier, we initiated a strategic review process for our Global Knowledge segment. In order to help you understand the details, we've broken out the segment level adjusted EBITDA for you this quarter. This analysis shows that GK represented most of the year-over-year decline in adjusted EBITDA. The process of removing this top and bottom line drag will be accretive to growth margins and improved free cash flow and leverage as well. In connection with the decision to explore strategic alternatives for GK, we're unable to provide revenue and adjusted EBITDA guidance for GK for the remainder of the year but will do so for the TDS business. Accordingly, we're withdrawing previous consolidated revenue and adjusted EBITDA guidance given it included GK. For TDS, we expect revenue for the full fiscal '26 year to be between $410 million and adjusted EBITDA of between $112 million and $116 million or about 28% of revenue. Interestingly, the guidance for TDS compares closely to our previous consolidated guidance of $112 million to $118 million. With that, operator, please open up the call to questions. Operator: Thank you. We will now be conducting a question and answer session. Before pressing the star key. Our first question comes from the line of Ken Wong with Oppenheimer. Please proceed. Ken Wong: Fantastic. Thanks for taking my question. Really appreciate all the detail, guys. Maybe first one on the strategic review. Can you help us kind of think through what timeline could be for, you know, getting some sort of a transaction done there? And you know, as you think about, you know, the prioritization in terms of Operator: yes, Ken Wong: the speedy exit from the business versus trying to optimize for price. Like, how should we think about the kind of which direction you're tilting there? Ronald W. Hovsepian: Happy to, Ken. Thank you for the question. In terms of your first part of your question, the time frame, as we indicated, in a process right now, so it'd be inappropriate to, you know, speculate on the exact timing. To your point as to what are we optimizing to, I think what John shared with you on the call around the amount of impact that we've had on the cash flow as he walked you through that piece of it. I think the urgency associated with making that better for the company overall or the RemainCo is top priority for the company. That's as far as I want to comment on that particular piece, John. Don't know if you want to add anything to that part. I think the only thing I would add is we have been John Frederick: thinking about this and working on this for a while now. And Rich Walker: consequently, we're into the process pretty heavily. Ken Wong: Perfect. That's actually super helpful. Really appreciate, you know, the context that you could provide. And then on the breakouts between the two businesses, you know, when I look at the margin profile of Core TDS, you know, very very strong at, you know, 28% EBITDA margins. As you guys were thinking about expanding margins, over the coming years, how much of that was influenced by GK is underperforming and you move those margins up in that pulls up the overall business? Or is there still headroom for, you know, the content business as well? Rich Walker: So, thanks for the question, Ken. So we see the profitability in TDS as being really the flagship both growth as well as profitability. The consolidated group. Currently. When we originally modeled out the business when we're going through our original strategic process, and I'm really now going back to August 2024. We really thought about the GK business as being more of a breakeven business that would grow and as and contribute to cash flow, maybe not at the same rate as you would expect TDS? I think from a growth perspective for TDS, sitting today at 28% EBITDA, attractive EBITDA, The most important part now is gonna be to maintain profitability that's an attractive financial profile but investing in a way to get to growth. Because we do think that a dollar vested in TDS right now is really the right place to put any of our bets at this juncture. Obviously, given the process that we're going So I think what you'll see as we go into next year, we're gonna be focused on getting the investment mix correct to drive growth. But we're very comfortable with the profitability profile of the business, both near term and long term. Ronald W. Hovsepian: Just to add to that, Ken. When you think of the transformation in the core of your question, it really is that is gonna be the cash generative part of the company. And as John indicated, that has the capability. So what we started our journey on was really around the transformation. So as you said, you know, you referenced the content business. You know, what I want to highlight is in '26, specifically, we have done a number of things to prepare to address that talent management market, which we both know is a growing market. And as part of that story, what we were really picking on was that dimension around skills that we announced in September. Again, these were, you know, September type announcements. So this is all unfolding now in front of everybody. The shift from content to content and a platform. Now why is that important? A lot of people speculate what AI is gonna do to content, what it's gonna do to every industry. We agree it's gonna redefine it. However, if you study parallel markets, like the media market, what's happened in entertainment, the entertainment market went through three stages. Everybody raced to content was king. It became platform as king. And as we all know, it's now settled down into where it is today, which is streaming platforms with content. And the Warner acquisition is a good example of it happening again. We believe that same hypothesis, and we parallel, I should say. And we believe we're perfectly positioned for that because we do have a content business, now have announced platform part of the business, and that AI native nature of that. And that really positions us well, so for the growth next year. So as we come into the year, we've set the table with what we're doing with product, what we're doing with our brand repositioning the value proposition, all that will begin to get rolled out in earnest as we enter into next year. That's what's been going on behind the scenes, and we're starting to let those pieces come out. The four customers that John referenced, those are people that now have signed agreements and paid us money to be part of that journey in the very early stage. So it's all set up for growth for next year. Ken Wong: Got it. Got it. And I guess on that comment, just making sure we clarify and parse through the pieces. Yep. You know, set up for growth next year. I assume the you know, this isn't necessarily signaling that you guys will see growth next year, but again, perhaps stabilizing the platform, kind of putting the piece in place and maybe optimistically, we could see growth? Or just want to make sure we understand kind of how you're thinking about next year given that we've kind of thought you talked around some comments here? Ronald W. Hovsepian: Yeah. Absolutely setting the table for growth is a quotable piece of what we're doing here. And we'll give you details around that as we end the year. And John was just kind to remind me that we actually had another one of those another customer deal signed last night on that journey on the platform side. Which was fantastic. And that one's actually a competitive win back. So it's really nice to see it. So but the answer to your core question of growth is we'll give you guidance at the right time there. But we are setting the table for growth. And we really do believe that we have Rich Walker: a very attractive growth or a very attractive profitability profile in the business that really gives us the credibility and the wherewithal to invest properly as we go into next year to set the table for growth. Ken Wong: Understood. And then perhaps if we could dive into the public sector, it sounds like the dynamic there has stabilized now that the shutdown is over. But would love to just get your feedback. Any context you can provide. Are we fully out of the wood, or are we still, you know, kind of one foot out? Any thoughts on how that piece of the business is shaping up? Rich Walker: Yeah. It's a great question. So, I'm gonna set aside GK for a moment because the government shutdown during the quarter had a material impact on its open enrollment segment of its business. But if I look at TDS, I look at the DRR related to our federal business, and to our public sector business more generally, that DRR is, you know, kind of been a 103, 104 sort of level. So we're seeing some actual evidence of coming back after having a really tough first half of the year. So we feel pretty good about that. We had some really nice wins in Q3 around the federal business. So that business is pretty healthy. We see it continuing, hopefully, into Q4. And that's really reflected in the guidance that we have for the full year for TDS. Ken Wong: Okay. Perfect. And then again, it feels like excuse me, and then on Q4, maybe a slight softness in 3Q still, but you know, stabilizing. You know, what based on what you're how would you characterize sales cycles, seeing in kind of the early parts of Q4, you know, deal momentum, conversion? Any color you can provide that gives us a little more confidence in that reiterated TDS outlook there? Ronald W. Hovsepian: Sure. Two things. One, for TDS, Q3, we actually rolled out our new sales coverage model while delivering the forecast at the same time. And made some notable changes in our approach there. So I share that with you in the spirit of we really are trying to prepare for what's around the corner and align ourselves for that growth story. In terms of what I see right now, everything's within the normal boundary conditions of what we've learned about the business, some of the discipline we've put around it. From a forecasting perspective. And it all obviously, all that's included in John's guidance. For the quarter. So and most of the comments that were talking about, it goes back a little bit to the repositioning. Ken, we said we're gonna reposition ourselves around what we're doing inside the enterprise because we have the most value there. That's why I shared that a 115% DRR number with you. In those large, larger customers we're seeing the goodness that we want. As part of it. Some of those customers are part of the group that signed up, for the platform, which is great. Right? That's a good thing for us. So again, we put a lot of discipline. We'll package that up as we come into next year. And deliver that story holistically so you can put all the pieces together. But in terms of what I'm seeing right now, we're targeting, I'm seeing the growth. That's why I gave you that 105 and 115 number in my prepared remarks. And want to really see us push ourselves and get everything in place as we come into the year. We're not rolling stuff out, but we're a little bit ahead of the curve as much as we can be. So, you know, again, the platform product. Excuse me. GA of the product is actually in Q1. So the pieces are shaping up. Rich Walker: And for the rollout of the platform, we're focusing our attention primarily on our existing customers. That we have these relationships. We have more than 800 large enterprise customers that are in our base. And right now, we're targeting a subset of those, say, roughly a quarter of them specifically as folks that would be very they're very attractive candidates for the platform. Obviously, where our win rates tend to be much higher with our existing customers. I'm gonna Yeah. For on a relative comparative, it's three or four times higher selling a platform to an existing than trying to win that new. Ken Wong: Got it. Okay. Perfect. And then I realized that you know, global knowledge, you know, might not be something we have to consider too much longer. But as we think about our numbers for the rest of the year and you know, for our model, at least initially for next year, like, what's the right way to think about how that played out? I know you're not providing guidance because it's just a little uncertain, but it fair to assume a slight downtick from expectations in 3Q just given the way you kind of framed the quarter and that carries over into Q4 as far as how we should be kind of tweaking and refining our thinking there. Rich Walker: Yeah. So, certainly, we want to be helpful to try to help think about this within the context of their models. We pulled guidance, and we ultimately decided to not guide on GK just because of the uncertainty that created by the process itself. But I think just in terms of making the math work in your model, yep, a downtick from Q3 is about as good of a way to approach it as any. Ken Wong: Okay. Understood. And then lastly for me, just lots of lots of chatter on AI. It seems like you guys have put in many of the pieces necessary to be successful there. Love hearing about the platform. You know, as you think about the customer interest, the conversations you've had, should we think of these AI capabilities as table stakes that aid in retention, or do you credibly believe based on what you've heard from customers that you can actually capture incremental wallet with these capabilities? Ronald W. Hovsepian: I'll answer it in two dimensions, the customer and the market. So in terms of the market, we know that the customer is going through a transition and a redefinition of what content is and what a platform is to run their skills or talent management life cycles. So inside of there, we believe we can migrate our base and grow from there and get new customers. And then two, when I look at the new accounts, this gives us an opportunity to now have a new conversation. With the customer where we can go in with just the generic platform. I can have a conversation with you about content. I can have a conversation about content and the platform, and then I can have a conversation with you just about the platform. And we've got customers that are in all three of those buckets from the market research we're doing around pricing and packaging. Again, that will also be rolled out in next year, and we've done that review and research and really understand what's happening out there in the market. So that will open it up in two dimensions here. It will open up in the existing base, of customers, and it will allow us to go into the other into new customers we go on the journey. But there's two parts to the story again. Right? And I want us to wake up like a Netflix where I've got a platform and content. Right? That's exactly where I'm going. I'm not implying that we're gonna be Netflix. At all, not this week. Mhmm. But I see the historical pattern. And that's what we set everything out on candidly a year plus ago now. And our planning was that's what we thought would happen in this market. And I still believe that to be true. That uniqueness of having that experience, that uniqueness of already migrating our capabilities and our own practices 50 plus percent of the content in the platform now was AI-driven as part of it. That's as good as you can get in such a short window. And I think that's a very important point. What it also does is it adds to the tools that we announced in September because those are the same tools that our customers are gonna use, we're using. So we can walk in with incredible credibility for our customer because I can talk to about their own content, I can talk to about our content. I can talk to about how it will flow into AI personalized experiences. Those are the things that the customer wants from us on managing their skills life cycle and the organizational skills. And I think we're really well positioned to do that. Now we gotta go out and tell the story. All of that is all queued up to start happening in Q1. A brand, the sales, Hardee's is under all underway, the pricing, the packaging, the sales skills update upgrades. All those pieces are all underway right now as we start to head into it along with a very detailed product plan. Rich Walker: And all of this is getting integrated across the company. So the piece is getting it's actually fairly important for us to have commonality of message across the entire company, both with respect to the customer and within the company. John Frederick: Very true. Ken Wong: Perfect. Perfect. And I said that I actually have one more question. Sure. Just on you know, how should we think about your approach to the investment cadence on a go-forward basis? I mean, we went through a restructuring, and then you probably had a bit of optimization on the GK side. Well, perhaps Stephen Poe: know, Ken Wong: you may partially investing on the TDS side. Again, hard to see through the optics of kind of the blended John Frederick: business. Ken Wong: Know? So now that you've got you know, just what you guys feel is core to your operating model, what's the approach? Like, what's your mindset right now, Ron, John? Rich Walker: Yeah. So really, first ordinal point for us was to try to make sure that we create a track record hitting our TDS EBITDA. As you've seen in the past several quarters, we've been able to reduce our cost structure year over year pretty consistently. And we saw some interesting nuggets as we've been going through the year. Ron talked about one of them, which was the adoption of AI within our four walls in terms of content creation. So we're looking every quarter. Every month, for interesting ways to drive productivity. That will continue for the foreseeable future. And then as we prove our model, then we'll shift some of that economic goodness into investing in growth. Okay. Ken Wong: That makes a lot of sense. Really appreciate all the color guys. And yep, best of luck going forward, and, yeah, we'll circle up later on. Ronald W. Hovsepian: Sounds good. Thanks, Ken. Operator: Thank you. There are no further questions at this time. I'd like to pass the call back over to Ron for any closing remarks. Ronald W. Hovsepian: Thank you. Thank you to all of our everybody who joined the call. Just to summarize, we worked our way through the quarter, as we shared with you just now, there are a bunch of significant things that have occurred now in the transformation. Obviously, the announcement around GK. But more importantly, what we just what I was just summarizing back to Ken's last question, which is focused on a large and growing market. We've refocused ourselves through the enterprise reach. Companies making the migration to adding a platform to our content history and capabilities to migrate that revenue and introduce new revenue streams. All those pieces are now queuing up and setting the table for FY '27. Those pieces, as I said, branding from our team is well underway. The sales model has already shifted and was implemented in Q3. When I think about how we've embraced AI as a native construct inside the platform. That's been critical for what we've done as we've gone on the journey. And all the pieces are now coming together to align towards that while we deliver on what John just highlighted for the commitment for Q4. So I thank you all, and may you all have a good night. Look forward to chatting with our investors shortly. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Rich Walker: It's a tricky
Operator: Thank you for joining us and welcome to the Planet Labs PBC Third Quarter of Fiscal 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand. 6 to unmute. I will now hand the conference over to Cleo Palmer-Poroner, Director of Investor Relations. Cleo Palmer-Poroner: Thanks, operator, and hello, everyone. This is Cleo Palmer-Poroner, Director of Investor Relations at Planet Labs PBC. Welcome to Planet's 2026 earnings call. I'm joined by Will Marshall and Ashley Johnson, who will provide a recap of our results and discuss our current outlook. We encourage everyone to please reference the earnings press release and earnings update presentation for today's call, which are available on our Investor Relations website. Before we begin, we'd like to remind everyone that we will make forward-looking statements related to future events or our financial outlook. Any forward-looking statements are based on management's current outlook, plans, estimates, expectations, and projections. The inclusion of such forward-looking information should not be regarded as a representation by Planet that future plans, estimates, or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions as detailed in our SEC filings, which can be found at www.sec.gov. Actual results or performance may differ materially from those indicated by such forward-looking statements, and we undertake no responsibility to update such forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. During the call, we will also discuss historic and forward-looking non-GAAP financial measures. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that these measures provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. For more information on the non-GAAP financial measures, please see the reconciliation tables provided in our press release issued earlier this afternoon, which is available on our website at investors.planet.com. Further, throughout this call, we provide a number of key performance indicators used by management and often used by competitors in our industry. These and other key performance indicators are discussed in more detail in our press release and our earnings update presentation, which are intended to accompany our prepared remarks. At this point, I'd now like to turn the call over to Will Marshall, Planet's CEO, chairperson, and co-founder. Over to you, Will. Will Marshall: Thanks, Cleo, and welcome everyone joining us today. It was another strong quarter, so let's dive in. To briefly summarize the financials, we generated $81.3 million in revenue, representing approximately 33% growth year over year, marking another quarter of growth acceleration. Non-GAAP gross margin was 60% in the quarter, and adjusted EBITDA profit came in at $5.6 million, representing our fourth sequential quarter of adjusted EBITDA profitability. Our backlog was $734.5 million at the end of the quarter, representing a year-over-year increase of 216%. Once again, we delivered positive free cash flow for the third quarter in a row, reinforcing our expectation of being free cash flow positive for the full fiscal year. I'm particularly proud to report that with a strong performance in Q3, we are now also expected to be adjusted EBITDA positive in FY 2026. An excellent milestone for the team as we work to strike a balance between profit and growth. Turning to sales highlights, I'll start with the defense and intelligence sector, where Q3 revenue accelerated to over 70% growth year on year, up over 15% quarter over quarter, all driven by strong performance in our data subscription and solutions businesses, as well as our satellite services business. As previously announced, we were awarded a prime contract under the LUNO b program by the National Geospatial Intelligence Agency for a $12.8 million initial award with partner Cimmax. The award is for advanced analytics for maritime operations and reconnaissance. Under this program, we will provide the NGA with AI-enabled maritime domain awareness solutions, which include vessel detections and monitoring over key areas of interest in Asia Pacific. We're honored to have been selected and excited to be expanding this relationship. The National Reconnaissance Office renewed its baseline contract for PlanetScope board area monitoring data under the electro-optical commercial layer program for $13.2 million through June 2026. If you were to analyze this award, the annual run rate would be approximately $21.1 million. For the high-resolution component of our EOCL relationship, we have been awarded a framework contract, which the NOO can utilize to order high-resolution pelican imagery. As a reminder, the EOCL program has been impacted by both the US government shutdown and potential federal budget reductions. That said, we're encouraged by the continued engagement from this critical customer and see significant opportunities for growth in that relationship in the future, particularly as this administration leans into leveraging commercial technologies. We also won an 8-figure renewal with a long-standing international defense and intelligence customer for high-resolution imagery, which we announced last month. And also, as previously announced, we were awarded a six-month $7.5 million contract renewal by the US Navy for vessel detection and monitoring over key areas of interest throughout the Pacific. Finally, our global monitoring pilots with NATO and DIU have been progressing very well. We're pleased to share that last month we were awarded a 7-figure expansion by NATO prior to the completion of our existing pilot for them. We're incredibly proud of this early traction and are working hard to continue delivering for these customers. More broadly, we continue to see robust demand for downstream products that embed AI-enabled analytics on top of our daily scan for customers' operations, enhanced situation awareness, and support informed decision-making. Turning to the civil government sector, where third-quarter revenue was up approximately 1% year over year, up approximately 15% quarter over quarter. To share a recent highlight, during the quarter, NASA awarded us a one-year $13.5 million task order under the Commercial Satellite Data Acquisition Program. As a reminder, this program has also been impacted by the US government shutdown and potential federal budget reductions. Although this relationship has historically been an approximately $20 million annual run rate, we are very pleased to be continuing this important work with our partners at NASA and see opportunities to expand the relationship in the future. In fact, since the end of the quarter, we have received an incremental CSDA task order from NASA for disaster response. Under this new order, which is just under a million dollars in value, we will be providing high-resolution task-to-imagery to support disaster response and recovery. Shifting finally to the commercial sector, where revenue was moderately down both year over year and quarter over quarter. While this trend is expected given our increased focus on large government customers, we remain confident in the commercial sector as a significant market opportunity for Planet, especially as we continue to advance our solution capabilities. We believe that AI-enabled solutions we're developing for our government customers will enable us to deliver insights that can serve applications across a broad range of industries and use cases, from supply chain, security, and optimization, to insurance, finance, energy, and agriculture, where we have had a number of marquee customers today. We expect these solutions will help unlock growth in the commercial sector, bridging the gap from data to insights for those customers. To share a recent commercial highlight, we signed a new operational contract with AXA, one of the world's leading insurance groups, following a successful proof of concept. AXA Digital Commercial Platform or DCP will integrate data from Planet base maps, our medium-resolution monitoring satellite, and high-resolution tasking fleets as well directly into its DCP GeoClaims application to enhance claim processing efficiency and accuracy for property management. We've also signed a strategic marketplace agreement, which will add Planet's products to AXA's DCP, making them commercially available to AXA's vast client network of insurance partners. This partnership marks a major step forward in proactive data-led resilience in the face of complex disaster and crisis management needs. Turning to our satellite services business, the team is continuing to execute well on our contract with JSAT, which once again contributed to revenue upside in the quarter. We've also begun ramping for our German-funded satellite services deal and saw a small contribution from that work in the quarter. As we've shared previously, we're seeing very strong demand signals for satellite services driven by our current geopolitical landscape and the demand for sovereign access to space. We're continuing to aggressively pursue strategic opportunities, and the pipeline is robust. Turning now to the consistently remarkable execution of BIOS space Systems teams. Just twelve days ago, we launched two of our high-resolution pelicans into orbit, bringing our commercial fleet size to five satellites. We also launched 36 super doves, which would join our broad area monitoring fleet. We have successfully contacted all 38 satellites, and they're now undergoing routine commissioning as they prepare to begin serving customers. We got first light down from the Pelicans the next day, and we're excited to share initial images, which you can find in the investor deck or on our IR website. We also recently announced plans to open a new Berlin satellite manufacturing for the production of next-generation high-resolution Pelican satellites in Germany. We expect to begin ramping operations next year with the aim to roughly double our manufacturing capacity and better meet growing demand from the European market. Now I want to provide a little more context on our two strategic projects that we announced in the quarter. Firstly, in October, we announced Owl, our next-generation monitoring fleet, to continue our unique broad area monitoring mission currently serviced by the Super Dove fleet but improving the resolution to one-meter class, lowering the latency, and significantly upgrading the onboard compute to incorporate NVIDIA GPUs. Our list is designed from the ground up to adjust expanded applications ranging from security to disaster response to rapid change detection. The first tech demo is slated for launch later in calendar year 2026, and we're incredibly excited about the future of our daily monitoring solutions. Secondly, we recently announced a funded R&D with Google called Project SunCatcher. SunCatcher aims to enable scaled AI computing in space by putting Google's tensor processing units or TPUs on purpose-designed satellites where they can leverage the energy of the sun and shed excess heat into the natural coldness of space. This was a competitive win for Planet, and our strong track record of building, launching, and operating over 600 satellites to date, together with our collaboration on AI-enabled solutions, represents a competitive edge underlying the depth of our experience and our agile aerospace approach. SunCatcher aligns well with our technology development roadmap for OWL, leveraging the same satellite bus and is therefore highly synergistic. As previously announced, we're planning to deploy two prototype satellites in early 2027. We're excited to be working with our long-term partner Google to develop this promising new technology. On the solution side, I'm excited to share today that we recently closed the acquisition of Bedrock Research, an AI solutions company based in Denver, Colorado. Through our collaborations to date, Bedrock has successfully delivered for our existing defense and intelligence customers. From a team perspective, they have a rare deep expertise in the intersection of remote sensing, AI, and national security. We've been very impressed with their team's agility, creativity, and innovation. We view this as a strategically valuable capability, and given the traction we're seeing in global monitoring, bringing this expertise in-house now will help us to accelerate our roadmap for AI-enabled solutions and support our ability to efficiently scale to meet that market demand. We're thrilled to welcome the Bedrock team to the Planet organization. To close out, in Q3, we demonstrated continued momentum across the business driven by strong execution, strategic wins in the government sector, and exciting new developments and technologies that we announced with Owl and SunCatcher. We believe we are well-positioned for growth and profitability, reinforced by our robust backlog and commitments to developing best-in-class solutions for our customers. I'm incredibly proud of our global team for the phenomenal execution and excited for what lies ahead. With that, I'll turn it over to Ashley to discuss our financials. Over to you, Ash. Ashley Johnson: Start by echoing Will's remarks and saying that Q3 was another outstanding quarter with strong execution by our teams around the globe. I was particularly proud of our finance and operations teams who added to our list of accomplishments by raising $400 million of convertible debt in September and hosting a highly successful investment Day at the New York Stock Exchange in October, where we provided an in-depth update on momentum in the business, our go-to-market focus. Turning to the quarter's results, as Will highlighted, revenue came in at $81.3 million, representing approximately 33% year-over-year growth. The outperformance was driven primarily by our defense and intelligence and civil government customers, as well as continued progress against our JSAT satellite services contract. We saw upside during the quarter from the Luno B win with the NGA, as well as contribution from some one-time factors, which supported our better-than-expected results. During the third quarter, revenue from the Defense and Intelligence sector grew significantly year on year, driven largely by wins with the NGA, the US Navy, and international defense and intelligence customers. The commercial sector was down in part due to seasonality in the sector in addition to our shift in focus towards larger accounts. Civil government revenue was up modestly with strength from international customers in the sector, offset primarily by the end of our contract with Norway for their NICFI program. We're pleased to see strong uptake of our AI-enabled solutions in the government markets, contributing particularly to defense and intelligence wins in the quarter. Turning to our regional revenue breakdown, growth was distributed across the globe in the third quarter, with approximate revenue growth of 38% year over year in both Asia Pacific and EMEA, 30% in North America, and 7% in Latin America. As of the end of Q3, our end-of-period customer count was 910 customers, flat on a sequential basis, reflecting our direct sales team's intentional shift to focus on large customer opportunities and leveraging our self-serve platform to provide access to data for our other customers. As a reminder, Planet Insight platform customers are not included in our end-of-period customer count. We continue to see strong revenue growth, and thus a solid increase in average revenue per customer as a positive indicator that our sales team's focus on landing and expanding high value is yielding results. As we shift to some of our ACV metrics, I want to remind you that the JSAT multi-year satellite services contract is not included in our ACV metrics, although it is included in our RPOs and Backlog, which we will discuss in a moment. Recurring ACV was 97% of our end-of-period ACV book of business, reflecting our continued focus on selling subscription data contracts and solutions as opposed to one-time professional or engineering services. Approximately 83% of our end-of-period ACV book of business consists of annual or multi-year contracts, lower than prior periods as we have seen a higher proportion of large, shorter-term government deals closed in recent Net dollar retention rate at the end of Q3 was 109%, and net dollar retention rate with win backs was 110%. Turning to gross margin, non-GAAP gross margin for the third quarter was 60%, compared to 64% in 2025, reflecting investments in support of our satellite services contracts and the mix of contracts including AI-enabled partner solutions. Our gross margins came in better than expected, primarily driven by the revenue outperformance in the quarter. Adjusted EBITDA profit was $5.6 million for Q3, better than expected primarily driven by revenue outperformance in the quarter and disciplined OpEx spend. This marks our fourth sequential quarter of adjusted EBITDA profitability. Capital expenditures in Q3, which include our capitalized software development, were approximately $27.7 million. This was above our guidance range driven primarily by our decision to prepay for more favorable pricing in certain hardware procurements and launch deposits for our next-generation satellites. As a reminder, we're currently in a growth CapEx investment cycle as we lean into market demand and build out our next-generation fleets. Turning to the balance sheet, we ended the quarter with approximately $677 million of cash, cash equivalents, and short-term investments, an increase of approximately $4 million sequentially. The increase is driven primarily by our convertible note raise in September. We achieved an excellent outcome, raising $460 million at a 0.5% interest rate for a five-year term. Use of proceeds for the transaction are general corporate purposes, with a portion of the proceeds used to purchase a capped call, allowing us to avoid dilution up to a stock price of $18.04, providing net proceeds of approximately $460 million. This capital provides us a strategic asset in the form of a very strong balance sheet. Year to date, we generated approximately $114 million in net cash from operating activities and $55 million in free cash flow. Our focus remains on managing the business to enable sustainable cash flow generation through efficient growth across our data, solutions, and satellite services revenue streams. At the end of Q3, our remaining performance obligations, or RPOs, were approximately $672 million, up about 361% year over year, of which approximately 33% apply to the next twelve months, 59% to the next twenty-four months. We estimate our backlog, which includes contracts with the termination for convenience clause, to be approximately $734 million, up about 216% year over year. Approximately 37% of our backlog applies to the next twelve months and 61% to the next two years. Let me turn now to our guidance for the fourth quarter and full year for fiscal 2026. In Q4, we're expecting revenue to be between $76 million and $80 million, representing approximately 27% year on year growth at the midpoint and excluding many of the one-time factors that drove upside in Q3. We expect non-GAAP gross margin for the quarter to be between 50-52%, driven by our satellite services contract with JSAT, the mix of deals with AI-enabled partner solutions, and investments in our next-generation fleets. Our range for adjusted EBITDA loss in the fourth quarter is expected to be between minus $7 million and minus $5 million, reflecting our investments to drive sustained growth across both AI-enabled solutions and our next-generation fleets. We are planning for capital expenditures of approximately $22 million to $26 million in Q4. For the full fiscal year 2026, we now expect revenue to be between $297 million and $301 million. This increase reflects our strong performance in Q3 and improved outlook for Q4, as we've seen some of our U.S. Government contracts come in. We believe our backlog provides us with good visibility to sustain our Q4 revenue growth rate into fiscal 2027 and achieve our revenue and adjusted EBITDA targets as shared at our Investor Day in October. You can find these details in our Investor Day presentation on our Investor Relations website. We are updating our guidance for non-GAAP gross margin for fiscal 2026 to be between 57% to 58%, reflecting the better-than-expected gross margins during Q3. We expect our adjusted EBITDA profit for fiscal 2026 to be between $6 million and $8 million, reflecting the strong performance we've seen throughout the year in revenue and cost efficiencies, even as we continue to invest in downstream solutions and our space systems capabilities. Achieving adjusted EBITDA profitability on an annual basis represents a major milestone in the company's maturity and reflects the hard work of our global teams in focusing our investments in the highest priority growth areas. We are planning for capital expenditures of approximately $81 million to $85 million for the year, as the increased investments we're making in our satellite fleets puts us in a strong position to meet accelerating market demand. As I mentioned earlier, we're also pulling forward some investments to take advantage of some favorable pricing opportunities. We continue to expect to be free cash flow positive on an annual basis this year. While quarterly results may vary due to the timing of cash collections, CapEx requirements, and other factors, we remain focused on generating sustainable annual positive cash flow. As always, we're incredibly grateful for the ingenuity, collaboration, and achievements of our Planet team. These stellar results were made possible by your hard work. Operator, that concludes our comments. We can now take questions. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. A reminder that if you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand. 6 to unmute. Please standby as we compile the Q and A roster. And our first question comes from the line of Ryan Koontz with Needham. Your line is open. Please go ahead. Ryan Koontz: Great. Thanks for the question. Terrific quarter, guys. Just outstanding, in the October quarter. I wanted to ask about the guide a little bit here. You know, in terms of the revenue and the margin guide down, is the revenue down on one-time benefits on usage in the past quarter and then the gross margin guide down, is that mostly tied to some of your large international programs you're ramping? Ashley Johnson: Great. Thanks, Ryan. Appreciate the question. In terms of Q3 to Q4 trends, a couple of factors to keep in mind. So I did highlight that there are some one-time items in Q3. Those can be related to renewals of certain contracts that have archived components. You know, anytime we have any kind of bonus payments or deliverables, that can factor into a quarter that obviously wouldn't continue into the next. And then I mentioned there was some upside that was driven by the timing of landing new business. That does continue into Q4, and you see that rolling through. That's balanced against, we mentioned that both the NASA contract and the EOCL contracts were downsized. So we have to factor that revenue drop into the Q4 guidance. So that is fully factored into the guidance that we've given, and that results in that quarter-to-quarter flatness just like down that we guided to. In terms of margin, we're both investing in the opportunity that we see as we've highlighted, investing into execution against our satellite services contracts, which continue to perform well. And that also causes some margin compression quarter to quarter. So those are the factors it really comes down to mix of business. And the fact that we are investing because we see a lot of opportunity in front of us. Ryan Koontz: Great. Actually, thanks. And just a clarification, on those partner fees, are those front-loaded in some way before revenue hits? Or, you know, how should we think about how those kinda behave in the future? Ashley Johnson: No. They align to revenue. Ryan Koontz: Got it. Perfect. And maybe a quick question on the acquisition of Bedrock. I mean, which sectors are these guys focused on, and what sort of data does Bedrock integrate? Will Marshall: Yeah. Good question. Bedrock is fantastic. It's a small team, but they're very, very talented at the intersection of remote sensing, AI, and national security. Very, very good team there. What we see them doing, I mean, we already worked with them on that with actual customers as we're building out our GMS solution, and it's been working really well. And we thought bringing them in-house would help us to scale and speed that execution faster and make it more efficient to the margins point we were just discussing. Ryan Koontz: Got it. And what sorts of data do they deal with? Is it all primarily your data, or do they bring other data sources together? Will Marshall: Well, they have done multiple different datasets in the past, public and primarily, though, security datasets on contract with the government. So it's a variety of things. And it's a sort of versatile approach that they've been doing using embeddings, a technology we've been also working with in our AI modeling work. And so it's a kind of very generic scalable solution that can work across different data streams. Ryan Koontz: Great. Thanks, Will. Thanks, Ashley. Will Marshall: No worries. Ashley Johnson: Thank you. Operator: Your next question comes from the line of Edison Yu with Deutsche Bank. Your line is open. Please go ahead. Edison Yu: Hi. Thank you, and congrats on the very impressive quarter. Want to ask about Project SunCatcher. There's been a lot of talk, a lot of excitement about, you know, data centers in space. Can you give us a sense on how you think about just feasibility and viability of this, and how does one kind of measure that going forward? Will Marshall: Yeah. Well, thanks on the quarter. We agree. It's really great. And, yeah, SunCatcher is really exciting. I do think it's a very viable project long term. It's, you know, we have spoken in the space sector for some decades about how as space infrastructure costs come down, it eventually makes more sense to put compute into space and other energy-intensive infrastructure. And your point about the feasibility of scaling it, well, that is hard. Right? And there's only a couple of companies in the world that have done scaled constellations, basically, SpaceX, and therefore, knowing how to put that get costs down is something that really is an incredible advantage we have. It's a competitive position in going into this. It's one of the reasons, obviously, we're very proud Google selected us. That's obviously one of the reasons for that. I see a huge market opportunity here. I do in the long run. This is just an R&D at this phase. This is an R&D contract. We're gonna do these couple of demo satellites. That would test out some of the critical components of that, like, shedding heat from the TPUs into outer space and doing the formation flying, so that building towards a cluster system approach, which is the architecture that the Google and Planet teams have been designing towards. And we think the most efficient approach to this. So yeah, so in summary, it's early days. But an exciting potential project for Planet. Really exciting. Edison Yu: Just one follow-up. I think you mentioned in the prepared remarks that you're using the same bus as Owl. Are there any special kind of design changes you need to make on the bus? Anything you do differently? Just from a, I guess, engineering perspective given it's a TPU? Will Marshall: Yeah. I mean, there's a few things, but not much. On the scale of things. For example, we've been expanding the number of solar panels a bit and a few things like that. But on the scale of the hard complex things of the avionics and all those systems, how they work together, it's primarily the same at this stage. And that's why I mean, you know, there's two big reasons we did this project at the tactical level. One was how aligned it was to our OWL project for the point on the same path. And the second is that there's an option on a big program in the future. You know, to the earlier, I mean, I think this is a big market. So let's take advantage of the fact that we're one of the couple of companies that can do I'll just add as well that, you know, Planet, we've been saying, is a space and AI company. And I think, you know, we have the credibility to say that we're the first one in a way to prove that. We've obviously got scaled satellites stuff. So we had space company. We've got that scale use of AI based on our daily scan, and we've already been putting NVIDIA chips in space on satellites, including the ones that were launched just twelve days ago. And so we are already familiar with building compute in space. So it's a natural extension of where we're going to think about AI and space together in this way, and so Planet is incredibly well positioned that, we believe. Edison Yu: Thank you very much. Will Marshall: Thank you. Operator: Your next question comes from the line of Mike Latimore at Northland. Your line is open. Please go ahead. Mike Latimore: Excellent. Thanks. Yeah. Excellent results. I guess, on the quarter, I think you said JSAT was one of the drivers of maybe the upside. Can you talk a little bit about is JSAT sort of ahead of schedule and maybe just generally how is the JSAT in Germany deals proceeding relative to maybe your internal timelines? Ashley Johnson: Yeah. You know, obviously, this was the first time we had engaged in this type of contract. And so while we have obviously agreed milestones with the end customer, we gave ourselves some flexibility for, you know, when certain milestones might get hit for the year and, you know, obviously, that flexibility translates also into how we guide. And so that team continuing to execute and, you know, meet and hopefully exceed the customer's expectations also results in upside in our financial forecast. Will Marshall: I would just add. Yeah. I mean, overall, things are going very well with those programs. And, you know, we're very focused on committed commitments to those customers. And, yeah, things are going great. And the pipeline of opportunities for both of yours is going really well as well. So, yeah, we're very happy with that side of the business too. Mike Latimore: Very good. Ashley, did you say that you expect the fourth quarter implied growth rate to be sort of continue into fiscal 2027, is that what you said? Ashley Johnson: I did. Yeah. So as we're, you know, as we're looking at the shape of the business, and kind of the drivers of growth, you know, Q4 is pretty indicative of how we see things going forward. You know, I've mentioned the change in the government contracts. You know, those go into full effect in Q4. We've obviously continued to land new business and expand relationships both with the US government and international government. And we expect, you know, across all of the areas of business, to continue to focus on, you know, converting the pipeline that we have. So we're very comfortable with that as kind of a target for growth going into fiscal 2027 and, you know, also as we think about margins next year, you know, that's a pretty good benchmark to use as a reference. Will Marshall: And we said at the beginning of the year, we would accelerate revenue growth rate, and here we are, and we can it's nice to be in a position where we can see that continuing into next year. Ashley Johnson: And then the only qualifier I'd add to that is reference back to the Investor Day materials where, obviously, you know, we're thinking about FY '27 very actively right now, and we continue to uphold a commitment to targeting EBITDA breakeven or better as well as maintaining our annual cash flow positivity. Mike Latimore: Okay. Excellent. Congrats. Ashley Johnson: Thank you. Operator: Your next question comes from the line of Colin Canfield with Cantor Fitzgerald. Your line is open. Please go ahead. Colin, are you there? Operator: You may be muted, Colin. You may have to unmute yourself. Colin Canfield: Thank you. Apologies. Zoom mechanics. So just going back to the pipeline that you put together for the Investor Day, call it 20 contracts, average contract value of $170 million. That tracks pretty closely to kind of the F-35 friends and family. So as we think of kind of drawing comparisons between that portfolio of opportunities and the companies that we're looking at, how do you kind of think about the sizing and magnitude of those awards? I mean, is it fair to assume that like we could see 20% of that pipeline convert and maybe the magnitude of that pipeline looking similar as a factor of the JSAT and Germany deal such that maybe it's $100 million awards upfront? Like, how do we think about kind of just the timing and magnitude of that pipeline? Will Marshall: Well, yeah. I mean, firstly, I mean, I think Planet is extremely well positioned for this market. I mean, our techno I mean, we're the only ones that have built hundreds of earth imaging satellites. We did 600 so far. So these countries, when they want sovereign satellites, especially at least in optical, with obvious first call. And, yeah, we feel well positioned against those 20 or so opportunities. We're focused on half a dozen or so that are a little bit more mature, and those ones are doing very, very well. When we really go in, I think we've got a higher probability than that. But, you know, time will tell exactly how this turns out. We are committed to really executing on this business side and being a reliable partner with these countries, building off a long-term relationship we've had with them in most cases. And so, yeah, overall, feeling very good about where this can. Did that answer your question? I'm not sure of the subtleties in your question. Colin Canfield: Yeah. No worries. I think timing probably might be a little bit too aggressive in terms of answering the question. So good to hear that you're well positioned and looking forward to seeing those awards. Maybe pivoting to putting some numbers around SunCatcher. So if we think of the eighty eighty-one cluster concept, let's call it, you know, $50 to $300,000 per satellite, a million per cluster, is it fair to assume that that has some value capture tail on top of that such that it can be above, call it, an initial award of $81 million? And then just a high-level question, as we think of Google's R&D budget of, call it, $30 billion a year, and the concept that a lot of these AI, you know, people that are basically chasing data centers and the like, are now pivoting that R&D spend from the development of the systems to the scaling of systems and that scaling of systems likely going through space infrastructure versus terrestrial? So maybe $81 million, is that fair? Or is it above that? And how do we think of kind of that longer-term scaling opportunity into that Google R&D wallet? Will Marshall: Got it. Yeah. Well, firstly, what we're on contract to do with Google is a couple of demo satellites. It's really just the testing early phase. So we're not getting into the scale cluster. You're referring to the paper that they put out where they were talking about 81 satellites in the cluster. That's more to do with the architecture that we're building long term. I think you're right to point out that this would, you know, this would take significant R&D dollars, and these companies are gonna be willing to put dollars behind it. Because if it has the cost advantages, which we believe it will, and, you know, the experiments will need to show that, we will, this is a scaled operation. It would require thousands of satellites and many other things. It's just but at this point, we're very early on. And I think it's important to think about, you know, Google's choosing us in this process is a huge compliment to us, of course. But one of the reasons is that we're one of the few companies that has done this at scale, as I said in prior remarks. And so even though it's at an R&D scale at this stage, we think we're one of the few players that can really build that out. It is not trivial to put up huge numbers of satellites in a cost-efficient way. There's literally only a couple of companies in the world that have done that. And to boot, Planet, as I was mentioning in my earlier remarks, really, the first proven space and AI company. We've already put fast processes in space. We already do a huge amount of AI work. And so our collaboration and a bunch of that AI work with Google, we've got a partnership with the Gemini team. And we've got a long trusted record working with them. So, you know, I think Planet is well positioned. Again, this is an early option, early contract on R&D, but it's an option on a big long-term future. The plan is well positioned to be taking part on. Does that answer your question? Colin Canfield: Yep. I think so. So thank you for the color as always. Appreciate it. Will Marshall: No problem. Operator: Thank you. Your next comes from the line of Jeff Van Rhee with Craig Hallum Capital. Your line is open. Please go ahead. Jeff Van Rhee: Great. Thanks. Thanks for taking the question. I have my congratulations. Just a few left for me. Will, on the compute front, you know, as it relates to, obviously, congrats on what you're doing with Google, and you've been ahead of that embedding compute into your platform already. Just talk about the demand pull. You're pushing it, but to what degree are people ready to consume it, demanding it, having use cases already pegged out and driving value from it? Will Marshall: You mean demanding compute in space? Jeff Van Rhee: Yep. Will Marshall: Well, look. I mean, this is really talking about putting compute in space because it ultimately has launch costs and satellite infrastructure costs come down. There's a point at which it becomes more economically feasible to put those entire data centers in space. So it's not about any particular compute demand. It's about the entire compute demand in principle. But that, you know, depends on us getting that cost threshold. You know, I think it's the position of Google and Planet that we are just, you know, a few years away from that, and therefore, it's the right time starting to invest in the R&D. There are some types of compute demand that more lend themselves to space than others. But, generally, we're talking about, you know, the entirety of that business. And I would just say, I think, you know, I think, certainly to Sundar, he, you know, he was talking about this last week and talking about how in ten years' time, he thinks most compute will be going up to space. So that's the way I perceive it too. So that's the way I think we should think about it. Does that make sense? As opposed to any particular piece of the compute sector? Jeff Van Rhee: Yeah. Understood. That's fair. Two last, if I could then. One, as it relates to Pelican, congrats, you know, real quick First Light imagery. Is there a number in the sky or a particular point in time this year? Just talk maybe to whatever degree you can share how that revenue layers in if it just tends to be very gradual, they're gonna be lumps in that. So that would be the first question. And then my last would just be, on EOCL. Obviously, the cutbacks in the first place shocked everybody. Just wondering if you have any more clarity on what might replace what they've taken away if there's any clarity there. So those two questions. Appreciate it. Will Marshall: Yeah. Absolutely. Let me take the second one first. I mean, I just came back from DC, and I can tell you there is a lot of interest in this administration in leveraging new tech to drive real mission value. And in the DOD. And we sit firmly in that area. And so we are seeing them leaning in. So despite what you're seeing there with the EOCL, it's growing. But more importantly, they are leaning in heavily. In fact, I mean, we see this, of course, in the numbers already. You know, the Lunar award, the navy expansion, and so on. They're already leaning into this stuff, but I think we're gonna see it in a big way coming. So I think the outlook is really very positive. What's the first part of the question again? Ashley Johnson: First part of the question is, you know, as we continue to launch Pelicans, how do we see revenue flowing in? And I see it more gradual. Build any of that. Yeah. As we continue to bring on contracts, and, obviously, if we'd land bigger contracts, we talked about we have a framework contract in place already for Pelican or for high res in general with USG under EOCL. There's opportunities to expand that. There's opportunities, obviously, to expand with many of our existing customers and new customers. So nothing at this point that would cause me to say there's gonna be irregularities in it. It's, yeah, I think it's roughly linear as we scale it, and they're scaling as the sky starts ramping down, and then we're building towards what we've said before, ultimately, a 30 satellite fleet with 30 revisits a day, thirty minutes latency, and all this. And, yeah, we're already seeing customers very excited about leveraging that data, and I'm glad you saw that first line as impressive for the team to bring that out the next day. I think the first light came out. So it's really fast how quickly they're able to process all of this and get those satellites up to it's almost routinized at this point that we can launch these satellites and get them going. It's really cool. Jeff Van Rhee: Absolutely. Congrats on the quarter, guys. Will Marshall: Thank you. Thank you. Ashley Johnson: Thank you. Operator: And a quick reminder to keep it to one question and one follow-up, please. Our next question comes from the line of Christine Lee Weg with Morgan Stanley. Your line is open. Please go ahead. Christine Lee Weg: Great. Good afternoon, everyone. Thanks for taking my question. I guess, look, you've delivered four consecutive quarters of positive adjusted EBITDA. And, you know, the loss for Q4 is really driven by incremental investments, which are all good problems. I was wondering, can you parse out how much these investments are for Q4, their duration into fiscal year 2027? And if we take out these investments, would fiscal year 2027 be adjusted EBITDA profitable? Ashley Johnson: Thanks, Christine. Appreciate the question. So first of all, at the Investor Day, I talked about the fact that for fiscal 2027, we are targeting EBITDA profitability as one of the metrics that as we're doing our fiscal 2027 planning, we are keeping in mind. So breakeven or better. So I'd urge you to look back at some of those materials where we talked about just general framing for thinking about that year. For Q4 specifically, it's, you know, kind of a step up as we're ramping up some new contracts. And then scaling the revenue alongside of it. As that revenue continues to scale, that gives us the opportunity to sustain these investments but get to that adjusted EBITDA breakeven or better goal. So, really, the key for us is balancing the opportunity for growth that we see with, you know, sustaining profitability across the business. Hope that helps. Christine Lee Weg: Yes. Super helpful. And if I could do a follow on, you know, the AXA contract that you mentioned earlier, if you think about the opportunity set for that kind of insurance type business, when you sign on incremental customers, how scalable is your capability set there regarding you sign on new customers and have incrementally higher profit? Like, how do we think about that versus incremental investments you would have to make if you sign on customers similar to what they're already doing? Will Marshall: Yeah. I and highly scalable. And, I mean, the direct margins of this sort of data business is extremely high. I mean, in the nineties percent. What we did with AXA is really cool because just think about it very practically. They're trying to make claims processing more efficient. Let's take natural disasters like floods or fires. Have quicker assessments of losses and damages. And instead of people having to send individuals out to check, they can, in many cases, just check that with the satellite imagery automatically from their computer. I mean, this is a huge efficiency saving across a big business. That's why AXA is not just bought some data for their own use. They're also putting it on their platform exactly to your point about scaling it up to other insurance companies in their network, in their partner network on their platform. So they're providing the platform, these other. And, yeah, the incremental margins on that are really great. And, you know, I've seen lots of potential customers like that in the future. We think the commercial business is gonna continue to grow really well in the long term, and I mean, things like insurance and finance, we believe are massive markets for us to go over. After. So hope that answers the questions. Christine Lee Weg: Thank you. Very, very excited about that. Will Marshall: Great. Thank you. Operator: Thank you. Our next question comes from the line of Trevor Walsh with Citizens JMP. Your line is open. Please go ahead. Trevor Walsh: Great. Can you guys hear me okay? Will Marshall: Yep. Trevor Walsh: Cool. Thanks for taking the questions. I guess around the Luno b contract, and the upside in the quarter, for Will or for Ashley jump ball. But can you maybe explain or go in a little bit more detail as to how that just seems like a very from kind of signing the contracting quarter and then having it immediately kinda lead to recognize or whatever. It seems like a nicer just better, I guess, execution. And is it is that more is that actually what happened, or was there some details around the POC being set up beforehand and just kinda getting off with that customer right away? Specific to NGA? Or I guess I'm trying to understand there's gonna be more, yeah, more kind of potential with that with some of these DNI you kinda sign the deal and then leads to kind of immediate revenue impact. In that actual quarter. Thanks. Will Marshall: Yeah. I mean, look. We're ready to go on these things. We've already got the data. We've already got the analytics. So they can just turn it on. And the great thing I mean, sometimes the government can be slow initially, but when they go, it can just be straight away. And so we just turn it on, and that's exactly what happened in this case. You know? It's great to read that we prime that, and it's, you know, a really substantive award. And it's in an area we've talked about that NGA are leaning into, broad area, looking with AI on top, and it is an area that Planet believes we are we believe we're really well positioned to do take. And, you know, that's that's for maritime domain one. It's a bit like our navy program and the navy has subsequently in the extensions been doing that as a sole source of war because we're the only ones that can do it. That also speeds things up. Faster. But, yeah, the main ramp here was just because we were ready to go. And as soon as they would they turn us on, we were on. Trevor Walsh: Terrific. Great. Thanks a lot. Really helpful. Color. May actually, a follow-up maybe for you. Just circling back to JSAT, and the Pelican revenues, understand that the JSAT's not included in your ACV metrics as far as the recurring piece of revenue. But can you just help us understand or remind us exactly how when as you build the 10 or so satellites specific to JSAT, and that revenue flows in, is that gonna create kind of a one-time nonrecurring type of bump in a particular quarter, which we won't really see in that ACV metric because you're not including in there. And so in other words, you'd have a big revenue bump, but you still have that's not but you have 97, you know, percent kind of similar to this quarter. Type of a metric. So not a good way to necessarily kinda track that, if that makes sense. Can you maybe just help us understand the dynamics there? Ashley Johnson: Yeah. Happy to. And I mean, basically, you can see this in our when we talk about RPOs and backlog and next twelve-month revenue. It is more gradual. There might be some lumpiness quarter to quarter, but it's minimal. It's not something that's gonna, you know, cause things to swing wildly. But so I would say the majority of our revenue still is coming from our traditional ACV business, and it is a very good indicator that we use both on, you know, internal managing that growth versus profitability balance, also looking at the health of the business, looking at renewal rates and that recurring revenue. And then the nice thing about contracts like JSAT and other constellation services contracts that were either, you know, engaged or pursuing. Is it actually aligns the revenue quite nicely to the lifetime of the satellite. So while there is an upfront component of the revenue, there is also, you know, a managed component of the revenue that spreads the revenue over the lifetime of the satellite. So it's a mix. It's a little hard to overlay it directly to our traditional ACV metrics, which is why we exclude it. But it is still very predictable revenue, and, obviously, enables us to accelerate the build-out of that 30 Polycom fleet that we talked about, which we think gives us some a great competitive advantage and competitive offering. Trevor Walsh: Great. Awesome. Super helpful. Thanks both for the questions. Ashley Johnson: Great. Thanks, Trevor. Operator: Your next question comes from the line of Greg Pendy with Clear Street. Your line is open. Please go ahead. A reminder to unmute yourself, Greg. Greg Pendy: Hey, guys. Thanks for taking my question and congrats on the quarter. Just a real quick one. I think you mentioned there was some weakness in agriculture on the commercial side and some seasonality. Is that just the overall pressure we're hearing about in the agricultural sector? And could you just provide a little bit of color on that? Ashley Johnson: Yeah. Sure. Actually, it's not weakness. It's seasonality, and it's just the timing of deliverables and usage around those contracts. As I've mentioned, we get these annual commit contracts, but some of them are recognized ratably, and some of them are recognized based on usage depending on the nature of the product the customer's purchased. And so in this case, you see a lot of usage in the harvesting or preharvesting periods. For operational efficiencies, and then you see that drop off as you get later into the harvest harvesting cycles. And so that's just seasonality that we would expect year to year. Actually, we're pleased with the stability that we're seeing in the agricultural business, and I think that's largely driven by the shift in that we've made over the last couple of years to move out of more of the marketing arms of the agriculture sector and really be embedded into the operations of our customers. So I'm actually very pleased with the progress we're seeing in the ag and see that as a potential growth vector for us in the future. Will Marshall: Yeah. If I just have one more thing, it's that we have figured out how to align our business model with this. And now we believe we're in a stronger position to help serve that market. But you're right that the overall segment has been having challenges. Greg Pendy: That's very helpful. Thanks a lot. Operator: Thank you. Our next question comes from the line of Chris Quilty with Quilty Space. Please. Your line is open. Please go ahead. Chris Quilty: Thanks, guys. Following on the earlier talk of the pipeline, you know, $170 million deals, and the fact that you're doing the factory expansion in Berlin. What do you expect you'll need in terms of production rate? And is that, you know, where are you at today, and where do you expect to scale in the next year? And is that sufficient capacity with those two facilities, you know, should the opportunity show? Will Marshall: Yeah. Well, obviously, we are building those facilities both of our expansion here and what we're doing in Berlin exactly to build towards the demand that we expect to see. So, yeah, we're obviously trying to do that. As I think we said at the time of announcing the Berlin manufacturing side, that will roughly double our capacity to build the Pelican satellites. And we're excited to say we're making some really good headway there. Found the place, and now our next year, we'll be going into operations there. So excited by that. But yeah, we're obviously trying to match that demand. We are seeing very strong demand for deals that include building new satellites and for deals that involve leveraging existing satellites both. Remember that the mix between those two affects whether or we have to launch new satellite. But on both sides, we're seeing good traction. And I think what's great about this, again, is that it will pace the CapEx of our deploying that 30 satellite fleet or more. You know? I think that we're in a great position with so much demand there that will help build out our full fleet. Ashley Johnson: And I would just add to that, Chris, that the team does a really good job of making these different fleets very synergistic. So just as a reminder, the Tanager leverages the same as the Pelican. We highlighted that we're leveraging the for the SunCatcher program, and that enables us to also be very efficient in how we utilize space both for the R&D front and the manufacturing side. So it enables us to run a pretty efficient operation through and through. Chris Quilty: Gotcha. But, again, Will said he doubled you'll double production to no number given, but I was just asking for a number. Will Marshall: Yeah. I don't wanna specify that right now just because of competitive reasons. Chris Quilty: No. Fair enough. And, you know, again, on the Tanager, any update there? I mean, are you finding a killer app market or application with the hyperspectral? What are your thoughts on scaling with the technology? Will Marshall: Yes. Well, Tanager just got to its first year of being in orbit. Had great traction so far. You know, one of the things we're really pleased about is our California partnership, a powerful proof point that has shown that they are able to find methane leaks across California, stop them, have real incremental benefits for both those businesses as well as for the environment. And we're committed under that program to do the first four of those challenges. Yeah. So it's obviously, as we've said before, that's a very new kind of capability. Hyperspectral imagery. But so far, the results have been really impressive. The signal-to-noise ratio on that satellite, the quality of the data is producing that is and it's been beyond what we our expectations, and the users are starting to report good results. And not just in the civil government side, we have early interest in the defense intelligence sector as well. Chris Quilty: Great. And, congrats on the Pelican turnaround on First Light. I think was it a record? Will Marshall: Yeah. It was certainly yeah. I think that might have been our record. I mean, the team just keeps on getting better and better. I mean, just to put it in perspective, when I started in the space sector, you know, a couple decades ago, this is a really complex process planning for launch. And now it's and commissioning and all of that process. And our team does this in their sleep at this point. It's incredible how well we do these operations, and I'm incredibly proud of how quickly they and efficiently they build us out lives. Get them to launch vehicle, launch them, commission them, contact them, commission them, and then provide those capabilities to customers rapidly and, yeah, continue to get continue to be impressed by that. Chris Quilty: Gotcha. And we've got the is it the next two satellites going up will be next-gen 30 centimeter and can you just remind us what is the fundamental difference in the, you know, driver for the improvement? Is it altitude, you know, taking satellites down below four twenty, or is it some change to the payload itself that you've learned from the first iteration? Will Marshall: Yeah. It's both. It's upgraded telescopes on those future generations, those v twos, as well as we are flying them lower as well. So, yeah, it's a bit of both. So some of those improvements can happen existing satellites, and some of those improvements have to wait for the latest satellites. But we will be doing those next year. I won't go into more details, but it's basically, it'd be exciting to have them up to. Chris Quilty: Very cool. Looking forward to it. Will Marshall: Thanks. Operator: That is all the time we have for questions today. I will now turn the call back to Will Marshall, CEO and co-founder, for closing remarks. Will Marshall: Thanks, operator. Yeah. So I think in summary, Q3 was another excellent quarter for the company. The business is humming both across the data and solutions business, which we see rapidly scaling. We saw the major expansion, the LunarView award, and more. Those efforts in AI are paying off. And the satellite services, we have strong execution and a strong and maturing pipeline. It was great to see us all of this leading to us beating our revenue guidance again in Q3 and raising our forecast for the full year. Given our robust backlog and recent wins, we're excited to share that we believe that we're well positioned to continue the end-of-year growth rate into next year. So and since last quarter closed, we launched those 38 satellites and brought in Bedrock and announced SunCatcher, with Google. Which is a new and exciting R&D initiative at this scale, but a lot of promise for the future. So the team is just executing at pace. I'm incredibly proud of everyone for the phenomenal execution this quarter and excited for what lies ahead. Thanks again for joining everyone. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to Oxford Industries Third Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note this conference is being recorded. I will now turn the conference over to Brian Smith from Oxford. Thank you, and you may begin. Thank you, and good afternoon. Brian Smith: Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and actual results may differ materially from the expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC, including the risk factors contained in our Form 10-K. We undertake no duty to update any forward-looking statements. During this call, we'll be discussing certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP financial measures in our press release issued earlier today, which is posted under the Investor Relations tab of our website at oxfordinc.com. And I'd like to introduce today's call participants. With me today are Tom Chubb, Chairman and CEO, and Scott Grassmeyer, CFO and COO. Thank you for your attention, and I'd like to turn the call over to Tom Chubb. Good afternoon, and thank you for joining us today. As is typical for our third quarter, I'll keep my comments on Q3 relatively brief, before turning to what we're seeing in the early weeks of the fourth quarter and how we are approaching the holiday season and the rest of the year. We are pleased with what we were able to accomplish during the third quarter with our financial results broadly in line with the expectations we set earlier in the year. The environment remained highly competitive and promotional, and the consumer continued to be selective with their discretionary spending, often requiring new and innovative product to catch your attention. Against that backdrop, our team stayed focused on our long-term priorities and executed well on the fundamentals of our strategy. Strong sales growth in both the Emerging Brands Group and Lilly Pulitzer offset declines at Tommy Bahama and Johnny Was. Total company comp sales were slightly positive, and while gross margins continue to reflect the pressures we've discussed in prior quarters related to tariffs, our underlying adjusted gross margin, absent that pressure, improved over last year's even in a highly competitive environment. In addition to the financial results, we made important progress on a number of key initiatives across the enterprise. Starting with people, we were pleased to have realigned and strengthened our teams at Johnny Was and the Emerging Brands Group through a combination of internal promotions and hiring key executive talent from outside the company. Also at Johnny Was, we made significant progress with the business improvement plan we discussed last quarter. In Tommy Bahama, our bars and restaurants are a distinct competitive advantage, and we were pleased to have added two important restaurant openings during the quarter. In Lilly Pulitzer, we anniversaried last year's very successful Palm Beach fashion show with a fashion show in Key West. Last year's event has helped fuel creative content and commercial success throughout 2025, and we expect this year's event to do the same for 2026. We also completed the renovation of our Worth Avenue Lilly Pulitzer flagship location in Palm Beach. Finally, we are in the final stages of construction of the new state-of-the-art fulfillment center that will be such an important asset to our direct-to-consumer businesses. None of these items will have an immediate impact on our financial results but are critical parts of the foundation of future success. As I previously mentioned, across the portfolio, performance varied by brand as it has for much of this year. The bright spot continued to be Lilly Pulitzer, where the brand again demonstrated a deep connection with its core consumer and delivered healthy growth in the quarter. Our Emerging Brands business also posted strong year-over-year sales gains, reflecting growing recognition, relevance, customer engagement, and growth potential. Moving to Tommy Bahama, while our third-quarter results did not meet our goals for the brand, we did see encouraging progress. Comps improved sequentially to down low single digits from down high single digits earlier in the year. We believe we've made meaningful headway in addressing key areas that contributed to softness early in the year, particularly around color assortment and completeness of the line, which led to disparate regional performance and softness in Florida, our most important market. There is still work to do, but we feel good about the adjustments made so far. At the same time, we continue to invest in the long-term health of the brand through thoughtful expansion of our retail and hospitality footprint. During the quarter, we reentered the important Saint Armand Circle outside of Sarasota with a beautiful new full-service restaurant and retail store, which replaced our previous restaurant that was damaged and closed in 2024 due to a hurricane. This new location reinforces the strength of our hospitality model in one of our most important markets. We also opened a new Marlin Bar on the Big Island of Hawaii, further deepening our connection to a region that has been central to the Tommy Bahama brand for decades. Both locations are off to encouraging starts, and we believe they will be long-term assets for the brand. Turning to Johnny Was, we made several important changes during the quarter to strengthen the foundation of the brand and position it for long-term success. As we discussed last quarter, Johnny Was is an incredible brand with beautiful product, a loyal and engaged customer base, and a hardworking, deeply dedicated team. To ensure the brand can fully capitalize on that potential, we have refreshed key leadership roles, including the promotion of Lisa Kayser, our former Chief Commercial Officer at Johnny Was, to lead the brand as President of Johnny Was. Lisa is an experienced business leader with over twenty-five years of leadership roles at Neiman Marcus, including ten years as SVP General Merchandising Manager of Women's Ready-to-Wear. We also made changes to the lead designer and head of retail positions to bring sharper creative focus, strong merchandising discipline, and more consistent execution across the business. Earlier in the year, we also engaged an outside specialist to help us assess the Johnny Was business and identify the actions needed to meaningfully improve profitability. That comprehensive project has now been largely completed, and we have begun executing against its recommendations with clear priorities around creative direction, merchandising and planning, marketing efficiency, and retail performance. While we are still early in the process, we're encouraged by the focus, energy, and alignment we are seeing across the team. We believe that a combination of refreshed leadership with a very capable incumbent team and a clear actionable plan will allow us to reinforce the fundamentals of the brand and unlock the substantial long-term opportunity we continue to see in Johnny Was. With that backdrop, let me turn to the fourth quarter and our early read on the holiday. As a reminder, our comps in the fourth quarter last year were flat and benefited from a post-election bounce. When evaluating the yearly results of the fourth quarter this year, it is clear that the softer start to the holiday season reflects a combination of tariff-related product limitations and a holiday period that has been more promotional across the industry compared with last year. That made for a difficult environment along with the more challenging comps than earlier in the year. Most significantly, our brands have experienced these challenges in our product assortments that trace back to the tariff-related sourcing decisions made earlier in the year. When our brands were building their holiday and resort lines last spring, the tariff landscape was highly uncertain, with the potential for substantial increases on certain China-origin categories. As a result, we made difficult but prudent choices to reduce our exposure in categories heavily reliant on China, for example, sweaters and other cold-weather products that are important at this time of year. Those decisions were appropriate given the information available at the time. However, they left us with assortments that were not as complete or as comprehensive as we would like for the holiday season. Sweaters, in particular, have historically been strong drivers of fourth-quarter demand across our portfolio, and our reduced presence in this category has been a meaningful headwind. At the same time, the holiday selling period has been more promotional than last year, with consumers showing heightened sensitivity to value and a willingness to wait for deeper discounts. While our promotional cadence and depth were consistent with our brand-appropriate approach, many competitors entered the season earlier and more aggressively. That dynamic contributed to a slower start for us in the opening week of the quarter. At Lilly Pulitzer, our holiday promotions included curated gift-with-purchase events and a broader seasonal sale, both of which resonated well with our core consumer, and we saw strong engagement with many of our most giftable styles and capsules. Unfortunately, our successful gift-with-purchase events were somewhat limited due to high Chinese tariffs and the difficulty of shifting the production of these items elsewhere. Similarly, we identified that there were gaps in our assortments related to the tariff environment, particularly in novelty items and certain other seasonal products that could not be quickly moved out of China, which limited our ability to fully serve demand. We also leaned into our core programs to mitigate tariff exposure, which reduced the level of newness we might have otherwise offered. At Tommy Bahama, we built on themes introduced earlier in the year, offering a compelling mix of gift-ready items and cold-weather seasonal products. But as with Lilly, many of the categories that have historically carried momentum for us during the holiday, especially sweaters and other cold-weather essentials that are heavily China-reliant, were reduced as a result of the tariff uncertainty earlier in the year. Those gaps, coupled with a promotional marketplace that moved earlier and deeper than usual, created incremental pressure. Despite these challenges, we have seen continued encouraging response in our Tommy Bahama Boracay pants that we discussed last quarter. While the price point increased from $138 to $158, new product innovation has led to significant sell-throughs, and the Boracay Pant has played meaningfully into the holiday gifting mindset. This success also highlights some of the trends we have seen in the market, where consumers are gravitating to versatile products that can be worn to work and casual events and are less discretionary than some other categories. At Johnny Was, the customer continues to connect most strongly with the unique, artful product that defines the brand. Elevated, embellished pieces, rich textures, and vibrant color stories again resonated with loyalists. But similar to our other brands, limitations in certain seasonal categories due to tariff-driven sourcing adjustments, along with heightened promotional intensity across the marketplace, created a more challenging backdrop for converting that interest at the levels we had anticipated early in the season. While still small in absolute terms, our Emerging Brands Group continues to be a meaningful source of energy and growth within the portfolios. Southern Tide, the Beaufort Bonnet Company, and Duck Heads have each built strong momentum this year, and we are seeing that momentum carry into the holiday season with a stronger start than what we have seen in our three larger brands. These brands benefit from exceptionally loyal customer bases, focused product stories, and highly engaged teams, and their performance is a testament to the opportunity we believe exists in each of them. As we continue to invest in their capabilities, particularly in product marketing and retail expansion, we remain very encouraged by the role the Emerging Brands Group can play in our long-term growth algorithm. Taken together, these early holiday trends reinforce what we observed throughout the year. When we deliver fresh, differentiated products that align with our brand heritage, the customer responds. However, given today's promotional climate, achieving that response requires more competitive value propositions. As a result, and as Scott will detail in a few minutes, we now expect our fourth-quarter performance to land below our previous guidance, and we are revising our outlook for the remainder of the year. And that is our focus across the portfolio. Concentrating on what makes each brand special and ensuring that what we put in front of the consumer inspires confidence, joy, and a sense of possibility. That same focus has guided our product development and marketing plans throughout the year. It's why we have leaned into newness and innovation across our brands, and it's why we continue refining our offerings to match the customer's mindset heading into resort and the early spring period. While the environment remains dynamic, we are approaching the remainder of the year with clear-eyed realism. We recognize that the consumer continues to navigate uncertainty and that promotional intensity remains high. But our teams are executing with discipline, and we believe we are well-positioned to meet the consumer where she is today while investing in the long-term strength and potential of our business through initiatives such as those I outlined at the beginning of the call. As we look ahead to fiscal 2026, we are approaching the year with a clear focus on improving profitability and with confidence in the levers we have already begun to put in place. We expect to begin realizing the benefit of cost reduction initiatives that we started during fiscal 2025, including efforts around indirect spend and other SG&A-related efficiencies across the enterprise. At Johnny Was, the significant merchandising and work we undertook this year should begin to bear fruit, and we also expect to extend the merchandising efficiency project we piloted at Johnny Was to the other brands in our portfolio. In addition, we will continue to focus on input cost reductions and tariff mitigation as we refine our sourcing strategies. Capital expenditures will decline significantly as we complete our new fulfillment center in Lyons, Georgia, which will allow us to meaningfully reduce our debt levels. All of these actions position us well to make tangible progress on profitability while continuing to invest with discipline in the long-term strength of our brands. As always, I want to express my deep appreciation for our people across the enterprise. Their resilience, creativity, and focus on our customer continue to be the foundation of everything we do. With that, I'll turn the call over to Scott for more detailed commentary on our updated financial outlook. Scott Grassmeyer: Thank you, Tom. As Tom mentioned, our teams have shown great discipline and resilience in executing our plan against the backdrop of a challenging consumer and macro environment. In the third quarter, our teams were able to deliver top and bottom-line results within our previously issued guidance range. In the third quarter of fiscal 2025, consolidated net sales were $307 million compared to sales of $308 million in the third quarter of fiscal 2024 and within our guidance range of $295 million to $310 million. Direct-to-consumer channels were up in total, but they totaled a company comp increase of 2%, which was in line with our guidance for the quarter. The direct consumer increase was led by increased e-commerce sales of 5% and increased sales in our food and beverage and full-price brick-and-mortar locations of 31%, respectively. The increases in full-price brick-and-mortar were driven primarily by the addition of non-comp stores, with comps in our restaurant and full-price brick-and-mortar locations down slightly, at 21%, respectively. Sales in our outlet locations were comparable to the prior year. Our increased direct-to-consumer sales were offset by decreased sales in our wholesale channel of 11%, driven primarily by decreases in our in-and-off price business. By brand, Lilly Pulitzer delivered another strong quarter, with total sales increasing year-over-year, driven by double-digit growth in retail and high single-digit growth in e-commerce, partially offset by a decline in the wholesale channel. The positive comp sales at Lilly Pulitzer, along with positive comp sales and overall sales growth in our Emerging Brands businesses, helped to offset the low single-digit negative comp at Tommy Bahama and high single-digit negative comp at Johnny Was. That led to sales decreases in both businesses. Adjusted gross margin contracted 200 basis points to 61%, driven by approximately $8 million or 260 basis points of increased cost of goods sold from additional tariffs implemented in fiscal 2025, net of mitigation efforts, and a change in sales mix with a higher proportion of net sales occurring during promotional and clearance events at Tommy Bahama and Lilly Pulitzer. These decreases were partially offset by lower freight costs to consumers due to improved carrier rates from contract renegotiations, a change in sales mix with wholesale sales representing a lower proportion of net sales, and decreased freight rates associated with shipping our products from our vendors. Adjusted SG&A expenses increased 4% to $209 million compared to $201 million last year. Approximately 5% or approximately 70% of the increase was due to increases in employment cost, occupancy cost, and depreciation expense due to the opening of 16 net new brick-and-mortar locations since 2024. This includes the 13 net new stores, including three Tommy Bahama Marlin Bars and one full-service restaurant opened in the first nine months of 2025. We also incurred preopening expenses related to some planned new stores scheduled to open in the fourth quarter. The result of this yielded an $18 million adjusted operating loss or negative 5.8% operating margin compared to a 3% operating loss or negative 1.1% in the prior year. A decrease in adjusted operating income reflects the impact of our investments in a challenging consumer and macro environment. Moving beyond operating income, our adjusted effective tax rate was 30.3%, which was higher than we anticipated due to certain discrete items that were amplified by our operating loss. Interest expense was a million dollars higher compared to 2024, resulting from higher average debt levels. With all this, we ended with 92¢ of adjusted net loss per share. As a result of interim impairment assessments performed in 2025, the company recognized noncash impairment charges totaling $61 million, primarily related to the Johnny Was trademark. The impairment charges for Johnny Was reflect the impact of organizational realignment activities in 2025, including changes to the Johnny Was executive team that Tom discussed, revised future projections based on Johnny Was's recent negative trends in net sales and operating results, and challenges in mitigating elevated tariffs. I'll now move on to our balance sheet. Beginning with inventory. During 2025, inventory increased $1 million or 1% on a LIFO basis, $6 million or 3% on a FIFO basis, compared to 2024, with inventory increasing primarily as a result of $4 million of additional cost capitalized into inventory related to the US tariff implemented in 2025. We ended the quarter with long-term debt of $140 million compared to $81 million at the end of the second quarter and $31 million at the end of fiscal 2024. Our debt historically increases during the third quarter, primarily due to seasonal fluctuations in cash flow, but lower earnings during the third quarter resulted in increased cash needs. Cash flow from operations provided $70 million in the first nine months of fiscal 2025 compared to $104 million in the first nine months of fiscal 2024, driven primarily by lower net earnings and changes in working capital needs. We also had $55 million of share repurchases, capital expenditures of $93 million, primarily related to the Lyons, Georgia distribution center project, which remains on track for completion and go-live in early 2026, in addition to new brick-and-mortar locations and $32 million of dividends, that led to an increase in our long-term debt balance since the beginning of the year. I'll now spend some time on our updated outlook for 2025. Comp sales figures in the fourth quarter to date are negative in the mid-single-digit range, which is lower than our previous expectations of flat to low single-digit positive comps. While our average order value has increased nicely, traffic has been mixed, but mostly down, and conversion has been very challenging across our portfolio. Due to the slow start to the holiday season, we are revising our guidance for the remainder of the year with the expectation that the mid-single-digit comp will continue for the remainder of the year. For the full year, net sales are expected to be between $1.47 billion and $1.49 billion, reflecting a decline of 2% to 3% compared to sales of $1.52 billion in fiscal 2024. Our revised sales plan for the full year of '25 includes decreases in our Tommy Bahama and Johnny Was segments, driven primarily by negative comps, partially offset by growth in our Lilly Pulitzer and Emerging Brands segments, driven by positive comps and new store locations. By distribution channel, the sales plan consists of a low single-digit decrease in most channels, including wholesale, full-price retail, e-commerce, and outlets, partially offset by a low to mid-single-digit increase in our food and beverage channel that is benefiting from the addition of three new Marlin Bar locations and one new full-service restaurant opened during the year. For fiscal 2025, our current annual guidance reflects a net tariff impact of approximately $25 million to $30 million or approximately $1.25 to $1.50 per share. While tariffs represent the primary driver of margin contraction this year, we also expect continued promotional activity across our brands to weigh on margins as consumers remain highly responsive to value and deal-oriented shopping in the current macro environment. We expect our gross margins for the year to contract by approximately 200 basis points. In addition to lower sales and gross margins, we expect SG&A to grow in the mid-single-digit range, primarily due to the impact of our recent continued investments in our businesses, including the annualization of incremental SG&A from the 30 net new locations added during fiscal 2024, incremental SG&A related to the addition of approximately 15 net new locations this year, including three new Tommy Bahama Marlin Bars and a new full-service restaurant. Also, within operating income, we expect lower royalties and other income of approximately $3 million in fiscal 2025. Additionally, our fiscal 2025 guidance includes the unfavorable impact of nonoperating items, including $7 million of interest expense compared to $2 million in 2024, or an approximate 20 to 25¢ incremental EPS impact. Increased debt levels in fiscal 2025 are due to our continued capital expenditures on the Lyons, Georgia distribution center, technology investments, and return of capital to shareholders exceeding cash flow from operations. We also expect a higher adjusted effective tax rate of approximately 25% compared to 20.9% in 2024. The higher tax rate is primarily a result of a significant change in the impact that our annual stock vesting had on income tax expense in 2025 compared to 2024. We anticipate the higher tax rate will result in an approximate 15 to 20¢ per share impact. Considering all these items, including the $1.25 to $1.50 per share impact from tariffs, higher interest expense, and a higher tax rate, we have revised our guidance and expect 2025 adjusted EPS to be between $2.20 and $2.40 versus adjusted EPS of $6.68 last year. The biggest drivers of the decrease in EPS guidance include a reduction of our fourth-quarter comp assumption from low single-digit positive comps to a mid-single-digit negative comp, a decrease in royalty and other income from lower order expectations from key licensing partners whose customers have elevated inventory levels, an increase in SG&A primarily resulting from increased consulting costs related to our ongoing projects to improve operating results, and some additional costs related to our new Lyons, Georgia distribution center. For 2025, we expect sales of $365 million to $385 million compared to sales of $391 million in 2024. This primarily reflects our mid-single-digit negative comp assumption and decreased wholesale sales in the low single-digit range, partially offset by the impact from non-comp stores. We also expect gross margin to contract approximately 300 basis points, primarily driven by increased tariffs and a higher proportion of net sales occurring during promotional clearance events. SG&A is expected to grow in the low to mid-single-digit range, primarily related to the new store locations. Increased interest expense of a million dollars, decreased royalty and other income of a million dollars, and an effective tax rate of approximately 26%. We expect this to result in fourth-quarter adjusted EPS between 0 and $0.20 compared to $1.37 last year. I will now discuss our CapEx outlook for the remainder of the year. Consistent with our prior guidance, we expect capital expenditures for the year to be approximately $120 million compared to a total of $134 million in fiscal 2024. Remaining capital expenditures relate to completing the new distribution center and the execution of our current pipeline of new stores at Tommy Bahama and Lilly Pulitzer. We expect this elevated capital expenditure level to moderate significantly in 2026 and beyond after the completion of the Lyons, Georgia project. Consistent with the seasonal nature of our business, we expect a modest decrease in outstanding borrowings in the fourth quarter. Thank you for your time today, and we will now turn the call over for questions. Vaughn? Vaughn, we're ready for questions. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and the number 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Ashley Owens with KeyBanc Capital Markets. You may proceed with your question. Ashley Owens: Hi. Great. Thanks so much, and good afternoon. So just first and foremost, I'd appreciate all the color on, you know, what was exactly a gap within each of the banners in terms of assortment for the holiday. But just moving forward as we navigate the quarter, you know, how meaningful would you expect this to be for the upcoming season? Is it something that's been corrected, or are you observing some disruption still? Just want to understand how much of the holiday is now fully aligned versus where you originally planned. And then maybe on that, you know, I know China's complex right now, and that it might be ironing out a little bit, but would ask if this gap is shifting your viewpoint on resourcing strategy moving forward? Would you try to diversify further, place orders further in advance? Just any color there. Thanks. Tom Chubb: Yeah. I think the big thing, and while we did give a lot of the detail, one thing that we didn't really call out specifically was that it's really what's on the floor right now that most impacted some of our sourcing decisions. And the reason is at the time that we were placing the buys for what's on the floor right now, corresponded with that brief period of time where the duty or the tariff on China was going to be 145%. You know, when it's been 20% or 27% or whatever, that's something that, you know, we could make a conscious decision to just stay in China with a particular product if we needed to and just try to take various routes to mitigate that tariff. When we were looking at 145%, which you know, that's off the table at this point, but that was right when we were placing the buys for what's on the floor now. Lots of stuff we were able to move out of China. Tommy and Lilly are mostly out of China, if not completely. But sweaters are the one category, and there are a couple of other ones. Sweater is the big one. That they're just not a lot of haven't historically been great resources that we could go to outside of China. So what we decided to do, Ashley, well, you know, at the time, I think it was the right call. We knew we couldn't bear that much tariff. So we really cut back the sweater assortment and tried to fill it in with other products. You know, you look at our assortment right now, and you wish you had the sweaters. And that's really what we were talking about. So by the time you get to spring, that had settled down a lot. The tariff stuff is still a little bit up in the air. But it's settled down a lot. And we were able to either move the stuff or, you know, know that it was going to come in at a tariff rate that we could deal with otherwise. So for spring, I don't think we have this same kind of impact. We still have tariff issues that we have to deal with, but they're not going to impact the way that they have for this season. Does that help? Ashley Owens: Yeah. Yeah. That's super helpful. You know, just a couple of other questions really quickly. So I think you know, you mentioned earlier that competitors were more aggressive with promotions for holiday and also earlier, which created that tougher backdrop. Any insight as to what you're seeing in the marketplace now in terms of that and if the intensity is moderated, but also how that's helping to inform your promo strategy for the balance of the year? And then, additionally, just following your, you know, leadership refresh and then the external assessment on Johnny Was, would be curious as to what emerged as the key priorities you're now focused on, and then also as you look out to 2026, key objectives for the brand and should we be thinking of this as another period of stabilization or any color you could provide us on some of the road map or some of the key building blocks for stabilizing Johnny. Thank you. Tom Chubb: Okay. So with respect to the promotional sort of intensity out there, I would say right now, it still feels quite high, but we're a little bit in that in-between time. Between the, you know, Black Friday, Cyber Monday, weekend, and the final stretch, and those are usually the most promotional times. I don't think it's really retracted, but I'm not sure it's taken another step up yet. But wouldn't be surprised to, you know, to see that happen. And, you know, we're going to try to be responsive to that in brand-appropriate ways. I think the catchword in all the brands is to stay nimble. We do, you know, want to make sure that we're not totally selling out our brands, but we're also thinking about things that we can do to, you know, to respond to the marketplace. The one other thing I'll point out, and this is this calendar that we have this year where there are twenty-seven days between Thanksgiving and Christmas, and Christmas falls on a Thursday. The last time we had that calendar was in 2014. And that year, the business sort of came very late if you looked at the sales build through the Thanksgiving to Christmas selling period that really came on late. Last year, if you remember, you had Christmas on Wednesday. So this year, they've got an additional weekday to shop, which could be meaningful. And, also, it allows us to cut off e-commerce shipments probably on Saturday or in some cases, even Sunday and still have people feeling good that they're going to get them by Christmas, while last year, that was mostly on Friday that we were cutting off. So there's some things there that, you know, we kind of built the current trajectory into our, you know, our forecast. But I think there's, you know, some reason to hope that it could the season could rally a bit. I don't think it's going to be a great one, but there are some differences there that are worth noting. And then on the Johnny Was plan, I will say a couple of things. The game plan was developed by the team at Johnny Was with some outside assistance. But it's very much the team's plan. Lisa Kayser, who's now the President of Johnny Was, was part of that team. She's relatively new to Johnny Was, but she's been with us for several months. She was the Chief Commercial Officer before, and she was very, very much central to the development of that plan. So the refreshment of the leadership does not entail, I would say, any change in the direction of the plan that we've been working on. And as we talked about last quarter, the keys to that are merchandising effectiveness, which is about having better assortments that hit have the right level of investment and the right price points, the right product categories, getting that to the stores at the right time, and in the right, you know, store-level assortments. And all of that will drive, we believe, some incremental sales versus what we would otherwise have had and also improve the margins, improve full-price sell-through, and ultimately, gross margin. And then two other big areas of focus by the team. And, again, it's the team's plan. Really, the same team. We've just added a few more people and elevated a few people, including Lisa, who we're very excited about. But the second element is about marketing efficiency. And that's really just more effectively spending the dollars that we spend to drive better results. And, you know, some of that, we've already started to kick in. And I will say what we're seeing today is encouraging in that we're actually getting, I would call it, better efficiency out of the spend that we've done in the last month or so, maybe a little longer than that. And then the last thing is about improving the go-to-market process and calendar, and that's something that a whole team led by Lisa's, you know, they're very bought into that. Lisa's a big believer in that kind of discipline. So I think the refreshment of the leadership team and the elevation doesn't change the plan because they all developed the plan. But it enhances our, you know, our ability to execute that well. Ashley Owens: Great. Thank you for clarifying. Appreciate all the information, and I'll pass it along. But best of luck. Tom Chubb: Okay. Thank you. Operator: Our next question comes from Janine Stichter with BTIG. Janine Stichter: Hi. Good afternoon. Wanted to dig into wholesale a little bit. I know it's a relatively smaller piece of the business, but just curious if you can share what's going on there. It sounds like your wholesale partners are being a bit more cautious with orders. But there's maybe a little bit more inventory in the channel. And then I think you mentioned that off-price was going to be down. Is that a strategic plan, or maybe just elaborate on what's going on there? Thank you. Tom Chubb: I think I may on the overall on the wholesale, I think it is, you know, a level of concern and caution by the, you know, by the retailers. And I would say most especially the specialty retailers that, you know, are a big part of our wholesale base. And, during uncertain times, they tend to pull back a bit, and I think we're seeing that now. And, Scott, I don't know if you want to elaborate on the off-price situation a bit. Scott Grassmeyer: Yeah. But we did have less inventory that needed to be liquidated through those channels. So we are, you know, trying to keep our inventory and hopefully, we'll continue to have less that we have to put through those channels. Janine Stichter: Got it. And then just thinking through the tariffs, as you're just now seeing the impact of product that you were planning, I guess, in April or May when the China tariffs were 145%. Is the Q4 what we should think of as the peak headwind from tariffs? Or how much should we think about continuing into the first quarter of next year? Tom Chubb: Well, I think in terms of it, you know, the impact it had on our product assortment, I think it is peak. I think as we get into spring, we were able to, you know, make the product that we wanted to make at somewhere that was, you know, a manageable level of tariff. In terms of the impact, the financial impact, of tariffs, remember, we didn't have them during the first quarter of last year. Really, they didn't really kick in until later in the year. So first quarter, you're not going, you know, apples to apples. And then as you get later in the year, you start to lap the tariffs. Yeah. And I don't know if you want to add. Scott Grassmeyer: Yeah. Yeah. We had settled, like, accelerate a lot of products. So, you know, early in the year knowing that tariffs were going to be coming or fearful they're going to be coming. So we were able to most of the first quarter had very, very minimal. Now we go into the first quarter next year. Everything will have some tariff on it, but we will have some price increases to at least help mitigate that impact. As we get later in the year, you will be going apples to apples with tariffs and hopefully have a little bit more mitigation price-wise as the year moves on. Janine Stichter: Okay. Thank you very much. I can pass it on. Tom Chubb: Thank you, Janine. Operator: Our next question comes from Joseph Civello with Truist Securities. Joseph Civello: Hey, guys. Thanks so much for taking my questions. Following up on wholesale a bit, understand, you know, the general cautious tone from retail partners. But can you give any incremental color on your sort of competitive positioning within the channel? And maybe, you know, as we get past the tariff pressures on inventory and stuff like that that you're facing right now? Tom Chubb: Well, I think through the third quarter, our, you know, relative performance to the extent we know, and we don't always have perfect information. But I think we performed well. And I don't think we, you know, for the overall, I would say, well, there were small pockets where maybe that was not the case. But I would say, overall, our performance was quite good on the retail floor. For the fourth quarter in the holiday, I think it's, you know, it's too early to know for sure. We don't have enough data, but my hunch is that we're going to continue to perform well relative to the rest of the floor. And it's more about the general caution. Scott Grassmeyer: Got it. Makes sense. And then if we could also just get a little bit more color on, you know, thoughts around price increases, as we go through the spring, which I believe was, like, the original trajectory we were looking at. Scott Grassmeyer: Yeah. You know, we do have some price increases in for, you know, the fall holiday period, but would there be, you know, more in the spring. But, again, we'll, you know, have the full tariff load coming in that inventory. And then we're, you know, looking at next fall pricing on, you know, are there any adjustments we additional adjustments we need to make. So I think there'll be, you know, once we have an early part of next year, the, you know, pricing should, you know, the goal is to have it mitigate the tariff dollars. Oh, I don't think we'll get the percentage quite mitigated, but the dollars, you know, once we get out of the early part of the year, the goal is to have the pricing mitigate the tariff dollars. Joseph Civello: Got it. Makes sense. Thanks so much. Operator: Alright. Thank you, Joe. Our next question comes from Paul Lejuez with Citigroup. Tracy Kogan: Hi. It's Tracy Kogan filling in for Paul. I had a question about what you're seeing quarter to date. And in outside of the key sweater category, can you talk about the trends there in some of those other categories and also talk about trends by brand quarter to date? Is it pretty broad-based weakness you're seeing across the brands, or is there a big deviation of one brand or the other? Thank you, guys. Tom Chubb: Sure. Thank you, Tracy. Well, I would say that, and we talked about this in the prepared remarks, but the big three brands are all relatively weak at the moment. You know, and the smaller brands are still sort of humming along. They were plus 17% in the third quarter, and they're continuing to have a strong fourth quarter, while the big brands are where we're really seeing the softness. And then in terms of product, we also talked about that a little bit. And I think in, you know, in Lilly, we're because of the China tariff situation and the threat of a 145%, China is where we make a lot of our more embellished kind of, you know, novelty type stuff, things with, you know, sparkles and rhinestones and bows and that kind of stuff. And so we just got less of that stuff. And so the consumer's almost being forced into some things that, I mean, Lilly is never basic product, but that within the Lilly spectrum are a little more tame. And then in Tommy Bahama, we've actually seen very good performance in things like the Boracay pant, which is basically a chino. It's a really great one, really nice one, but it's a chino pant, and that is we talked about third quarter and, again, this quarter, we introduced a new one or I say third quarter, second quarter. We introduced it earlier in the year. It's at $158 versus $138. It does have some new features and benefits. But it's sold just incredibly well. And, actually, we're selling a lot more of them than we sold the old one last year. And then also things like long sleeve wovens are performing well. Some of the second layer knits. And I think the kind of theme to a lot of those things is versatility. You know, things that can be worn on a lot of different use occasions. But, you know, we'll see more as the season develops, Tracy. Tracy Kogan: Great. Thank you, guys. Good luck at the holidays. Tom Chubb: Okay. Thank you. Operator: Our next question comes from Mauricio Serna with UBS. You may proceed with your question. Mauricio Serna: Great. Thank you for taking my question. I guess, you know, I understand now in this fourth quarter, you're experiencing some assortment issues that related to, you know, the sweaters and the move out of China for that for this particular season. But as you think about the spring 2026 season, how are you thinking about assortment, you know, how ready you are in terms of different, you know, the three big brands, I guess, and the potential for maybe, you know, after getting through this bit of a hiccup in Q4, you know, having stronger results in the first half of next year? Thank you. Tom Chubb: I think the challenges to the assortment were really mostly for what's on the floor right now. I think as we get into spring, by the time we were placing those buys, the 145% tariff was off the table. And or we had found other places to make things. So I don't think we'll have that challenge so much in the spring. As Scott mentioned a minute ago, the tariff issue for the spring will just be that this year, we will have tariffs, whereas in spring of last year, we didn't really have them yet because they hadn't been implemented and or we were at, you know, pulled in ahead of them. Mauricio Serna: Got it. And just as a reminder, what kind of price increases are you planning for spring 2026? To offset the tariffs? Scott Grassmeyer: Yeah. It it's kind of varying, but, you know, it's ranging from, you know, four to say 8%. But some of it, ones that are more in the 8% or more the, you know, it's more a little more elevated in mix. So I think for the tariff piece of it around four. Which kind of offsets the dollar impact. The dollar? Yeah. Yeah. Not quite the margin impact, but the dollar impact. Mauricio Serna: Understood. Okay. Thank you very much, and good luck in the rest of the holiday season. Tom Chubb: Alright. Thank you, Mauricio. Operator: This now concludes our question and answer session. I would like to turn the call back over to Tom Chubb for closing comments. Tom Chubb: Thanks to all of you very much for your interest. We look forward to talking to you again in March. And until then, I hope you have a happy holiday season. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines and have a wonderful day.
Operator: If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. Good afternoon, and welcome to the Vail Resorts, Inc. Fiscal First Quarter 2026 Earnings Conference Call. Operator: Today's conference is being recorded. Currently, all callers have been placed in a listen-only mode. Following management's prepared remarks, the call will be opened for your questions. If you would like to ask a question at that time, please press 1. To remove yourself from the queue, press 2. To get to as many questions as time permits, we ask that you please limit yourself to one question and one follow-up. At any time, if you should need operator assistance, press 0. I will now turn the call over to Connie Wang, Vice President of Investor Relations at Vail Resorts, Inc. You may begin. Connie Wang: Thank you, operator. Good afternoon, and welcome to our fiscal 2026 first quarter earnings conference call. Joining me on the call are Rob Katz, our Chief Executive Officer, and Angela Korch, our Chief Financial Officer. Connie Wang: Before we begin, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings. Actual future results may vary materially. Forward-looking statements in our press release issued this afternoon, along with our remarks on this call, are made as of today, December 10, 2025, and we undertake no duty to update them as actual events unfold. Connie Wang: Today's remarks also include certain non-GAAP financial measures. Reconciliations of these measures are provided in the tables included with our press release, which, along with our annual report on Form 10-Q, were filed this afternoon with the SEC and are also available on the Investor Relations section of our website at www.vailresorts.com. I would now like to turn the call over to Rob Katz for opening remarks. Rob Katz: Thank you, Connie. Good afternoon, everyone. Thank you for joining our first quarter conference call. Before we discuss the results from the quarter and past sales results, I want to provide an update on some of the key strategies we laid out last quarter to drive visitation and evolve our marketing approach. Beginning in the fall, we made some shifts in our marketing approach to increase spending channels outside of traditional email, which drove improved results for the fall past selling period. This included broadly increasing paid media and specifically being much more present in social and influencer channels. We saw some initial positive results from this effort, turning around the past sales dollar trend for the post-Labor Day period from up 1% compared to the prior year through Labor Day to up 6% post-Labor Day, even though we faced challenging early season conditions heading into the final past selling period that likely impacted our local passholder results. Rob Katz: As we head into the winter season in the Northern Hemisphere, we are turning our focus to driving lift ticket visitation. For this season, we have several new strategies aimed at increasing lift ticket visitation, which is an important funnel for driving long-term guest lifetime value. Earlier this year, we launched Epic Friends tickets, which provide a 50% discount to friends and family of pass holders. This pass holder benefit enables our most loyal pass guests to share their experience with their network of family and friends, who can apply the cost of that lift ticket to a pass the following year. In addition to the new Epic Friend tickets, we have also announced a new advanced discount offering for guests willing to commit one month in advance. The new lift ticket offer provides a 30% discount off window pricing for customers who commit over a month in advance at select resorts. That means that some of the company's largest destination mountains, skiers, and riders can save over $100 per lift ticket depending on the day by purchasing four or more weeks in advance. This provides another important bridge in product offerings for guests who cannot commit to a past purchase ahead of the season. Rob Katz: In addition to our new lift ticket product offerings, we are also looking to be more strategic in pricing across our individual resorts and time periods. We are implementing more dynamic pricing strategies targeted at driving off-peak visitation at certain resorts, which fulfills the dual purpose of pricing select resorts more competitively and incentivizing visitation in lower volume time periods. We will be utilizing these strategies at resorts like Keystone in the upcoming ski season, where we see the most opportunity to offset lower prices with additional volume capture to drive overall revenue. Finally, in addition to purchasers of Epic Friends tickets, purchasers of Advanced and Window Lift tickets will be able to apply up to $175 of the cost of their lift ticket to a pass for next season. Growing lift ticket sales is a critical entry point for guests to join our pass program, and we believe it is critical to have an integrated approach across all lift access products. Given the widened spread between lift tickets and pass prices, we believe that even with these new discounts, passes still represent the best value for our guests. Rob Katz: Moving now to our broader marketing efforts, we are looking to evolve and modernize our approach in how we reach and engage our guests. On the messaging front, we are in the early stages of creating content that builds a stronger connection with our guests by tapping into the passion they feel for our resort brands. Over the past quarter, we took some first steps to increase our media spending with messaging that celebrated the individual identity of each resort, which helped drive improved fall pass sales performance and incremental return compared to the spring selling period. We have also shifted our marketing to better capture guests at the top of the funnel, a key to building awareness, and have expanded marketing in channels where younger consumers spend most of their time, including social, video, connected TV, and streaming audio. While the full impact of brand-building marketing is expected to increase over time, we are seeing early signs that our investments in these channels are resonating with guests through increased engagement and outperformance versus our traditional branded creative stronger brand awareness based on guest research. Rob Katz: The total magnitude of our actions around lift tickets and marketing will be less visible this fiscal year, but we are seeing early signs that reinforce our focus on these key areas. Longer term, we are focused on optimizing our products and pricing across our pass and lift tickets to drive long-term value creation. We are excited to have our new Chief Revenue Officer, Celeste Bergon, join us next month. Celeste has an incredible twenty-year track record of success at Lululemon and is a very strong business leader with a passion for guest experience and leadership. I'm more than confident that Celeste will make a very strong and long-term impact on helping us drive growth and ensure we live up to our mission of experience of a lifetime. I look forward to partnering with Celeste in modernizing our marketing engagement to drive future growth. Rob Katz: While we've seen a slow start to our Rockies and Tahoe resorts due to challenging early season conditions, we've seen some strength in the Northeast and seen more typical patterns at Whistler Blackcomb and in Switzerland. Changing weather and snowfall patterns are not new to us, but they reinforce the importance of the stability we create from our past business, which remains a key long-term driver to our success. Overall, I am confident that we are working on the key areas that will drive our next phase of growth. We are laser-focused on delivering an exceptional guest experience, deepening our consumer connection with our resorts, and driving lift ticket visitation. While still in early innings, we are seeing early signs that our initial efforts are resonating. We will continue to look for opportunities to optimize our products and pricing to support overall guest experience for fiscal year 2027. Our calendar year 2026 capital plan, which Angela will go into more detail shortly, reinforces our commitment to improving guest experience through investments in technology and multiyear initiatives to continue elevating our destination resorts. With that, I will turn the call over to Angela to review our financial results and outlook more in-depth. Angela Korch: Thank you, Rob. Good afternoon, everyone. Overall, we are pleased with the results from the first quarter, which were in line with our expectations. Resort net revenue was up 4% year over year as we saw improved visitation at our Australian resorts due to more favorable weather conditions and the introduction of the Epic Australia four-day pass. Fiscal first quarter resort reported EBITDA was flat year over year, reflecting the Australia weather favorability and the benefits from the resource efficiency transformation plan, offset by typical inflation in year-round overhead costs, increased marketing spend aimed at driving winter past product sales, and one-time costs related to the resource efficiency transformation plan. Angela Korch: Regarding our Resource Transformation Plan, we expect to deliver approximately $75 million in cumulative efficiencies before one-time operating expenses of approximately $14 million in fiscal year 2026. This represents $38 million in incremental savings versus fiscal year 2025. As stated in our prior call, we anticipate exceeding the original $100 million annualized target and we're looking forward to providing more details next spring. Angela Korch: Turning to pass sales, we finished the North American pass product selling period for the upcoming 2025-2026 ski season with units down 2% and sales dollars up 3%. We saw an acceleration in past sales trends from our September update, with pass sales improving from the 3% decline in units and 1% increase in sales dollars for the period ending September 19, to a 1% decline in units and a 6% increase in dollars from September 20 through December 5, 2025, reflecting improvements from our paid media investments and higher price flow through from an increased mix of unlimited pass products. While paid media drove positive results, snowfall was also down almost 60% versus the prior year at our Western North American resorts, which likely impacted local pass sales near the end of the selling period. Angela Korch: The results from the full pass selling season show that the company now has approximately 2.3 million guests committed to our 42 North American, Australian, and European resorts in advance of the 2025-2026 season in nonrefundable advanced commitment products this year, which are expected to generate approximately $1 billion of revenue and account for approximately 74% of all skier visits excluding complimentary visits this year. We have grown pass units by 55% over the past five years, highlighting the increased guest commitment, which in turn provides greater financial stability to the company. Angela Korch: Moving to guidance, we are reiterating our previous guidance range of $201 million to $276 million in net income and Resort reported EBITDA of $842 million to $898 million for fiscal year 2026. Similar to last quarter, our guidance assumes growth from price increases and ancillary capture, as well as the assumed benefit from the approximately $38 million incremental efficiencies related to the resource efficiency transformation plan, offset partially by lower pass units, which are expected to have a negative impact on skier visits relative to the prior year, along with normal cost inflation. Angela Korch: What's changed this quarter is that while our paid media efforts have driven an early improvement in pass sales, we've also seen a slow start to the season from below-average conditions and recognize that it's very early in the North American ski season. We have seen conditions improve with recent increased snowfall, but recognize that most of our primary earnings period is still ahead of us. Therefore, we are reiterating our previously announced guidance at this point in time. Angela Korch: Rounding out the fiscal first quarter, our balance sheet remains strong with liquidity of $1.5 billion and net debt of 3.0 times trailing twelve months EBITDA. We are confident in our ability to address our upcoming convertible debt maturity with a combination of cash on hand and our delayed draw term loan facility. Our capital allocation priorities remain intact, as we announced our calendar year 2026 capital investments at our resorts, along with maintaining the cash dividend of $2.22 per share. We continue to be opportunistic about share buybacks, having completed approximately 200,000 shares of repurchases after the quarter end for $25 million. Angela Korch: Expanding on our 2026 capital plan, we announced a core capital investment plan of $215 million to $220 million, which reflects the growth in inflation, including the impact from tariffs. In addition to the core capital plan, the company plans to invest an additional $12 million in growth capital investments in its European resorts, $5 million in resource efficiency transformation projects, and $2 million in real estate planning capital. Including these investments, total capital is expected to be between $234 million to $239 million. Angela Korch: Within our capital plan, I want to highlight our investments in a couple of key areas. First, we are making multiyear investments to elevate guest experience at our destination resorts. In Park City, we will replace the existing eight-passenger Cabriolet lift with a 10-passenger gondola, enhancing the accessibility and experience between the village and connecting multiple gondolas to the canyons village in the garage base area. At Whistler Blackcomb, we are also investing in a new lift to replace the Showcase T-Bar lift, which will greatly improve accessibility to skiable terrain on the Blackcomb Glacier. We are also rolling out a larger initiative around elevating our dining experiences at our top resorts, which includes remodels, as well as activations at our destination resorts. Angela Korch: We are also beginning a multiyear investment at select resorts to implement remote avalanche control systems. These systems remotely trigger controlled avalanches, reducing manual intervention and improving safety, reliability, and the guest experience through faster, more consistent, predictable terrain openings. We're also investing to upgrade the Blitzen Lift at 7 Springs to ease congestion and improve the experience in accessing the North Bay side of the resort. Angela Korch: Next, we are investing in technology to support the guest experience, with improvements and additions to the My Epic app, along with enhancements to our marketing capabilities and e-commerce platform. Within the My Epic app, we've added functionality that will provide guests with information they need and streamline their resort experience, allow for in-app commerce with Apple and Google Pay, and continue to invest in revamping and digitizing the ski school experience, integrating the My Epic gear experience into the broader rental platform. Angela Korch: On the marketing front, we are modernizing our e-commerce platform by migrating to a new content management system to enhance personalization, flexibility, and speed to market. We're also expanding our capabilities for more agile pricing and product updates to capture revenue opportunities and improve operational efficiency. Angela Korch: Last, we will continue to support our sustainability initiatives through investments in low-energy snowmaking at Epimo and waste reduction projects across the resort. We are also investing capital to support the Resource Efficiency Transformation Plan. Angela Korch: In closing, we are leveraging our distinct competitive advantages and progressing on the drivers of our next growth phase to drive results in fiscal year 2027 and beyond. With our track record of disciplined capital allocation, we are laying the foundation to drive long-term sustainable growth and consistent value creation. At this time, I'm happy to turn the call back to the operator for your questions. Operator: Thank you. At this time, if you wish to ask a question, please press 1. You may remove yourself from the queue by pressing 2. Again, please limit yourself to one question and one follow-up. We'll take our first question from Shaun Kelley with Bank of America. Your line is open. Shaun Kelley: Hey, good afternoon, everyone, and thank you for taking my questions. Rob or Angela, I would love to start with the announcement yesterday. Obviously, it kind of builds on the momentum of what you did with Epic Friends over the summer. But just help us think about how you're thinking about quantifying an initiative like this. Just how do you expect it to play out between price and volume as you take another stab at the advanced period? How did you measure it? And when you put these two initiatives together, how are you thinking about when you're going to know if this trade-off was the right level to offer this product out to people? Rob Katz: Yeah. So I think the drivers here, obviously, we have been talking about this for a little bit in terms of making lift tickets more accessible, being more competitive on that but also doing it in a disciplined and fenced way. In our mind, this was a unique opportunity to address this moment in time. There are some people who will book a vacation before they know they're going skiing. They're going to buy a pass before the deadline that just passed in December. Then there are other people who may be truly making a decision right in the moment on that day. But there's a bunch of people who are not ready to make their decision by the December deadline but are still planning a vacation in the future. So when they go to our website, they will now see these lower prices. As they think about the ability to make this decision, they're going to be looking at those lower prices on the website. That's one. So we're trying to catch them in their booking phase and in their comparing phase. Two is that we are providing a call to action for lift tickets that we think is a little bit stronger than what we've had before. So now when somebody's going to a website, for instance, somebody's on the site now looking for MLK, they'll know that they only have a little bit of time if they want to book a lift ticket. And we're going to be showing them that on the website. So that actually creates some time sensitivity to their purchase. Last is that once people don't buy a pass, we see very few people buying lift tickets this early. So in our minds, it was also an opportunity to start getting a little bit of the mini advance commitment piece, which we thought was more important than just a seven-day advance or the three-day in some resorts that we have today. So in our mind, we looked at that and thought this would move enough vacation decisions plus enough additional incremental days of skiing even for people who are already going to come, that trade was worth the cut in price. Shaun Kelley: Great. Thanks for that. And then for my follow-up and maybe to switch gears slightly, obviously, comments on the weather on the one side, but what we saw on the past trajectory on the other seem to offset each other here a little bit. But just wanted to dig into that core message if you could. Was the message here that all other things equal, we could have actually raised had it not been for what you're seeing in the early conditions on the resorts? And then, if so or regardless, just help us think about, is that comment on the weather through today, or have you also de-risked a little bit as we look into the forecast here just knowing that this is always evolving with weather? Rob Katz: Yeah. I guess what I'd say is I'm not going to comment on a hypothetical around guidance. But I would say that we did over-deliver on passes. And even that over-delivery on passes, we think, was muted by challenging weather at the end when, obviously, that March consumer is not as motivated. Last year, at that exact time, we had very strong conditions. So we had a little bit of a tougher comp at the very end than we did this year. But we were really pleased with the turnaround, particularly the revenue turnaround, right, up 1% through Labor Day and now up 6% post-Labor Day. And it speaks to a lot of what we've been saying in terms of changing how we're going to engage with guests and then particularly drive much better results from our higher-priced pass products. In terms of conditions, I think the comments we're making about guidance are assuming a normal experience at our resorts over Christmas. It's really not possible for us to assess anything beyond that. Obviously, we've all seen conditions change dramatically in just a couple of days. So at this point, that is where we're focused. I do think that some of the early, by definition, we lost some momentum in the early season just given sluggish conditions, but that is factored into our guidance. Shaun Kelley: Thank you so much. Rob Katz: Thanks. Operator: We'll take our next question from Ben Chaiken with Mizuho. Your line is open. Ben Chaiken: Hey, thanks for taking my questions and apologies for any background noise. I guess sticking to the past, as you strategize for next year, Rob, it'd be helpful to get your current view on past benefits. And maybe specifically, how do you think about third-party benefits to the past? How focused are you on this opportunity? And then one quick follow-up. Thanks. Rob Katz: Yeah. So I think we are taking a look holistically at every piece of this. And as we've said, we'll look at pricing, we'll look at pricing of the different products and see. Our focus, as it's always been, is about driving and maximizing long-term revenue. And so that's going to be a key driver for us. We absolutely look at third-party benefits. We do a lot of research, direct primary research with our guests and actually broader destination guests on this. And I think some of those benefits can move the needle, but it's really on the margin. I mean, I think people really are looking at this, and they're looking at price, and they're looking at access to the resorts. And it's about, like, whether we have the resorts that they want to go to, and is that at a price that's reasonable? Of course, there's no doubt that people would love to have, you know, cut the line, they'd love to get on the mountain earlier and things like that. Certainly, those things move the needle. The Epic Friend tickets, what we used to call buddy tickets, we have seen that that's quite important, especially to our Spring Pass purchasers. I think the third-party benefits are kind of a nice to have, but it's certainly not what we see as the primary driver of results. Ben Chaiken: Got it. Okay. That's very helpful. And then as you think about the price adjustment made yesterday, as we sit here today, does that make sense for the overall path in the future to evolve as well, whether that's through an extended deadline or different price points? I guess just thinking about the positioning of the whole mosaic of the company today. Rob Katz: Yeah. I don't see us extending the deadline for passes. So, I mean, right now, that is very much a key part of how we provide that discount is that it's before the majority of the ski season has started. And that, you know, if you're buying products after that, they are refundable. And so that's true even with the product we just talked about. So this thirty-day advanced ticket is refundable ultimately. So it is why there's still a delta, it's a pretty significant delta, between that and buying a pass in terms of what you could ski for by the day. So I think that the price, the core structure of this, we're not anticipating changing. But we do think there's an opportunity for us to be more creative about how we market lift tickets. And I think there's an opportunity potentially for us to be a little smarter about how we price all of them. Angela Korch: I'd just say on the spectrum there, it is consistent with what we already do with our passes. When you think about the deadline approach we have with passes, the greater you commit in advance, the better price you get within pass. And so this is a similar thing with lift tickets. We had a seven-day advance lift ticket. Thirty days in advance is kind of extending that out, but in a similar structure. And describe the similar behavior that we're trying to do, is to commit in advance. Operator: We'll move next to David Katz with Jefferies. Your line is open. David Katz: Hi, afternoon everybody. Thanks for taking my questions. Firstly, I'd like to just focus on the technology investments. And, you know, just talk about how you think about returns on those investments. You know, obviously, they enhance the experience. But what are you able to measure in terms of maybe preschool lift or other ancillary spend that may occur as you make those investments? Rob Katz: Yeah. I think, absolutely. They drive, I think, two things. One is they definitely improve the guest's digital kind of guest experience and the technology piece. Or they're enhancing kind of the in-person experience like we are doing with ski school or with rental. But a lot of these technology investments also help us improve conversion. And, certainly, if you compared it versus putting in a new lift, actually, it's a lot easier to track the return on these investments because we're getting the real-time feedback and can see it. In particular, I think the focus that we're putting on the app right now, we're seeing a lot of traffic growth to the app and on mobile, and we are currently, in mobile, obviously, if you're on a mobile website, certainly, we can take payment. But in the app, we're not doing any commerce, and we don't have easy ways like Apple Pay and Google Pay to close a sale. And so we do see that as having a direct improvement in our ability to drive sales. We're going to be starting with basically lift access products, but ultimately, we will have ski school and rental in there as well. And so now when we look at ski school, for instance, for this year, I would say one of the key things is going to be seeing how guests react to the digital ski school experience that we're going to be providing. I don't know whether it's necessarily going to have an impact this year on conversion. But, obviously, to the extent that we can improve our guest experience scores and net promoter scores within ski school, then we expect to see that actually come back certainly in follow-up visits or in next season. David Katz: And as my follow-up, I'd like to go back to Shaun's first question and maybe ask it in a bit more direct way since it's something that comes up in our conversations quite a bit. With respect to the discounting on lift tickets, I think what we're all at least in part trying to figure out is whether there is kind of a reset in lift ticket revenues separate and apart from past revenues, and or whether those decisions that you're making are producing incremental revenue now, or are they setting you up to create incremental revenue in the future? We're all trying to sort of plot your revenue growth and put it all together. Rob Katz: Yeah. So what I would say is I think if you look at our lift ticket visitation over the last couple of years, it's declined at the same time that our season pass revenue has basically been flat. And so, you know, it's and particularly on visitation. And so when you look at that, I think that's not that relationship is not something that, you know, I think it was one thing to see lift ticket visitation decline when we were growing past units dramatically. But to the extent that we are seeing more mature growth in season pass, we should see growth in lift tickets. And so this is one of the things that, you know, Epic Friend tickets would be a way. Being more creative on pricing and more differentiated on pricing at our resorts is another way, which we're doing. Another way is the promotion, the 30% off promotion that we announced yesterday. Another way is increased marketing and improving the brand and all I'd say, the basic blocking and tackling of marketing, of lifting tickets, which we were not really doing in the same way that we were doing for past before. So, yes, we do see this as adding revenue, and we do see this as adding revenue this year, and that is included within our guidance. It is included when we put out our guidance and highlighted that we saw past visitation declining, but overall, that would be offset by lift ticket visitation improving that was included in that. What we're saying, though, is that we think these things take a few years to get into the guest psyche. It's not I think one of the things we've learned over time is that just like when we introduced the Epic Pass a long time ago, it wasn't that everyone in the entire ski industry was aware of it and all of a sudden started making decisions around it. It took time. These new things that we're doing, I think, are the same. That'll have some impact this year. But we think we'll see better impact with Epic Friends and this 30% off four-week-out ticket as guests really start to get in that habit. David Katz: Very helpful. Thank you. Operator: We'll move next to Arpine Kocharyan. Your line is open. Arpine Kocharyan: Thank you very much. Thanks for taking my question. This is a bit of a maybe unfair question since I'm about the current quarter, but I was wondering if you could speak to broader visitation trends into November and early December in terms of seeing traction with some of the promotional initiatives you have going on for the season. But specifically within this broader bifurcation in the consumer space between upper end and lower end, what are you seeing in regional versus destination resorts? Do you see that leverage of lower pricing kind of discounting working better at regional resorts, while maybe higher end not as price elastic, and maybe there isn't much need to discount with those guests? Rob Katz: Yeah. I think we said in our comments, and I'd reiterate that, I think we're in very early innings of even this season, let alone the life cycle of a lot of these changes that we're doing. And what we're seeing is encouraging. But it's hard. Obviously, we're not ready to really speak to a lot of this because the season has barely begun. And, of course, conditions are impacting so much of this in terms of looking at current visitation. So really hard for us to assess. A lot of this, I'd say, on the broader point about upper end versus lower end of the consumer, I think at this point, we're not ready to suggest that any of our results are being impacted by that. That's maybe a broader point about the economy and broader points about travel. But I think it's a little too early for us to comment on that. I think a lot of what we're seeing we think is much more about our own trends than it is necessarily about macro trends at this point. Arpine Kocharyan: Thank you very much. Thanks. Operator: We'll move next to Patrick Scholes with Truist Securities. Your line is open. Patrick Scholes: Hi. Thank you. You know, as you think about changes to your past structure, I've seen that there's been the announcement of the ICON reserve type of pass. Would that ever be a consideration for you folks? That type of pass? Rob Katz: Thank you. You know, I would say, you know, everything is always a consideration for us. So, you know, I think in terms of having some more premium experience, that's something, you know, we clearly will always think about and focus on. I think, you know, some of the things that they're doing, you know, we have in some of our higher-end resorts, obviously, like private clubs and private dining, and then, obviously, you know, ski school for us is a major driver. So it's almost like a club in and of itself, right, in terms of getting the line-cutting privileges plus concierge-type support services plus, obviously, ski instruction, you know, in the midst of all that. So, you know, it's something we'll always look at, but for us, like, just like a lot of the other changes that sometimes people suggest, you know, we have to look at how it would impact the total ecosystem and other sources of revenue and other business lines that we have. But for us, we really do feel like we've got some pretty good avenues for our upper-end guests if they want to spend more on their vacation and get some unique services. Patrick Scholes: Okay. And then sort of a breaking news, well, there's a chance Telluride may go on strike. Roughly, how much does, in a normal year, does your relationship with Telluride and the Epic Pass contribute to your overall earnings ballpark? Rob Katz: Well, it's, I mean, I think it's, yeah. The relationship is, it doesn't, Telluride doesn't necessarily contribute to our earnings. Into the year. I think access to Telluride helps pass sales, which is important. And, you know, obviously, we are very hopeful that they can find a way to resolve the differences and that they have an amazing ski season ahead. Patrick Scholes: Okay. So, you know, it's pretty small, I assume, in the big picture of things because you don't own it. It's just a past relationship, essentially. Correct? Right. In a nutshell. Okay. There's no earnings from Telluride that go to us. Okay. Okay. Okay. Okay. That's it. Thank you. Rob Katz: Thanks. Operator: We'll take our next question from Chris Woronka with Deutsche Bank. Your line is open. Chris Woronka: Hey, good afternoon, everyone. So I guess, Rob, as you kind of get this year and understanding the slow start, but if you kind of look at, I know you've always viewed lodging bookings for both holiday periods and then further out into the spring as a little bit of an indicator. Have you seen any change in pattern or booking behavior in terms of people, maybe if you look at the same customer coming that has, you know, an Epic pass, are they waiting longer to book? Are they booking shorter or longer? Any patterns you can see yet? Rob Katz: You know, what I'd say is I think there's no doubt that I think as conditions were not great during November and early December, we definitely have seen a booking deceleration by that. But the flip side to that is we've also seen it rebound very, very quickly. And so that's not that uncommon in terms of where we are. I think, obviously, we go into the season with a billion dollars of revenue on passes, but those represent visits. Like we're saying, almost 75% of our visits. So those are folks who are going to come, most likely, as we see in every year. But, yeah, we do see, of course, people are trying to pick and choose, like, when's the right time to come. I think, you know, for Christmas, we're going to get a lot of folks who, you know, because a lot of our biggest destination resorts, they have incredible experiences, right, not only on the mountain but, of course, in the town and with other activities. And so what we see, actually, there's been a lot of evidence of this. And even in years that were slower for us on the mountain, sometimes, actually, it's been record sales tax years for some of these towns. So, actually, for us, we feel like that's where this combination of a broad set of experiences that people have plus the past pulls people in. And, yeah, then it's just a matter of how many visits do we get during Christmas. And when snow comes and when conditions shift. But at this point, we've kind of factored that in. And assuming that we have a more normal Christmas experience, we feel very good about the guidance. Chris Woronka: Okay. Understood. And then as you, and this kind of question relates to both your new friend pass to friend tickets and also just your overall goal of getting more folks onto the mountains. Any early read yet on how ancillary spend looks for kind of the first-timers and what you're kind of embedded in your expectations related to ancillary spend for first-timers? Rob Katz: We don't, I'd say, yeah, it's way too early to try and assess that because I think that's something we'll probably have a much better sense of much deeper into the season. But I would also say that, you know, there'll be some people who are true first-timers. There'll be some people who just couldn't make up their mind, you know, in Epic Friends, for instance, before the past deadline. Then there'll be other people who are normal lift ticket purchasers, who are just going to be, you know, committing thirty days in advance. So for us, these guests, I think, our destination guests largely we see as a cohort in terms of their spend on the mountain, and we would expect that a lot of these folks who are coming in would be quite similar to those folks. Chris Woronka: Okay. Very good. Thanks, Rob. Rob Katz: Thanks. Operator: We'll move next to Jeffrey Stantial with Stifel. Your line is open. Jeffrey Stantial: Great. Good afternoon, everyone. Thanks for taking our questions. I wanted to follow back up on one of Shaun's questions from earlier. If I heard you correctly, Rob, I think you described the thirty percent one-month advance discount as sort of unique was the term I believe you used. I guess my question is this, could this represent a bit more of a transition or a long-term evolution towards a suite of, call it, advanced lift ticket discounts, whether it's, you know, four weeks, three weeks, two weeks, and it starts to become really more of a yield management exercise more than anything else? Or to that point, by unique, should we think about this more as one-off? And then just as a corollary to this, how do you think about the potential for AI to sort of simplify the consumer purchasing journey and help enable some more differentiation than you've been able to drive historically? Thanks. Rob Katz: Yeah. Sure. So I think, I don't remember if I said it in the prepared remarks, but if I said it in the answer in terms of unique, what I'd say is I think it's unique for us. We have not had a product like this before. At this point, no. We're not anticipating having, you know, kind of multiple products that, you know, you know, by seven days, ten days, fifteen days, twenty. We're not thinking that. I mean, I guess it's certainly possible. I would say yes. I think AI does help quite a bit, and it's certainly something we are using in terms of taking a lot of data and synthesizing it down to give you some insights. And so when you look across how many resorts we have, how many lift ticket products we have, and how many pass products we have, that give essentially the same access and all the different, you know, advanced dynamics. We do think that AI can help kind of really take our information plus research and assess, like, what's the right pricing point and approach for that. But in the end, of course, it's still business judgment. And us setting our strategy for what we think makes the most sense for the company, and that's still going to be, you know, that it's us ultimately setting pricing based on, you know, what we think ultimately drives revenue. Jeffrey Stantial: That's great. Thanks. And then turning over to the lodging side of things. I'm just curious if you think there's an opportunity to sort of run similar initiatives as what you're doing right now with the window and the lift ticket side of things, whether it's, you know, more advanced, some sort of discount, just, you know, obviously, lodging is a material piece of the budget for a destination guest coming into one of your resorts. So I'm just curious if there's an opportunity to sort of rethink pricing there as well. Rob Katz: Well, I would say, I mean, lodging is already a highly dynamic pricing system. It basically is participating in the broader lodging dynamic pricing system. So there, right, obviously, we're changing price all the time, like, literally on an almost daily basis. Based on what we have in inventory, we're seeing out in the market. So it is a very different ecosphere than what we see in lift tickets and passes. So I'd say, no. I don't see us trying to do what we're doing right now on lift access to lodging because lodging is much further along. I also don't see lift access going to where lodging is either because they're just different businesses, and I think we respect that. But we feel good about our entire approach to lodging. I think we absolutely are leveraging the right technology and very much looking at all of our competitors to ensure that we're driving the most revenue. Jeffrey Stantial: Thanks very much. Rob Katz: Thanks. Operator: We'll take our next question from Brandt Montour with Barclays. Your line is open. Brandt Montour: Good afternoon, everybody. Thanks for taking my question. So the first question is, I think it was pretty clear, Rob. You know, the pricing discounts and cuts that you've talked about throughout the call are more than offset by volumes, and you said you thought you were going to, you guys baked in some incremental revenue for these. And so I guess the question is, when you think about that incremental revenue that you baked in, I know you're trying to give that number, but is that piece more coming from what you called out today, selectively being more aggressive on dynamic pricing from window tickets at certain resorts, or is it more from the thing you announced yesterday, the month-ahead 30% discounted ticket program? Rob Katz: Yeah. We're not going to give specifics on that. But, yeah, all of these things come together, including Epic Friends, to help and marketing, right, to help in terms of marketing. I mean, additional paid media, better brand elevation, more top of funnel. I mean, all of these are things that are all coming together to create the guidance that we have. And so, yeah, at this point, tougher to parse it out. But I would say, yeah, we absolutely see this as driving additional revenue because, yeah. I mean, that's based on the assessment that we have and what we look at in the market and what other people are doing. In a way, just because, you know, we've been, again, if you go back historically, right, we have been, we really haven't been focused on lift tickets to drive lift tickets on their own. We've really been focused on moving people to a path. So you just haven't seen this level of dynamic approach that we're taking today. So I think it maybe stands to reason that you're going to see some benefit from this, you know, now that we're really putting our muscle behind it. Brandt Montour: Okay. That's helpful. I appreciate it. A follow-up on this, though, will be, you know, for that sort of more dynamic pricing at select resorts throughout the season. Can you just benchmark us on sort of what you did before? I mean, we remember you talking about pushing into off-peak before, but, you know, it wasn't really a situation where you were taking price down specifically. What were you doing before? And then what also can you see in your data as you were raising prices that kind of gives you the sense for the elasticity that you need to see for this to work out in terms of volumes? Rob Katz: Well, I'd say two things. One is, in terms of what we're doing before, well, we had, I mean, there's certainly activations at the resort. Obviously, pricing was lower. Lodging pricing was lower in off-peak than in other time periods. Ski school prices were lower. Rental prices were lower. So it's not that, obviously, we weren't ignoring it. But in a way, right, we're, but so much of our focus is on a path, and the path, you know, really wasn't focused on peak. I mean, there's some passes that have blackout dates, some didn't. So we were focused, but we were not really focused on when actually going to use the product. It was much more of a focus on just getting them into the program as a whole. So, like, this is a pretty big shift in terms of where we're sitting today and how we're going to go about this. And I would say that we, yeah, we have done a number of price tests on different things at different resorts that are not, you know, we're not going to call attention to. But we actually do get learning from that. And a lot of what we've launched so far has been built on the experience that we've gleaned from a number of those things. And, again, it's helpful because we have a lot of data capture, and we have a lot of personalization amongst our guests, and so we can really track and we can compare resort to resort. We can compare different periods. So that allows us to do some things that, you know, obviously, are tougher to do if you don't really have the same breadth that we have and that we could bring. And I'd say, yeah, of course, the other piece is, well, we have just the broad piece that I mentioned earlier, which is our lift ticket sales were down the last two years. Even though the industry's lift ticket sales were, I think, flat and then up or maybe up in both years. And so, you know, I would say that that's also a test that clearly we're doing something that wasn't working. And so which is why it's not like we're not saying that it's just about price. What we're saying is it's about these multiple things. It's about price. It's about promotion. It's about engaging with guests. It's about brand and the individual resort brands. So, you know, it's and it's about, yeah, this kind of top of funnel advertising versus call to action. I mean, so we see this as a multipronged effort, not just, oh, price. Brandt Montour: Super helpful. Thank you. Operator: We'll move next to Megan Clapp with Morgan Stanley. Your line is open. Megan Clapp: Hi. Thanks so much for taking our questions. The first one I wanted to ask is about the larger initiative you mentioned to enhance your dining offerings. Can you talk about what the impetus was for that investment? Was it driven by guest feedback? And maybe at a high level, how you're thinking about your value proposition there and how impactful you think the investments will be ultimately for your ancillary business. Rob Katz: Yeah. I think one of the challenges I think we saw from COVID was we went into COVID and although it was terrific that we could operate the resorts, you know, in that second year, you know, kind of, you know, 2020, 2021, we couldn't, we barely could operate our dining. And then even in the following year, we also were operating at a much more scaled-down level. And I just don't think the company has fully come back from that. I think maybe we're a little slow to do that. And I think, you know, a little slow maybe to realize that it was going to take the consumer more effort by us to get them back into our restaurants. It wasn't going to be enough for us to do what we were doing before COVID. We actually were going to need to do some new things. And so the things that we've launched are really, one, having a much greater level of personalization and creativity and merchandising branding in each outlet, both resort by resort and within each resort. So, you know, I think, yeah, giving more initiative opportunity to people managing all of these locations but at the same time having a central team that's watching all of it then saying, wait. Here. This is working. That's not working. We should try this. We should try that. And much better data. So that's key. Then two is, yes, the investments we're making, which are really, I'd say, threefold. One investment is we're actually improving the dining physical structure of the dining. Sometimes it's adding new food or stations. Sometimes it's just upgrading the visual look of it. Or upgrading kind of how people move through it. We also have another initiative where we are trying to optimize seating. And so we've gone back and looked at table size and chair size and everything else and how we're laying out each dining room. And, again, we know with technology and a centralized approach, we can kind of compare and contrast what's working in one place, what's working in another place, and make sure that we're doing what we can on that. And then last is ultimately the food itself. And then this is not a capital investment, but more of an operating investment in terms of how we can invest in the food, either elevating ingredients or providing more breadth. So, you know, it's and we do see this as also an effort. Where I think you'll see even more of this as we go into FY '27. Where we've got a lot of work going on right now on, yeah, what are ways for us to really differentiate on the food business. Megan Clapp: Got it. Thank you. That's very helpful. And then just one quick follow-up on the improvement in past sales trends post-September. You saw it in both pricing and in units, but you mentioned that the marketing investments helped improve mix sequentially. I guess my follow-up there is, was that an intentional byproduct of your marketing changes? You know, should we expect to see more improvement from mix going forward, or do you think, you know, maybe units may accelerate a little more as we go forward and as these initiatives mature? Rob Katz: Well, I think we're, one, we're obviously going to try to drive growth. But, yes, our marketing was, you know, I think a little more heavily weighted this year to our unlimited products. One, the Epic Friend tickets are for unlimited products. And the Epic Friend, we extended it for the first time into the fall so that fall purchasers of unlimited products could get Epic Friend benefits. We also, you know, doing more upper funnel kind of brand building and brand connection. We also felt, you know, was directed at these folks who are making a bigger commitment. And, you know, really trying to inspire their passion for the business. And that is something that we intend to do, I think, you know, more of and, candidly, a much better job of as we have more time to prepare as we go into next year. I think we are going to be focused on those unlimited products. I think we've done an, you know, maybe much like the season pass, the pass and lift ticket piece. You know, we've done this incredible job of building out the Epic Day pass product line and promoting that and bringing new people in. And obviously, when you look at the growth we've had over the last, you know, four years, it's been significant. A lot of it coming in Epic Day. But we also think it's now an opportunity for us to go back to that kind of unlimited pass holder and the Epic and Epic Global pass holder to make sure that they're feeling, yeah, the strong connection and incentive to go into those products. Megan Clapp: Got it. Thanks so much. Operator: This concludes the Q&A portion of today's call. I would now like to turn the call back over to Rob Katz for closing remarks. Rob Katz: Thank you all for joining our first quarter fiscal 2026 earnings call. I want to close out by saying that our path to sustainable growth is clear. And I'm confident we're focused on the right priorities to keep advancing these strategies. I'd also like to take a moment to thank our dedicated team members, particularly our frontline employees, as they create an experience of a lifetime for our guests. It is only because of our team's commitment and passion that we are able to deliver on this mission. With that, thank you all again for your interest and time, and we look forward to seeing you on the slopes this season. Operator: This concludes today's Vail Resorts, Inc. fiscal first quarter 2026 earnings conference call and webcast. You may disconnect your line at this time and have a wonderful day.
Operator: Hello. And thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oracle Corporation Q2 FY 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Ken Bond, Head of Investor Relations. Sir, please go ahead. Ken Bond: Thank you, Tiffany. Afternoon, everyone, and welcome to Oracle's second quarter fiscal year 2026 earnings conference call. On the call today are Chairman and Chief Technology Officer, Lawrence Ellison, Chief Executive Officer, Mike Cecilia, Chief Executive Officer Clay McGork, and Principal Financial Officer, Doug Caring. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation, other supplemental financial information, and a list of many customers who purchased Oracle Cloud Services or went live on Oracle Cloud recently, will be available from our Investor Relations website. As a reminder, today's discussion will include forward-looking statements, and we will discuss some important factors relating to our business. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today. As a result, we caution you from placing undue reliance on these forward-looking statements and we encourage you to review our most recent reports, including our 10-K and 10-Q and any applicable amendments. And finally, we are not obligating ourselves to revise our results or these financial-looking statements. Before taking questions, we'll begin with a few prepared remarks and I'll turn the call over to Mike. No. It's actually to me, Ken. Appreciate it. This is Doug. As it relates to the numbers we are about to present, the following apply to both the results for Q2 and to our guidance for Q3. First, we'll be discussing our financials using constant currency growth rates as this is how we manage the business. Second, we'll be presenting our numbers on a non-GAAP basis, except where we indicate otherwise. Finally, as it relates to currency, it had a 1% positive impact on revenue, and 3¢ positive impact on earnings in Q2. For Q3, assuming currency exchange rates remain the same as they are now, currency should have a two to 3% positive effect on revenue and have a 6¢ positive effect on EPS depending on rounding. In terms of the result for Q2, we had another excellent quarter of execution. Remaining Performance Obligations, or RPO, ended the quarter at $523.3 billion, up 433% from last year and up $68 billion since August. Driven by contracts signed with Meta, NVIDIA, and others as we continue to diversify our customer backlog. RPO expected to be recognized in the next twelve months grew 40% year over year, compared with 25% last quarter, and 21% last year. Total cloud revenue, which includes both applications and infrastructure, was up 33% at $8 billion. Representing a significant acceleration from the 24% growth rate reported last year. Cloud revenue now accounts for half of Oracle's overall revenue. Cloud infrastructure revenue was $4.1 billion, up 66% with GPU-related revenue growing 177%. Oracle's cloud infrastructure businesses continue to grow much faster than our competitors. Cloud database services revenue was up 30%, with Autonomous Database revenue up 43% and multi-cloud consumption up 817%. Cloud applications revenue was $3.9 billion and up 11%. Our strategic back-office applications revenue was $2.4 billion and up 16%. We finished combining our industry-based cloud apps and our Fusion cloud apps under one selling organization in each region across the world, have been seeing increasing cross-selling synergies that are expected to drive higher cloud applications growth rates in the future. All in, total revenues for the quarter were $16.1 billion, up 13% and higher than the 9% growth reported in Q2 last year. Continuing our trend of accelerating total revenue growth. Operating income grew 8% to $6.7 billion. Non-GAAP EPS was $2.26 up 51% while GAAP EPS was $2.10, up 86%. We recognized a pretax gain of $2.7 billion in the quarter, stemming from the sale of our interest in Ampere. Turning to cash flow. Operating cash flow in Q2 was $2.1 billion, while free cash flow was a negative $10 billion and CapEx was $12 billion reflecting the investments being made to support our accelerating growth. As a reminder, the vast majority of our CapEx investments are for revenue-generating equipment that is going into our data centers. And not for land, buildings, or power that collectively are covered via leases. Oracle does not pay for these leases until the completed data centers and accompanying utilities are delivered to us. Rather, the equipment CapEx is purchased very late in the data center production cycle allowing us to quickly convert cash spent into revenues earned as we provision cloud services to our contracted and committed customers. In terms of funding our growth, there are a variety of sources available to us throughout our debt structure in public bond, bank, and private debt markets. In addition, there are other financing options through customers that may bring their own chips to be installed in our data centers and suppliers who may lease their chips rather than sell them. Both of these options enable Oracle to synchronize our payments with our receipts and borrow substantially less than most people are modeling. As a foundational principle, we expect and are committed to maintaining our investment-grade debt rating. Turning to guidance. Let me start with the impact of the added RPO that occurred in Q2 on our future results. The vast majority of these bookings relate to opportunities where we have near-term capacity available, which means we can convert the added backlog to revenue sooner. The result is we now expect $4 billion of additional revenue in FY 2027. Our full-year FY 2026 revenue expectation of $67 billion remains unchanged. However, given the added RPO this quarter, can be monetized quickly starting next year, we now expect fiscal 2026 CapEx will be about $15 billion higher than we forecasted after Q1. Finally, we are confident that our customer backlog is at a healthy level and that we have the operational and financial strength to execute successfully. While we continue to experience significant and unprecedented demand for our cloud services, we will pursue further business expansion, only when it meets our profitability requirements, and the capital is available on favorable terms. As it relates to specific guidance for Q3, total cloud revenue is expected to grow from 37% to 41% in constant currency, and is expected to grow from 40% to 44% in USD. Total revenues are expected to grow from 16% to 18% in constant currency, and are expected to grow from 19% to 21% in USD. Non-GAAP EPS is expected to grow between 12% to 14%, and be between $1.64 and $1.68 in constant currency, and grow between 16% to 18% and be between $1.70 and $1.74 in USD. And with that, I'll turn it over to Clay. Clay McGork: Thank you, Doug. Our infrastructure business has grown at an accelerating 66% year over year. You are well aware of the strong demand for AI infrastructure. But multiple segments across OCI are also contributing to this accelerating growth rate, including cloud natives, dedicated regions, and multi-cloud. Our diversity of capabilities within infrastructure differentiates us from AI infrastructure neo clouds. Our unique combination of infrastructure and applications differentiates us from other hyperscalers. We have ambitious, achievable goals for capacity delivery worldwide. OCI now operates 147 live customer-facing regions with 64 more regions planned. In the last quarter, we handed over close to 400 megawatts of data center capacity to our customers. We also delivered 50% more GPU capacity this quarter than Q1. Our super cluster in Abilene, Texas is on track with more than 96,000 NVIDIA Grace Blackwell GB 200 delivered. We also began delivering AMD MI 355 capacity to customers this quarter. Our pace of capacity delivery continues to accelerate. We continue to see strong demand for AI infrastructure across training and inferencing. We follow a very rigorous process before accepting customer contracts. This process ensures that we have all the necessary ingredients delivered to customer success at margins that make sense for our business. We analyze, land and power for data center buildings, component supply, including GPUs, network gear, and optics, labor costs for all phases of construction and low voltage work, engineering capacity to design, build, and operate, revenue and profitability, and capital investments required. Only when all these components come together do we accept customer contracts. Having the confidence we can deliver on schedule with the highest quality. As Doug said, this quarter, we contracted for an additional $68 billion of RPO. These contracts will quickly add revenue and margin to our infrastructure business. We continue to carefully evaluate all future infrastructure investments, invested only when we have alignment across all necessary components to ensure profitable delivery for our customers. The holiday season is a peak period for many of our retail and consumer customers. It is our responsibility at OCI to deliver the most secure, highest performance, and highest availability infrastructure to support these customers at the scale they need. Uber has now surpassed 3 million cores on OCI, powering their highest traffic ever this Halloween. TMove scaled to nearly 1 million cores for Black Friday and Cyber Monday. In addition, we also supported thousands of other customers across our retail and other applications through their largest and most successful holiday period yet. OCI is constantly expanding in features and services. We recently launched Acceleron, delivering enhanced networking to all OCI customers, and other services like our AI agent service. However, we cannot deliver everything ourselves. And we rely on our rapidly expanding partner community to provide the best experience on OCI. Added new AI models from Google, OpenAI, and xAI to ensure our customers have the latest and greatest AI capabilities. Our marketplace consumption has grown 89% year over year, powered by partners like Broadcom and Palo Alto. Those same partners drive OCI consumption by building their SaaS businesses on OCI. Palo Alto released their SASE and Prisma Access platform on OCI, and Cyber Reason and New Fold Digital continue to scale their businesses rapidly. These partnerships make our ecosystem richer, which helps our customers, and that growth translates directly to more OCI growth as our partners build their solutions on our infrastructure. Oracle database services see increasing demand across all clouds. Multi-cloud database consumption has increased 817% year over year. We launched 11 multi-cloud regions this quarter, bringing us to 45 regions live across AWS, Azure, and GCP with 27 more planned over the next month. We see increasing customer demand with billions in identified pipeline. We launched two important programs this quarter for multi-cloud. The first is multi-cloud universal credits, which enables customers to commit once to Oracle database services and use it anywhere in any cloud with the same price and flexibility. The second is our multi-cloud channel reseller program, which enables customers to procure Oracle database services through their preferred channel partners. We also launched nine services across the different clouds, such as Oracle Autonomous AI Lakehouse. This combination of the best services, universal availability, consistent and easy pricing and procurement, and partner support is accelerating the adoption of Oracle database services across our entire customer base. OCI is the only full cloud available to individual customers. We launched dedicated region 25, which provides the full capability of OCI in a tiny three-rack footprint. OCI is also the only cloud that enables partners to become cloud providers themselves through our alloy program. And our new footprint is available for all alloy providers. Dedicated region and alloy consumption grew 69% year over year. We launched one dedicated region for Ithka Group in Oman, and both NTT Data and SoftBank launched one alloy region each this quarter. This brings our live dedicated regions to 39 with 25 more planned. In summary, the four segments of our business are growing at incredible rates. This will contribute to a continued acceleration in our infrastructure revenue in the coming quarters. Customers are choosing OCI for its performance-optimized architecture, unrelenting focus on security, consistently low and predictable pricing, and unmatched depth in database and enterprise integrations. Those priorities have been our strategy from the beginning and are the driving force behind this growth. OCI is in a constant state of reinvention, you can see the value that has for our customers. When you combine our commitment to deliver the best in performance, efficiency, and security with the growing customer demand for cloud infrastructure services we are seeing. I couldn't be more excited about what's coming next. And with that, over to Larry. Lawrence Ellison: Thank you very much, Clay. Over the years, Oracle has developed software in three important areas: database applications, and the Oracle Cloud. We used AI to make our database software and our autonomous software eliminates human labor and human error, thus lowering operating costs and making our systems faster, more reliable, and more secure. Now with the development of the Oracle AI database, and the Oracle AI data platform, we're bringing all three layers of our software stack together to solve another very important problem. Enabling the latest and most powerful AI models to do multistep reasoning on all your private enterprise data while keeping that data private and secure. Training AI models on public data is the largest, fastest-growing business in history. AI models reasoning on private data will be an even larger and more valuable business. Oracle databases contain most of the world's high-value private data. Oracle applications also all hold huge amounts of exceptionally valuable private data. The Oracle Cloud includes all the top AI models: OpenAI ChatGPT, xAI Grok, Google Gemini, and MetaLama. Oracle's new database and AI data platform plus the latest versions of Oracle applications, enables all of those AI models to do multistep reasoning on your database and application data while keeping that data private and secure. All our database and application customers want to do this. Because for the first time, they get a unified view of all of their data. AI models can respond to a single inquiry by reasoning across all your databases, all of your applications. By treating all of your data holistically, the combination of AI models both the Oracle AI database and AI data platform, breaks down the walls that isolate and fragment your data. The Oracle AI data platform makes all your data accessible to AI models not just Oracle databases. And Oracle applications. The data in the Oracle databases and Oracle applications but data from other databases. Cloud storage from any cloud, even data from your own custom applications. Are accessible to AI models using the Oracle AI data platform. Using our AI data platform, you can unify all your data and reason on all of your data using the very latest AI models. This is the key to finally unlocking all the value in all your data. Very soon, through the lens of AI, will be able to see everything happening in your business as it happens. Mike, over to you. Mike Cecilia: Thanks, Larry. As Doug shared, the total revenue growth of 13% in constant dollars, I think it's worth noting that that's three consecutive quarters now where total revenue growth has been in double digits. So a solid quarter, and we see even better days ahead of us. So let me break down a few of the numbers a bit further, and I'll do so all in constant currency. Cloud applications revenue was up 11%, and that brings us to about a $6 billion annualized run rate. Within that, Fusion ERP up 17%. Fusion SCM up 18%, Fusion HCM up 14%, NetSuite grew by 13%. Fusion CX is up 12%. In our industry cloud, specifically hospitality, construction, retail, banking, restaurants, local governments, and communications all combined were up 21% in the quarter. So big growth rates on a big base. In our health care business, we now have 274 customers live in production on our clinical AI agent, and that number continues to rise daily. Also in health care, our brand new AI-based ambulatory EHR is generally available and that it's received US regulatory approval. We expect both our bookings and our revenue in Q3 to accelerate materially. So overall, cloud apps were up 11% on a bigger base. This is very meaningful because we see this business as continuing to accelerate going forward. We achieved this growth while we also undertook a major Salesforce reorg in many regions throughout the world. This is something we've been talking about for many years, and that is the synergies between our back-office applications and our industry applications. We're seeing more and more deals where our industry apps are pulling fusion or the fusion apps are pulling the industry apps. And as a result of seeing more and more deals, we're also seeing larger deals with more components. So recently, we combined our industry application sales team and our fusion sales teams into a single selling organization. This enables our sellers to have more strategic One Oracle conversations with our customers to sell higher and to sell more. We think about our very large installed base of on-premise application customers, these strategic conversations are driving upgrades. And you've heard us say before, just moving a customer to the cloud results in a three to five x annual revenue lift compared to support revenue. Now on top of all of that, top of the Salesforce, the one-off of go-to-market, one or four go-to-market motions, the industry suites, think about combining our AI data platform. With this unmatched suite of applications. This creates an incredibly unique opportunity for our customers to gain value very quickly from enterprise-grade AI. The combination allows customers to unite the industry-leading foundational models with company-specific proprietary data, as Larry mentioned, much of which comes from the Oracle applications. And, of course, the AI data platform also ties in non-Oracle applications, competitive data sources like MongoDB or Snowflake, object stores, and even complete bespoke unstructured data. So we think this allows our customers to very easily build enterprise lake houses, AI agents, and applications that leverage built-in, not bolted on, but built-in AI to transform their business. So just to repeat, AI, of course, is a great OCI play. It's also a broader software play for Oracle. It's driving growth in our applications. And our database businesses as well. Let me highlight a few key wins. In communications, the communications industry, Digital Bridge Holdings selected ERP and SCM. Ethihard Salam Telecom SCM. Motorola Solutions, ERP, SCM, and CX. Tim Brazil, who is the country's five-g leader, just signed a new five-year expansion to accelerate AI adoption and to transform customer experience at scale. All built on OCI. This five-year deal was an expansion or extension of a partnership that began with TIM Brasil's full data center migration to OCI back in 2021. So they're now building AI agents that are powering real customer interactions, including the content agent which compares bills for customers across months, and explains variations automatically. Already in the pilot, 18% faster issue resolution with the AI agents built. On OCI. Expecting even further improvements as we roll out. Continues. They've got 24 projects in motion. Seven of them are already in production. It's just a matter of months. Six more launching soon. All enabled by a multi-cloud architecture with Oracle as the key AI infrastructure partner. Already as a result of this initial rollout, customer satisfaction is up 16%, and call center flows are managing end to end with 90% accuracy. Resulting in 30% faster services times for customers, and a 15% fewer network failure interventions all using predictive analytics and, again, AI Copilot's built in OCI. So we are the AI engine for TIM Brasil to enable personalization at national scale. In financial services, CoreCivic selected ERP. SCM, and HCM. PrimeLife Technologies ERP Jewelers Mutual Insurance, ERP. In public sector, city of Costa Mesa, ERP, SCM, HCM. The United States Space Force, ERP, and HCM. The city of Santa Ana, ERP, SCM, and HCM. In the high-tech industry, SolarEdge Technologies, ERP, and SCM. Zscaler, ERP. Dropbox, ERP. And SCM. I could go on and on about these wins, but I think it gives you the flavor of just the sheer amount of multi-pillar wins why it's so important, that we have, you know, so many different options for customers and back office and front office. In terms of go-lives, we had 330 cloud apps customer go-lives this quarter. That's multiple go-lives per day. Virgin Atlantic Airways went live in September on Fusion ERP. And HCM and payroll, Broadridge just recently relaunched their Fusion ERP and EPM. Go live. LifePoint Health just went live on their third wave of Fusion ERP as SCM, and HCM. Saudi Telecom is live on Fusion SCM. With ERP and HCM to follow soon. DocuSign is now live on Fusion Data Intelligence. Again, I could go on about to go live. So with 330 of them in the quarter, gives you a flavor of some of the really important go-lives that we had recently. The cloud application deferred revenue is up 14%. That is higher than the cloud apps revenue growth of 11% just to reinforce my earlier statements, that we expect continued apps growth acceleration. So a solid quarter across the board. We're on the back end of a sales reorg that was focused on unified selling, across our applications portfolio, We're seeing a clear AI halo effect for our cloud applications, which is driving upgrades our AI data platform, combined with our applications is an absolute conversation changer it brings the Oracle database and all of our applications into the center of the modern ejectic enterprise. Looking ahead, we're executing well on a big and growing pipeline and I expect revenue and earnings growth to accelerate off an even larger base. With that, Ken, I'll turn it back to you. Mike, Tiffany, if you could please poll the audience for questions. Operator: At this time, if you would like to ask a question, press star. Then the number one on your telephone keypad. To withdraw your question, simply press star 1 again. Your first question comes from the line of Brad Zelnick with Deutsche Bank. Please go ahead. Brad Zelnick: Thank you. Congratulations and a particular shout out to Mahesh and the team for standing up a massive amount of capacity. In this quarter. My question is for Clay or maybe Doug. Oracle is clearly the destination of choice for the most sophisticated AI customers but this is a far more capital-intensive proposition unlike any business Oracle's ever been in before. Very specifically, how much money does Oracle need to raise to fund its AI growth plans ahead? Thank you. Clay McGork: Thanks for the question, Brett. This is Clay. So look. I'll answer that question in two parts. First, let me give you kind of the reason why it's hard to answer that question exactly. So the thing I think that a lot of people don't understand is that we actually have a lot of different options how we go about delivering this capacity to customers. There's obviously the way that people think about it, which is we buy all the hardware upfront. And as we and I talked about it in my financial analyst meeting, we don't actually incur any expenses for these large data centers until they're actually operational. So then it goes on to, well, how do you pay and what's the kind of cash flows look like the stuff that goes into the data center? Well, we have some other interesting models that we've been working on. One of them is that customers can actually bring their own chips. And in those models, Oracle obviously doesn't have to incur any capital expenditures upfront. For that model. Similarly, we have different models that we're working on with different vendors where some vendors are actually very interested in a model where they rent their capacity rather than selling their capacity. And as you can imagine, that comes with different cash flow impacts that are favorable to reduce the overall borrowing needs and capital required for Oracle. So as you can imagine, as we look at all of these kinds of commitments, we will use a range and a variety of those. That we minimize the overall cost of capital. As well as, you know, in certain cases, we'll be raising our own funds. As part of that, I think it's important that everyone understand that we're committed to maintaining our investment-grade debt rating. So now to give you some more specifics, what I would say is we've been reading a lot of analyst reports, and we've read quite a few that show an expectation of upwards of $100 billion for Oracle to go out and complete these build-out. And based on what we see right now, we expect we will need less if not substantially less, you know, money raised than that amount. To go and fund this build-out. So, hopefully, that helps answer your question, Brad. Brad Zelnick: It does. Thank you. It's very helpful, and thanks for taking the question. Operator: Your next question comes from the line of Ben Reitzis with Melius Research. Please go ahead. Ben Reitzis: Hey, guys. Thanks a lot. Appreciate it. Good to speak with you. In light of the answer to that question, the path for OCI margins seems very important to improving the EBITDA and cash flow. So at the analyst meeting, you said margins for AI workloads for OCI. Would be in the 30 to 40% range over the life of a customer contract. I guess, my question is how long will it take your AI margins across all your OCI data centers to ramp to that level? And what needs to happen to get there? Clay McGork: Yeah. Thanks for the question, Ben. Look. The answer is it really depends. So the good thing is that as I mentioned earlier, we don't actually incur any expenses for the data centers until they're actually built up and running. And then we've highly optimized our process by which we actually put in and then are able to hand that over to customers, which means that the period of time where we're incurring expenses without that kind of revenue and the gross margin profile that we talked about is really on the order of a couple of months. So in that scenario, that time period is not material. So a couple of months is not a long time. What actually matters much more is the overall mix of the data centers that we have online right, and how they're growing compared to the total amount that we're scaling across the world. And so I think as we go through this build-out phase, right now, we're in a phase of very rapid build-out without the majority of the capacity online. Obviously, the aggregate mix is going to be lower. But as we actually get the majority of this capacity online, and that's really our focus, the best way to improve margins quickly, is to actually go out and deliver capacity faster. That ends up very rapidly ensuring that we get to that 30 to 40% gross margin profile for all of the AI data centers. Operator: Your next question comes from the line of Tyler Radke with Citi. Please go ahead. Tyler Radke: Yes. Thank you for taking the question, and this question for Larry or Clay. So Oracle has clearly established itself as a leading provider, for AI infrastructure. To AI labs and, in some cases, enterprise clients. How are you thinking about the opportunity to sell additional services such as database, middleware, other pieces of the portfolio similar to how we saw cloud providers add that on at the early days of the public cloud space, and what might be some of the similarities or differences that you see with the emerging AI platform as a service market versus the traditional cloud platform as a service market. Thank you. Lawrence Ellison: Well, let me start with traditional cloud and traditional cloud. Oracle database. So I think the biggest change we've made there was to make database available in everyone's cloud. So you can buy the Oracle database at Google or Amazon, that it's available at Microsoft Azure. As well as OCI. So that was the most maybe that was the first move we made. We call it multi-cloud, and we embed OCI data centers within the other clouds. So they get the latest, greatest version of the Oracle database. Second thing we did is we actually converted the Oracle database or added capabilities to the Oracle database. To allow you to vectorize all of your data. So it's a vector database. Some people call that an AI database. So it's designed to make data available to models. You can then once you back your data, you can place AI models on top of that. And the AI models can understand what's in the database and reason with the data that's in the database. So we think that combination of making the data available on our database also accessible by AI models dramatically increases the value of the data. We think that's very so far, none of the other large-scale databases have been able to do that. We can do that. Not only we can do that and keep your data secure. That's one of the bigger issues. We have to scale it, keep everything reliable, keep it secure. And we actually have to add all of those capabilities and features to the Oracle database. So that was step two. First multi-cloud, Second, vectorize all the data. And make it accessible, by all of the popular AI models. Third step, well, you know, it's great that we're making the Oracle database data available to these AI models. But companies actually have data that's not stored in an Oracle database. It's not stored in an Oracle application. So we built an AI lake house. We call the AI data platform. That actually points to and vectorizes all of your data whether it's in an object store in different clouds, whether it's a bespoke application, whether it's in another database, it really will take the universe of your data that catalog that data, vectorize it, and allow an AI an LLM to do multi-step reasoning on all of that data. Now the thing that's really remarkable about that is think about asking one query. Asking one question. And the model looks at all of your data. When you ask a question, you have to direct it to this database or this application. You can't say, look. I just like to know whose next customer I should be selling to. I'm a salesperson in territory. I wanna look at all the accounts in my territory, and I want to see who's the best prospect in my territory. Well, that means looking at contractual data, means looking at publicly available data. That means looking at our sales system. At our support system, all of these separate systems. Well, suddenly, all of that data is unified. We take all of your data and unify it. So you can ask a single question and the AI models can find the answer to that question regardless of what data store it's in. That's really a unique proposition, and we think that thing is gonna turbocharge the use of our database and the use of our cloud dramatically. Operator: Your next question comes from the line of Brent Thill with Jefferies and Company. Please go ahead. Brent Thill: Thanks. Question for Larry and Clay on the fungibility of your infrastructure. What would you have to do to convert a data center from one customer to another such as one of the larger customers was unable to pay? Clay McGork: Yeah. Thanks. Thanks, Brent. So I think the first thing to understand is that what we deliver for our AI infrastructure is exactly the same cloud that we deliver for all of our customers. You know, we made specific choices at the beginning of OCI around bare metal virtualization, and the way in which we do things like secure wipe of hardware, etcetera. But the reason I bring that up is that take as an example, you anyone right now with a credit card should show up and sign up for any one of those hundreds of regions that I talked about earlier, and you can spin up a bare metal computer in as quickly as a few minutes. And at the end of that, you can turn it off, and I will recycle that. And I can hand it to their customer in less than an hour. And so when you ask the question of, well, how long does it take to transfer capacity from one customer to another? It's on the order of hours. And what actually I think is kind of a corollary to that question is, well, then how long does it take customers to adopt it? And, thankfully, we have a lot of experience getting more than 700 AI customers on our platform, including the vast majority of the large model providers. Already run on OCI. And when we give them capacity, they typically spend that capacity up in the order of two to three days. And so when I think about how long does it take for me to take capacity handed to the customer, it is not a laborious process. It is not a unique. And something else I would say that I think a lot of people don't realize about our cloud is this is actually happening all the time. So, you know, we have lots of customers that might sign up for a few thousand of one type of GPU, then they'll come back and say, well, actually, you know, I'd like to get even more capacity somewhere else. Will you take this back? And we do that all day every day. We're constantly moving customers around. And, you know, adding aggregate net capacity. So we have the technology. We have a secure base from which to do that, and we also have a customer base of a lot of demand such that whenever we find ourselves with capacity that's not being used, it very quickly gets allocated and provisioned. Operator: Your next question comes from the line of Mark Moerdler with Sanford Bernstein. Please go ahead. Mark Moerdler: Congrats on the quarter. Doug, you gave some color earlier tonight that I'd like to dig in on. Clay presented a slide at the financial analyst meeting where he showed the revenue and expenses for a single data center. Doug and Clay, can you talk about the cash flow for that same data center? Starting with the commitment for the data center and then the hardware and how that flows into becoming cash flow positive, and then how that rolls up across multiple data centers. Any color would be really appreciated. Clay McGork: Sure. Happy to answer, Mark. So as we talked about earlier in this call, it starts with the actual data center and the power capacity along with it. And the way in which we structure that is that we incur no cash expenses until that's fully delivered and provisioned and fit for purpose. So then it really comes down to what does the cash flow look like for the capacity going inside the data center. And as I talked about earlier, that really depends on kind of the business model and the financial model that we've used procuring that. In some cases, customers actually wanna bring their own hardware, in which case, we don't have any capital expense. It's really around the data center itself possibly networking gear, as well as human labor cost. We have other models where vendors want to rent that capacity. In which case, those rent payments start when the is provisioned for the customer. And so customer cash flow comes in, we're then taking that cash flow and pushing that out to all of the different suppliers. And then, obviously, you got the model where Oracle takes its own cash, pays upfront for the hardware, and then puts the capacity in. That's obviously the most cash-intensive upfront. And then there's a depreciation schedule over the next several years. So it really depends on the exact business and financial model used for each of the data centers. And then you ask well, how do they layer together? Well, thankfully, we don't need calculus for this one. Basic arithmetic is enough because they actually just layer on top of each other. So if you have a time schedule for one data center and a time schedule for a second data center, the cash flows add together. And, obviously, if the data center comes in sooner, you'll have the expenses as well as revenue coming in sooner. If data moved out, then the expenses and the revenue also move out. Mark Moerdler: That's very helpful. I appreciate it. Operator: Your final question comes from John DiFucci with Guggenheim Securities. Please go ahead. John DiFucci: Okay. I won't make you kiss my ring. It's actually John DiFucci. Anyway, I'm sorry. Listen, a lot of my questions on infrastructure have already been asked, and they're really important questions because that's a big part of your growth. But I have a question on the applications business. Mike, you said applications are gonna accelerate this year. Why the confidence in this business when all your large SaaS peers are seeing just the opposite where growth is decelerating, especially because you know, we thought that something similar about Oracle's application business last year. We didn't really start to see it until the fourth quarter. We've heard some things in the field around One Oracle, your go-to-market motion where apps and infrastructure are more combined versus separate. And you also talked about combining vertical and horizontal apps teams here. Is that it? Is it mostly go-to-market? Is there something more about the products or something else that we should be thinking about? Thank you. Mike Cecilia: Well, yep. Thanks for the question, Doug. First, I think it's a combination of things. But let me just start with what I think is happening in the industry. All of our competitors are largely in the best of breed business. Because they're not in the applications business in totality. They're not in the back-office business. They're not in the industry business, and they're not in everything in. They're not in the front of the house, the back of the house, and the middle of the house. We are the only applications company in the world that's selling complete application suites. Then you add in baked-in AI, the AI halo, baked-in AI right into our application. So we're over 400 AI features live in Fusion already. I mentioned 274 customers live on our Clinical AI agent. So, you know, the go-lives for these clinical AI agents are a new breed of SaaS applications for us, are measured in a matter of weeks. So you're looking at an industry like health care where it would take months or years to get anything done at that magnitude. Weeks. And by the way, the customers are implementing these things. All by themselves. Right? They don't need us to help them. You just roll them out and they work. So we're in the applications industry suite business. We're building AI into our back-office applications, our front-office applications, and we are building applications that are also AI agents themselves. Are in fact AI agents. That's why you see the growth rates in our industry applications of 21% in the quarter. Our fusion ERP is up 17 SCM up 18%. HCM up 14%. CX up 12%. Again, all on a bigger base. Then I think the next piece of this is you add in the AI data platform. So if you'd like an industry suite, of applications then you'd like to create your own AI agents. You'd like to create and unlock your own enterprise data on top of it all. We are the only all of those ingredients for a customer. And I think as you look at customers' tiring of spend on best of breed because the integration costs are so high, and it's hard to bolt AI onto all that because you're actually not retiring anything in the process. We're in a very unique position. And I think we're starting to see it in the numbers too, John, with the deferred revenue for apps growing at 14% now. You know, faster than the in-quarter revenue growth of 11%. For all those reasons, I'm optimistic on our apps business going forward that it's a continued growth measure. For Oracle. John DiFucci: Thank you, Mike. When I when you as you were talking, I sort of clarified in my mind. When I think of one Oracle, I used to think of I thought of it when I started to hear about it as a go-to-market motion, but it's more than that. It's actually a it's a product thing too. It's everything. So thanks a lot. Mike Cecilia: Thank you. Thank you, John. Ken Bond: A telephonic replay of this conference call will be available twenty-four hours on our Investor Relations website. Thank you for joining us today. And with that, I'll now turn the call back to Tiffany for closing. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Doug Clark: Good afternoon, and thank you for joining us. With me on the call today are Shantanu Narayen, Adobe's Chair and CEO, David Wadhwani, President of Digital Media, Anil Chakravarthy, President of Digital Experience, and Dan Durn, Executive Vice President and CFO. Shantanu Narayen: Thanks, Doug. Good afternoon, everyone, and thank you for joining us. In fiscal 2025, Adobe delivered significant AI-influenced and AI-first ending ARR, which accelerated through the year. We achieved record revenue of $23.77 billion and non-GAAP EPS of $20.94, which represents outstanding financial performance. We are leveraging AI to accelerate innovation to anticipate and serve the needs of large and expanding audiences: business professionals and consumers, creators and creative professionals, and marketing professionals. Our vision for business professionals and consumers is to deliver AI-driven quick and easy applications that enable them to be creative and productive, consuming or generating content across multiple media types and channels. We do this by delivering new conversational and agentic interfaces in Adobe Reader, Acrobat, and Express to provide a freemium integrated experience for billions of users. For creators and creative pros, our vision is to deliver the most comprehensive, power, and precision applications from ideation and creation to production and delivery. We've done an outstanding job of both creating our own commercially safe FIREFLY models as well as seamlessly integrating third-party partner models across Creative Cloud flagship applications like Photoshop, Illustrator, and Premiere. With the Firefly application, we're giving creators a rich set of generative AI capabilities that allow users to generate with Adobe and partner models, ideate with Firefly boards, and create and edit videos and images through conversational experiences blended with direct manipulation. Along with the Firefly app, we've introduced new products like premium mobile with YouTube integration and Photoshop mobile to further serve creators anywhere they create. We're transforming the enterprise content supply chain by integrating creative applications, workflow management, asset management, Firefly services, and custom models with Firefly Foundry. We have the most comprehensive vision for marketing professionals, whether they are freelancers or working at an agency or within an enterprise, to create a brand or address the expanding needs of the content supply chain in the era of AI to deliver customer experience orchestration solutions. Adobe Experience Platform and apps power customer engagement and loyalty. Adobe Experience Manager and AgenTic Web Solutions, including LLM Optimizer, Sites Optimizer, and Brand Concierge, deliver brand visibility and discovery. And Adobe Gen Studio enables enterprises to optimize their full contact supply chain to realize true personalization at scale. FY '25 accomplishments and highlights include establishing ourselves within leading AI ecosystems with partnerships and integrations across AWS, Azure, Google Gemini, Humane, Microsoft Copilot, OpenAI, and others, offering unprecedented access, choice, and flexibility to customers. Leading the way in AI innovation around conversational and agentic interfaces, including products like LLM Optimizer and Acrobat AI Assistant, creating custom models through Firefly services, Firefly Foundry, and GenStudio, as well as infusing AI within our applications, including Photoshop, Lightroom, Express, and Premiere. We continue to leverage inorganic strategies to deliver more value to customers and are pleased with our recently announced intent to acquire SEMRush to help brands enhance their visibility and expand audience reach. Driving significant new user acquisition across individuals and enterprises, with products including Acrobat, Creative Cloud, Express, and Firefly, achieving total MAU growth of greater than 15% year over year. Accelerating adoption of our AI functionality by enterprise customers further highlights our leadership and their trust in Adobe's ability to deliver AI value seamlessly across workflows. In Q4, globally, we drove record bookings of deals greater than $1 million and achieved over 25% year-over-year growth in the number of customers with $10 million plus in ARR. Our customer group strategy, large market opportunity, and product innovation drove strong FY 2025 results. This is the foundation for our FY 2026 total Adobe ARR growth target of over 10%, and we're focused on accelerating this momentum beyond FY 2026. I'll now turn it over to David. David Wadhwani: Thanks, Shantanu. Hello, everyone. Digital Media had a record Q4, driven by user acquisition and expanded customer value across business professionals and consumers, and creators and creative professionals, underpinned by two big areas of innovation: generative AI models and agentic experiences. Digital media achieved revenue of $4.62 billion in Q4 and full-year revenue of $17.65 billion, both of which grew 11% year over year. We exited the quarter with $19.2 billion of digital media ARR, growing ending ARR 11.5% year over year. As it relates to generative AI models, we have continued to develop our own commercially safe FIREFLY models while dramatically expanding our ecosystem of GenAI model partnerships. The new Firefly Image five model is performing incredibly well with generation quality, native four-megapixel resolution, and industry-leading prompt-based editing capabilities. At Adobe MAX in October, we significantly expanded Firefly to become the only app with our own commercially safe models and over 25 leading partner models, including Google, OpenAI, Black Forest Labs, Luma, Runway, Topaz Labs, and Eleven Labs. These models are now integrated into our FIREFLY Express and Creative Cloud applications. We also announced advanced model capabilities, including custom model support for Firefly and Creative Cloud customers. Usage and monetization of new Adobe and third-party models is measured and charged through generative credits. Different models, FIREFLY, GEMINI, or FLEX, for example, and different media types, video, and high-resolution images, for example, consume different quantities of generative credits. Generative credits are a great indicator of high-value usage, and credit consumption increased three times quarter over quarter. As subscribers consume more generative credits, they have the choice of moving to higher-value Creative Cloud offerings or acquiring Firefly credit add-ons. We also took a huge step forward in Q4 as we showcased the work we've been doing to atomize Photoshop Express and Acrobat capabilities as model context protocol endpoints at Adobe MAX. In addition to delivering applications, we are providing imaging, video, and productivity functionality in ChatGPT Copilot and other conversational platforms in order to deliver and monetize creative and PDF functionality in new surfaces. Users will be able to work conversationally while still benefiting from the power and precision of Adobe's industry-leading features and direct manipulation tools, making it easier than ever to go from intent to outcome, whether editing a PDF, refining an image, or generating a design. The advances in generative models and agentic capabilities position Adobe well to take advantage of the long-term opportunities servicing business professionals and consumers, and creator and creative professional audiences. Our vision for business professionals and consumers is to deliver AI-driven, quick and easy applications that enable users to be creative and productive, whether consuming or generating content across multiple media types and channels. The strategy is showing real traction, and we are driving strong business momentum. We revolutionized how users consume and comprehend documents by introducing Acrobat AI assistant in FY '24, and recently added PDF spaces, allowing individuals and teams to create knowledge hubs to collaborate across multiple documents. Users package multiple documents, not just PDFs, but other file types and web links, into a single workspace they can share with others, enabling a collaborative conversational experience. Usage of these AI features inside Acrobat and Reader has grown more than four times year over year, as users increasingly turn to Acrobat to help them discover insights, synthesize new ideas, and share knowledge. Adobe Xpress made significant advances in Q4 with the introduction of an AI assistant capable of generative content creation and complex editing. Express now supports generative presentations and designs, moving the industry into a post-template world. Express AI assistant is capable of conversationally editing images, flyers, presentations, infographics, and more. Innovations like these have contributed to significant express MAU growth. Adobe Acrobat Studio brings together the conversational consumption and comprehension capabilities of AI assistant and PDF spaces with the generative creation power of Express, alongside the PDF tools people know and rely on into a unified offer. Customer reception of Acrobat Studio has been strong, with nearly 50% of Acrobat commercial ETLAs renewed in Q4 already upgrading to this offering, reflecting user enthusiasm for unified document comprehension and content generation. FY '25 business professional and consumer accomplishments and highlights include continued growth of Acrobat Web, which saw MAU increase over 30% year over year, strong adoption of Express in Education, with over 70% year-over-year growth of students with access to express premium, over 45 new partners added to the Express in Q4, including Binder, Bootsuite, and Sprout Social, over 25,000 businesses purchased Express or Studio for the first time in Q4 alone, accelerating quarter over quarter. And key enterprise customer wins include Allianz, American Automobile Association, Bundeswehr von Duschland, Nippon Life, PwC, Sony, and the US Navy. Turning to creators and creative professionals, our vision is to deliver the most comprehensive power and precision applications from ideation and creation to production and delivery. We continue to succeed in our goal to attract the next generation of content creators, provide creative professionals with game-changing generative AI capabilities, and automate content production at scale in enterprises. We are attracting new creators to Adobe through the Firefly application, which can be purchased through our Firefly standard, pro, and premium subscription plans. Firefly has a rich set of generative AI capabilities that allow users to generate with Adobe and partner models, ideate with Firefly boards, and create and edit videos and images. Simply put, Firefly is a one-stop shop for accessing industry-leading models integrated into rich creative workflows at an affordable price. In addition, we're seeing strong adoption of Firefly from Creative Cloud customers as they embrace the growing breadth of AI models and tools seamlessly integrated into creative workflows. We drove two times quarter over quarter growth in first-time subscriptions of Firefly. The release of Premier Mobile in Q4 marks an important milestone in next-generation AI video editing. In partnership with Google and YouTube, we are introducing AI-driven audio and video tools to streamline how creators remix YouTube Shorts, which receive 200 billion daily views. Creative Cloud delivered massive new value at Adobe MAX, including the release of new models for generative fill, upscaling, and prompt editing in Photoshop, reflection removal in Lightroom, turntable in Illustrator, and smart masking in Premiere. We also announced the general availability of Firefly boards, a new ideation surface that brings together everything creative professionals need to explore visual and design concepts with stakeholders using industry-leading models from Adobe and our partners. Use of AI in these applications continues to accelerate, underscoring the impact AI is having on what creative professionals can produce. As part of the overall content supply chain solution for marketing use cases, we continue to advance automated content production with Firefly services that include video resizing, video reframing, image composition, image harmonization, digital twin generation, and more. We also announced Adobe Firefly Foundry at Max, which delivers enterprises with proprietary foundation models trained on their own content, data, and brand catalogs. Interest in Firefly Foundry has been strong from enterprise marketing teams and media and entertainment companies, where there is increasing desire to produce content faster and more cost-effectively. FY '25 creator and creative professional accomplishments and highlights include hosting Adobe MAX, the world's largest creativity event with over 10,000 members of the creative community in attendance, with millions more online. The tremendous innovations we showcased earned over 2,000 articles and garnered 820 million video views. Growing our base of creative users across 70 million in Q4, growing over 35% year over year. Accelerating adoption of Firefly services within enterprises, accelerating generative credit consumption in Creative Cloud, Firefly, and Express with over 100 new deals signed in Q4 by individuals and enterprises, which grew approximately three times quarter over quarter. Strength across all routes to market and geographies, with particular strength in SMB, enterprise, and emerging markets. And key enterprise wins include Coca-Cola, Humane, IKEA, JPMorgan Chase, Lowe's, Nintendo, and Sony. Over the last few years, we have extended our lineup to anticipate and serve the diverse needs of creative users. The continued strength of Creative Cloud, generative credits, and Firefly automation underscores the success of this strategy with creative professionals across both individuals and enterprises. The accelerated growth of creative freemium MAU demonstrates success with offerings that target creators, consumers, and business professionals and is already starting to have an impact, as evident in our Q4 results and FY 2026 targets. Overall, we delivered strong business results and record Digital Media net new ARR in Q4, and are excited about the opportunity in FY 2026. I'll now turn it over to Anil. Anil Chakravarthy: Thanks, David. Hello, everyone. Our success serving creative and marketing professionals in the enterprise has been driven by having the most comprehensive vision for customer experience orchestration, enabling enterprises around the world to deliver personalized experiences at scale in the era of AI. Digital experience had a strong close to the year, achieving revenue of $1.52 billion for the quarter, and a record $5.86 billion in revenue in FY 2025. Subscription revenue in the quarter was $1.41 billion, representing 11% year-over-year growth. Adobe delivers a unified AI-powered platform for customer experience orchestration, spanning brand visibility, content supply chain, and customer engagement. Adobe Experience Platform is a leading customer data platform that serves as the foundation in enterprises for digital customer engagement and brings together new AI-powered apps and agents to drive engagement and loyalty as well as to reduce costs. Our platform operates at scale with over 35 trillion segment evaluations and more than 70 billion profile activations per day. We released six new AI agents powered by AEP agent rator to transform how businesses build, deliver, and optimize marketing campaigns and customer experiences. Subscription revenue for AEP and native apps grew over 40% year over year, demonstrating our continued leadership. We have the best pulse on digital conversations across search, social media, and LLMs and enable marketers to get a unified view of where online traffic is originating, how to create and promote brands, and drive engagement and commerce. In fact, our most recent Adobe Digital Index data, which is based on online transactions across more than 1 trillion visits to US retail sites, shows that generative AI traffic is up 760% thus far, the 2025 holiday season. Our data shows that AI-powered traffic from LLMs and agentic browsers is rising and requires different approaches to conversion, underscoring the growing importance of the agentic web and our opportunity to provide insights and automation to marketers. Brand visibility is critical to success in this new agentic web, and Adobe solves customer needs through solutions like Adobe Experience Manager, Adobe Analytics, and the newly available Adobe LLM Optimizer. The pending acquisition of SEMRush, we announced a few weeks ago, brings complementary assets to help us address marketers' growing need for sustained brand relevance in AI search. Over the past decade, Sambrace's data-driven search engine optimization and generative engine optimization solutions have earned the trust of industry leaders like Amazon, JPMorgan Chase, and TikTok. Together, Adobe and Semrush will deliver a solution to enable marketers to shape how their brands appear across own channels, LLMs, traditional search, and the wider web. We anticipate the transaction to close in 2026, subject to regulatory approvals and other closing conditions. Adobe Brand Concierge, which was launched in Q4, is an AI-first application enabling businesses to configure and manage AI agents that guide consumers from exploration to purchase decisions using immersive and conversational experiences. By uniting data, content, and agentic AI in a single experience, BrandConcierge gives businesses ownership of the critical discovery and consideration phase. We are pleased with the significant customer interest and the wins we had for brand concierge in Q4. The third pillar of customer experience orchestration is the content supply chain. Chen Studio is our comprehensive offering spanning content ideation, creation, production, and activation. At Max, we introduced new scaled production capabilities through Firefly services, enhanced model customization with Adobe Firefly Foundry, and integration with a growing ecosystem of ad networks. Ending ARR for the Adobe Gen Studio solution grew over 25% year over year as the world's leading brands increasingly turned to Adobe to power their content supply chain. FY '25 marketing professional accomplishments and business highlights include strong customer demand for our newly introduced agentic web offerings with over 50 customers in Q4 for Adobe LLM optimizer sites optimizer, and brand concierge. Growing international momentum resulting in a record quarter for our enterprise business in our Europe, Middle East, and Africa, and Asia regions. Expanded ad network partnerships with Amazon, Google, LinkedIn, Microsoft, Snap, and TikTok, Q4 industry analyst recognition, including being named a leader in the Forrester Wave for digital experience platforms, and three Gartner Magic Quadrants including multichannel marketing hubs, B2B marketing automation platforms, and digital asset management. And key global customer wins for the quarter include AstraZeneca, AT&T, Citigroup, Comcast, Costco, CVS Health, Ernst and Young, General Motors, IKEA, JPMorgan Chase, Lowe's, NatWest Group, PwC, Tony, Walgreens, Wells Fargo, and Woolworths Group. Customer experience orchestration continues to be a critical area of investment for companies of all sizes. We are helping brands across the world turn the promise of AI into tangible marketing ROI. As a leader, we're well-positioned to grow our business and help our customers drive customer loyalty, revenue growth, and profitability. I'll now pass it to Dan. Dan Durn: Thanks, Anil. Today, I'll start by summarizing Adobe's performance in Q4 and FY 2025, highlighting growth drivers, and I'll finish with our targets. In FY 2025, Adobe delivered record revenue of $23.77 billion, growing 11% year over year as reported and in constant currency. GAAP EPS for the year was $16.7 and non-GAAP EPS was $20.94, growing 3514% year over year, respectively. We delivered over $10 billion in operating cash flows while investing in AI product innovation. We executed record share repurchases totaling nearly $12 billion, reducing our shares outstanding by over 6% during the year, underscoring our confidence in the company's long-term opportunity. FY '25 business and financial highlights included Digital Media revenue of $17.65 billion, growing 11% year over year as reported and in constant currency. Digital Experience segment revenue was $5.86 billion, growing 9% year over year as reported and in constant currency. Digital Experience subscription revenue was $5.41 billion, growing 11% year over year as reported and in constant currency. Digital media ending ARR was $19.2 billion, growing 11.5% year over year, exceeding our prior target of 11.3%. Over 75% of Digital Media net new ARR was driven by continued growth in subscriptions and cross-sell and upsell, with the remainder from value-based pricing reflecting the success of our customer acquisition strategy. Total Adobe ending ARR across business professionals and consumers, and creative and marketing professionals of $25.2 billion, growing 11.5% year over year. Cash flows from operations of $10.03 billion and ending cash and short-term investment position of $6.6 billion. RPO of $22.52 billion exiting the year, growing 13% year over year or 12% in constant currency. And CRPO growing 11% as reported or 10% in constant currency. And repurchasing approximately 30.8 million shares of our stock during the year. We currently have $5.9 billion remaining of our $25 billion authorization granted in March 2024. In Q4, Adobe achieved revenue of $6.19 billion, growing 10% year over year as reported and in constant currency. GAAP EPS in Q4 was $4.45 and non-GAAP EPS was $5.5, increasing 1714% year over year, respectively. Q4 business and financial highlights included Digital Media revenue of $4.62 billion, growing 11% year over year as reported and in constant currency. Digital Experience segment revenue was $1.52 billion, growing 9% year over year or 8% in constant currency. Digital Experience subscription revenue was $1.41 billion, growing 11% year over year as reported and in constant currency. Total new AI-influenced ARR now exceeds one-third of our overall book of business as we integrate AI deeply into our solutions and continue to launch new AI-first offerings, which are now included as part of the AI influence metric. As we've shared over the past year, our strategy is to drive the entire book of business with AI-influenced solutions. Record net new digital media ARR, growth reaccelerated year over year, driven by strong demand for AI-influenced offerings including Creative Cloud Pro, Acrobat, and Express, as well as AI-first products, including Firefly. When combined with the strong net new digital experience ARR in Q4, we delivered record net new total Adobe ARR in the quarter. Record cash flows from operations of $3.16 billion, adding a record $2.08 billion to RPO in the quarter. For Business Professionals and Consumers Group, subscription revenue was $1.72 billion, increasing 15% year over year as reported or 14% in constant currency. Q4 growth drivers for business professionals and consumers included double-digit ending ARR growth with strength across digital, SMB, and enterprise, and across all geographies. Mobile ending ARR grew greater than 30% year over year. Monthly active users of Acrobat and Express surpassed 750 million, growing 20% year over year. And strong customer reception of Acrobat Studio with nearly 50% of Acrobat commercial ETLAs renewed in Q4 already upgrading to this offering. For the creative and marketing professionals group, subscription revenue is $4.25 billion, increasing 11% year over year or 10% in constant currency. Q4 growth drivers for creative and marketing professionals included growth in Creative Cloud driven by CC Pro, growth in single apps driven by strength in Photoshop and Lightroom. Consumption of generative credits in Creative Cloud, Firefly, and Express increased three times quarter over quarter. Significant web and mobile user acquisition across Firefly, Express, Premier, and our other freemium offerings, growing over 35% year over year to greater than 70 million monthly active users. AEP and apps ending ARR grew over 30% year over year. Demand for content automation offerings like Firefly Services and Firefly with ending ARR more than doubling year over year. GenStudio solution ending ARR grew over 25% year over year. And continued success in the enterprise, adding a record number of customers to the group with ARR exceeding $10 million. Total customers with ARR over $10 million grew 25% year over year to over 150. On November 19, we announced the intent to acquire Semrush Holdings for an equity value of approximately $1.9 billion in an all-cash transaction. We expect the transaction to close in 2026, subject to regulatory approvals and other customary closing conditions. We expect the non-GAAP EPS impact of the acquisition to be negligible in the first year post-close and accretive thereafter. Let me now turn to our financial targets, which assume current macroeconomic conditions. Our targets do not include any contribution from SEMRush. As is customary, we revalued ending ARR at the end of FY '25, which resulted in a $460 million increase to total Adobe ARR, from $25.2 billion to $25.66 billion entering FY '26, primarily from FX rate changes. We've now provided historical information on total Adobe ARR going back to FY '23 in our investor datasheet. For FY '26, we're targeting total Adobe revenue of $25.9 to $26.1 billion. Business professionals and consumer subscription revenue of $7.35 to $7.4 billion. Creative and marketing professional subscription revenue of $17.75 to $17.9 billion. Total Adobe ending ARR book of business growth of 10.2% year over year. GAAP EPS of $17.9 to $18.10. And non-GAAP EPS of $23.3 to $23.50. This total Adobe ARR book of business growth of 10.2% translates to approximately $2.6 billion of growth, which would be our highest beginning of year guide for total net new ARR. This target is based on the strength exiting FY '25, and continued momentum across all three audiences: business professionals and consumers, creators and creative professionals, and marketing professionals. Our FY 2026 targets anticipate non-GAAP operating margin of approximately 45%, a GAAP tax rate of approximately 20.5%, and a non-GAAP tax rate of approximately 18%. This non-GAAP tax rate is based on a three-year projection and may be adjusted for changes in the future. For Q1 FY '26, we're targeting total Adobe revenue of $6.25 to $6.3 billion, business professional and consumer subscription revenue of $1.74 to $1.76 billion, creative and marketing professional subscription revenue of $4.3 to $4.33 billion, GAAP EPS of $4.55 to $4.6, and non-GAAP EPS of $5.85 to $5.9. For Q1, we expect non-GAAP operating margin approximately 47%, a GAAP tax rate of approximately 21.5%, and a non-GAAP tax rate of approximately 18%. In summary, Adobe delivered another outstanding year fueled by strong global demand for our AI solutions across business professionals and consumers, and creative and marketing professional customer groups. Our disciplined execution and strategic investments position us to extend our leadership as we deliver an ecosystem of AI models, conversational interfaces, and agentic experiences. Looking ahead to FY '26, we're confident in our ability to deliver industry-leading innovation, double-digit ARR growth, and world-class profitability. Shantanu, back to you. Shantanu Narayen: Thanks, Dan. Our success is fueled by the incredible ingenuity of our global employees, who are passionate about delivering innovation, with relentless execution in service of our expanding customer base. Adobe is well-positioned to seize the immense market opportunities that we are creating, driving continued growth and shaping the industry in 2026 and beyond. Thank you, and we will now take your questions. Operator, Operator: Thank you. Phone, please make sure your mute function is turned off. Allow your signal to reach our equipment. Again, that is star one if you would like to ask questions. First question comes from Mark Murphy with JPMorgan. Thank you very much, and congratulations on a great finish to the year. Shantanu, you know, down at Adobe MAX, the energy, the enthusiasm was just truly phenomenal. And it felt to us like a breakthrough moment. Talking to customers down there, there was just quite a bit of interest in Firefly Foundry specifically because the customers can end up with this private AI model and, you know, something that'll understand their identity and their style. Can you speak to how customers are starting to use foundry in the early stages and perhaps just what type of economic potential that might be able to unleash for Adobe? Shantanu Narayen: Sure, Mark. And, thanks for the comment. I'll start and then maybe David can add as well. And I did see in your report that you had, you know, sort of the work that you've been doing behind the scenes to customer sentiment. So we appreciate that. You know, from our perspective, we just look at it and for enterprises. The entire content supply chain Gen Studio is really the offering that we wanna provide that takes care of every aspect of their content production. Whether it's the creation part of the campaign, whether it's then creating custom models, whether it's training it at the back end, whether automating it, and then, you know, certainly delivery. And so Firefly services is off to a great start, continues, I think, the prepared remarks. David talked about, you know, the hundreds of deals that we're signing in that particular space. And foundry just takes it to a different level in terms of our ability to customize whether it's for a retailer, whether it's for media and entertainment, the ability to do a lot more. So, you know, we really view that as a massive opportunity. In terms of whether it's a marketing team or the media and entertainment workflow, that allows them to create content, deliver that content, localize it. But maybe, David, you can add to, you know, some of the sort of customers and what we can do there as well. David Wadhwani: Yeah. As Shantanu talked about because we have this great position with GenStudio and the content supply chain, we've been hearing more and more from customers that in order to take it to the next level, they need more than what off-the-shelf models can provide. And as a result, we introduced Foundry, like you mentioned, at Max on the core value is that we train on their content, their data, and their brand guidelines. We're able to generate images, videos, audio, and 3D models. And we operate it as a managed service. So, marketing teams can then train on product shots, environment styles, brand guidelines, and media companies actually train on their individual franchises, whether it's a movie or whether it's a series. They'll train their characters, their sets, their props, their locations so they can generate the whole thing. I'll give you one example from a financials or economics perspective. Let's take a media and entertainment company we're working on. And I'm rounding the numbers here, but to give you a little bit of context, let's say that that organization was spending $10 million with us ARR on our core creative products that we've been selling with them. We ran a sales process with them and gave engagement with them for about six months. We were able to sell them Firefly services Firefly Foundry for about $7 million, so pretty significant step up in terms of, you know, the engagement that we have with the customer. We're able to train models within two or three months and now we're running some of those models specifically as managed services for them for ideation and production processes. They're already seeing increased efficiency in content production. They're able to generate more production content, and they're now getting into opportunities that are revenue-bearing opportunities, like increasing the types of content they produce for social shorts, and personalizing more of it for fan engagement with the integration with our real-time CDP. And, of course, that's with just a few of their franchises, more opportunities to expand beyond that. So very excited. Shantanu Narayen: Maybe one last thing to just punctuate what David said. So our, you know, the vision clearly is that for every single brand, if you're a consumer company or for every single TV show or a movie, we can create a foundry specifically for that particular franchise, as David said, because the ability to, you know, help with the automation of that content and production is massive. Mark Murphy: It sounds like an incredible unlock. Thank you very much for taking my questions. Operator: And the next question will come from Matt Swanson with RBC Capital Markets. Matt Swanson: Great. Thank you guys so much for taking my question. I had a question, kind of, as we expand the product portfolio and the go-to-market motion of really mirroring up the Creative Cloud and the Experience Cloud. Could you just talk about maybe the ROI focus on kind of justifying the value creation of these new productivity enhancements? Right? We've seen through all your product demos how much more content can be created. So really being able to marry that up to results and really kinda why is it a good thing for the enterprise that they have all these new capabilities? Shantanu Narayen: Well, if you take a step back, Matt, and you think about every single business, I mean, they are trillions of dollars that are spent in marketing. And, you know, our opportunity is to really say we can help you make sure that that content is more personalized. I'll have Anil also add after this. And deliver it. And the fact is that since we can deliver that through an ad network, and then we understand through our analytics where that is resulting in traffic, where that is resulting in conversion, where that's not. The only company that can close the loop from the creation of a campaign, the execution of that campaign, as well as then, you know, actually looking at what that causes in terms of commerce. And so, you know, I think our real value proposition in all of this is that as increasingly people are saying, hey. I wanna use AI to create more. We can not only optimize and accelerate the amount of content that they're producing, we're the only company that can then help them say, hey. This caused so much traffic. And I think, you know, we can speak more to that as well as it relates to what we are doing around search, LLM, and ROI. Anil Chakravarthy: Yeah. Exactly. Say, Santil. Depending on the industry, 10 to 20% of the total marketing budget is spent on content, on content creation and production. And exactly with the content supply chain, this is the solution we offer to GenStudio. One, we are helping them reduce content production creation or production cost. But equally importantly, we're helping them create the content much in a much more agile manner and create a lot more content. So most marketers are moving from traditional marketing channels to a lot of the new channels, like Shantanu was saying, digital channels, for paid media as well as their own, own media. And that requires a lot more agility in content production. Therefore, the content supply chain solution that we offer helps them, get a lot more effectiveness out of their marketing and better ROI. Operator: And we'll take our next question from Alex Zukin with Wolfe Research. Alex Zukin: Hey, guys. Thanks for taking my question. This is Ivan here on the line for Alex. Maybe one question on going back to SEMrush acquisition. Can you maybe talk a little bit about, you know, what was the strategic rationale, a little more color on that, and maybe how we should think about the synergies from the deal for next year. Thank you. Anil Chakravarthy: Yeah. If you look at what's top of mind for marketers right now, when we think of customer experience orchestration, brand visibility is one of the key areas that's top of mind for marketers. How their brands appear, how they're positioned, especially in new channels like the LLMs, whether it's, you know, ChatGPT or Google or Perplexity. That's top of mind for marketers. So one of the things that we do really well by bringing, Adobe and Semrush together, we'll be able to offer a comprehensive solution for marketers so that whether it is their own media, like their own websites and their mobile apps, whether it is earned media like these LLMs, or across search engines. They have one solution that helps them improve their brand visibility, and make sure that they understand what customers are searching for, what prospects are actually searching for or prompting for, they are in the right places in the right way with their brands. And that we are the only ones that can offer a comprehensive solution be able to do that across their own channels, as well as all of these new channels like, LLMs, in addition to search engines. Shantanu Narayen: Maybe the one thing I'll say is to, you know, also based on, the previous that Matt had. When we think about our own spend and how we do this at Adobe as we are engaging with, you know, billions of customers, being able to provide an integrated way of spending money across search, across LLMs, and understanding what is the relative efficiency of that. I think most companies would say when they're seeing their business move up into the right, it's now coming from a more diverse set of channels. And this just allows us, between the search engine and the generative engine, to provide this unified approach. So I think it's a very unique, and then we can provide analytics for folks. So I think combining both your questions, this is why the excitement around the creative and marketing and the combination of that is something that, you know, really gives us a lot of confidence. Operator: And moving on to our next question from Keith Weiss with Morgan Stanley. Keith Weiss: Excellent. Thank you guys for taking the question. And, congratulations on a solid end of the year. Maybe a kind of longer-term focus question. You guys have been clear that the strategy is proliferation first and then kind of monetization. Going forward. When it comes to a lot of these technologies and a lot of the innovation that you're pushing into the base, and I think some of the metrics that we're seeing in Q4 are getting us a little bit excited that we're starting to see some of that ability. You guys talked about monthly active users up over 15%. So the user base is growing. You talked about three times growth. And, the usage of the models. On a quarter-on-quarter basis. The usage is ramping up. When can we potentially see this sort of grow the totality or ex stabilize or accelerate the totality of growth? At Adobe. Meaning, another when we see a year where ARR growth is stable, right, on a year-on-year basis or actually improving, because I think that's what investors really wanna see to get more confident in the stock and start revisiting the stock and coming back to the shares? Shantanu Narayen: Yeah, Keith. I mean, from my perspective, Q4 was a really strong quarter. And frankly, starting to be this inflection in terms of as we see the leading indicators. What is happening across the leading indicators. You know, which gives us a lot of confidence. And that's why, you know, when you look at the total Adobe ARR growth target, you know, which translates to approximately $2.6 billion. That's the highest beginning of the year guide for total net new ARR. But unpacking your question, you're absolutely right. I mean, when we think how we've innovated in AI and transformed the business, you know, to serve the massive customer audiences that we see, what we've done a really good job of is in the business pros and consumers, you're seeing the MAU increase. You've seen the fact that we've got this technology in front of a lot of people. We've got usage. You saw the metrics that, I think David provided there in terms of, you know, what's happening on the freemium usage of that. So that's the early indicator. On the Creative Pro, you know, what we have seen across all three parts of the business, which is what's happening in Creative Cloud, what's happening in Firefly as a new app, and, you know, to the earlier question, Firefly Foundry. The automation associated with that. So, you know, we look at all of the three, you know, markets that we serve. And, you know, I think in the data as well, you know, I'm sure you looked at the fact that when you look at what's happening on the creative business, you can see, given you have underlying visibility into the core creative subscription, that is now growing sequentially, you know, quarter over quarter. And that's coming. You know? Frankly, the record, you know, digital media ARR is coming as a result of all three of them. So, you know, I think we're pleased not just with the strong Q4, but underlying how we've actually changed the, you know, sort of, underlying part of the business, to be whether it's on MAU, whether it's infusing AI, whether it's on high higher value, products, and combining all of that, frankly, for the enterprise, which we continue to think is a differentiated strategy for us. So, you know, we have to just keep executing, but I think Q4 was inflection in the early indicators, which we continue to track. Keith Weiss: Outstanding. That's super exciting. Operator: And our next question comes from Mark Moerdler with Bernstein. This is Shelly calling on behalf of Mark. And thank you so much for taking my question. Congratulations on a solid quarter. Total Adobe NAIR growth this year ended at 11.5%, and next year, you're guiding to 10.2%. Could you help us understand what is driving the difference between this year's growth and the guidance? Is it certain parts of the markets that you think might behave differently next year versus this year? Thank you. Shantanu Narayen: Well, first, I guess there's another call that's also going on. So, you know, I but I, you know, from our perspective, when we look at it, I think you have to look at it also in terms of the absolute. And the target actually shows momentum across all of these audiences. And so if you think that we've been, you know, we accomplished approximately $2.6 billion, this actually starts our guide for fiscal 2026, at that level. So I think, you know, from our perspective, it's showing the momentum have. And to your second question, as we think about, you know, the ARR across the business professionals and consumers, as well as the creative and marketing professionals. This is predicated on our confidence associated with all customer groups as opposed to one of them. Again, to the question that Keith asked earlier, it reflects, the progress that we made on Express and Acrobat, whether it's with AI assistant, whether it's with PDF spaces, whether it's with infusing creativity into that offering, Firefly, and Creative Cloud, and Creative Pro, CC Pro offering, Firefly services. So, you know, across the board and AP and apps on a talked about AEP and apps. He talked about Gen Studio brand visibility. As well as the acquisition of Semrush that will when that happens, you know, based on all the regulatory conditions that we need to fulfill, that also adds to our offering. So, you know, we're, we're pleased with our performance in Q4, and we're excited about the future. Operator: And we'll take a question from Jake Rubersch with William Blair. Jake Rubersch: Yeah. Thanks for taking the question. And good to see the partnership announced and integration with ChatGPT. David, as you expand to these new services outside of the Adobe ecosystem, how are you thinking about driving monetization of that usage, or converting those users over to your platform? David Wadhwani: Yeah. Our focus has always been around sort of meeting customers where they are. And, you know, that used to predominantly be focus on search and the web, and now we're seeing this incredible growth with, LLMs. And so we are, taking all of our technology and making sure that it can run in these LLMs. They represent, in our mind, a great top of funnel. They let us reach new users that we took wouldn't have reached with some of the traditional markets that we go through. And we can engage them in new ways. And it gives us an the journey work that's already in there. It gives us the opportunity to flow them into our full paid plan. So it's a real top of funnel game with a conversion opportunity on the back end of that. And of the maybe the more important, you know, elements and moments of why this is such a critical, moment for us is that as LLMs start embracing these model context protocols, these MCP endpoints, it's no longer that these LLMs are about a prompt to a model and a response. It now gives us the opportunity to have the mod the LLMs actually work with models and APIs. And that plays to a really strong strength that we have in durable differentiator given the incredible APIs we have across creativity and productivity. So it lets us reach a lot more customers. It lets us atomize the capabilities, you know, double down on the freemium, experience that we put in been putting in place, as Keith mentioned. Our creative freemium MAU grew, over 35%, and this just continues to drive that. And we're starting to see the tail end of that turn into conversion and show up in our results. Operator: And our next question will come from Michael Turrin with Wells Fargo. Michael Turrin: Hey, thanks very much. Appreciate you taking the question. Mentioned credit consumption up 3x this quarter. I was just hoping to hear a bit more around what you're seeing from an overall consumption perspective, how third-party models are impacting that and if you're becoming at all more confident in monetizing or forecasting consumption? And then secondarily, from your perspective, there better or worse scenarios for us to be thinking about in terms of which of the larger models win mindshare in the market for Adobe just given I think you've seen a lot of differing opinions of that. Especially of late Thanks very much. David Wadhwani: Yeah. Happy to take that. So just for the broader group on the call, if you take a step back, we introduced, generative credit a few years ago when we introduced, generative AI into our products. And customers get credits in a couple of different ways. First, you know, all of our plans now come with some base level of credit, access. And, of course, higher-end plans include more credits. The second thing is that when customers deplete their credits, they can get more credits in one of two ways. They can upgrade to a higher-end plan, and or they can purchase generative credit add-on pack. And as we think about the growth algorithm associated with this, it's really a multiplier across four different things. First of all, the number of apps that have these generative capabilities, times the number of media types that we support, times the number of use cases and workflows that we've integrated these into, times the number of models that we have that people are able to use. And we had major updates for all of these, at Max earlier this earlier in Q4. From an apps perspective, we now have these generative capabilities into our Firefly app, our Creative Cloud, application including Photoshop, from your Lightroom, obviously, also in the Creative Cloud Pro offer that we have. From a media types perspective, we've been doing a lot with images, video, audio design. We've seen a huge inflection in terms of video consumption in particular. So that's been a great sort of to the growth we're seeing. In terms of use cases, it's, you know, we've been focused on editing use cases. We've been expanding those editing use cases. We also introduced Firefly Boards, is around ideation that generates hundreds of images or videos or designs. And also bulk generation at the end of the process for individuals that wanna do bulk actions on things. And then last, it's the models continue to get better with Firefly, and our partner models we're seeing higher resolution outputs. We're seeing, you know, higher density of and quality. All of those things also, increase the number of credits that are getting consumed. And so in addition to all that, we announced a big amplifier to onboarding, which was we have a very attractively priced plan with our Firefly apps. It's really an all-in-one offer. You can get the world's best models from Adobe and third parties. And they're fully integrated into these amazing workflows at a very attractive onboarding price. So all of that led to the three times quarter over quarter growth in generation. And as a result of that, as we as we touched on, we're starting to see increasing user upgrades to higher price plans and including credit pack add-ons. So we're excited, and you saw that in some of the numbers. And, you know, our vision here is we'll work with all the great model providers of course, including the work we're doing internally. And we will increasingly, you know, be the single destination that everyone comes to access those models. Shantanu Narayen: Operator, we have time for one more question. Operator: And that question comes from Keith Bachman with BMO. Keith Bachman: Yes. Thank you very much. David. I'd like to direct this to you if I could. And just ask you how you're thinking about the components or the construct of growth over the course of FY '26. And if I break it into two parts, just wondering if you could comment specifically on seats within the creator and marketing professionals not looking for specific numbers, but is seat growth remained steady within that category? It looks like you're filling top of the funnel across the board, but really what I'm asking about is paid seat growth. Is would you anticipate that that remains steady in FY '26? And then the second part of the question is if in the prepared remarks, digital media more broadly it was 75% It was up upselling price, and then the balance was basically price. And what I'm asking the spirit of the question is, despite growing competition, do you think pricing is still a lever that you can draw on to support growth in '26 and beyond? Many thanks. David Wadhwani: Yeah. Happy to take that. You know, a few things. One is I know we've spent a number of time a number of couple years with all of you explaining the evolution of the product lineup. You know, a few years ago, we used to have, you know, for in the creative ecosystem, we have to used to have Creative Cloud all apps and Creative Cloud single apps. And one of the most important things we've done over that period of time is to really look at where and how consumers or business professionals want to engage with creativity, and we found that it's very different. So when it comes to our lineup, we now have, you an increasing number of freemium offers. You know, with business professionals, with the introduction of Express, but also the introduction of Acrobat Studio with which has is off to a great start. We have, you know, a specific offer for creators with everything we're doing with the Firefly application. And, again, that's another freemium offer, but also has, you know, a nice sort of, tiered pricing associated with it. We have a strong, momentum with creative Pros, and those using the Creative Cloud applications. We've mentioned in the past, and we continue to see very strong migration over to the Creative Cloud Pro plan, the higher value plan that has, you know, more generative capabilities embedded in it. And we have, you know, at the very tail end of that process, we have the ability to do all of this automation work that we have. Associated with Firefly services and Firefly Foundry integrated into GenStudio. So as we look at creativity and how it seeped into all of these different flows, we feel really good in the first two, as we said, with the freemium MAU 35 over 35% year over year, and our ability to start converting some of that MAO with the plans that we have in place now with both Express and Acrobat Studio and with everything we're doing with Firefly. And we're continuing to see strong usage, that three times growth we talked about. You see a lot of creative professionals actually using that and starting to see more and more and more, you know, reliance and value from that in addition to what we're seeing in the enterprise. So, overall, we're seeing strong seat growth. We continue to believe that we have a lot of user acquisition ahead of us. We continue to see a lot of value to pricing opportunity with professionals, and I think there's a lot more ahead of us on that. And as we mentioned in that case with media, the media company and enterprises at the highest end, we think that automation is gonna be a really good addition and sort of additional rocket engine to what we do. Shantanu Narayen: Thanks, David, and thank you all for joining us since that was the last question. What I wanted to again just summarize was not only was Q4 a good strong end to the year, I would say fiscal 2025, we just continue to execute. And in particular, I'm pleased with three aspects of what we are focused on. The first is certainly our customer groupings as we provide these tailored offerings for business professionals and consumers and creative and marketing professionals. How we've embraced AI and infused AI into all of those offerings, demonstrating that that's the value that people look as they increasingly adopt our solutions. And, something that we probably talked a little less about. But the execution that we have across all routes to market. And so whether that's what we are doing on digital, online in terms of engaging with our customers, what's happening both through the channel as well as our phone, in terms of selling to small and medium businesses. And, certainly, at the higher end, the strategic partnerships and the relationships that we're creating at the enterprise across our combined offerings. So thank you for joining us. Happy holidays, and we look forward to continuing to execute against our strategy and sharing more with you in the future. Thank you. Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
Operator: Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Fourth Quarter and Fiscal Year 2025. Later, we will conduct a question and answer session. To remove yourself from the queue, it's star one again. If you should require assistance during the call, please press 0, and an operator will assist you. Today's call will last one hour. As a reminder, today's call is being recorded. This time, I would like to turn the conference over to Tushar Jain, Head of Investor Relations. Please go ahead. Good afternoon, everyone. Us today are Sassine Ghazi, President and CEO of Synopsys, Inc. and Shelagh Glaser, CFO. Tushar Jain: Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys, Inc. will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. As shown in today's financial statements, all of ANSYS revenue appears under the ANSYS product group, including the ANSYS semiconductor products. In addition, we will refer to certain non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release financial supplement, and 8-K that we released earlier today. All of these items plus the most recent investor presentation available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call. With that, I'll turn the call over to Sassine Ghazi. Good afternoon. In 2025, we redefined Synopsys, Inc. With ANSYS, Synopsys, Inc. has transformed from an EDA leader to the leader in engineering solutions from silicon to systems. We achieved record annual revenue of $7.05 billion and exited FY '25 with more than $11 billion in backlog. In Q4, we made strong progress executing the actions we identified to accelerate our strategy and drive long-term growth. More specifically, ANSYS integration is well underway following completion of the planned divestitures of the Optical Solutions and PowerArtist businesses. We've also initiated restructuring actions to drive efficiency and accelerate our committed synergies. And recently, we welcomed industry veteran Mike Aloe as our new Chief Revenue Officer. Fourth quarter revenue was in line with our guidance and EPS came in slightly ahead of guidance. Looking ahead to FY 2026, we're guiding revenue of $9.61 billion at the midpoint which factors the addition of ANSYS, the completed divestitures, and continued pragmatism around China. Zooming out, we are operating amidst a multitrillion-dollar AI infrastructure build-out, which is driving robust semiconductor demand and design starts for both specialized and general-purpose compute. We're also seeing stronger semiconductor demand in mobile and automotive while markets like industrial and China broadly remain subdued. AI will revolutionize every industry, demanding more compute performance while compounding engineering complexity. AI is driving chips to the atomic level while scaling from factory to edge to intelligent devices everywhere. As AI evolves from large language models to world models, engineering AI's future is not just a software challenge. It's a physics challenge. AI makes it both possible and imperative that we reengineer how engineering is done. Building complex AI-powered systems with the right performance, scale, and efficiency requires new tools with multi-domain integration and new workflows to enable tight software and hardware co-design. That's why we're so excited about the combination of Synopsys, Inc. and ANSYS. ANSYS diversified our revenue, expanded our customer base, and supercharged our opportunity. Together, we can bridge digital and physical design to help engineering teams across industries deliver better products, faster, and at lower cost. Our recently announced strategic partnership with NVIDIA further positions us to revolutionize design and engineering with AI and accelerated computing. Now more than ever, Synopsys, Inc. is mission-critical to technology innovation. I'll briefly share some Q4 business highlights, and then Shelagh will provide the financial details. First, design automation. In Q4, we saw continued strong demand in hardware-assisted verification, driven by the increasing engineering complexity of AI and high-performance computing. Our HAV business ended a record year with 12 competitive wins in the fourth quarter. We're also seeing continued demand for virtual prototyping among automotive and high-performance compute customers looking to accelerate their software development. Our leadership on advanced node, multi-die, and AI design drove steady demand and growth in the fourth quarter. Last week's AWS Graviton 5 launch is a great example. For years, we've collaborated with AWS to enable their custom silicon development and Synopsys, Inc. tools, including VCS, Primetime, Fusion Compiler, and IC Validator, were critical to the design of this new custom chip with impressive gen-on-gen performance gains. Importantly, Synopsys, Inc. continues to pioneer AI-driven chip design. Nearly 5,000 active users among our tier-one semi customers are applying synopsys.ai's assistive and creative capabilities to increase their engineering productivity. We also continue to advance agent-engineered technology with partners like NVIDIA and Microsoft. AgenTeq AI capabilities promise to transform engineering workflows and unlock new business models. The ANSYS business continues to demonstrate robust growth across key industries, including industrial, where customers are using simulation to virtualize and optimize production, saving time and money. At Microsoft Ignite, we partnered with Microsoft, NVIDIA, and Kronets, a leader in packaging and bottling, to show what's possible. Using ANSYS accelerated physics solvers, NVIDIA Omniverse, and Microsoft Azure, Cronos built a digital twin of its bottle filling line to simulate and optimize operations in real-time. A powerful example of how open ecosystems and cross-industry collaboration are redefining industrial innovation. Turning to design IP, which performed in line with our adjusted expectations. As interconnect standards evolved at an unprecedented pace, customers count on Synopsys, Inc.'s one-generation-ahead approach. We saw strong momentum in the quarter for PCIe, 224 gig, and UCIe IP. Notably, we secured 13 PCIe 7.0 design wins during FY 2025 and established first-to-market position with our silicon-proven 224 gig IP and the new standard UA link. We also had 10 competitive wins in FY '25 for LPDDR6 and MRDIMM2 memory IP, which address two critical challenges in AI hardware: data throughput and power efficiency, while also improving reliability and security. As stated last quarter, 2026 is a transitional year for the IP business, and we expect growth to be muted. However, given our leadership position in interconnect and foundation IP, our healthy sales pipeline, and a renewed focus on the highest value opportunities, we are confident in our long-term mid-teens growth target. To sum it up, we continue to transform and drive our strategy forward with a focus on technology leadership, operational excellence, and financial discipline. Our priorities for FY '26 include advancing our technology leadership by continuing to pioneer the use of AI for engineering workloads and delivering our first Synopsys, Inc. ANSYS joint solutions in 2026, and efficiently scaling to accelerate our strategy through disciplined cost and portfolio management, resulting in sustainable growth and margin expansion. I want to thank our global team for their commitment and adaptability navigating an unprecedented year of transformation. Together, we've built the foundation for our future success. I'm also grateful to our shareholders, partners, and customers for your continued support, and I look forward to seeing many of you at CES in January. Now over to Shelagh. Shelagh Glaser: Thank you. As Sassine said, 2025 was a transformational year highlighted by the close of the ANSYS acquisition, record revenue, and strong backlog. Backlog came in at $11.4 billion, up from $10.1 billion last quarter, driven by strength in bookings across the business. We are acutely focusing on executing financial discipline as we head into fiscal year 2026. We are well into delivering on our plan to improve efficiency with the previously announced workforce reductions. These decisions are never easy, and I'm thankful to the Synopsys, Inc. team as we execute these actions and accelerate realizing our cost synergy commitment. Let me provide some highlights of our fourth quarter and full year 2025. All comparisons are year over year unless otherwise noted. As a reminder, full-year comparisons do not adjust for the eight extra days in fiscal 2024. In 2025, we generated total revenue of $7.05 billion, up approximately 15%, which included $757 million of ANSYS revenue. Q4 revenue was $2.25 billion, coming in at the high end of our guidance. ANSYS Q4 revenue was $668 million. Geographically, China continued to be challenged, consistent with our commentary last quarter. China ended 2025 down 18%. Excluding ANSYS, China was down 22% this year. 2025 total GAAP costs and expenses were $6.14 billion, and total non-GAAP costs and expenses were $4.42 billion, resulting in a non-GAAP operating margin of 37.3%. Q4 GAAP costs and expenses were $2.13 billion, and total non-GAAP costs and expenses were $1.43 billion, resulting in a non-GAAP operating margin of 36.5%. Q4 and full-year 2025 GAAP earnings per share were $2.39 and $8.07, respectively, which included the gain on the sales from the recent divestitures. Q4 and full-year non-GAAP earnings per share were $2.90 and $12.91, respectively, ahead of our guidance on lower expenses. Now onto our segments. Full-year 2025 design automation segment revenue, which includes EDA, ANSYS, and other, was $5.3 billion, up 26%. Excluding ANSYS, design automation revenue grew approximately 8% with steady growth in EDA software and a record year in hardware. Design automation adjusted operating margin was approximately 42% in 2025. Full-year Design IP segment revenue was $1.75 billion, down 8% due to the challenging second half with the headwinds highlighted last quarter. The IP business performed in line with our revised Q3 expectations. Design IP adjusted operating margin was 24% in 2025. Moving to cash. Free cash flow for 2025 was approximately $1.35 billion and came in ahead of expectations primarily due to the accelerated timing of collection. We ended the quarter with cash and short-term investments of $2.96 billion, which includes approximately $600 million in proceeds from the sale of the Optical Solutions Group and ANSYS PowerArtist business. Total debt ended at $13.5 billion. We repaid approximately $850 million of our term loans in Q4 '25 and $900 million in November, and plan to prepay the balance of $2.55 billion in 2026. We have incorporated this in our guidance that I will now discuss. For 2026, the full-year targets are total revenue of $9.56 to $9.66 billion. Within that, ANSYS revenue contribution is expected to be $2.9 billion at the midpoint, growing double digits. Following the close of the Optical Solutions Group and PowerArtist in October, our fiscal year '26 guidance excludes revenue associated with those groups, resulting in an impact of approximately $110 million. We expect the first half, second half revenue split to be approximately 48-52%. We expect ANSYS revenue to be strongest in Q1 given their historical strength in December driving the sequential revenue increase. Total GAAP costs and expenses between $8.47 and $8.61 billion, total non-GAAP costs and expenses between $5.69 and $5.75 billion, resulting in a non-GAAP operating margin of 40.5% at the midpoint, up approximately 320 basis points versus 2025, driven by the inclusion of ANSYS and cost synergy acceleration. We are adopting a normalized non-GAAP tax rate of 18% projected through 2028 to provide consistency across future periods. The two-point increase is driven by geographic mix of earnings, inclusive of ANSYS and recent tax law changes. GAAP earnings of $2.49 to $2.90 per share, non-GAAP earnings of $14.32 to $14.40 per share. We expect the first half, second half EPS split to be 46-54 with the second half benefiting from the debt repayment. Cash flow from operations of approximately $2.2 billion, up approximately $700 million year on year. The cash flow guide includes the impact of certain nonrecurring outflows such as restructuring costs of approximately $225 million and $135 million of incremental cash taxes from recent divestitures. We expect CapEx of approximately $300 million, up $130 million versus 2025, driven by investments primarily in compute infrastructure, resulting in free cash flow of approximately $1.9 billion. Fully diluted shares outstanding are expected to be between 192 and 194 million shares. This includes the impact of the recent share issuance to NVIDIA as part of our strategic partnership. With our plans to accelerate our term loan repayment, we expect the net impact to be accretive to EPS in fiscal year 2026, which is incorporated in the guidance. Now to targets for the first quarter. Total revenue between $2.365 and $2.415 billion, total GAAP costs and expenses between $2.165 and $2.23 billion, total non-GAAP costs and expenses between $1.395 and $1.425 billion, GAAP earnings of 22¢ to 41¢ per share, and non-GAAP earnings of $3.52 to $3.58 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations. Before we take your questions, I'd like to reiterate our focus on driving sustainable growth and margin expansion through unmatched innovation and disciplined execution. 2025 was a transformational year that redefined Synopsys, Inc. In 2026, we will expand our position as a leader in engineering solutions from silicon to systems. With that, I'll turn it over to the operator for questions. Thank you. You. And if you would like to ask a question, please press 1 on your telephone keypad. Question and one brief follow-up to allow us to accommodate all participants. If you have additional questions, please reenter the queue, and we'll take as many as time permits. The first question today will come from Jason Celino from KeyBanc. Jason Celino: Great. Thank you for taking my question. Maybe my first one for Shelagh. The embedded organic growth rate in the 2026, you know, guide, I don't know if there's a way for us to, you know, understand what that might be and what that might imply for IP growth. I'm okay at math, but I'm just a sell-side analyst. I mean, if we adjust for the ANSYS and the divestitures, I'm getting, like, 8% growth organic. I ask the question because I'm just trying to understand the level of conservatism. Shelagh Glaser: Yeah. It's definitely in that ballpark. And I think two things that I would highlight. One is, and I had it in my prepared remarks. We did have the disposition of the Optical Solutions Group and the PowerArtist Group, but it's $110 million. So that's about a point and a half. They're just pointing that out to you. As we talked about in Q3, we do anticipate a muted year of growth for IP. We are very much, well into, repositioning workforce to build out the HPC titles so that we've got those fully available for customers. But we do expect the group to be in transition this year. And so we factored in muted growth for the IP business. So you're seeing that? And as I talked about ANSYS, our guide for ANSYS is $2.9 billion at the midpoint. And that's double-digit growth for ANSYS. So we're trying to be pragmatic with our forecast in light of the body of work that the IP team needs to do in '26 to be able to, you know, get us back to the long-term growth rate in IP. Jason Celino: Okay. And then the operating margin EPS guide is pretty fabulous, you know, even when considering the extra dilution from the NVIDIA investment. I don't know if I heard you talk about a specific synergy number, but curious, you know, if there's any extra details there. Thank you. Shelagh Glaser: Sure. So one of the things we had talked about last time that we're well on our way to do is the 10% workforce reduction. That encompasses a body of work that we've been doing on synergies. We've already done an action in the November time frame. We anticipate that we're largely complete with that in 2026. So very much on the path of working to accelerate those synergies as quickly as possible. And as you know, Jason, we've been very focused on driving margin expansion over, you know, multiple years, with this guide. It's about a 12 margin expansion since 2020. So we're very focused on that. Very focused on driving both sustainable growth and expansion of margin. Jason Celino: Great. Thank you. Shelagh Glaser: Thank you. The next question is from Harlan Sur, JPMorgan. Harlan Sur: Good afternoon. Thanks for taking my question. If I exclude ANSYS to the person that asked the question before me, the core EDA plus IP is going about eight, eight and a half percent year over year in the fiscal year guidance. Can you just help us understand what you're embedding for growth in EVH and IP? In the guidance, for example, if I assume IP is going modestly as you guys say, let's say 5%, then your EDA business is growing around 9%. Which is still below kind of your forward target of, like, 12, 13%. Is that kinda the way to think about it? And if so, like, why is the EDA business still undergoing your long-term sort of forward target CAGRs? Sassine Ghazi: Yes. Thank you, Harlan, for the question. Your math is in the ballpark. What we're taking into account for the EDA growth because on IP, you captured it well, we're guiding muted growth for IP. In EDA, we're taking a couple of things into account. One, the China environment. Where the cumulative impact of restrictions is something that we are seeing and seen in '25 that has had an impact is different than say, 2020, '21 time frame where many start-ups and significant spending was happening in China. And the other factor is we're still operating in a tale of two markets. There are a number of companies that they're building chips for industrial, automotive, and anything outside the AI infrastructure build, their road map is somewhat muted. They're not driving at the same pace as what we're seeing with the other group of customers that they are delivering chips for the AI infrastructure. Then as you know, with EDA, there are a number of components. There is the software and the hardware-assisted verification. On HAV, we continue on seeing a significant demand due to the complexity of verification. The long-term view is double digits, but that's what we have taken into account in terms of the guide for twenty-six. Shelagh Glaser: And the other thing that I would add that's just a mechanical item, Harlan, is the divestiture of the Optical Solutions Group and the PowerArtist Group. So that's a $110 million headwind. But that's just a mechanical thing just to add that into what Sassine outlined. Harlan Sur: Got it. No. Got it. Thank you. That was insightful. And then, Shelagh, I have a question for you. Total expenses exiting Q4 was about $1.43 billion. You're guiding that to roughly about $1.41 billion in the first quarter. But if I look at your average quarterly expense run rate to the year on the full-year guidance, it's still averaging about $1.43 billion per quarter. So kinda doesn't seem like there's much in the way of synergy unlocking fiscal twenty-six or are cost synergies being offset by increased spending in other areas? And where do you expect the total expense to be run rating sort of exiting fiscal twenty-six? Shelagh Glaser: Yes. So our commitment on the cost synergies, you're really seeing that flow through kind of back to Jason's question. On the op margin, the 40.5. Obviously, we've committed to mid-forties long term, so we're well on the way to that. And when we think about kind of the profile of expense structure, it is changing a little bit just because of the ingestion of ANSYS. As to how the quarterly splits run. But our expectation is, you know, throughout the pace of the year, we're gonna continue to have reductions in workforce. But we're still gonna focus our main investment on driving innovation. And driving the road map. And so the reductions will still allow us to have significant investment in R&D. Harlan Sur: Great. Thank you. Shelagh Glaser: Thanks, Harlan. Next up is James Schneider from Goldman Sachs. James Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could maybe give us a bit of an update on the IP business and your expectations you laid out last quarter around some of the headwinds that you're seeing. Was that your foundry customer, China, and the execution on custom IP blocks? Can you maybe give us an update on sort of the level of progress you've had in each of those three dimensions and how that sort of plays into the overall IP outlook for the year? You expect it to be sort of low single digit or you think mid-single digit is possible? Thank you. Thank you, James. I want to start with as we zoom out, my confidence in our long-term mid-teens for our IT business only gets stronger. I know when we talked ninety days ago, we have focused on some of the headwinds. But the overall strength of the portfolio we have is such a privilege to have the portfolio we engage our customers in various markets. Not only AI HPC. Because as you know, the market of semiconductor is much broader. Today, we are the leader in providing the IP for automotive, for mobile, for many other segments. In the AI HPC, we have a very strong position and our customers constantly reminding us how mission-critical we are to their road map and development. We outlined, ninety days ago, three headwinds. China, and the whole foundry uptake. We're assuming in our guide that not much change going into FY '26. In other words, we are being balanced and pragmatic the way we're taking into account in our guide for IP these two factors. In terms of resources and prioritization, we made a number of changes. We made changes in our development leadership. We made some changes in the sales leadership as it relates to IP. And we are well on our way to close some of the gaps. You're gonna see from a customer engagement point of view on some a couple of the titles that we are being pressed on timing of delivery. Is that we will close these gaps by midyear FY 'twenty-six. So all in all, we're looking at '26 as a transitional year, muted growth, with the long-term objective of mid-teens, and that we feel very strongly about. That's helpful. Thank you. And then maybe just as a follow-up, obviously, last week, you had your announcement of the NVIDIA partnership and the investment in the company. Can you maybe give us a little bit more color on sort of the rationale for why an investment made sense? What could have been, you know, done with an investment that couldn't have been done simply through a strategic partnership that maybe kind of walk your or walk us through the logic around that. Thank you. Sassine Ghazi: Sure. I'm happy to walk through how it ended up being an investment. Where the discussion started with NVIDIA, is enthusiasm and excitement about the new Synopsys, Inc. The silicon to systems engineering solutions that addresses not only the silicon part, it's going up to the whole physical AI and delivering solutions to the future of engineering in every industry. So the discussion with NVIDIA started around how do we accelerate at the computational level with the GPU and that's something that is already a number of our products. We have a road map for that acceleration. Then it went up to the Omniverse level, how to modernize or the way we refer to it, how do we reengineer engineering for intelligent systems? And this is where the ANSYS portfolio is very unique. As they bring in a multiphysics simulation leadership to bring that physical simulation, physical AI into effect and providing that modernization of engineering. The third element is our go-to-market reach. ANSYS has built a very strong channel partnership and direct sales channel that we touched thousands and thousands of customers in many industries. So as the discussion with NVIDIA started evolving on defining the technology partnership, the discussion with Jensen moved to, I want to endorse it with an investment because I know we can make money. And I know you heard his own words as we announced the partnership. So the financial aspect was second because as you can see, we have a very strong balance sheet. And we welcome the $2 billion investment. And as Shelagh outlined, we will accelerate some of the debt payment and help us with accelerating some of the strategy we have. So that's how it really came about. Operator: The next question comes from Kelsey Chia from Citi. Kelsey Chia: Hi. Hi, Sophie. For taking my question. So I would like to tap on the EDA growth rate again. So you mentioned that it lowered EDA growth in fiscal year twenty-six is due to slower chip design momentum in China. Is that the same reason for the lower growth rate this year as well? And are there any share shift dynamics happening over there? And if synergies with ANSYS could drive that revenue growth back to target? Sassine Ghazi: Yeah. As it relates to China, there is some share shift happening inside China. Because, you know, when you restrict the sale of EDA or IP, the customers in China are looking for alternatives. And that is happening, and it's happening at an accelerated rate. The customers we can serve, we're fine selling to, and they're buying from Synopsys, Inc. or other. The companies we cannot sell to, they are looking for alternatives, and these alternatives are typically organic local, EDA or IP companies. In terms of the longer-term growth opportunities for EDA, and that's why we still standing behind double-digit growth for EDA. It's gonna come from the joint solutions between Synopsys, Inc. and ANSYS. We are targeting the '26 to deliver the first wave of these solutions. There's a need for customers from customers to address the current challenges they're facing as they're designing the most advanced chips, advanced package, 3D IC, where they need the physics analysis to be taken into account during the design phase of the chip. And this is something we're very excited about. The team is already working toward the goal of delivering the first wave of the solution, and that's a monetization opportunity. But, of course, that opportunity in terms of monetization will happen over time. As customer adopt etcetera. The second monetization opportunity is as the agentic AI solution start maturing and start changing the workflow, that's another opportunity for our industry to rethink how do we sell our solution for the value and impact. So again, the China impact, we're taking it into account in our guide and the upside opportunity as we look at the long term is joint solutions and the AI changing the workflow. Kelsey Chia: Got it. Thank you. So on the IP business, so I know that Synopsys, Inc. provides several IPs for a large foundry customer, including the in EMID advanced packaging technology. It seems that there are several customers evaluating that. Using that technology from a large foundry customer. Will that be incrementally positive for Synopsys, Inc.? Given the new growth that you have provided? And also relating to that, on the operating margin, I believe all the expenses related to those IPs have been consistently recognized over the prior quarters. Despite the lack of customers. So does that imply that operating margins for that segment could come back to historical average? When the revenue for that large foundry customers are being recognized. Sassine Ghazi: Yeah. Let me address the first part of your question, then I'll turn it to Shelagh. The way we monetize our IP, the first step is to build it. And what you build on Foundry A is not the same on what you build on Foundry B even though it's the same protocol, the same title. It does require what's called porting, and that's not a simple effort. It requires quite a bit of an R&D effort. To achieve the same performance power, etcetera. Now that's one part of the monetization, but where we look for the incremental monetization is when that foundry start on ramping customers. And if whichever foundry has expansion of customers that are using the technology that we already developed the IP, that's an incremental opportunity for us. And there, we sell to the end customer who is ramping on the foundry customer. And for us, as we're looking at FY '26, for that particular foundry that we talked about in Q3. Assuming a status quo in terms of new customers being on ramp. Shelagh, if you wanna address the operating margin. Shelagh Glaser: Yeah. Sure. So in terms of operating margin, Kelsey, you're right. We still are investing and building the titles out. We've repositioned the workforce to be able to build the HPC titles up, as Sassine talked about. And so it is really we're gonna have, you know, muted growth in '26, which will mean there'll be some pressure on the operating margins. But as we get back to that mid-teen growth long term, we'll see expansion in the margins. And they do expect that IP margins are always slightly below the corporate average because it's such a people-intense body of work to deliver but, it's really a short-term effect just because of the headwinds on revenue. Of the op margin challenge through '26. On IP. Kelsey Chia: Okay. Got it. Thank you. Shelagh Glaser: Thank you. Operator: Thank you. We'll now hear from Sitikantha Panigrahi from Mizuho. Sitikantha Panigrahi: Thanks for taking my question. I want to drill it into the ANSYS. Double-digit growth for next year is pretty good. So I'd love to hear what's baked into that in terms of the jumpsuit there. It's been now more than four months since you closed ANSYS. Do you expect, you know, in terms of business model or contract, which are different, do you expect them to convert to subscription? And this is if you do so, what kind of uplift or any kind of multiplier effect we should expect there. And, Sassine, in terms of integration, where are you so far? Any color would be helpful. Sassine Ghazi: Sure. Thank you, Sitikantha, for the question. In terms of what's driving our confidence in double digits growth for ANSYS, the way we look at it, there are two markets we're serving with the ANSYS portfolio. There is the semiconductor market. That the joint solutions will bring an opportunity to uplift our pricing as we integrate the ANSYS solution with the EDA solution that we offer today. Then the rest of the ANSYS market, if you look at the significant transformation that's happening on how to develop a modern car, robot, any industrial applications, drones, etcetera, aerospace, those are all customers of ANSYS. And the demand, the increase in R&D investment that we are seeing in those markets is giving us the confidence to continue on expanding the growth opportunity. In terms of the business that ANSYS has, they've always had a mix of subscription and perpetual. And that will continue based on the customer need, requirement, demand. So that's what's driving the double-digit growth assumption for the portfolio. Which, by the way, is no different than what the legacy ANSYS team has delivered in the prior year. So it's consistent in line with prior expectations. In terms of integration, since we finalized the divestitures in October, we're full force ahead in terms of integrating the teams. Our R&D teams right now, they're one team. They're delivering on the joint solutions I just mentioned. From a go-to-market point of view, we are maintaining a separate go-to-market engagement, the one that they deal with semiconductor. Those are integrated given the relationship Synopsys, Inc. has with semiconductor companies. And the slew of other customers. And I'm talking multiple factors larger than the classic Synopsys, Inc. in terms of the space that the legacy ANSYS has served that will remain separate so we don't miss a beat in terms of how to go to market with the existing portfolio that we have. Shelagh Glaser: Yeah. And I would just add, Sitikantha, that the portion that Sassine talked about of ANSYS that you know, in lockstep with the EDA business, that is moving to a similar ratable, and that's included in our guidance. Sitikantha Panigrahi: Okay. And then just wanna clarify that we need the same customer now using Synopsys, Inc. EDA, and ANSYS. When you launch your combined product, should we expect any kind of uplift there, or what kind of uplift should we expect? I mean, is that one plus one would be more than two? Or less than two? Dollar there. And, Sassine, quickly, any update on that royalty model for IP you talked about in traction you're seeing? Sassine Ghazi: Sure. Yeah. When we talk about joint solutions, the customers have the options. They have the choice. If they don't have a need for that new joint solution, they can continue buying the classic Synopsys, Inc. and the legacy ANSYS products and will negotiate those based on value and usage and need, etcetera. If the customer's looking for the joint solutions because we're solving a new problem, one plus one is greater than two for sure. And that's where we will capture that monetization opportunity over time as they start adopting the technology. As I stated, the first wave where the customers start using, feeling, the technology and evaluating it, is the '26. In terms of the IP, value capture, the focus we put together in Q4 that I'm very pleased with, we looked at it from, I want to say, two pathways. The first one is just a discipline in pricing and guardrails because we have a differentiated IP portfolio. And I was very pleased with the go-to-market team in monetizing around the newly established, I wanna say, guardrail and disciplines we put in place. Then the second aspect of it and that's where we spent quite a bit of time ninety days ago talking about, there's an increase in customization in IP. And we are having discussions with a number of strategic customers. That were happy to allocate resources to deliver on that work but we need to change the business model from an NRE plus a use fee to NRE plus use fee plus royalty and upside. And these discussions are happening, and I feel very good that in FY '26, we'll be able to lock up some customers in that new business model where they see the value of bringing that customization and portfolio to their road map. Sitikantha Panigrahi: Thank you. Sassine Ghazi: You're welcome. Operator: And, everyone, just a reminder, please limit yourself to one and one quick follow-up. We'll go next to Vivek Arya from Bank of America. Vivek Arya: Thanks for taking my question. For the first one, Sassine, I'm trying to, you know, gauge whether the IP business is, you know, did it. Because if I look at your Q4 IP and I just annualize that, that's about $1.6 billion in change. But if I assume that it grows modestly, that's more like 1.8, you know, billions, right, or so. So from a year-on-year, you know, perspective, it seems dealers, but off of Q4 levels, not as much. And I wanted to get your sense. Is that a fair pushback? Just how are you thinking about the sequential recovery in your IP business? And, Shelagh, do you have a number for one, that would be very helpful also. Sassine Ghazi: Yeah. I really urge you not to look at it from a quarter basis because the IP business, as we often refer to, can be lumpy. I am very confident, very confident in our portfolio, as well as the market position we have. We were very transparent in Q3, that there were a couple of titles that we needed to do some work to accelerate our road map to deliver to customers. And for those titles, we're having ongoing customer engagement with the customers with our revised road map. And I have no doubt that we will capture the opportunity for these couple of titles. The rest of the portfolio is performing incredibly well. So, yes, I feel very good. That we have derisked the headwinds that we communicated last quarter, as we look into '26. Shelagh Glaser: And, Vivek, what I give you with the sort of flavor for the year is IP will be back half loaded. And that's really got to do with the availability of all the titles. So the team is actively working, hitting all the milestones to be able to deliver that a few of them are not gonna be available until the second part of the year. And so that's really kinda how we built the forecast. As Sassine said, the demand is there from the customers in, you know, very solid. But some of our delivery is more back half weighted. Vivek Arya: Understood. And for my follow-up, what are you assuming for your China sales and on an absolute dollar basis relative to the $814 million or so that you're doing in fiscal twenty-five. And I guess, Sassine, the broader question there is, can your EDA and IP business get back to double-digit growth if we continue to see these China restrictions or if you kind of, you know, proactively, you know, derisk your business from China engagements? Thank you. Sassine Ghazi: Thank you, Vivek. So we expect the environment to remain challenging in China. That's why when we look at FY '26 compared to '25, what we are taking into account in our forecast and guide is truly pragmatic balanced view. We're not assuming that the environment is gonna change in the next one or two quarters. To the positive. So, therefore, we continue on derisking it in our guide for FY '26. In terms of the double digits growth for EDA, we still feel strongly about the opportunity to achieve double digits from a long-term basis and it's driven by the complexity and the need for the joint solutions and as AI evolves from generative to agentic, it will change the workflow, and that's a great opportunity for our industry to find a new way to monetize for the value that we will be delivering to the customers. So, again, from a China point of view, we continue on derisking with an assumption of the environment remains the same, and the long term for EDA double digits is something we're holding for that commitment. Vivek Arya: Thank you. Shelagh Glaser: Thank you, Vivek. The next question is from Joe Vruwink from Baird. Joe Vruwink: Great. Thanks for taking my question. I just wanted to stay on the IP topic and given everything that's come up so far in terms of the titles you're seeking availability on midyear and some of the other, like, strategic elements, the custom IP and potentially changing the business model. That midyear time frame, would you expect to know by then the magnitude of commitments you have in hand so that FY '27, you can maybe make the statement it will be back to mid-teens growth. I guess my question is mid-teens growth is that capable for FY 2027 based on the pipeline of opportunities you see today? Sassine Ghazi: Yeah. To just let me clarify the midyear. We're not waiting for us to talk to the customer until midyear. We talk to the customer, we have active engagement and even in contract phases with customers based on their road map and based on our road map of delivery. We have established very strong trust with those customers, and they build their road map based on our ability and delivery. So the other thing I'll point out in terms of IP and in general is the strength of the backlog we're entering the year. Entering the year at $11.4 billion in backlog. That shows the strength of the bookings, the commitment we've had with customers, and it's all about execution. And delivery. So, Joe, in general, as I keep repeating, my confidence in our IP portfolio is driven by the discussions we're having with customers and the essentialness of what we're delivering here. Joe Vruwink: Okay. No. Thanks for that clarification. I guess I'll next ask about cash flow performance. I look at your adjusted EBIT margins better than 40%. That's nearing the mid-40 goal. Cash flow, I think the guide implies something closer to 20%. So, obviously, a lot of upside still to the margin framework there. Just would you expect some of these one-time cash items restructuring do those start to settle out of the model as we think forward into the out years? Shelagh Glaser: Yeah. Absolutely, Joe. That's why I called them out because I very much think they're one-time, kind of one-off. Items. The two that I called out was the restructuring. And then, obviously, as a part of the OSG PowerArtist, there's a gain, and so there's the tax on the gain. But those aren't, you know, those are not recurring. And we're very much focused, you know, that's the $700 million improvement year on year. We're very much focused on driving to the, you know, long-term commit of unlevered free cash flow in the mid-30s margin. Joe Vruwink: Great. Thank you. Shelagh Glaser: Thanks for the question, Joe. Operator: Charles Shi from Needham and Company has the next question. Charles Shi: Hi. Thanks for taking my question. Hey, Sassine. Maybe a question for you a little bit longer term, a little bit beyond fiscal twenty-six. A lot of the, you know, pushbacks I'm hearing from the investment community Synopsys, Inc. and, actually, not just Synopsys, Inc., but the entire EDA industry, entire group is AI is doing very well, but the sector you are in continue to show a, I mean, continue to show deceleration, I would say, since 2022. And it's kinda hard for a lot of folks to understand the given you have all the exposures to all the AI players there, but your business didn't really turn up. And over the past few years, is that a monetization problem? And, if yes, how do you plan to solve the monetization problem? Thank you. Sassine Ghazi: Charles, if I understood your question correctly, when you look at the AI from a semiconductor road map development point of view, it continues on being very strong. If you're a hyperscaler and pretty much every hyperscaler, they have three parts to satisfy their infrastructure build-out. They're buying merchant chips, they're engaged in ASIC. And pretty much each one of them, they have their own COT. Where the customer owns tooling, where they're developing their own semiconductor chips. And the reason they're counting on all three is because of the optimization they need to do for different workloads from a cost and power consumption and the overall ownership of the consumption it makes sense for them to have a strategy based on these three vectors. From a Synopsys, Inc. point of view, that's a great opportunity because remember, we don't sell based on volume. We sell based on chip start. So if the chip is coming from a merchant or coming from ASIC or the customer themselves building it, for us and the industry, that's an upside. So we don't see that changing actually, and we see these hyperscalers are doubling down on that strategy. Charles Shi: Yeah. So maybe I should make my question clear because I think all the trends you described, I think that's pretty well understood. But at the same time, folks are looking at your revenue growth and, especially the EDA IP part. Maybe not just Synopsys, Inc., but also Cadence and some of your peers. This whole EDA/IP industry seems to have quite a bit of a deceleration, a growth deceleration over the last couple of years. So this is kinda in the opposite way of which have seen the very strong AI uplift. So kinda let us to kinda think maybe you what the problem you have is not exposure. Not that you don't have exposure to AI, but you have a little bit difficulty to monetize AI. And I think one of the things you mentioned about maybe opening up a third avenue of monetization for IP business basically, for getting into the royalty is the right direction. But we're still kinda curious. What do you do about that on the EDA side? It has been a segment that's kinda growing in the single-digit range for a couple of years. It looks like it's gonna be another single-digit growth year again. Thanks. Sassine Ghazi: Yeah. It's yeah. Charles, thank you for clarifying. Absolutely, as an industry, we can do better in capturing more value for the impact we're delivering to our customers. No question. Given the complexity of these chips, what these customers are building is not possible without Synopsys, Inc. and the industry to deliver to the complexity of what we're building. If you look at it from an EDA point of view, the hardware part of EDA is growing at a pace that, each year, we're saying we're breaking the prior record. And so customers are willing to pay in order to deal with that complexity. On the EDA software, there is a challenge in terms of the inflection point of monetization. From a Synopsys, Inc. perspective, every one of these advanced customers are looking for that joint solutions between ANSYS and Synopsys, Inc. that's an opportunity one plus one to be greater than two. As we move to a different workflow for agentic AI, that's another opportunity for the industry. To rethink how do we sell that solution. From an IP standpoint, the conversations are happening. And that's why when we talked about it ninety days ago, we were talking about it from a position of strength and an opportunity that those customers are expecting and wanting to engage differently. And we're having the right conversations right now to say we're happy to do it but we need a different monetization upside. For these engagements. So good observation, Charles, and I hope my, the way I'm describing where we've been, where we are, where we're going, it's giving you confidence and shedding some light to it. Charles Shi: Thanks, Sassine. Operator: And our final question today comes from Ruben Roy from Stifel. Ruben Roy: Thank you. Sassine, you spent a lot of time talking about China, but I do have one question. On sort of where you are with China revenue. It's still meaningful. Exit rate around 10% of overall revenue. And I'm wondering if you could talk about the mix there and if the headwinds that you're, you know, sort of seeing in the pragmatism is across, you know, the mix? Meaning, is it core EDA plus IP plus hardware and ANSYS, or, you know, are there specific areas that you're more concerned about, you know, as you think about, you know, this year or even longer term relative to China. And I guess I'm trying to get to is this a reasonable floor, you know, once you get past maybe, you know, some of the IP issues that you have there or, you know, are there other shoes to maybe drop, you know, in China as we think about the longer-term model? Thank you. Sassine Ghazi: Yeah. Thank you, Ruben. I wanna clarify, and I know Shelagh mentioned it in her prepared remarks, the Synopsys, Inc. Classic had a decline in China. The ANSYS portfolio performed fairly well in China. Because they sell to a very broad market that is not restricted. And we believe a lot of those customers will continue on seeing the value in the legacy ANSYS portfolio and that will continue on growing. On the classic Synopsys, Inc. side, what we're facing in China is primarily our inability to sell to the market that needs the most advanced solution. And you're familiar not only with entity list, but with technology restrictions. From a Synopsys, Inc. standpoint, where it impacts us the most is in IP, given the proportion of our business and our leadership in IP, not only in China broadly, but in China that has a fairly big impact on Synopsys, Inc. From EDA in general, as I answered it earlier, we're not losing share to our standard or the peers that you think about when we are losing share in China, are for customers our industry cannot sell to, and, therefore, there's an erosion that is happening on the EDA side on customers that we cannot deliver or support due to entity restriction or technology. So we believe we have derisked it. In our guide for '26. And, of course, when you pass '26 and assuming the environment is the same, meaning no additional restrictions, then the comps get easier. In terms of comparing, year over year. Operator: And everyone, that does conclude our question and answer session. I would like to hand the conference to Tushar Jain for any additional or closing remarks. Tushar Jain: Thank you all for joining the call. We look forward to talking to you during the quarter and meeting you at CES. Lisa, you can go and close us out. Thanks. Operator: Thank you. Thank you. And once again, everyone, that does conclude today's conference. Thank you all for your participation today. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Evertz Q2 of Fiscal 2026 Conference Call. [Operator Instructions] I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Thank you. Please go ahead. Brian Campbell: Thank you, Ina. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2026 second quarter ended October 31, 2025, with Doug Moore, Evertz' Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR and on the company's investor website. Doug and I will comment on the financial results and then open the call to your questions. Brian Campbell: Turning now to Evertz' results. I will begin by providing a few highlights, and then Doug and I will provide additional detail. First off, sales for the second quarter totaled $132.7 million, up 18.4% sequentially from the prior quarter and revenue in the U.S./Canada region was $98.5 million, up 24% sequentially. Reoccurring software, services and other software revenue totaled $60.7 million in the quarter, an increase of 17.6% sequentially from the prior quarter. Our sales base is well diversified with the top 10 customers accounting for approximately 53% of sales during the quarter with no single customer accounting for more than 16% of sales. In fact, we had 98 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $77.8 million or 58.6% compared to 59.3% in the second quarter of the prior year. Net earnings were $18.6 million, resulting in fully diluted earnings per share of $0.24 for the quarter. Investments in research and development totaled $36.6 million. Evertz' working capital was $205.7 million, including cash of $96.7 million as at October 31, 2025. Operational highlights for the quarter include Evertz' stellar presence at the International Broadcast Conference, where Evertz' innovative ENX converged media infrastructure platform was recognized with a TV Tech Best of Show Award and Evertz frame rate conversion platform, which is purpose-built for premium live sports and news production and global content delivery won a TVB Europe Best of Show Award. At the end of November, Evertz' purchase order backlog was more than $240 million and shipments during the month of November were $46 million. We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation; increasing global demand for high-quality video anywhere, anytime; the ongoing technical transition to IP, IT and cloud-based architectures; and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, Evertz IT and cloud solutions; our immersive 4K, 8K ultra-high definition solutions; our state-of-the-art DreamCatcher IP replay and live production with BRAVO Studio featuring the iconic Studer audio. And today, Evertz' Board of Directors declared a regular quarterly dividend of $0.205 per share payable on or about December 24. Furthermore, Evertz' Board of Directors also declared a special dividend of $1 per share, also payable on December 24. The special dividend reflects both the strong long-term operating performance of the company and its solid balance sheet, thereby enabling a distribution of cash over and above what is considered necessary to meet known commitments and maintain adequate reserves. I'll now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail. Doug Moore: Thank you, Brian. Looking at revenue. So revenue was $132.7 million in the second quarter of fiscal 2026, a 6% increase compared to $125.3 million in the second quarter of fiscal 2025. For the 6 months ending October 31, 2025, revenues were $244.9 million, up $8 million or 3% from the 6 months compared to the 6 months ending October 31, 2024. Quarterly hardware revenue increased slightly year-over-year from $70.5 million to $72 million, a 2% increase, while Software and Services revenue also increased from $54.8 million to $60.7 million or 11%. Revenue from Software and Services represented approximately 46% of total revenue in the quarter. Year-to-date, hardware revenue is up 5% to $132.5 million for the 6 months period ending October 31, while revenues from Software and Services were up slightly to $112.4 million from $110.7 million. Doug Moore: Looking at regional revenues. Quarterly revenues in the U.S./Canadian region were $98.5 million compared to $94.8 million in the prior year, while quarterly revenues in the international region were $34.2 million compared to $30.4 million in the prior year. The International segment represented 26% of the total sales in the quarter compared to 24% in the same period last year. For the 6 months ended October 31, international revenue was $66.9 million compared to $68.1 million in the same period last year, a decline of 2%. And then for the 6-month period ending international sales represented 27% of total sales compared to 29% in the same period last year. Gross margins for the quarter were 58.6% compared to 59.3% in the prior year. The gross margin is down sequentially for the past 2 quarters, driven by varied product mix delivered in the quarter, but overall was within our 56% to 60% target range. For the 6 months ending October 31, the gross margin was 59.9% at the very high end of that same target range. Doug Moore: Turning to selling and administrative expenses. S&A was $19.1 million in the second quarter, an increase of $0.7 million or 4% from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 14.4% compared to 14.7% for the same period last year. Sequentially, S&A is up approximately -- sorry, sequentially $0.5 million from Q1. That includes a $0.8 million increase in trade shows and travel costs quarter-over-quarter, the largest driver of which was our attendance at the IBC show. For the 6 months ending October 31, S&A expenses were $37.7 million or 15.4% of sales compared to $36 million or 15.2% of sales for the same period last year. Doug Moore: Research and development expenses were $36.6 million for the second quarter, which represents a $0.3 million increase from the same period last year. As a percentage of revenue, R&D expenses were 27.6% compared to 29% in the prior year. Sequentially, R&D expenses were declined $0.4 million from the first quarter, July 31. The decline was primarily due to lower salary and benefit costs, including the impact of less co-ops that we have in the Q1 during the summer. For the 6 months ending October 31, R&D expenses were $73.6 million compared to $73.7 million for the same period last year. Doug Moore: Investment tax credits for the quarter were $4.4 million compared to credits of $3.6 million in the prior year second quarter. And then FX for the second quarter resulted in a gain of $0.8 million. It's pretty consistent with the foreign exchange gain of $0.8 million in the second quarter last year. While for the 6 months ending October 31, foreign exchange resulted in a gain of $1.5 million compared to a gain of $0.8 million in the same period last year. And that foreign exchange gain was predominantly driven by a weaker Canadian dollar compared to the U.S. dollar, which closed at approximately [ $1.4 million ] as at October 31, 2025. Doug Moore: Now looking at the liquidity of the company. Cash as at October 31, 2025, was $96.7 million. That's a decline of cash compared to cash of $111.7 million as at April 30. And working capital was $205.7 million as at October 31, 2025, compared to $206.9 million at the end of April 30, 2025. Doug Moore: Now looking at cash flows for the quarter. The company used cash from operations of $5.4 million, which is net of a $26.3 million change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded from the calculation, the company would have generated $25.2 million in cash from operations during the quarter. The biggest use of cash and working capital during the quarter relates to a $19.9 million decrease in payables that was driven by the disbursement of bonuses in the quarter and the net release of $8.1 million in deferred revenue in the quarter. The company used cash of $6.4 million for investing activities, which was principally driven by the acquisition of capital assets and those acquisition of capital assets included the acquisition of land and building that we were renting outside of Pittsburgh, Pennsylvania. That's the facility where we're increasing our manufacturing capabilities. The company used cash and financing activities of $17 million, which was principally driven by dividends paid of $15.1 million and lease payments of $1.1 million. Subsequent to the past quarter end, so just recently, we also renewed our NCIB, which will have an effective date of December 11. Doug Moore: Finally, looking at our share capital position as at October 31, 2025. Shares outstanding were approximately 75.5 million and options and share-based RSUs outstanding were approximately $2 million. Weighted average shares outstanding were 75.5 million and weighted average fully diluted shares was 76.6 million as of October 31. That concludes the review of our financial results and position for the second quarter. Finally, I would like to remind you that some of the statements presented today are forward-looking, subject to a number of risks and uncertainties, and we refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Brian? Brian Campbell: Thank you, Doug. Ina, we're now ready to open the call to questions. Operator: [Operator Instructions] And your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Thanos Moschopoulos: On the gross margin, clearly, it was within your targeted range, but a little lighter than the last 2 quarters. Is that just typical volatility in product mix? Or is there anything else to call out that maybe some impact from the initial ramp of your U.S. facilities or something like that? Doug Moore: No, it's really a product mix. There's not really a specific item to call out that materially impact the margin. I think that's part of the reason we are -- we have that volatility. We expect that volatility, but that's part of the reasons why we're hesitant to change our target range from that 56% to 60%. And we're still at the strong end of that. But yes, it's really just the volatility driven by product mix that we happen to deliver in the quarter. Thanos Moschopoulos: R&D spend has been relatively stable in recent quarters, which I mean, from my perspective, is a healthy dynamic. Is that reflective of maybe greater OpEx discipline on your part? Is it reflective maybe of just how you feel about the strength of the competitive position and thus not needing to ramp up that investment relative to competitively? Or what's the dynamic there? Doug Moore: No. I think there was a significant ramp-up a couple of years ago that were partially due to inflationary factors with, quite frankly, hiring and retaining engineers. Some of that broader inflationary drivers have subsided to some levels anyway. But no, R&D is still a major commitment of Evertz to as an investment. So it's really the salaries -- the inflationary factors on salaries kind of going back to more historical norms as opposed to we dealt with a couple of years ago. Thanos Moschopoulos: Great. And then, Brian, just in terms of the overall environment, what you're hearing from your customers coming out of IPC, is it sort of status quo? Or is there anything else? Any changes that you'd highlight in recent weeks or months regarding customer priorities or propensity spend. Brian Campbell: We continue to have a very robust backlog, and you can see from the month shipments in November, along with a very strong quarter. We're firing on most of the cylinders. So we had increases in the North American and international regions in sales. So we have been seeing continued adoption of Evertz products from our customers. They have projects that they want to execute on, and we have the products to be able to help them with those needs. Operator: And your next question comes from the line of Robert Young from Canaccord Genuity. Robert Young: Maybe just a little more around the decision to issue the special dividend. I mean, you've renewed the buyback. You increased the quarterly dividend and you're issuing a special dividend. So I was wondering if you could give us some sense of the decision-making behind that and the timing. And maybe if you could take it one step further just to give us a sense of where you see the balance sheet in the near term after that and what it means for your confidence in the near term? Brian Campbell: So the Board does make a decision regarding the dividends and the special dividends. The timing is consistent with prior special dividends that we've had. The balance sheet still remains pristine with a cash position and no debt. And we are confident, as you can tell, with the business prospects we've got going forward. We continue to invest very heavily in R&D and have a very robust product portfolio. So we're in very good shape as an organization. And with respect to M&A activities going forward, we still have full flexibility. Robert Young: Okay. And then maybe I just take one of Thanos' questions a little further, the gross margin. It is notable that the recurring software is up quarter-over-quarter, but the gross margins are down. And although it is at the higher end of the range, it is at the low end of where we've seen it over the last several quarters. And so I'm just trying to understand the dynamic there. Is that the international revenue taking higher? I'm just trying to understand what is that's driving that because it doesn't make sense to me. Doug Moore: Well, I mean, I think there's always going to be volatility. So international revenue, you're correct, and generally has a little bit lower margin. But it really is -- it's not as simple as saying U.S. region sales are up, therefore, margins up or Software and Services up, therefore, it's up. It really is driven by a general product mix. And we've had volatility in the past through -- although it slightly above that target range, I think there's not really one item to point to. Brian Campbell: I guess another point to make is, in the quarter, we did have some pretty significant customer concentration. So often very significant customers may get higher discounting. Robert Young: Okay. And then we're just around the corner from the renegotiation of [ CUSMA ]. And I know that you guys as a management team have been trying to prepare operations in the U.S. ahead of that. Could you give us a summary of where you are on that and how comfortable you are if [ CUSMA ] ends without a replacement deal? Doug Moore: Yes. I mean -- so currently, from -- as of today perspective, so again, the vast majority of what we're selling is USMCA compliant and therefore, not being impacted by the tariffs when we sell through to the United States. We do continue to build up manufacturing capabilities outside Pittsburgh, Pennsylvania. That's the acquisition of the building and land there to exert a bit more control on as we build out that facility. It is a work in progress, but we continue to progress. Robert Young: If tariffs suddenly apply to your product, if a renegotiation isn't successful, what does that look like for Evertz, I guess? And just at a high level, if you can just give us a sense of what your planning looks like to deal with something like that? Doug Moore: There would be certain products that we would increase manufacturing out of that facility. We would not be able to push every single product there at this point in time. But certainly, we would ship some builds there as opposed to here. There as being the United States as opposed to Canada. But we continue to build on the amount of products we can build there. Robert Young: Okay. Would you believe that the gross margin target range would still be something you could maintain? Brian Campbell: Yes. Robert Young: Okay. And then last question for me, just on the portion of the backlog that you expect to convert in the next 12 months, that would be helpful. I'll pass it on. Doug Moore: So I guess it would be about 40% is more than 12 months out, so that's 60% in the next 12 months. Operator: [Operator Instructions] Your next question comes from the line of Paul Treiber from RBC Capital Markets. Paul Treiber: Just a question on the recurring software revenue in the quarter. It was quite strong. You mentioned a number of different product areas that you did see strengthen. But specifically, could you speak to like was there any outliers that drove the momentum in the quarter? And then do you see -- looking forward, do you see it sustained? Or should we expect it to be sustained in the $60 million-plus range going forward? Doug Moore: So there is some lumpiness to it because it's recurring software and other Software and Services as well. So there are times when you could have software-based projects that have acceptance net, so where you would have a bit of a spike, I guess, you'd say. If you look at the past 8 quarters, there's a general range that kind of has been falling through, but there's definitely some peaks, I'd say, within that quarter-to-quarter. Brian Campbell: So looking at it over the trailing 12 months, if you do that on a rolling basis, we're at $224 million of recurring Software and Services and software. And it's now that's 44% of a trailing 12-month basis. So we're in and around that 40% to 44% range. And we do suggest that you look at it on a trailing 12-month basis. Paul Treiber: Okay. That's helpful. Secondly, just can you remind us or outline the company's traction in the defense market? And specifically, where I'm going is the Canadian Federal Government announced a number of initiatives to boost defense spending and make other investments. Do you see opportunities for Evertz within the Canadian Department of Defense? Doug Moore: Yes, we do. And we're actively pursuing them. We have historically had good success with U.S. and at times NATO partners. So that's not the business that we've had over the past years. And we do have key elements of our technologies that are common criteria certified and NIAP listed, allowing us to sell into those products into government facilities. So that is definitely a key focus of ours, and we have been spending an increasing amount of time with the Canadian Government as they've increased the spending initiative and dialogue with specifically Canadian content. We fall front and square as a dual-use innovation leader and are exactly the type of company that the Canadian Government and Defense should support. Operator: There are no further questions at this time. I will now hand the call back to Mr. Campbell for any closing remarks. Brian Campbell: Thank you, Ina. I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q2 of fiscal 2026, which saw sales of $132.7 million, including $60.7 million in Software and Services revenue, solid gross margins of 58.6% in the quarter, which together with Evertz' disciplined expense management, yielded quarterly earnings per share of $0.24. We are entering the second half of Evertz' fiscal 2026 with significant momentum fueled by over $46 million of shipments in November, with a combined purchase order backlog plus shipments totaling in excess of $286 million by the continued adoption and successful large-scale deployments of Evertz' IP-based software-defined video networking and cloud solutions with the largest new media and broadcast players in the industry and with government, defense and enterprise and by the continuing success of DreamCatcher Bravo, our state-of-the-art IP-based replay and production suite. With Evertz' significant investments in software-defined IP, IT and cloud technologies, the over 600 industry-leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and media technology sector. Thank you, and good night. Operator: And this concludes today's call. Thank you for participating. You may all disconnect
Operator: Good afternoon, ladies and gentlemen, and welcome to the Evertz Q2 of Fiscal 2026 Conference Call. [Operator Instructions] I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Thank you. Please go ahead. Brian Campbell: Thank you, Ina. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2026 second quarter ended October 31, 2025, with Doug Moore, Evertz' Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR and on the company's investor website. Doug and I will comment on the financial results and then open the call to your questions. Brian Campbell: Turning now to Evertz' results. I will begin by providing a few highlights, and then Doug and I will provide additional detail. First off, sales for the second quarter totaled $132.7 million, up 18.4% sequentially from the prior quarter and revenue in the U.S./Canada region was $98.5 million, up 24% sequentially. Reoccurring software, services and other software revenue totaled $60.7 million in the quarter, an increase of 17.6% sequentially from the prior quarter. Our sales base is well diversified with the top 10 customers accounting for approximately 53% of sales during the quarter with no single customer accounting for more than 16% of sales. In fact, we had 98 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $77.8 million or 58.6% compared to 59.3% in the second quarter of the prior year. Net earnings were $18.6 million, resulting in fully diluted earnings per share of $0.24 for the quarter. Investments in research and development totaled $36.6 million. Evertz' working capital was $205.7 million, including cash of $96.7 million as at October 31, 2025. Operational highlights for the quarter include Evertz' stellar presence at the International Broadcast Conference, where Evertz' innovative ENX converged media infrastructure platform was recognized with a TV Tech Best of Show Award and Evertz frame rate conversion platform, which is purpose-built for premium live sports and news production and global content delivery won a TVB Europe Best of Show Award. At the end of November, Evertz' purchase order backlog was more than $240 million and shipments during the month of November were $46 million. We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation; increasing global demand for high-quality video anywhere, anytime; the ongoing technical transition to IP, IT and cloud-based architectures; and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, Evertz IT and cloud solutions; our immersive 4K, 8K ultra-high definition solutions; our state-of-the-art DreamCatcher IP replay and live production with BRAVO Studio featuring the iconic Studer audio. And today, Evertz' Board of Directors declared a regular quarterly dividend of $0.205 per share payable on or about December 24. Furthermore, Evertz' Board of Directors also declared a special dividend of $1 per share, also payable on December 24. The special dividend reflects both the strong long-term operating performance of the company and its solid balance sheet, thereby enabling a distribution of cash over and above what is considered necessary to meet known commitments and maintain adequate reserves. I'll now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail. Doug Moore: Thank you, Brian. Looking at revenue. So revenue was $132.7 million in the second quarter of fiscal 2026, a 6% increase compared to $125.3 million in the second quarter of fiscal 2025. For the 6 months ending October 31, 2025, revenues were $244.9 million, up $8 million or 3% from the 6 months compared to the 6 months ending October 31, 2024. Quarterly hardware revenue increased slightly year-over-year from $70.5 million to $72 million, a 2% increase, while Software and Services revenue also increased from $54.8 million to $60.7 million or 11%. Revenue from Software and Services represented approximately 46% of total revenue in the quarter. Year-to-date, hardware revenue is up 5% to $132.5 million for the 6 months period ending October 31, while revenues from Software and Services were up slightly to $112.4 million from $110.7 million. Doug Moore: Looking at regional revenues. Quarterly revenues in the U.S./Canadian region were $98.5 million compared to $94.8 million in the prior year, while quarterly revenues in the international region were $34.2 million compared to $30.4 million in the prior year. The International segment represented 26% of the total sales in the quarter compared to 24% in the same period last year. For the 6 months ended October 31, international revenue was $66.9 million compared to $68.1 million in the same period last year, a decline of 2%. And then for the 6-month period ending international sales represented 27% of total sales compared to 29% in the same period last year. Gross margins for the quarter were 58.6% compared to 59.3% in the prior year. The gross margin is down sequentially for the past 2 quarters, driven by varied product mix delivered in the quarter, but overall was within our 56% to 60% target range. For the 6 months ending October 31, the gross margin was 59.9% at the very high end of that same target range. Doug Moore: Turning to selling and administrative expenses. S&A was $19.1 million in the second quarter, an increase of $0.7 million or 4% from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 14.4% compared to 14.7% for the same period last year. Sequentially, S&A is up approximately -- sorry, sequentially $0.5 million from Q1. That includes a $0.8 million increase in trade shows and travel costs quarter-over-quarter, the largest driver of which was our attendance at the IBC show. For the 6 months ending October 31, S&A expenses were $37.7 million or 15.4% of sales compared to $36 million or 15.2% of sales for the same period last year. Doug Moore: Research and development expenses were $36.6 million for the second quarter, which represents a $0.3 million increase from the same period last year. As a percentage of revenue, R&D expenses were 27.6% compared to 29% in the prior year. Sequentially, R&D expenses were declined $0.4 million from the first quarter, July 31. The decline was primarily due to lower salary and benefit costs, including the impact of less co-ops that we have in the Q1 during the summer. For the 6 months ending October 31, R&D expenses were $73.6 million compared to $73.7 million for the same period last year. Doug Moore: Investment tax credits for the quarter were $4.4 million compared to credits of $3.6 million in the prior year second quarter. And then FX for the second quarter resulted in a gain of $0.8 million. It's pretty consistent with the foreign exchange gain of $0.8 million in the second quarter last year. While for the 6 months ending October 31, foreign exchange resulted in a gain of $1.5 million compared to a gain of $0.8 million in the same period last year. And that foreign exchange gain was predominantly driven by a weaker Canadian dollar compared to the U.S. dollar, which closed at approximately [ $1.4 million ] as at October 31, 2025. Doug Moore: Now looking at the liquidity of the company. Cash as at October 31, 2025, was $96.7 million. That's a decline of cash compared to cash of $111.7 million as at April 30. And working capital was $205.7 million as at October 31, 2025, compared to $206.9 million at the end of April 30, 2025. Doug Moore: Now looking at cash flows for the quarter. The company used cash from operations of $5.4 million, which is net of a $26.3 million change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded from the calculation, the company would have generated $25.2 million in cash from operations during the quarter. The biggest use of cash and working capital during the quarter relates to a $19.9 million decrease in payables that was driven by the disbursement of bonuses in the quarter and the net release of $8.1 million in deferred revenue in the quarter. The company used cash of $6.4 million for investing activities, which was principally driven by the acquisition of capital assets and those acquisition of capital assets included the acquisition of land and building that we were renting outside of Pittsburgh, Pennsylvania. That's the facility where we're increasing our manufacturing capabilities. The company used cash and financing activities of $17 million, which was principally driven by dividends paid of $15.1 million and lease payments of $1.1 million. Subsequent to the past quarter end, so just recently, we also renewed our NCIB, which will have an effective date of December 11. Doug Moore: Finally, looking at our share capital position as at October 31, 2025. Shares outstanding were approximately 75.5 million and options and share-based RSUs outstanding were approximately $2 million. Weighted average shares outstanding were 75.5 million and weighted average fully diluted shares was 76.6 million as of October 31. That concludes the review of our financial results and position for the second quarter. Finally, I would like to remind you that some of the statements presented today are forward-looking, subject to a number of risks and uncertainties, and we refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Brian? Brian Campbell: Thank you, Doug. Ina, we're now ready to open the call to questions. Operator: [Operator Instructions] And your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Thanos Moschopoulos: On the gross margin, clearly, it was within your targeted range, but a little lighter than the last 2 quarters. Is that just typical volatility in product mix? Or is there anything else to call out that maybe some impact from the initial ramp of your U.S. facilities or something like that? Doug Moore: No, it's really a product mix. There's not really a specific item to call out that materially impact the margin. I think that's part of the reason we are -- we have that volatility. We expect that volatility, but that's part of the reasons why we're hesitant to change our target range from that 56% to 60%. And we're still at the strong end of that. But yes, it's really just the volatility driven by product mix that we happen to deliver in the quarter. Thanos Moschopoulos: R&D spend has been relatively stable in recent quarters, which I mean, from my perspective, is a healthy dynamic. Is that reflective of maybe greater OpEx discipline on your part? Is it reflective maybe of just how you feel about the strength of the competitive position and thus not needing to ramp up that investment relative to competitively? Or what's the dynamic there? Doug Moore: No. I think there was a significant ramp-up a couple of years ago that were partially due to inflationary factors with, quite frankly, hiring and retaining engineers. Some of that broader inflationary drivers have subsided to some levels anyway. But no, R&D is still a major commitment of Evertz to as an investment. So it's really the salaries -- the inflationary factors on salaries kind of going back to more historical norms as opposed to we dealt with a couple of years ago. Thanos Moschopoulos: Great. And then, Brian, just in terms of the overall environment, what you're hearing from your customers coming out of IPC, is it sort of status quo? Or is there anything else? Any changes that you'd highlight in recent weeks or months regarding customer priorities or propensity spend. Brian Campbell: We continue to have a very robust backlog, and you can see from the month shipments in November, along with a very strong quarter. We're firing on most of the cylinders. So we had increases in the North American and international regions in sales. So we have been seeing continued adoption of Evertz products from our customers. They have projects that they want to execute on, and we have the products to be able to help them with those needs. Operator: And your next question comes from the line of Robert Young from Canaccord Genuity. Robert Young: Maybe just a little more around the decision to issue the special dividend. I mean, you've renewed the buyback. You increased the quarterly dividend and you're issuing a special dividend. So I was wondering if you could give us some sense of the decision-making behind that and the timing. And maybe if you could take it one step further just to give us a sense of where you see the balance sheet in the near term after that and what it means for your confidence in the near term? Brian Campbell: So the Board does make a decision regarding the dividends and the special dividends. The timing is consistent with prior special dividends that we've had. The balance sheet still remains pristine with a cash position and no debt. And we are confident, as you can tell, with the business prospects we've got going forward. We continue to invest very heavily in R&D and have a very robust product portfolio. So we're in very good shape as an organization. And with respect to M&A activities going forward, we still have full flexibility. Robert Young: Okay. And then maybe I just take one of Thanos' questions a little further, the gross margin. It is notable that the recurring software is up quarter-over-quarter, but the gross margins are down. And although it is at the higher end of the range, it is at the low end of where we've seen it over the last several quarters. And so I'm just trying to understand the dynamic there. Is that the international revenue taking higher? I'm just trying to understand what is that's driving that because it doesn't make sense to me. Doug Moore: Well, I mean, I think there's always going to be volatility. So international revenue, you're correct, and generally has a little bit lower margin. But it really is -- it's not as simple as saying U.S. region sales are up, therefore, margins up or Software and Services up, therefore, it's up. It really is driven by a general product mix. And we've had volatility in the past through -- although it slightly above that target range, I think there's not really one item to point to. Brian Campbell: I guess another point to make is, in the quarter, we did have some pretty significant customer concentration. So often very significant customers may get higher discounting. Robert Young: Okay. And then we're just around the corner from the renegotiation of [ CUSMA ]. And I know that you guys as a management team have been trying to prepare operations in the U.S. ahead of that. Could you give us a summary of where you are on that and how comfortable you are if [ CUSMA ] ends without a replacement deal? Doug Moore: Yes. I mean -- so currently, from -- as of today perspective, so again, the vast majority of what we're selling is USMCA compliant and therefore, not being impacted by the tariffs when we sell through to the United States. We do continue to build up manufacturing capabilities outside Pittsburgh, Pennsylvania. That's the acquisition of the building and land there to exert a bit more control on as we build out that facility. It is a work in progress, but we continue to progress. Robert Young: If tariffs suddenly apply to your product, if a renegotiation isn't successful, what does that look like for Evertz, I guess? And just at a high level, if you can just give us a sense of what your planning looks like to deal with something like that? Doug Moore: There would be certain products that we would increase manufacturing out of that facility. We would not be able to push every single product there at this point in time. But certainly, we would ship some builds there as opposed to here. There as being the United States as opposed to Canada. But we continue to build on the amount of products we can build there. Robert Young: Okay. Would you believe that the gross margin target range would still be something you could maintain? Brian Campbell: Yes. Robert Young: Okay. And then last question for me, just on the portion of the backlog that you expect to convert in the next 12 months, that would be helpful. I'll pass it on. Doug Moore: So I guess it would be about 40% is more than 12 months out, so that's 60% in the next 12 months. Operator: [Operator Instructions] Your next question comes from the line of Paul Treiber from RBC Capital Markets. Paul Treiber: Just a question on the recurring software revenue in the quarter. It was quite strong. You mentioned a number of different product areas that you did see strengthen. But specifically, could you speak to like was there any outliers that drove the momentum in the quarter? And then do you see -- looking forward, do you see it sustained? Or should we expect it to be sustained in the $60 million-plus range going forward? Doug Moore: So there is some lumpiness to it because it's recurring software and other Software and Services as well. So there are times when you could have software-based projects that have acceptance net, so where you would have a bit of a spike, I guess, you'd say. If you look at the past 8 quarters, there's a general range that kind of has been falling through, but there's definitely some peaks, I'd say, within that quarter-to-quarter. Brian Campbell: So looking at it over the trailing 12 months, if you do that on a rolling basis, we're at $224 million of recurring Software and Services and software. And it's now that's 44% of a trailing 12-month basis. So we're in and around that 40% to 44% range. And we do suggest that you look at it on a trailing 12-month basis. Paul Treiber: Okay. That's helpful. Secondly, just can you remind us or outline the company's traction in the defense market? And specifically, where I'm going is the Canadian Federal Government announced a number of initiatives to boost defense spending and make other investments. Do you see opportunities for Evertz within the Canadian Department of Defense? Doug Moore: Yes, we do. And we're actively pursuing them. We have historically had good success with U.S. and at times NATO partners. So that's not the business that we've had over the past years. And we do have key elements of our technologies that are common criteria certified and NIAP listed, allowing us to sell into those products into government facilities. So that is definitely a key focus of ours, and we have been spending an increasing amount of time with the Canadian Government as they've increased the spending initiative and dialogue with specifically Canadian content. We fall front and square as a dual-use innovation leader and are exactly the type of company that the Canadian Government and Defense should support. Operator: There are no further questions at this time. I will now hand the call back to Mr. Campbell for any closing remarks. Brian Campbell: Thank you, Ina. I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q2 of fiscal 2026, which saw sales of $132.7 million, including $60.7 million in Software and Services revenue, solid gross margins of 58.6% in the quarter, which together with Evertz' disciplined expense management, yielded quarterly earnings per share of $0.24. We are entering the second half of Evertz' fiscal 2026 with significant momentum fueled by over $46 million of shipments in November, with a combined purchase order backlog plus shipments totaling in excess of $286 million by the continued adoption and successful large-scale deployments of Evertz' IP-based software-defined video networking and cloud solutions with the largest new media and broadcast players in the industry and with government, defense and enterprise and by the continuing success of DreamCatcher Bravo, our state-of-the-art IP-based replay and production suite. With Evertz' significant investments in software-defined IP, IT and cloud technologies, the over 600 industry-leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and media technology sector. Thank you, and good night. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Good day, ladies and gentlemen, and welcome to Major Drilling's conference call for the second quarter of fiscal 2026. With me on the call today are Denis Larocque, President and CEO; and Ian Ross, CFO. Our results were released last night can be found on our website at www.majordrilling.com. We also invite you to visit our website for further information. Before we get started, we'd like to caution you that during this conference call, we will be making forward-looking statements about future events or the future financial performance of the company. These statements are forward-looking in nature, and actual events or results may differ materially from those currently anticipated in such statements. I'll now turn the presentation over to Denis Larocque, President and CEO. Denis Larocque: Thanks, Ryan, and good morning, everyone, and thank you for joining us today to discuss our second quarter results. I'd like to begin by highlighting what was a record-setting quarter, which resulted in quarterly revenue increasing by 29% to $244 million when compared to the same period last year. This represents the highest quarterly revenue generated in the company's 45-year history and a level that we hope to build upon. We are continuing our proactive efforts by leveraging our strong balance sheet to ensure that rates and inventory are ready for rapid deployment, which will position us to take on expected increased demand from mining customers in anticipation of what we believe will be a busier calendar 2026. Denis Larocque: In the quarter, our Canadian operations saw a strong rebound in activity levels from -- with a 63% year-over-year increase in revenue. As strategic market positioning, drove results despite the continued competitive environment. While the majority of incremental demand continues to come from senior mining companies, the number of discussions with juniors has also begun to increase following the number of financing, which we're completing over the last few months. In South America, we also saw further growth in the Peruvian market with Explomin's revenue run rate continuing to grow following the closing of the acquisition in November 24. Additionally, slowdowns in Argentina and Chile due to challenging economic conditions and customer delays were more than offset by growth in Brazil and Guiana Shield. Strength throughout the North and South American markets was partially offset by the Australasian and African region, which was impacted by the company's largest customer in Indonesia, experiencing an operational incidents that resulted in the suspension of all mine site activity for the majority of the quarter. While some activity now gradually beginning to resume, drilling operations are expected to return to full capacity in our fourth fiscal quarter. I'll discuss the rest of our outlook in more detail once Ian has taken us through the financials. Ian? Ian Ross: Thanks, Denis. Revenue for the second quarter was $244.1 million, up 7.8% from the prior quarter and 29% from $189.3 million recorded over the same period last year. Revenue growth was driven by operations in North and South America, particularly Canada and Peru, which was partially offset by the Australasian and African region, largely due to a pause in activity in Indonesia as previously discussed. Favorable foreign exchange translation impact on revenue when compared to the effective rates for the same period last year was approximately $2.7 million, while the impact on net earnings was minimal as expenditures in foreign jurisdictions tend to be in the same currency as revenue. The overall adjusted gross margin percentage, excluding depreciation, was 26% for the quarter compared to 30.5% in the same period last year. Decreased margins was attributable to the continued competitive pricing environment in North America as well as ongoing training and maintenance programs at various branches around the world to ensure the company is well positioned for an increase in demand in calendar '26. Additionally, Explomin's margin profile also continues to have a moderate impact given its focus on longer-term contracts and a higher proportion of underground drilling. While these programs typically result in lower margins, they provide increased revenue diversification and stability. Ian Ross: G&A costs increased by $3.6 million to a total of $21.7 million compared to the same quarter last year due to the addition of the Explomin's operations. Company generated EBITDA of $37.7 million in the quarter compared to $38.7 million in the prior year period with net earnings of $13.9 million or $0.17 per share compared to net earnings of $18.2 million or $0.22 per share from the prior year period. Given prior investments in the fleet, CapEx in the quarter totaled $11.8 million compared to $20.1 million in the same period last year. With the addition of 2 new drill rigs and support equipment, while 4 older, less efficient rigs were disposed of, bringing the total rig count at quarter end to 707. The company increased its cash position by over $17.6 million, ending the quarter with $14.3 million in net cash, while total available liquidity grew to over $149 million. While the company remains focused on balance sheet strength and being well positioned to take advantage of additional growth opportunities, it also continues to evaluate options to drive shareholder returns. So that effect during the quarter, the company announced a normal course issuer bid, whereby 5% of the issued and outstanding shares of Major Drilling may be repurchased over a 12-month period beginning October 21. The company intends to be opportunistic in the use of its NCIB, taking advantage of any potential share price weakness resulting in a valuation that we feel do not accurately reflect our strong financial position and underlying fundamentals. Ian Ross: The breakdown of our fleet and utilization in the quarter is as follows: 310 specialized drills at 47% utilization, 160 conventional drills at 54% utilization, 237 underground drills at 54% utilization for a total of 707 drills and 51% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Rather, it is work that requires to meet the rigorous standards of our customers in terms of technical capabilities, operational and safety standards and other related factors. These standards are becoming increasingly important to our customers. In the second quarter, specialized work accounted for 60% of our total revenue. We continue to see high levels of demand for our specialized services and expect this trend to continue as deposits become increasingly more challenging to find with discoveries continuing to be made in remote locations. Conventional drilling, which is mostly driven by juniors, increased slightly to 16% of revenue for the quarter, while underground drilling contributed 24% of total revenue, aided by the contribution of [ Explomin ]. We continue to see the bulk of our revenue driven by senior intermediates, representing 92% of revenue this quarter as they continue their elevated efforts to address depleting reserves. While junior financing has begun to increase, there's usually a 6-month lag between an increase in financing activity and increased activity levels in the field. As a result, juniors continue to represent approximately 8% of our revenue in the second quarter. In terms of commodities, gold represented 39% of revenue in the second quarter, while copper accounted for 31% of revenue, driven primarily by strength in the South and Central American region. Iron ore continues to make a meaningful contribution at 10%, aided by our Australian operations and demonstrating the diversity in the commodities for which we drill for around the world. Also of note in the second quarter was silver, which represented 6% of revenue, driven by record high silver prices. With that overview of our financial results, I'll now turn the presentation back to Denis to discuss the outlook. Denis Larocque: Thanks, Ian. As we head into our seasonally weaker fiscal third quarter, we expect to see the usual pause in activity as programs shut down over the holiday period. Also, as Ian mentioned, we continue to move through training and maintenance programs in order to ensure that we're well prepared for what we expect to be a busier calendar year. These preparation initiatives are expected to have a slight impact on third quarter margins. While challenging to forecast, numerous data points continue to influence our positive outlook for calendar 2026. As seniors move through the budgeting period, the gold price continues to trade near record highs, remaining above $4,200 an ounce level. This represents an increase of over $1,600 an ounce when compared to the same time last year when seniors were compiling their budgets. Higher gold prices have led to substantially higher levels of free cash flow generation and stronger balance sheet for senior mining companies as they assess depleting reserves following a long period of subdued exploration. Also, we've seen that the current gold price environment has led to a sharp increase in the number and size of junior financings over the last few months. Copper prices have also more than doubled over the last 2 years, recently reaching an all-time high, while the world continues to working towards increased electrification and decarbonization, both of which are expected to require enormous amounts of copper. Recent supply disruption are only expected to further exacerbate the projected supply deficit. Lastly, critical minerals continue to move increasingly into the spotlight as countries around the world look to secure and increase supply of various strategic commodities. With substantial investments having been made in our fleet and inventory through the most recent downturn, the company remains very well positioned to take advantage of rapidly growing demand for drilling services driven by these various factors. While the shortage of experienced drill crews is expected to put temporary pressure on labor costs and productivity, particularly in our busiest markets, we expect wider industry demand for drilling services to drive pricing improvements and expedite margin recovery over a longer term. It's crucial that we continue to aggressively and successfully invest in the recruitment and training of new drillers to ensure that major drilling remains both the operator and employer of choice in the industry. Finally, I know it's a bit early, but I'd like to wish happy holidays to our more than 6,000 employees around the world, and thank you for your amazing dedication and hard work. I'm always amazed by the passion and commitment of our crews and staff to safety and getting the job done. I hope you each get a chance to rest up as it should be a busy year ahead. With that, we can open the call to questions. Operator? Operator: [Operator Instructions] And our first question comes from Donangelo Volpe with Beacon Securities. Donangelo Volpe: Congratulations on the results, strong print. I just wanted to highlight the Canadian revenues. I think they were up about 63% year-over-year. Majority of the peers reflecting year-over-year declines in Canada through the July through September period. Just wondering if momentum kind of accelerated throughout the quarter and you guys finished with a strong October? Or was it kind of a function of pricing dynamics that led to the strong year-over-year improvement? Denis Larocque: Yes. It was pretty much throughout the quarter and driven by pricing dynamics. As I said, we had strategic market initiatives that we put in place to gain market share and obviously work. And basically, the idea is to be positioned on key projects going forward as we see -- as we said, as we see good activity coming up in the future. Donangelo Volpe: And then just pivoting over to kind of the junior financings. I usually look at the TSX. So October was a record-setting month in terms of financings. It's now up 74% year-over-year on a year-to-date basis and the highest level we've seen in the last decade. So I'm just wondering how you view the pipeline for juniors heading into calendar 2026 on the back of these financings. And if you're starting to see any improvements in activity levels now that we're kind of, let's call it, the halfway point through December? Denis Larocque: Yes. The level of discussion has certainly increased. It's still early because as we said, there's always a lag of like 6 months, sometimes it could be a bit longer or it could be shorter, but usually, on average, it takes 6 months between the time that money is raised and the time it gets deployed with all the logistics and everything. But we've certainly seen an increase in discussions and phone calls and things like that. So we certainly see activity bubbling right now. Donangelo Volpe: Okay. Good to hear. And then final question for me and then I'll pass the line. Just I understand that direct costs are increasing in preparation for elevated activity levels for a busy calendar 2026. We've kind of seen an uptick in salaries and benefits as well as materials and consumables. Just wondering if we're approaching a level that you're starting to feel prepared for the upcoming bump in activity? Or do we still have a little bit of room to grow here? Denis Larocque: Well, the good quarter is always a time where there's a lot of activity that happens that way, right? We bring in, first of all, the rigs that have been busy during the year, we bring them in the shop to do the maintenance -- the yearly maintenance on them and everything. But at the same time, that's the time where as we forecast the level of activity, that's where we bring in more rigs that have been parked just to give them a bit of a cleanup or get them ready. And so that's where you have a little bit of extra cost. So every time that we have a pickup in activity coming, we usually see a bit of a pickup in the third quarter from these type of costs. But the good news is that the investments we've made in our fleet over the last few years, while we were in the downturn and keeping our fleet fresh and everything, that's where it's going to pay off because we can pull rigs out and have rigs ready very quickly and not have to rebuild or replace all kinds of parts that have been stripped off of them or things like that. We -- so the cost is going to be very reasonable, but it's just when you've got to an uptick of activity that happens, there's a lot of that happening and a lot of upfront hiring and mobilization and things like that. So upfront, there's always upfront cost and then things take off after that. Operator: Our next question comes from James Vail with Arcadia Advisors. James Vail: I've got 2 nitpick questions. In the income statement, you highlighted some extra income that could come in over the course of the year. One was foreign exchange, and I forget what the other one was. But how was that -- how will that play into future earnings? Or is that just an accounting issue? Denis Larocque: Sorry James, you're really bold, was coming in -- you said there's a line on we didn't get... James Vail: It's -- you showed net income and then you showed extra income, which was foreign exchange gains of like $7 million and then there was another -- the total of that account came to CAD 10 million, I guess. I mean how does that come into earnings? Is that cash? Or is it just accounting? Denis Larocque: Are you looking at like the other comprehensive earnings section? James Vail: Yes. Denis Larocque: Yes, that doesn't flow through the P&L. James Vail: Okay. All right. Denis Larocque: That's something -- yes, a lot of that is like the variation of, for example, the equipment that's denominated in U.S. dollars like the value of that equipment, but it's not a P&L. James Vail: Okay. Now my second question becomes -- you mentioned a new accounting standard that you're examining to see how it's going to affect the company. And I read that and concluded it was, excuse me, it was just written by lawyers. I had no idea what it means. Can you help me on that? Ian Ross: Yes, for sure. There's just some new presentation for the P&L that will be coming into effect and different breakout of different accounts. For us, we don't think it's going to have a material impact at this stage. And it's not until fiscal '28 that these changes need to go into effect. So we're just in the initial stages of reviewing those now, but we don't expect it to have material impact. Operator: [Operator Instructions] Our next question comes from Brett Kearney with American Rebirth Opportunity Partners. Brett Kearney: Denis, as you noted, the whole world is focused on critical minerals. You guys obviously have been ahead of the curve expanding and upgrading the fleet the past several years. As we look ahead to calendar 2026, how do you think about the allocation of the fleet by geography, customer type? How much will you lock up with senior customers relative to a potential wave you see coming with juniors following the recent financings to maximize economics and returns for yourself? Denis Larocque: Yes. That's a good question. Basically, first, the fleet -- the fleet is, I would say, well positioned in terms of geographic, but we can only move -- we can always move rigs if need be, but we do have the fact that we're still in the 50% utilization rates. We do have the [indiscernible] as demand comes, we fill that demand with either adding rigs or just moving rigs around. So on that part, I feel -- I feel really good and comfortable. On the contracts and like you said, in terms of locking how we go play the seniors versus juniors versus -- frankly, the thing we're -- that we're trying to avoid is to lock ourselves up in long-term contracts because at this point, it's a -- the labor cost is highly unpredictable, material cost, all these things -- I mean those are going to fluctuate with the cycle. And so therefore -- and really, the contracts are de facto lots of times short term. So just for that reason, you end up kind of maximizing you lock yourself into good contracts as the cycle lifts, we basically will price the jobs accordingly. It's -- and it's a factor of availability of rigs, availability of crews. And as those get tighter, that's where the prices typically goes up because there's a whole lot more -- I always tell our managers a lot more headache that comes with that. And therefore, you need a higher prices to basically be able to handle all these additional issues. Operator: Our next question comes from James Vail with Arcadia Advisors. James Vail: I promise this is the last question. It kind of follows up to the previous question. Given the 707 rigs, what is the effective top capacity utilization you would experience before you have to make some major capital spending decisions? Denis Larocque: Yes. Well, it's not necessarily in terms of -- in aggregate, it's more market by market where those decisions are made. So in other words, I don't know if -- in Argentina, there was a big boom, all of a sudden and the decision to move rigs or buy rigs. If things are busy everywhere else, you want to preserve your capacity, we might end up buying a bunch of rigs, even though the global fleet might only be at, I don't know, 60%. But we always say, though, that the maximum utilization that we can achieve with the total fleet is in the range of 75% to 80%, just because there's always rigs being mobilized. There are seasonal factors. There's different types of rates. There's -- so for us, 75% to 80% is highest and [indiscernible] that, that's where, yes, we would be -- if the demand is still booming and we are able to prove, then we would -- will likely be adding rigs at that point. Again, it all on the economics. Operator: There are no further questions at this time. I'd like to turn the call back over to Denis Larocque for closing remarks. Denis Larocque: Well, thanks -- thank you, and thank you, everybody, and Merry Christmas and happy holidays to everybody. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Good day.
Federal Reserve Chair Jerome Powell addresses reporters after the Federal Open Market Committee announced its third interest rate cut this year.
Federal Reserve Chair Jerome Powell addresses reporters after the Federal Open Market Committee announced its third interest rate cut this year.
President Donald Trump said the Federal Reserve's latest decision to cut benchmark interest rates by a quarter percentage point could have been "at least doubled." Trump, who has long urged the central bank to slash rates in order to spur further economic growth, called Fed Chair Jerome Powell "a stiff" who approved a "rather small" cut.
Federal Reserve Chair Jerome Powell addresses reporters after the Federal Open Market Committee announced its third interest rate cut this year.
Federal Reserve Chair Jerome Powell addresses reporters after the Federal Open Market Committee announced its third interest rate cut this year.
Federal Reserve Chair Jerome Powell addresses reporters after the Federal Open Market Committee announced its third interest rate cut this year.
Federal Reserve Chair Jerome Powell takes reporter questions after the Federal Open Market Committee announced its third straight interest rate cut.
Federal Reserve Chair Jerome Powell says officials are “well positioned” to wait and see how the economy evolves from here. He spoke at a news conference in Washington, DC after the central bank's policy-setting Federal Open Market Committee delivered a third consecutive interest-rate reduction, lowering the benchmark federal funds rate to a range of 3.5%-3.75%.