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Operator: Thank you for standing by, and welcome to SailPoint's third quarter fiscal year 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. I would now like to hand the call over to Scott Schmitz, VP of Investor Relations. Please go ahead. Scott Schmitz: Good morning, and thank you for joining us today to discuss SailPoint's Fiscal Third Quarter 2026 Financial Results. Joining me today are SailPoint's Founder and CEO, Mark D. McClain, and our Chief Financial Officer, Brian Carolan. For the Q&A portion of today's call, we will also be joined by our President, Matthew Mills. Please note that today's call will include forward-looking statements. Because these statements are based on the company's current intent, expectations, and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. This call will also include references to non-GAAP results, which exclude certain items that do not reflect our underlying business performance. Please reference this morning's press release and our supplemental earnings presentation hosted on investors.sailpoint.com for further information regarding our forward-looking statements and non-GAAP financial measures, including reconciliations to the nearest comparable GAAP financial measures. And with that, I'd like to turn the call over to Mark. Mark D. McClain: Thank you, Scott. Good morning, everyone, and thank you for joining us today. We are thrilled to share our most recent quarterly results that include a significant milestone for the company. In fiscal Q3 2026, we surpassed $1 billion in annual recurring revenue, or ARR. With this exciting milestone, I wanted to use today's call to emphasize three key themes. First, our reimagination of identity security. Second, our accelerated pace of innovation. And third, our confidence as we look ahead to Q4 and beyond. Let me start with the broader transformation happening in identity security. The market is moving beyond static, compliance-first approaches toward real-time adaptive identity, an approach we were one of the first to champion. By unifying identity, data, and security intelligence with the SailPoint platform, we are helping organizations gain the visibility, control, and scale needed to defend against an ever-expanding threat landscape in real-time. We believe our Q3 results validate that strategy, reflecting our disciplined execution, the impact of sustained innovation, and the accelerating demand for identity security as the control point for enterprise security. This leads to my second theme, innovation. Our newer product introductions continue to drive strong interest, fueling our robust cross-sell growth. Customers see clear value in how these capabilities extend the reach and intelligence of identity across their enterprises. This is especially true of our SailPoint machine identity solution, which remains our fastest-growing launch to date. We also just completed our largest-ever global user conference series, called Navigate, where we unveiled a family of innovations that together represent what we believe to be the most significant product launch in our company's history. These innovations center on four key themes: real-time identity governance, expanded protection for digital identities like agents and machines, a universal and dynamic approach to privilege, and deeper integration of identity intelligence into the security operation center, or SOC. All of this uses our Atlas platform as the foundation. The response has been immediate and extremely positive. Customers have confirmed that these innovations bring our real-time adaptive identity vision to life in a way they have been waiting for. The early momentum we are seeing across products signals that organizations are adopting this vision quickly and with conviction. A few areas in which we are seeing particularly strong interest include SailPoint agent identity security for deeply managing the exploding landscape of agent identities, SailPoint accelerated application management for helping enterprises quickly onboard the hundreds or thousands of applications they use and to put strong governance controls around them, and SailPoint observability and insights for delivering real-time identity intelligence, stitching together signals from across the IT ecosystem to reveal hidden risks while strengthening security for all identity types. Importantly, this wave of customer interest and adoption is reinforcing the strategic path we have been driving for years. Gartner's 2025 market guide for IGA validated what we have long believed: that identity is no longer a compliance checkbox. It is a critical control for securing the modern enterprise. The industry is only beginning to recognize this shift, but our customers are already benefiting from innovations we built on this very premise. As we continue expanding our family of identity security solutions, we are also evolving how customers can acquire and adopt that innovation. We recently introduced our new flex licensing model that is designed to meet customers where they are, not only in their identity journey but in how they prefer to buy and deploy our solution. With digital identity surging, customers need the ability to take advantage of new capabilities quickly and efficiently. Our flex licensing model is built for exactly that, giving organizations more choice, more flexibility, and a clear path to adopt the innovations we are bringing to market at the pace that makes sense for them. Another growth driver this quarter is the ongoing opportunity to help our IdentityIQ customers migrate to SailPoint Identity Security Cloud. These migrations are not only modernizing their environments but also strengthening their long-term alignment with our platform. For example, one of the largest US-based logistics and shipping providers is migrating to SailPoint Identity Security Cloud. As part of this migration effort, they also added SailPoint Machine Identity Security to identity security, choosing SailPoint for our scalable, automated, and intelligent approach. With Identity Security Cloud, they will be able to support a large and growing number of digital identities and applications, giving them a clear path to expand into agent identity security and other areas like identity threat detection. Organizations are making these modernization moves because they know we can scale with them as their journey evolves. At the same time, customers are strengthening their investment with us as their identity and digital landscapes continue to expand in the number and variety of identities they manage and in the volume of applications, systems, and data those identities need to access. Our Q3 results reflect this trend. We believe this is a clear sign of the trust customers place in SailPoint to secure their rapidly growing identity service. As just one example of this expansion trend, a large energy and utility company experienced such a successful migration to Identity Security Cloud that they significantly extended their investment with us, adding SailPoint machine identity security, agent identity security, observability and insights, accelerated application management, and Atlas Enterprise, all through our flex licensing model. This combination of new product offerings attracting new customers and our existing customers expanding with us shows the strength and balance in our business model. It also underscores our clear differentiation: the breadth of identities we protect and the depth of context we provide. The SailPoint platform delivers adaptive identity by unifying identity, data, and security intelligence in real-time. The platform also enables organizations to continuously adjust access security decisions based on risk and business dynamics. We believe this combination is unmatched in the market today, and it is why customers continue to choose SailPoint to grow with us over time. And finally, it has never been easier to deploy with SailPoint. We understand that innovation only matters if customers can quickly realize its benefits, which is why we are focused on simplifying deployment and accelerating time to value across our new solutions. The recent introduction of SailPoint accelerated application management allows customers to intelligently discover and onboard all, not some, but all of their applications for immediate governance. Our digital agent, Harbor Pilot, further simplifies the administration of identity programs through natural language prompts. And our partner ecosystem is leveraging AI to streamline and accelerate application onboarding, expediting time to value for our joint customers. Taken together, our results speak to a company executing with focus, delivering value for customers today while positioning ourselves for the next stage of growth. This brings me to my third theme, confidence. Just as important as what we achieved in Q3, what it signals about the path ahead. Our pipeline remains strong and diversified, and we continue to see strong engagement across both new and existing customers. As the attack surface expands and agent-based threats accelerate, organizations are turning to SailPoint faster than ever. Our most recent Horizons of Identity report underscores why. The majority of enterprises are still early in their identity maturity in horizons one or two, and moving forward requires stronger agent management and a unified identity data model. We believe we are uniquely positioned to help them advance. While we are focused on finishing the year strong, we are equally committed to building for the long term. Our strategy is grounded in what we believe has always set SailPoint apart: the depth of identity context we deliver and the breadth of identities we protect. With governance at our core, our platform provides a level of precision and granularity that we believe others cannot replicate. It is also what enables us to expand the definition of identity security and support an adaptive identity model that protects enterprises efficiently and effectively in an increasingly dynamic environment. As an independent player, a market more recently defined by consolidation and bundled point solutions, SailPoint is emerging as a strategic identity layer in the security landscape, with a common cross-vendor fabric that delivers clarity and context across all security signals. To that end, we are continually investing in innovation that continues to push the boundary of modern identity security. More intelligence, more automation, and deeper connectivity that embeds identity context across the security ecosystem. As identity becomes the control center of enterprise security, SailPoint is defining and leading a new era for the industry. I want to thank our customers for their trust, our partners for their collaboration, and our employees for their incredible commitment and execution as we continue driving this mission forward. And with that, I'll hand it over to our CFO, Brian Carolan, to walk through the financials in more detail. Brian? Brian Carolan: Thank you, Mark, and good morning, everyone. Thank you for joining us today. As Mark noted, this quarter, we surpassed $1 billion in ARR, closing fiscal Q3 at $1.04 billion, representing a 28% year-over-year increase. SaaS ARR grew 38% year-over-year and now stands at $669 million, representing 64% of total ARR. The consistency of our growth at scale is something we believe few in the cybersecurity market have been able to accomplish. This quarter, the durability of our growth was once again due to many drivers across both new and existing customers. The strength was also broad-based across geographies and industry verticals. We were especially encouraged by the strong initial interest in the new products we introduced at our Navigate conference. In fact, we booked orders for each newly available product despite only being generally available for one month. The demand behind these new offerings is contributing to the healthy expansion of our pipeline. Overall, we experienced strong growth in our cross-sell motion, driven by our nonemployee risk management, machine identity security, and data access security solutions, which collectively more than doubled in ARR year-over-year. As Mark noted, we also had a strong migration quarter, which we refer to as platform modernizations. The strength of our platform and ability to govern and secure all identities, from human to machine to AI agents, has led enterprises to conclude that now is the time to modernize their environment. It is also worth noting that more than half of our platform modernizations included at least one of our emerging cross-sell products. And with our new flex licensing model, we are making it simpler for customers to adopt and deploy our platform and future innovations. Additionally, we continue to see a shift towards our most fully featured business plus suite, which accounts for more than half of our suite-based ARR. The combination of strong suite-based adoption, cross-sell expansion, identity upsell, and platform modernizations demonstrates customer alignment with our strategic vision of adaptive identity security. These expansion motions contributed to our net revenue retention, or NRR, of 114% this quarter. Moving on to the P&L. In fiscal Q3 2026, we delivered revenue of $282 million, an increase of 20% year-over-year, with subscription revenue growing 22% on top of strong growth in the year-ago period. We remain committed to driving top-line growth through investments in our partner ecosystem and product innovations to extend our position as a market leader, all while delivering results in a responsible manner. In the third quarter, we delivered adjusted operating income of $56 million, or 19.8% margin, well above our guidance driven by higher term subscription revenue and disciplined expense management. We generated cash flow from operating activities of $54 million and free cash flow of $49 million, or 17.4% free cash flow margin, which reflects our robust growth profile. Turning now to guidance. For simplicity, I will refer to the midpoint of our guidance ranges where applicable. Full details can be found in this morning's press release and supplemental earnings deck. For the fiscal fourth quarter and full year 2026, we are increasing our ARR guidance by $12 million to $1.122 billion, up 28% year-over-year. From a net new ARR perspective, this implies $82 million, or 30% growth for the fiscal fourth quarter, and $245 million, or 26% growth for the fiscal year 2026. As it relates to our revenue guidance, we expect to deliver $292 million in fiscal Q4 2026, an increase of 22% year-over-year, with adjusted operating margin of 20.2% and adjusted EPS of $0.09. For fiscal year 2026, this translates to revenue of $1.069 billion, an increase of 24% year-over-year, with adjusted operating margin of 18% and adjusted EPS of $0.23. We expect our diluted share count to be approximately 565 million shares. In summary, we are confident in our strategic direction and our team's demonstrated ability to execute. Our strong quarterly results, underscored by our increased guidance, reflect the inherent strength of our market position and continued product innovation. We remain committed to driving durable, profitable growth, and we are optimistic about our ability to deliver significant long-term value to our shareholders. With a well-defined roadmap, an exceptionally talented team, and an expanding market opportunity with multiple growth drivers, we believe we are well-positioned for continued success. With that, let's invite Matt Mills, our president, to join us and open the call for questions. Operator? Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. Please limit yourself to one question and one follow-up to allow everyone the opportunity to participate. Our first question comes from the line of Joseph Anthony Gallo of Jefferies. Your line is open, Joseph. Joseph Anthony Gallo: Hey, guys. Thanks for the question, and congrats on the $1 billion ARR milestone. That's a huge achievement. Yeah. Obviously, AgenTeq security will benefit your existing customers first. But can you just talk about the top of funnel pipeline with new logos? I mean, IGA has been around for a while, but there's a huge opportunity there. Is AgenTeq forcing people to examine their human identities as well? Mark D. McClain: Thanks, Joe. This is Mark. And I just as we got into question and answer time, did want to thank everybody for joining us today and also look forward to seeing many of you tomorrow at the Barclays conference out in San Francisco. But with that, I'll probably pass that one straight to Matt because in terms of what we're seeing out in the demand landscape out in the customer, both new customers that are in the process of looking at our broader IGA offering as well as existing customers who are pretty excited about what's happening with JEDx. So, Matt? Matthew Mills: Yeah. Thanks, Mark. Hi, Joe. Look. I think you're thinking about it the right way, that install base and then the greenfield. And I think there's a consistent thread in all of that as folks are starting to move into this. And that is how much? How much do I need to get started? There's a certain amount of still, you know, people really don't know. And so that's one of the reasons. I don't know if you saw it yet. Yesterday, we announced our flex pricing, the Navigator flex pricing models. And one of them is actually called the digital identity flex. And it allows companies to get into this at a really nominal rate. Right, and then start growing into it from there. I think that's going to help accelerate a ton of interest because that's been one of the long poles in the tent, if you will. When you look at our greenfield proposals and things that are going out, look, I know that one's going out that doesn't have AI in it. And so again, I think this is going to accelerate all of that because, with these flex models now, no longer do we have to spend a ton of time trying to figure out exactly how many people need to be able to get started. So we remain hugely upbeat. I think the field is hugely excited about this announcement we made yesterday with these Flex Navigators. Joseph Anthony Gallo: Awesome. Thank you. And then just as a follow-up, you know, Brian, you've done a tremendous job with ARR beating raises. I just wanted to double click on 4Q. I mean, you beat the first two quarters of the year by 2% approximately, 1% this past quarter. 4Q appears to be a modest acceleration in new business for ARR. I know there are moving parts, but just anything that we should think about whether it was slip deals, FX, or anything else just to gain comfort in the ramp into April? Thank you. Brian Carolan: Yes. Thanks, Joe. Yes, I think you're right. I mean, I think we feel really good about the overall health of the business. We've been public for three quarters now. We have met or exceeded all guided metrics heading into Q4. We have a lot of confidence. I wouldn't read anything into slip deals whatsoever. I think this is a typical fourth quarter for us. We feel really good about where we stand right now with the pipeline. If you step back and look at the linearity of the fiscal year, Q4 will represent about a third of our total year net new ARR. So very consistent with prior two fiscal years. And I would say that, again, we feel really good heading into it. Joseph Anthony Gallo: Great to hear. Thank you. Operator: Star one one. Again, we remind you to limit yourself to one and one follow-up. Our next question comes from the line of Robbie David Owens of Piper. Your question, please, Rob. Robbie David Owens: Great. Good morning, guys, and thank you for taking my question. Mark, you talked a little bit in your prepared remarks about this is a market defined by consolidation of point solutions. I'd just like to hit on the consolidation theme, especially as we've seen a lot of adjacent vendors now starting to look at the IGA market. So I realize this has been relatively recent, but any market confusion from your sense, number one? And number two, maybe rewind us why SailPoint has such a differentiated and defensible solution over the long run. Some of these other larger tech bellwethers start to play in IGA? Thanks. Mark D. McClain: Thanks, Rob. Good to hear from you. Yeah. A couple of comments. And fortunately for us, this is a consistent message. If you even go back to our IPO roadshow messaging, we talked quite a bit at that time about what we thought was a pretty defensible moat around breadth and depth. And just to define those terms a little bit, right, breadth being the range and scale of identity types. You know, obviously, we've evolved through the years from employees to nonemployees to now two big flavors of nonhuman kind of machines, you know, bots and service accounts, etcetera, and now agents. And that breadth is certainly something that we've proven that we can handle at scale, but probably what gets lost sometimes is the importance of the depth of what we can do for that breadth of identities, and that gets into these detailed entitlements. And what we're finding is that others are jumping into this game as you say, Rob, there's a lot of movement either building and or buying into the IGA space from folks who have been near us and even folks that have been a little further away in the security landscape. What they're all, I think, going to struggle with is handling those two things together. There are people coming from the access landscape that have tons of breadth of volume, but typically solutions built on that base have very little depth. They're basically login-focused and very rarely can get into the detailed entitlement structure, particularly of older bespoke applications, which are very prevalent in large enterprises today. And on the other side of people coming from, say, the privileged landscape that certainly have demonstrated an ability to go deep, their challenge is going broad because, typically, they are managing a very limited number of identities in any given part of an enterprise. Those kind of permanently privileged static privileges like database admins and sys admins. So taken together, it's that ability to start from a very rich base of breadth and depth and then rapidly expand on both vectors, you know, expanding into this rapidly exploding landscape of machines and nonhumans and agents. While continuing to invest and we think a fairly defensible moat. We know of startups that are out in the market with sub 100 deep complex integrations into applications, and we are in the tens of thousands now. So that is a fairly significant gap from some of those companies' current offerings to our offerings. So I think we feel quite good that while people are making a lot of noise and it's easy to make a lot of claims about entering this marketplace, doing the hard work of really digging into these landscapes or these complex enterprises is very challenging. I think we're starting to see some acknowledgment of that from some of the folks around us. Robbie David Owens: Great. Thanks for the color. Operator: Thank you. And again, ladies and gentlemen, in the interest of time, we ask that you limit yourself to one question. Our next question comes from the line of Gray Wilson Powell with BTIG. Your question, please, Gray. Gray Wilson Powell: Great. Thanks for taking the question. Yeah. So can you talk about the Savvy acquisition that you announced back in August? And I think that underpins the accelerated application management products. So just, like, how does that impact a customer's time to get up and running on SailPoint? Are there any, like, finer points you can give there? And then to the extent that it's easing friction, is that something that can help you move down market? Mark D. McClain: Hi, Gray. It's Mark. I'll take the beginning of that. I'll probably pass it for a little more depth to Matt because he dug in now with some of the customers that are looking closer at that. But, yeah, we are really pleased to find Savvy out there. We've known of them in the market. And what they had is some pretty slick—I think that's not a technical term, but—pretty slick technology for discovering applications as they're coming through the front end to the browsers. And as a result, you know, we've had confidence now to stand up and say to customers, Chandra made this point at our Navigate conference, that we believe confidently we can discover effectively all of their applications in a relatively short time frame. But that's what we call tier one. In other words, understanding those applications are out there and exist. And when others have been claiming, oh, we're faster and better than SailPoint, it's like, well, they're just claiming they can get visibility. We then define tier two as the ability to kind of rich compliance and understanding how to, you know, authenticate who has, you know, access and then make sure that's audited and compliant. And then most deep and challenging level, we call tier three applications where we can get into automated provisioning life cycle management where changes are made automatically by SailPoint based on changes in the environment. But when you get into those tier two and tier three applications, it's much, again, much bigger moat technically for what it means to get into that realm. But where Savvy and now our SAM's, accelerated application management, SailPoint accelerated application management solution comes in is to help us get that broad coverage very rapidly and then go from there into the depth as customers require in their environment. You know, Matt, what are you seeing kind of in the demand out there in the customers? Matthew Mills: Well, look, I think this has been something that our competitors have, you know, effectively used against us for some time. And so now we have this savvy tool, as Mark said, we market it as SAM. It is now available. And I think there's a couple of things. When you look at these tier ones, right, these typically, it's like, just want to be aware. And you can get a little bit of detail around it, like users and maybe a basic level of entitlement. But with our savvy, SAM solution, you can also categorize. So now these companies will be able to say, how many of these applications are actually using agents? And I think that's a really, really big thing. Because all of a sudden now when you realize that of your thousand applications, 900 of them are actually using these agents that maybe you're getting from a self-serve service, ServiceNow or Salesforce.com. Right? Now you're going to have to do something other than just be aware. You're probably going to want to go up to this tier two level that Mark was talking about. And all of a sudden, the stakes just got really significantly bigger. Everybody trying to get there. So we think our tool here is going to continue to allow us to get to this security around and governance around these applications much quicker than anybody else. So, I think you're going to see this basically on every deal we do, to be fair, Gray. We priced it very reasonably so that everybody can actually use it. Because we think it's a big differentiator. Just one last comment I'd add there, Gray. That is that, you know, this is part of this fundamental evolution of this space from kind of a compliance audit focus, which came out of Sarbanes-Oxley and where big companies would really only govern deeply a small handful of applications because those are the ones they had to audit. As we move toward truly securing these applications, that's why we have to get visibility and control over basically the majority, if not effectively all apps, and then go deep into deep governance and deep compliance on the ones where the customer says, that's really important to me. I want to maintain much more strict controls over those. And it's that flexibility to understand the breadth of the landscape and then go deep into various apps again, I think others are going to have a lot of struggles to catch up to where we are today after a couple of decades of going deep in many, many of these complex applications. Gray Wilson Powell: Got it. That was really helpful. Thanks for the detail, and congratulations on the strong results. Mark D. McClain: Thanks, Gray. Operator: Thank you. Our next question comes from the line of Shaul Eyal of TD Cowen. Please go ahead, Shaul. Shaul Eyal: Thank you. Good morning, everybody. Congrats on the set of results. My question is about operating expenses. You guys are doing a great job. Talk to us about the internal usage of AI to also take advantage of some of these opportunities and curb cost? Thank you. Brian Carolan: Yeah. Hi, Shaul. It's Brian here. Thanks for the question. So we are embracing AI internally. You know, we use this as an existential competitive advantage as well in terms of the tools that we're exploring across all aspects of the business, you know, from product development to go-to-market to internal G&A functions. Really exciting stuff. I think that, you know, we're still, as with many companies, in the early stages of it. But we are really excited about the use case possibilities, and we're starting to see some payback on that. Shaul Eyal: Many thanks. Operator: Thank you. Our next question comes from the line of Peter Marc Levine of Evercore. Your line is open, Peter. Peter Marc Levine: Great. Thank you, guys, and congrats on the quarter. Maybe one for Mark or Matt. As you look at traditional PAM vendors, they emphasize bolting, session recording. How do you articulate SailPoint's competitive moat as you kind of move towards this, like, new-gen PAM? How do customers still view privileging through that kind of legacy lens? And then what's kind of what's your pitch to them? And then one for Brian. Brian, on the new kind of call it, not the pricing model, but if you think about the flexing model, maybe walk us through, like, the margin impact, the pricing model, how does that work, and should we expect any kind of variations or seasonality in the model going forward as this starts to ramp up? Thank you. Mark D. McClain: I guess I'll start with the privilege, and Matt may make a comment or two. Then I'll flip to Brian for flex pricing. Peter, I guess on the first point, yeah, the things we like to say is, like, it's not that that use case, that traditional PAM use case is going away. It's not. It's just going to represent an increasingly smaller part of the challenge that customers are wrestling with. Because even the folks at Palo who obviously did the cyber acquisition are making pretty public comments now about the challenge of now taking what they've done traditionally across that limited set of permanently static privileged users and making privilege—I think they've used the word dynamic or something like that. We've used the word democratizing privilege. The concepts are the same. The idea that over time, every identity, human or nonhuman, may have reasons to be treated as a privileged account and that can basically be flexed up and flexed down—not flexed pricing. Sorry. Don't want to confuse you with that term. But the level of privilege might flex up or flex down. And as a result, it's that challenge, again, of having that broad understanding of that deep entitlement landscape so you can make choices. Based on context is going to start to become a big word here. Not just the who/what is accessing what information, but from where, at what time, with what intent. That's going to be another concept we'll be talking more about, particularly with agents. What is the intent an agent has in accessing information, and does that seem typical or expected? And if so, great. If not, I'm going to escalate the privilege required to get to that in very real time. In a dynamic just-in-time kind of notion there. So this idea that privilege will become ubiquitous and flexible is quite different from the technology that was required to build static privilege—a kind of a permanent safe vault of these credentials that were kind of checked out and checked in for very important use cases like database administrators and such. So it's not that that isn't an important part of securing the environment. It still is. Right? But we believe that the next wave is going to be far more about this broad-based ubiquitous dynamic privilege. With all due respect, the folks that have come from PAM don't have any particular advantage at solving this problem versus folks like SailPoint who come from a broad and deep understanding of the entitlement landscape. So that's why we think we're well-positioned to handle that. Brian Carolan: And then I'll just comment on just the new flex licensing model. Flex navigators is what we call it. Again, we're really excited about this. We think it's going to help customers buy and consume the way they want to and really optimize their investment, deploying what they need, when they need it, recognized ratably over time. This will be SaaS. It'll be The flex licensing pool is tied to our rate cards, list prices, so I wouldn't read into anything in terms of an overall to see how margin degradation. So I think we're going to be really excited customers utilize this in the best way for their environment. It's also going to help accelerate migrations or what we call platform modernization. So helping our on-prem customers adopt and grow into an ISC identity security cloud platform, faster and easier. In a much more economical way. Peter Marc Levine: Great. Thank you, gentlemen. Congrats again on the great quarter. Operator: Thank you. Our next question comes from the line of Meta Marshall of Morgan Stanley. Your line is open, Meta. Ryan Lances: Hey, everyone. This is Ryan Lances on for Meta Marshall, and thanks for taking the question. Guess just from a go-to-market standpoint, you've announced multiple new product offerings and a new flex pricing model. So I'm just curious if you could provide some additional color around how ramping sales personnel on these new products and initiatives more broadly has trended thus far and maybe just kind of how you're thinking about sales hiring going forward? Thanks. Matthew Mills: Hi, Ryan. This is Matt. Look. I think this is something we certainly pay attention to. I think if you look at our go-to-market model, we have a lot of specialization that's built up historically in our solution engineering organization, and that's where a lot of that comes from. I think one of the things you'll see from us, we started this last year adding a bit of these specialty sellers that are specific to an area might so take into consideration data. We think that's a little bit of a different selling motion, and it warrants at least initially some expertise to come in and, you know, alongside the field team. So I think you can see us looking at things like that as we go forward, and that's one example of where we moved. Operator: Thank you. Our next question comes from the line of Jonathan Rakover of Cantor. Your line is open, Jonathan. Jonathan Rakover: Yes. Good morning, and thank you. I'm wondering if you could touch a little bit more on the success you called out with data security. But, you know, I would assume that the attach rate could be quite high on agent identity, but I realized it's still early in that journey. So maybe just touch on the use case that's driving that success. And just, you know, from a big picture viewpoint, we hear a lot of identity companies talk about the importance to data as it relates to identity security. Can you just, you know, touch on that strategy at SailPoint as well? Thanks. Brian Carolan: Hi, Jonathan. It's Brian here. I'll start, and I'm going to hand it over to Matt for a little bit more color. So, I mean, we're really excited about just kind of the, I'll say, the market basket of all of our cross-sell motions that contribute to our NRR number of 114%. They've more than doubled year over year, and that's a composition of things like nonemployee risk management, machine identity security, data access security, and then more recently, we're starting to see some green shoots from AgenTeq identity security and many of the other products that we launched at Navigate. So there's a lot of interest at showing up in the pipeline. I would say it's still early on some of the navigate launches, but very exciting from our perspective, and we're starting to see a strong attach rate of the new cross-selling motion. In fact, out of our new SaaS customers, this past quarter, we had a little bit more than a 40% attach rate of some of these new cross-sell motions. So, again, they we are landing with some of them right out of the gate. And that's only going to allow for some more expansion as we have more and more product out there that we just launched. It's the only point we can make. I'll jump in and probably pass to Matt again on this, Jonathan. We've had a product out in that data landscape for quite some time because we were pretty early on in identifying the fact that while the history of this space has largely been about application protection, you know, who or what are these identities and what apps can they access, and within the apps, what entitlements. Quite a while ago, we said, well, at some point, this space is going to need to incorporate direct access of those identities to data, both structured and unstructured. And things like, you know, the family of Microsoft apps, PowerPoint, Word, etcetera. But now as well as deep data access and the things like Snowflake and Databricks. Right? Well, there's going to be, we think, a continued need for that human direct access to data, which is, again, we'll be building on the heritage we've got with what we've called our data access security product. But importantly, in this new realm of AgenTeq, it's that full connection thread from the human or business function that has authorized an agent to take access directly to data, whether that data is in, again, Snowflake, Databricks, out in an LLM somewhere, understanding that full thread that's going to be extremely challenging for folks who don't have that breadth and depth already defined. And our data offering will actually be a part of our advanced AgenTeq coming in the future. We kind of pointed toward that at Navigate, but it's not yet available. I think, Matt, we can talk about kind of where that's headed. Matthew Mills: Yeah. No, Jonathan. If you're intuitively, you're right on. Right? We believe the same thing that it's going to be awful hard to secure the work of an agent without data. So I think we talked a little bit about that at Navigate. I think you look at us historically, our data access security product has been unstructured. It's now moving over to structured data as well. And so I think you're going to see as we roll out that product, DAS will it'll drag DAS with it. So it's, we're pretty excited about it. Jonathan Rakover: Yep. Very helpful. Thank you. Operator: Thank you. Our next question comes from the line of Shrenik Kothari of Baird. Line is open, Shrenik. Shrenik Kothari: Hey. Yeah. Congrats, and thanks for taking my question. So you did address the newly launched product traction, which is very impressive. I would like to double click into the observability insights you described as fabric. Of course, that's it is a telemetry across systems. Can you just walk us through how customers are using or looking to use that in practice? What's the monetization model there? And structurally, does this give you leverage to embed into broader SOC workflows and capture that wallet share as well? Thanks a lot. Mark D. McClain: Well, I'll start with we'll do a lot of these. We'll probably start and hand up to Matt. Right? I think on this one, yes, you got it exactly right. There's going to be a number of different things we think will be pretty powerful coming out of that O and I product. One is just the visualization of this connectivity, again, of that thread I talked about. When I can look in identity and understand the path all the way through an application or not through an application directly to the data and understand whether that's appropriate and, you know, being used as expected. And tying that as you observe into the SOC, whether that means kind of from our product line to other product lines from folks like Zscaler or CrowdStrike or Palo, or possibly embedding that into some other people's workflows in their SOC directly. And so we're having both kinds of conversations today, kind of I call it, higher level integration and perhaps even deeper kind OEM level integration that we think could be interesting over time. It's that visualization and understanding of that full value chain, if you will, that that product's going to be focused on. And then the insights part of it is to expose to the security teams and the identity teams whether there's current risk or potentially latent risk that needs to be identified and dealt with before something negative happens. So it's this idea of visibility into the true risk profile of a lot of these things is very, very difficult today. You will hear if you talk to I'll call them honest people that work in the SOC that one of their biggest challenges is when they see a vulnerability or a threat emerging, coming through any one of those landscapes out in the cloud, through a device, on the network, you know, all the places we look for threats, the great majority of those things, those tools are identity blind. They don't understand the identity that's either creating that access or could be negatively impacted. And so it's bringing together this rich identity context we believe SailPoint is uniquely positioned to provide tied into that deep security and threat landscape from the SOC and all those kinds of tools we mentioned. That's going to be a new era, we think, of much better defense against the bad and the threats merging. So that's you're right on in terms of where we're headed with that product and what we think will be kind of a breakthrough the landscape of really giving true security tools to the SOC relative to identity. Shrenik Kothari: Great. Very helpful color. Thanks a lot. Operator: Thank you. Our next question comes from the line of Matt Hedberg of RBC. Your line is open, Matt. Matt Hedberg: Hey, guys. Good morning. Thanks for taking my question. Congrats on the results from me as well. Brian, I realize you're not giving any sort of perspective on fiscal '27 yet. You got it so close off 4Q. But any sort of, like, high-level thoughts or guide rails on kind of how you're kind of approaching the new year, whether it be growth or margins or anything like that that would help us? Brian Carolan: Yeah. Sure. Hi, Matt. I would say that we're really pleased with our margin performance this past year. I think we've demonstrated our ability to expand margins, you know, in a nice healthy basis while, you know, driving high top-line growth. I would say that this year, we benefited to a certain extent by strong term-based revenue through strong, you know, Fed renewals, some slightly longer durations. Not so sure I expect that to continue FY '27. So that was a little bit of a tailwind for us this past year. We're still going to invest for growth. I think, you know, we're going to favor, you know, point of growth over profitability because we know we can deliver profitability. But we're in a rare universe here in terms of companies that can deliver into the high twenties almost touching 30 of ARR growth while delivering significant margin expansion. So we feel like we're really uniquely positioned. We're going to continue to take advantage of our competitive opportunity. Matt Hedberg: Thanks. Operator: Our next question comes from the line of Junaid Siddiqui of Truist Securities. Your line is open, Junaid. Junaid Siddiqui: You've talked about significant customer interest in your agent identity security solution. And my question is, what hurdles do you potentially anticipate in customer adoption of AgenTeq AI for identity security? And how are you preparing organizations to trust AI-driven identity decisions at scale? Mark D. McClain: Well, Junaid, I'll unpack that if I can. I think I heard two different questions in there. And one is, what are we going to do to help customers manage their agent environment? And as we've often said, there's basically two large flavors of that. Right? There's going to be all the agents that are proliferating from the big vendors, Salesforce, ServiceNow, Workday, etcetera, etcetera, etcetera. And mid to large organizations are clearly going to build a set of bespoke agents with kind of a genetic frameworks that they think are unique to their environment. So both flavors of agents, we think, are absolutely coming and coming at volume and scale. There's a lot there's a little bit of noise out there about bubbles and all that. And our view is, look. What companies are doing is trying a lot of things and experimenting and trying to figure out what works. But our belief is, certainly, as we get into the next year, there's going to be pretty widespread adoption. So there's the AgenTeq adoption of our customers and what they need help in managing those identities just like they manage all other flavors of identities. A different but also important question is, are they going to trust that we in the security landscape are using AI effectively to provide the value we provide? And I think on that front, again, we're doing a lot of work internally for everything from how we see patterns that might indicate there is a risk out there, how quickly we address concerns when they arise from customers by using LLMs ourselves to rip through lots of information and find out kind of root cause analysis of what might be going on. So both are really important threads. They're just kind of different. Is all the technology we're building to help customers manage this agentic explosion in their environments. The other is all the ways we're leveraging AI and various technologies inside our product line, including our own, you know, bespoke agentic technology for customers, Harbor Pilot, that's called. It's going to be a growing family of AgenTeq capabilities within SailPoint to address these problems. So I just wanted to tease apart. I think there's both in there. I don't know if you wanted to probe anymore in one or the other, but they're both very important to us. Junaid Siddiqui: Great. Thank you so much. That's very helpful. Mark D. McClain: Okay. You bet. Thanks. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone. Our next question comes from the line of Todd Weller of Stephens. Your line is open, Todd. Todd Weller: Thanks. I'll echo the congratulations. Good morning, and thanks for the question. Look. You robust set of new capabilities were launched at Navigate. Could you also talk about the potential for those to be a catalyst to drive more SaaS migrations? Then second question would be, last quarter, you talked about seeing an acceleration in legacy displacements. Just wanted to see if there was an update on what you're seeing there. Brian Carolan: Hi, Todd. It's Brian here. I'll start and then maybe hand it over to Matt for any additional color. So we actually had a very strong platform modernization quarter. When I say platform modernizations, these are customers that are migrating from our on-prem solution to ISC or Identity Security Cloud. All of our new offerings, they are SaaS, so they will be on the identity security cloud platform. So I think that's really kind of the innovation carrot that we say in terms of customer see our vision and they see where we're going to help them with their needs not only today, but also into the future. And we've actually seen when we migrate more than half of these migrations include emerging cross-sell modules. And that's what drives really kind of the two to three uplift that we often talk about of the ARR that our on-prem customers are spending with us today in the form of typical annual maintenance. We see a two to three x multiplier on that when they do migrate to Identity Security Cloud. The good news that, you know, there's a strong amount of interest, and it's still early. So we've only migrated about 15% of our historical maintenance base. And there's still 85% to go. So we view that as actually nice tailwinds, you know, for the next two, three years at least. And I think that's only going to compound with all these new product offerings and when customers need to, you know, meet the challenges of AgenTeq and observability and insights that we talked about earlier that Mark alluded to. So, again, we're really excited about the possibility. Operator: Our next question comes from the line of Ben Bollin of Cleveland Research. Your line is open, Ben. Ben Bollin: Good morning, everyone. Thank you for taking the question. You touched a little bit on some pieces, but when you look at nonemployee risk management data access and machine identity, you mentioned that that doubled year over year. Can you talk about the contribution to ARR? Where does that stand today? And how do you think about that progression looking forward? And then a follow-up on Flex. What did duration of those contracts look like versus traditional deals? And how do the unit economics differ for the customer? Thank you. Brian Carolan: Hi, Ben. It's Brian here. So while we won't talk specifically about the ARR number, it is doubling year over year. We also talked about how it contributes to our net revenue retention rate. It's probably in the low single digits if you combine the full basket of all those modules combined. Which, again, it's a high-growing, fast-growing basket of modules that's getting strong adoption and attach rate. With respect to the flex model, the navigator model, this is going to be no different from any other SaaS arrangement for us. It's typically an average of three years in length. And I think I mentioned earlier, this will be SaaS, and it will be ratably recognized. Operator: Thank you. Our next question comes from the line of Joshua Tilton of Wolfe Research. Joshua Tilton: Hey, guys. Thanks for sneaking me in here. Kinda wanna go back to the first question that was asked. And my question is, I'm trying to reconcile what is an incredibly positive earnings call and a customer base that is increasingly embracing, like, your new vision of identity with the lighter beat in the quarter. So my question really is, like, was there anything around fed? Or you keep emphasizing that it was a huge quarter for these platform migrations. Is there anything we need to understand about how term ARR becomes SaaS ARR as these migrations happen? Or is there anything around Fed or any other verticals you can kinda help us bridge, you know, what is an incredibly positively toned call. Kind of the lighter performance in the quarter, that would be very helpful. Thank you. Brian Carolan: Josh, it's Brian here. I think you need to step back and look at, you know, we're guiding to an annual number. This number is greater than a billion dollars, and we're beating on that. I think, you know, when you look at an beating on an annual number, you know, that's like four x of quarterly guide. So 1% beat on, you know, an annual ARR number is like a 4% beat on a quarterly. That aside, I think you have to look at also the net new ARR performance. It was $58 million. That's up 24% year over year. And the quality, which, by the way, that's 20% above the guidance. I think you need to also look at the underlying quality of the beat, which, SaaS net new ARR grew 52% year over year. So we feel really good about the overall health of the business, surpassing a billion dollars. Plus or minus 30% growth over the last eight quarters. While expanding margins nicely, and we're flowing through the full beat. On ARR. So I would not interpret anything. We had a very strong quarter on a variety of fronts across all verticals. You know, Fed was strong. We did have, you know, some strong term revenue out of Fed. Some slightly longer durations. That aside, SaaS also performed extremely. Again, I mentioned the net new ARR being up 52%. With a very strong attach rate. So I think we sit here today in Q4, and we feel really good about the business. Joshua Tilton: Appreciate the color. Loud and clear. Thank you so much. Operator: Thank you. Our next question comes from the line of Gregg Moskowitz of Mizuho. Please go ahead, Gregg. Gregg Moskowitz: All right. Thank you for taking the question. Mark, I wanted to ask about your Just in time capabilities and how additive you think they will be going forward to your customers and to SailPoint's business more broadly? Also, how valuable will JIT be when it comes to agentic protection? Mark D. McClain: Yeah. Thanks, Gregg. I think it's too early for us to kind of give you any sense of what that looks like in a financial impact. As Brian commented, even some of these other market basket of newer things we've introduced are—we're on such a large overall base now, even if they're going quite well, they're going to take a little while to have a financial impact. But that said, I think this trend is critical, and I'm really happy with a lot of the questions y'all are asking today because I think everybody's tuning into it more and more that the world of kind of a static, we sometimes call admin time approach to identity governance is shifting to a real-time, just-in-time identity security posture. And that is no more important than in the realm of agentic because it hit machine speed, as it's sometimes said, an agent that either goes rogue or has the potential to go rogue can do an awful lot of damage far faster than a human ever could. We're going to have to get very fine-tuned into understanding both the setup these things have, right, that configuration administration setup that what is this agent? Where did it come from? Even if it's being created relatively transiently, where did it come from? What's it designed to do? What's its intent? Again, that's a word I think we're going to be talking more and more about. And then is anything going awry as that thing is working? And so our ability to sense changes, to detect potential anomalies, to look for patterns, is going to have to be increasingly real-time. And as we said on the earlier question, richly tied into the SOC. We aren't going to have all those signals and patterns coming from the SOC just like they don't have all the patterns and signals about the identity landscape. But when we bring those together, in real-time, I think that's where we're going to really start to change the game for these customers that are trying to deploy this incredible new technology of LLMs and AI and agents but are still quite concerned about the risks that come along with that without good control. So I think it is kind of an inflection point shift in our landscape for the next few years. And you've heard it, but I'll say it one last time. We don't think there's anybody better positioned than SailPoint to help customers navigate that journey and take advantage of these new technologies. Gregg Moskowitz: Great. Thanks, Mark. Operator: Thank you. I would now like to turn the conference back to Mark D. McClain for closing remarks. Sir? Mark D. McClain: My closing remarks will be brief. Thank you all for joining us. We really appreciate all the interest and the questions. And as Brian said, we are very pleased with these results, and you're getting a strong sense of our confidence heading into the end of the year. And look forward to, again, going deeper on some of these and follow-on calls with some of you and or at the conference tomorrow in San Francisco. So thanks for joining us. Appreciate everybody's questions. Have a great rest of your day. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: On today's call, we will be referencing the press release issued this morning that details the company's full fiscal year 2025 results, which can be downloaded from the company's website at arquettegroupgroup.com. At the end of the company's prepared remarks, there will be a question and answer period for selected equity research analysts. Please note that those selected equity research analysts that would like to ask a question in the Q&A session will need to dial into the call rather than joining through the webcast link. Finally, a recording of the call will be available on the Investors section of the company's website later today. Please note that this webcast includes forward-looking statements. Statements about the company's beliefs and expectations concerning words such as may, will, could, believe, expect, anticipate, and similar expressions are forward-looking statements and are based on assumptions and beliefs as of today. The company encourages you to review the safe harbor statements, risk factors, and other disclaimers contained in today's press release as well as in the company's filings with the Securities and Exchange Commission, which identifies specific risk factors that may cause actual results or events to differ materially from those described in our forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after this webcast. And now, I would like to turn the call over to Andy Leaver, the company's Chief Executive Officer. Andy? Andy Leaver: Thank you, and thank you for joining our fiscal year 2025 earnings call. From my vantage point, fiscal 2025 was a year of building momentum. The issue which Arqit Quantum Inc.'s products and services address, specifically current weaknesses in encryption, and the future threat posed by quantum computers moved up the risk register of enterprises and governments around the world. It was a year of building momentum for the company as well, momentum in customer engagements across our key markets, momentum in revenue, and momentum in contracted backlog coming into fiscal year 2026. Fiscal year 2025 was also a year of broadening our product and service footprint. Our acquisition of Amplify's encryption intelligence product and risk advisory services broadens our engagement with current and prospective customers to address the migration journey to a post-quantum cryptographic posture from beginning to end. Innovative collaborations with Intel and Sparkle broaden our product solution sets to include confidential computing, which is an exciting emerging market opportunity on quantum secure communications across the optical transport layer. Finally, the year was marked by further building upon past successes, specifically replicating past successes in the telecom network sector and defense sectors with additional contract wins. The need for enhanced cryptography is ever increasing, particularly with each new announcement of advances in quantum computing capability. Organizations are increasingly aware of the need to address the issue. We have seen a change in the market from awareness of the issue to action to address it. The level of action is uneven across or within market segments. However, it is no longer a question of if organizations need to upgrade their cryptographic posture, but when they will upgrade their posture. Arqit Quantum Inc. recently was invited to present to a leading US securities industry regulatory organization about the rise of quantum computing and the threat it poses to cybersecurity for the financial industry. One of the most interesting questions posed was, what can we, as a regulatory body, do to support and encourage a transition to post-quantum security? From Arqit Quantum Inc.'s perspective, the invitation to present and the question asked demonstrated the increasing urgency which is being felt across key market sectors to move to a post-quantum encryption posture. Many governments, security agencies, and regulatory bodies across the globe are mandating or encouraging the migration to post-quantum cryptography. Some are even imposing deadlines. Top-down pressure plus increased awareness of the issue at the CTO or CISO level within organizations is driving increased action to address the issue. As a result of this market trend, Arqit Quantum Inc.'s marketing programs have been announced successes with seen increased activity with prospective customers. The first step with prospective customers is a demonstration and test engagement. In the first two months of this fiscal year, we have already signed 12 demonstration and test engagements. The pace of engagements is running well ahead of fiscal 2025. We believe this is the best barometer of building market migration towards a post-quantum cybersecurity preparedness. And it signals increasing awareness of Arqit Quantum Inc.'s symmetric key agreement encryption platform as a compelling solution. We have a proven solution to address the weaknesses of today's and the threat posed by quantum computers. However, we recognize that as an organization wants to migrate to a post-quantum encryption posture, it needs to understand its current cryptographic landscape and its risk exposure before we can take steps to upgrade its encryption architecture. We lacked an important capability, namely a risk advisory tool to help our organizations take the first important step to understand their risk. In May, we acquired Amplify's product portfolio IP and innovations team specializing in encryption risk advisory and AI analytics. Amplify's encryption intelligence risk analysis tools we acquired give organizations complete visibility into all encryption technologies in use across the network, automatically identifying weak points and vulnerabilities, including those susceptible to quantum attacks. Encryption intelligence risk analysis tools offer CSOs and CTOs an on-ramp for their post-quantum migration. They cannot address issues which they cannot see. Encryption intelligence shines a light on the problem. While a revenue opportunity in and of itself, encryption intelligence is also a sales lead generator for our symmetric key encryption solutions. Operator: Our encryption intelligence product combined with Arqit Quantum Inc.'s quantum encryption Andy Leaver: technology delivers a comprehensive proposition to identify and mitigate cyber risk exposure from both current and future quantum threats. Arqit Quantum Inc. can help organizations detect, protect, and comply. What I mean by that is firstly, we can help organizations detect their cryptographic risk exposure through the use of encryption intelligence. Secondly, we can help organizations enhance and protect their networks and IT infrastructure through the use of our quantum-safe symmetric key agreement encryption solutions. And thirdly, organizations can migrate to a post-quantum encryption posture that is compliant with cybersecurity guidance from leading government agencies and trade groups as our encryption intelligence tools map against leading security agency recommendations and our encryption solutions meet all such recommendations, including the National Security Agency's commercial solutions for classified key management requirements. While a concise multiphase detect, protect, and comply captures the essence of what we do and the value proposition which we offer customers. Adding encryption intelligence to our portfolio is an important broadening of our offering to assist clients in their end-to-end migrations. Another important point to add to the broadening of our product portfolio was the announcement of our collaboration with Intel to bring symmetric key cryptography into the trusted domain created by Intel's TDX enclave. What that means to the less technically inclined is workloads in our can move between on-premise and cloud environments, which is and confidential. Hence, it is called confidential computing. The security of workloads in process and transit is of vital importance to CTOs and CSOs. Confidential computing is increasing in importance. It is an element of the rise in market focus on trust and data sovereignty. Operator: Trust Andy Leaver: and sovereignty are the words we hear regularly in our engagements with existing and prospective customers. Data sovereignty is the concept that data is subject to the laws of the country or region where it was generated. It's an issue which is complicated by the continued movements of data and workloads to the cloud, which are often transnational. This is a particularly important issue in the European Union. Recent materials announced by Deutsche Telekom, British Telecom, and Orange focused on their sovereign cloud or network architecture initiatives. Arqit Quantum Inc.'s collaborative solution with Intel and its Intel TDX has significant applicability to the trust and sovereignty issues confronted by organizations seeking to comply with data sovereignty laws. We expect to have additional announcements about offerings and go-to-market strategies targeted to the confidential computing and data sovereignty market in this fiscal year. Arqit Quantum Inc. believes this market represents a meaningful opportunity for the company, and we have a strong partner in Intel with whom to attack it. While we have broadened our product offering with encryption intelligence and our activities with Intel, we remain focused on building on our recent successes specifically in the telecom and government and defense markets. In the telecom market, we signed a three-year contract with Sparkle, a tier-one network operator enabling them to offer a quantum secure network as a service. Building upon our relationship, we just recently announced in partnership with Sparkle that it had demonstrated embedding Arqit Quantum Inc.'s encryption technology directly into the optical transport layer, validating that sensitive data could be secured at the physical network layer without compromising performance. This demonstration opens the door for additional secured product offerings for network end users. In addition to activities with Sparkle, Arqit Quantum Inc. signed additional license agreements or contracts with RSG Telecom and its affiliate, Fabric Networks. Our engagement with prospective large telecom network operators is strong. We expect to replicate our success with Sparkle, RSG, and Fabric with other network operators as we have the blueprint which should shorten implementation times for prospective customers. Likewise, in defense, whether militaries or defense contractors are building upon our recent success. Our previously announced initial Department of War contract in partnership with a large IT vendor has been a validating event. Since the announcement, we've signed several additional defense-related contracts, including one for integration into unmanned battlefield assets. There is significant opportunity in the defense market, and we have undertaken multiple demonstration and test engagements, usually as part of a solution set with partners with US and foreign military organizations and defense contractors. While sales cycles in defense can be slower than other markets, we believe that this market will represent a large percentage of our revenue over time. In that regard, we've increased and realigned our US operations and personnel to drive our efforts to capture more of this market, whether US military, national security, or government. So circling back to my introduction, we are experiencing the market momentum to take action to address the weaknesses in today's encryption and the threat of quantum computers. Prospective customer engagements are accelerating. We have broadened our product offering to provide a comprehensive solution to detect, protect, and comply. We have also broadened our product offering to be a first mover in Quantum Secure confidential computing and data sovereignty. And finally, we have deepened our success in key network operator and defense markets. Our efforts are beginning to come through in our results, which Nick will talk about in a moment. I will say we believe that fiscal 2025 represents a trough year from a revenue perspective. The company grew revenue materially in the second half of the year as compared to the first half. We ended the fiscal year with executed contracts that represent $1,200,000 in revenue that could be recognized in fiscal year 2026. We expect to build upon that foundation through 2026. As momentum in the marketplace for quantum-safe solutions grows, so is our conviction. Organizations are starting the migration journey. We can assist in the assessment of risk exposure, and we offer a provably secure symmetric key encryption solution. We like our position in the marketplace to capture the demand we are building. We are excited about our prospects for 2026. Thank you. And with that, I will turn it over to our CFO, Nick Pointon. Thank you, Andy. For the fiscal year 2025, Arqit Quantum Inc. Nick Pointon: generated $530,000 in revenue as compared to $293,000 in revenue for fiscal year 2024. The variance between periods resulted primarily from the commencement in March of our previously announced multiyear contract with a customer in The Middle East. In 2025, we generated revenue from seven licenses for our SKA platform and network secure solutions and professional services. This compares to 13 licenses for fiscal year 2024. While our revenue for the fiscal year is modest, our full-year result does represent a material improvement from the prior year and a material sequential improvement from the 2025 to the end of the period. Recall, our 2025 revenue was $67,000 while the second half of the year saw revenue accelerate to $463,000. The acceleration in second-half revenue benefited from, amongst other factors, the commencement of revenue generation from our multiyear contract in The Middle East, which as previously reported, had been delayed. It also reflects the commencement of our multiyear contract with Sparkle. In keeping with Andy's theme of momentum, we previously reported that we ended fiscal year 2025 with $1,200,000 of contractual revenue which may be recognized in fiscal year 2026. While we are still speaking in modest nominal dollar terms, the trajectory of our prospective customer discussions, licensing activity, and now revenue is all moving in a positive direction. Revenue from the Arqit Quantum Inc. platform SKA platform as a service and Arqit Quantum Inc. Network Secure products totaled $476,000. Professional services and maintenance revenue in support of contract activity was $54,000 for the period. For fiscal year 2024, Arqit Quantum Inc. SKA platform as a service and Arqit Quantum Inc. Network Secure contracts revenue totaled $191,000. And professional services and maintenance in support of activity was $102,000. Our administrative expenses equate to operating costs for those more familiar with US GAAP. Administrative expenses for fiscal year 2025 were $34,700,000 versus $25,400,000 for fiscal year 2024. The variance between periods was primarily due to a reduction in foreign exchange gain resulting from the strengthening of the pound against the US dollar. Employee and property costs saw material reductions year over year. Arqit Quantum Inc.'s headcount as of September 30, 2025, was 91 employees as compared to 82 as of September 30, 2024. Administrative expense for the period includes a $5,600,000 noncash credit associated with share-based compensation versus a restated $600,000 noncash charge for fiscal year 2024. Operating loss for the period was $38,500,000 versus a loss of $26,900,000 for fiscal year 2024. The variance in operating loss between periods is primarily an increase in administrative expenses and recognition of an exceptional item for the outstanding class action lawsuit in the period. We previously announced that an agreement in principle has been reached regarding a settlement of the lawsuit. For the fiscal year, loss before tax from continuing operations was $36,500,000. For fiscal year 2024, loss before tax from continuing operations was $37,400,000. The variance between periods is primarily due to an improvement in currency translation differences. As of September 30, 2025, the company had cash and cash equivalents of $36,900,000. With that, I turn the call back to Andy. Andy Leaver: Thank you, Nick. A final thought. Nick perhaps said it best when he noted that the trajectory of key measures, prospective customer engagements, signed contracts, revenue, and backlog are all moving in a positive direction. From my perspective, that is a function of the market beginning to take serious action towards migrating to a post-quantum encryption posture. It's also a function of recognition that our key symmetric key agreement encryption platform offers a proven solution today. We are very excited about the market for our products in fiscal 2026. The hard work of the entire Arqit Quantum Inc. team is beginning to bear fruit. We expect to build upon the momentum that we experienced in 2025. Thank you again. I'll hand the call back over to the operator for Q&A. Operator: Thank you. If you are on a headset, please pick up the handset and then press star 11. If you would like to remove yourself from the queue, please press star 11 again. One moment while we compile our Q&A roster. And our first call from today will come from the line of Scott Buck of H.C. Wainwright and Company. Your line is open. Scott Buck: Hi. Good afternoon, guys. Thanks for taking my questions. Andy, I'm curious, is or was there a particular catalyst that's helping drive the higher level of demonstrations and activity here in the last couple of months? Either something external or maybe some change in the selling process. Andy Leaver: Hey, Scott. Good question. Thank you. So I kind of look when I kind of laid out where we're seeing business, I would say kind of thematically, what you're seeing is the news flow on quantum and the advances in quantum, this year, this calendar year 2025 have been huge. And I think when you see some of the larger players like sorry. Like IBM and Google when they talk about their hypercomputers and achieving quantum supremacy. And then you also see some of the smaller pure players, which we see a lot, by the way. I think their advances have gotten people to say, hey. We can see now that Quantum is moving very quickly, and we're still actually in the Europe Quantum. So that's the first thing that they're seeing, I would say, thematically. I think also then what we're also seeing is you'll see specifically within the telecom sector is a larger awareness because of I talked about in my notes earlier that in some cases, governments, in other cases, regulatory bodies, are saying to people, this needs to be on your risk register, and this is something you need to look at. And I think that's driving a lot of organizations starting with telco to say, hey. We need to have a position on this, and we need to understand the potential impact. And how we can mitigate against that impact. So on one side, it's hugely excited about quantum arriving in the way that it is because it's a force for good. We all know the benefits of quantum. But in a bad actor's hands, now people are starting to be aware of what the consequences of that are. I would just leave you with one other thing as well. I think it's very well publicized now. The threat of what's being called harvest now decrypt later, which is people having their information hacked and stolen today to be decrypted later when quantum computing is available in a more meaningful way. If that information has a shelf life or has any sort of validity going into the future, then it puts that organization at risk. And I think people are saying, hey. We need to guard against that now. Rather than wait for more and more evidence in terms of the availability of quantum computers. Hopefully, that helps, Scott. Scott Buck: No. That's very helpful. It sounds like the market is coming to you guys rather than you having to change any of your kind of internal selling procedures to grab more attention, which is great. Also wanted to ask about encryption intelligence. What does the sales cycle look like there versus the legacy product? I would imagine it's significantly shorter and maybe a driver of revenue here in the near term. Andy Leaver: Yeah. Hey. We're really pleased with the acquisition we made of encryption intelligence. For us, this is something that that ability to one, in a sales cycle, an organization their cryptographic landscape and show where they have potential weaknesses and potential problems in their network, but also identify that against existing regulatory body guidance. But right behind that is obviously we want organizations to use this as an ongoing tool as well to keep themselves safe against any new attacks. So we're seeing starting particularly with telco operators that are leaning into this and saying, hey. This is something that we'd like to use on an ongoing basis. So in discussion now with a number of telco operators not just to do an initial check on their network, but also then on an ongoing basis for them to use the tool. I like the fact now that we can be very specific about what the threat is, and be very deterministic about what we can do to help them mitigate against that potential attack and vulnerability. I think this year, as I said, being the Euro Quantum, we just have a lot more inbound on that side as opposed to before where we were talking about in the market. The market feels like a lot it's a lot more educated now when it's coming to us. Yep. No. That makes sense. I'm curious, Andy. Are there additional kind of bolt-on or tuck-in opportunities similar to that asset purchase you made back in May that might make sense to, I know, either bring in some additional revenue or expand, you know, the potential customer footprint. Andy Leaver: Yeah. That's a really good question. And I talked about what we're seeing particularly with data sovereignty and confidential compute. And I think those two areas are really coming to the fore now particularly as you think about a lot of organizations are now thinking about in that kind of detect, protect, comply. Where is my data going? How do I need to think about complying against local regulation? And then how do I protect it? So anyone that sits on the periphery of really the detect, protect, comply around data sovereignty and confidential compute will be great tuck-ins for us. I think anything around particular tech components of that would be interesting. And, you know, we've looked at a few different areas already in terms of people that are delivering components of it, but are obviously missing the deep intellectual property that we have around the quantum-safe part of it as well. So, absolutely, we've been looking in the market. Scott Buck: Great. And then if I can squeeze one more in, and this is probably for Nick. Curious, should we anticipate any change in OpEx for fiscal '26? Or can you support the anticipated growth in the business with this kind of current level of OpEx spend? Nick Pointon: Yes. So our plan is very much to maintain the control that we benefited from in FY '24. And to keep at the sorry, '25, and to keep the same level in FY '26. So $2,500,000 per month is our sort of target maximum cash spend per month that we anticipate ahead and we believe we can deliver the year ahead within those constraints. Scott Buck: Perfect. Well, I appreciate the added color, guys. Thank you for the time. Andy Leaver: Thank you, Scott. Operator: One moment for our next question. Operator: And our next question will be coming from the line of Troy Jensen of Cantor Fitzgerald. Your line is open. Troy Jensen: Hey, gentlemen. Congrats on all the great progress here. Maybe, Andy, for you to start with, can we just touch on competition? It seems like six, twelve months ago, there was really nobody the traditional security vendors talking about postmortem security and, you know, now I hear them upgrading their algorithms and whatnot. So curious is that just mainly software-based competition or just curious if you could touch on the competitive dynamics. Andy Leaver: Yeah. Sure. I mean, I think in line with what we're seeing in interest and activity within the market. Of course, there's going to be people that are gonna look at this as something that they want to lean into as well. So we absolutely see a few different competing ideas in terms of how people view this and how they want to deliver it. Just to kind of shine the spotlight back at us for a second, you know, we've been at this for over five years. We've got 25 patents. You know, we spend a lot of money deeply thinking about this problem. And believe that we've got something very unique and just to kind of quote a phrase, you know, the gold standard was always symmetric key agreements. Which have been used for a long, long time by governments, military, federal defense, etcetera. Because that's what they trust and have a good pure software solution that allows you to model that without hardware without having to think about distributing keys, and also the fact that it's not mathematical. Anything that mathematical, obviously, a computer eats up very easily. We believe that we've got something that's very light, very flexible goes all the way to the edge of a network, and extends itself into those kind of data sovereignty and also trusted domain conversations that we've been having. So hey, I'm sure there are people that will come along with slightly different views. We just want to make sure that we make it as frictionless and easy as possible what we're doing, and that's what we just keep building on. Troy Jensen: Perfect. Great answer. And then, Andy, also for you, just if you look at success lately, seems like it's been telco and government. I'm curious, can you just talk about the corporate side? It seems like this is something financial organizations and a variety of different kind of corporate American companies should be looking at. Andy Leaver: Yeah. Hey. That's a really good question, Troy. And we so I kind of feel like it's building a bit like the OS size stack if people know what that is kind of, you know, from the physical level of words as I talked about. Optical transport layers and things like that. The very basics are, hey. Let's protect the actual fundamentals of how things are connected together. And I feel like now we're getting into the kind of more operational layers I feel like anybody that is regulated, is critical in infrastructure, is heavy in intellectual property, are people that are starting to talk to us. And I mentioned that we'd done a briefing to a regulatory body in my prepared remarks, and you can see that now they're building their guidance saying, hey. This is obviously a threat to regulated financial industries. They're ones we're talking to at the moment. So we're seeing the people that are actually operating some of the infrastructure are thinking about how to protect that and also to protect against bad actors. And then anybody that's doing anything that's rich in IP that they've long development cycles. So you could think about farmers, life sciences, chemicals companies. They're the people that want to protect their IP as well. Because, obviously, if there's a harvest now decrypt later, that's got a long shelf life because they're years into development of that. So those are the industries we're seeing coming along next, and starting to have conversations with them. The secure compute really into financial services as well, obviously, being a regulated industry. So we see those kind of going hand in glove, really. Hopefully, that makes sense. Troy Jensen: Perfect. Thank you, Andy. Nick, keep up with good work, guys. Andy Leaver: Thank you so much. Operator: Thank you. And there are no more questions in the queue. I would like to turn the call back over to Andy for closing remarks. Please go ahead. Andy Leaver: Thank you. And, again, everybody, thank you for joining us today. Look forward to speaking with you again following the close of our 2026 first half results. We really appreciate your interest in the company. Thank you again for your attendance. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect. Speakers, please standby for your debrief.
Operator: Greetings. Welcome to Caleres, Inc. Third Quarter 2025 Earnings 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 Liz Dunn, SVP, Corporate Development and Strategic Communications. Thank you, Liz. You may begin. Liz Dunn: Thank you. Good morning, and thank you for joining our third quarter earnings call and webcast. A press release with detailed financial tables as well as our quarterly slide presentation are available at calaris.com. Please be aware that today's discussion contains forward-looking statements which are subject to several risks and uncertainties. Actual results may differ materially due to various risk factors including those disclosed in the company's Form 10-K and other filings with the U.S. Securities and Exchange Commission. Please refer to today's press release and our SEC filings for more information on risk factors and other factors which could impact forward-looking statements. Copies of these reports are available online. In discussing our operational results, we will be providing and referring to adjusted operating and earnings results. And in some cases, we will be discussing our results excluding the impact of Stuart Weitzman. Additional details on non-GAAP measures as well as others featured in today's earnings release and presentation are available in the reconciliation tables on our earnings release and on calaris.com. The company undertakes no obligation to update any information discussed in this call at any time. Joining me today are Jay Schmidt, President and CEO, and Jack Calandra, Senior Vice President and CFO. Our call will begin with prepared remarks followed by a Q&A session to address any questions you have. With that, I will now turn the call over to Jay. Jay? Thank you. Jay Schmidt: And good morning, everyone. Earlier today, we reported third quarter sales and earnings. We were pleased to deliver organic sales growth led by our brand portfolio, and particularly our lead brands. Sales trends also improved sequentially as Famous Footwear. Both segments of our business posted double-digit owned e-commerce performance with strong customer growth, enhanced targeting through our customer data platform, and incremental investment to fuel the momentum in trending fashion categories. As expected, tariffs continued to pressure our gross margin and earnings. However, our organic sales performance exceeded our internal expectations heading into the quarter. This is also the first quarter where our total financial results include Stuart Weitzman. It is important to remember that we are operating under a transition service agreement with Tapestry until we can fully integrate the brand into the Caleres ecosystem. I will speak in a moment about our plan to bring the brand to breakeven in 2026 and profitability thereafter. But we will incur temporary elevated, and in some cases, duplicative costs during this period. And will not be able to unlock synergies or cost savings for the most part until we fully integrate in February year. That said, we are pleased to be working with a highly engaged Stuart Weitzman team side by side to improve operating performance. Stuart Weitzman is an iconic brand with unique consumer resonance. Aligning with our strategic focus on premium contemporary, direct to consumer, international business. In addition, it represents a transformational moment for Caleres. With this acquisition, our brand portfolio represents nearly half of our sales while continuing to generate more than half of our operating earnings. We realized that scale is important in today's operating environment and leveraging that scale through an efficient operating structure matters more than ever. For this reason, we are taking decisive action in the back half of 2025 to bring Stuart Weitzman along with the rest of our portfolio into 2026 as clean, productive, and efficient as possible. To accomplish this, we have been working with an external consulting partner on integration to ensure we capture all synergistic opportunities and amplify our best capabilities. As a result of this effort, we have identified efficiencies across our company. We are establishing new centers of excellence that will support our entire Caleres portfolio. These efforts are expected to drive material structural cost savings, improve discipline, and growth in 2026. We will share more about this new structure on our fourth quarter call when we provide 2026 guidance. Turning now to the results for the third quarter. Brand Portfolio sales on an organic basis exceeded our expectations, increasing 4.6% in the quarter and 18.8% when factoring in Stuart Weitzman. Lead brands in total were up double digits organically with three of the brands showing growth. The full portfolio saw growth in both wholesale and owned e-commerce on an organic basis. Premium brands showed strength, while value-priced brands remained under some pressure. Our international business was markedly strong in the quarter, and our direct-to-consumer channels delivered growth and momentum. According to Circana, our brand portfolio gained significant market share in women's fashion footwear during the period. Boots were a standout category, particularly tall chef fashion boots. However, we also saw strength and growth in flats and loafers, solid performance in dress, and continued momentum in sneakers. Sam Edelman delivered a very strong quarter, marked by double-digit sales growth both domestically and internationally. Success was broad-based. Boots stood out as the fastest-growing segment driven by markedly strong demand in both established and new tall boot styles. While short boots and casual flats and loafers also performed well. Sam Edelman's own e-commerce channel had its best quarter ever, achieving higher full-price sales. Licensing initiatives progressed, highlighted by a successful fragrance launch that expanded retail presence for the holiday season. At quarter end, we had 114 Sam Edelman stores, 57 owned, and 57 franchised, with 110 of them international. Allen Edmonds delivered a strong quarter with positive comp store sales, solid e-commerce trends, and wholesale strength. Growth was steady across categories, led by sneakers, dress, and casual loafers. Boots saw improvement as the quarter progressed and are growing now in the fourth quarter. The elevated reserve collection expanded into new casual and sneaker styles. And we are highly encouraged by the stronger-than-expected demand for these styles at premium price points, which are now in 42 stores. Lastly, our 16 Port Washington studio stores continue outperforming the broader 59 store fleet this quarter, by 400 basis points. Naturalizer saw sequential revenue improvement in the third quarter with e-commerce in the U.S. and Canada showing double-digit growth compared to last year. Our direct-to-consumer channel saw growth across all major categories: boots, dress, casual, and sport, and delivered higher margins. Marketing efforts were highly targeted, spotlighting select product categories and silhouette, color, and material trends, through creative storytelling. The use of brand ambassadors helped to track and convert higher quality traffic. The brand had strong purchasing appeal among Gen Z, millennials, and Gen X, reflecting a broadening generational reach. Vionic saw growth this quarter, up solidly in wholesale and international markets, while e-commerce was softer. Retail sales increased in all categories, with casuals, sports styles, and slippers leading the way. International business was a bright spot showing robust growth, thanks to strong e-commerce and marketplace performance. New product launches like the Willa 2.0, and the walk slim sneaker gained traction and contributed to the brand's momentum. The quarter also marked the launch of the Gabby Rees campaign, introducing Vionic's first wellness ambassador. Campaign content outperformed traditional brand content, driving higher engagement, and capturing a significant share of spend. And finally, our newest lead brand, Stuart Weitzman. As many of you know, the brand under Tapestry ownership has been underperforming in recent years. And as such is dilutive to earnings as it came over. During our first three months of ownership, our focus has been on stabilization, and transition. Here's what's working. The design, product quality, and price value are all resonating with the consumer on the fall line offerings. Sell-throughs on the fall product have improved year over year, especially at wholesale and US-owned retail, with full-price strength in dress as well as short and tall boots. Marketing featuring global ambassadors has connected with consumers of all ages. Our system integration is on track for the beginning of 2026. And reporting structures are in place for key functional areas such as finance, specialty retail, international, and sourcing. Here's what's not working, which needed some intense focus and action. The China D2C business, where the shift in ownership resulted in sales volatility, especially in August. We have added new leadership in China and in working closely with the Stuart Weitzman team in New York, and our Caleres International team they have made significant progress on improving sales sequentially month by month. Global excess inventory, much of it aged, and thus more difficult to clear. We've established appropriate reserves through the purchase accounting process but it is diluted to the brand's gross margin for the back half. While costly, we feel this issue is momentary in nature and taking action now is essential for the success of this transition. The team has made significant progress on liquidation leading us to feel confident this issue will be largely behind us as we enter 2026. While we continue to expect the Stuart Weitzman business to be dilutive for the balance of 2025, we have a plan in place to achieve breakeven in 2026 through significant synergistic savings in distribution, logistics, specialty retail, digital and marketing operations, and office facilities, along with all other back-office functions currently being covered under the TSA. And while these expense reductions will not be able to be realized until system cut over in February, I look forward to speaking much more about Stuart Weitzman including our plans to improve sales performance, on the fourth quarter call. Looking at the balance of the year for the brand portfolio, sales performance appears stable with owned e-commerce showing strong momentum. Order to date direct to consumer performance remains up double digits, including during the Black Friday and Cyber Monday window. The tariff environment is stabilizing and our mitigation efforts are beginning to take hold. Our inventory position excluding Stuart Weitzman, is now more aligned with our sales trend. And we continue to work through Stuart Weitzman's inventory to enter 2026 in a clean position. Moving on to Famous Footwear. In the quarter, total sales were down 2.2% and comp sales declined 1.2% in line with our expectations. Retail conversion and average unit retails increased low single digits while traffic defined mid-single digits. We continue to see the famous consumer respond strongly during peak shopping periods with positive comps in August followed by September and October declines similar to our first half trend. Our e-commerce sales were up double digits for the second straight quarter. The launch of Jordan last quarter contributed steady momentum throughout the back-to-school season. Remaining a top 10 brand and reinforcing Famous's ability to launch leading brands and deliver powerful results. Famous continues to enhance its consumer experience through the player format. We ended the third quarter with 56 player locations, which generated a three-point sales lift overall and a six-point sales lift for stores converted in the last year. We plan to add one additional location by year-end, as the success of our flare concept continues to underscore Famous's ability to amplify elevated brands and products. Men's and kids performed best during the quarter while women's underperformed. By category, athletic was slightly positive on a comp basis, and fashion declined. Jordan, Adidas, Birkenstock, New Balance, Brooks, DC Shoes, and Timberland, were top growth brands. While our Caleres brands outperformed its famous footwear with sales up mid-single digits. Within the strategically important kids category, penetration was 25% in the quarter. In addition to Jordan, we are seeing a trend of outperformance from premium brands at Famous, which we plan to capitalize on by bringing in more of these highly demanded brands. At the same time, we see a need to edit some underperforming labels particularly in the fashion category. This will free up Open to Buy to invest in demanded brands, including some of our own Caleres brands. But I want to be clear. We are following the consumer. We are growing our Caleres brands, at Famous because they are performing. As we do this, it is accretive to our consolidated gross margin. Jack will cover our fourth quarter expectations in more detail. But I will note that holiday sales at Famous Footwear have been strong so far and comp store sales are flat quarter to date. In summary, we are pleased with our sales performance in the quarter and the particular strength of our strategic growth vectors. Lead brands, international, direct to consumer, and enhanced customer experience. Our near-term focuses are restoring gross margins, operational discipline, structural cost savings, and integrating Stuart Weitzman. We are finding new more efficient ways of working and leveraging our best capabilities. We are focused on speed, agility, and controlling what we can control. We are confident that fueling both brand portfolio and Famous Footwear and executing our strategic plans will result in improved financial performance and drive long-term value for our shareholders. And with that, I will now hand it over to Jack for a more detailed view of our financial performance. Jack? Jack Calandra: Thanks, Jay, and good morning, everyone. During today's call, I'll provide additional details on third quarter results, and our expectations for the fourth quarter. Please note my comments will be on an adjusted basis and will highlight where they exclude Stuart Weitzman. For the third quarter, sales were $790.1 million, up 6.6%. Sales on an organic basis, excluding Stuart Weitzman, increased 0.4%. Organic sales increased in brand portfolio, and declined in Famous. Both segments saw an improvement in the trend versus 2Q. Sales for Stuart Weitzman in the quarter were $45.8 million. Brand Portfolio sales were up 4.6% on an organic basis and 18.8%, including Stuart Weitzman. Lead brands in total excluding Stuart Weitzman, grew about 10% in North America, and 12% on a global basis. We saw strength in premium brands and declines in our more value-oriented brands. Tariffs did not have a meaningful impact on sales in the quarter. Famous sales were down 2.2% with comparable sales down 1.2%. Comparable sales increased 1% in August the largest month of the quarter, and declined about 3% in September and October, as expected. Consolidated gross margin was 42.7%, down 140 basis points versus last year, and was driven by lower margins in both segments. Stuart Weitzman was modestly accretive to gross margin. Brand Portfolio gross margin was 42.3%, down 150 basis points to last year, due to higher tariff-related costs and an unfavorable wholesale customer mix. Excluding Stuart Weitzman, gross margin was down 200 basis points, and the impact of tariffs was about 175 basis points. Famous gross margin was 41.6% down 130 basis points to last year, due to more clearance days additional LIFO and other inventory reserves, and an unfavorable channel mix with stronger e-commerce sales. SG and A expenses increased $42.6 million to $311.3 million. Approximately $10 million of this increase was organic, with the balance coming from Stuart Weitzman. As a percentage of sales, SG and A was 39.4% and deleveraged 310 basis points. On an organic basis, continued investment in our international business, higher depreciation expense for stores, and lapping last year's incentive compensation accrual release was somewhat offset by our cost savings initiatives. Operating earnings were $26.3 million and operating margin was 3.3%. Excluding Stuart Weitzman, operating earnings were $37.4 million and operating margin was 5%. Operating margin brand portfolio was 5.2%, and 9.2% excluding Stuart Weitzman. Operating margin at Famous was 5%. Net interest expense was $5.5 million up $2.6 million to last year due to higher average borrowings. Approximately $1.6 million of the increase was interest expense associated with the acquisition of Stuart Weitzman. The weighted average borrowing rate was down about 25 basis points. Tax rate was 41% for the quarter, and 27.5% year to date. Earnings per diluted share were $0.38 and earnings per diluted share excluding Stuart Weitzman were $0.67. Turning to the balance sheet. We ended the third quarter with $34 million in cash, $355 million in borrowings, and $312 million of liquidity. Inventory at quarter end was $678 million, up $92 million to last year. Of which $77 million was for Stuart Weitzman. Inventory was up less than 1% in 5.5% in Brand Portfolio, on an organic basis. Now turning to our outlook. As noted, tariffs continue to weigh on our results. On an annualized basis, the unmitigated tariff impact on our Brand Portfolio segment is approximately $65 million of which we have mitigated about $40 million through factory negotiations, price increases, and other actions to reduce the dutiable value of goods. The 175 basis point impact on brand portfolio gross margin in the quarter from tariffs was somewhat better than we expected due to timing differences. And we would expect a similar impact in April with improvement in 2026. That said, with the tariff and uncertainty largely behind us, we are providing guidance both on an organic basis including Stuart Weitzman. Our April expectations are as follows. For Famous, we expect comp store sales about flat and total sales down low single digits. This is in line with the quarter to date trend. For brand portfolio, we expect sales to be flat to up 1% on an organic basis, and we expect Stuart Weitzman to add $55 million to $60 million in sales. We expect consolidated gross margin to be down 75 to 100 basis points versus last year. Both on an organic basis and with Stuart Weitzman. With more pressure in the brand portfolio than Famous, though improvement in both versus last year as compared to 3Q. For SG and A, excluding Stuart Weitzman, we expect a modest increase in 4Q versus last year. We expect SG and A for Stuart Weitzman to be slightly higher than the $32 million incurred in 3Q. And we expect a full year tax rate of 27% to 28%. As a result, we expect a loss per share for the fourth quarter in the range of $0.35 to $0.40 including 30¢ to 35¢ of dilution from Stuart Weitzman. For the full year, we expect earnings per diluted share of $0.55 to $0.60 and earnings per diluted share excluding Stuart Weitzman of $1.15 to $1.25. With that, I'd now like to turn the call back over to the operator for questions. Operator? 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 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Dana Telsey with Telsey Advisory Group. Please proceed. Dana Telsey: Good morning, everyone. Couple things. As you think about Stuart Weitzman and what you're finding under the hood and what the opportunity is going forward into 2026 and beyond. And obviously, one happened this past quarter and what you're guiding to, how do you whether it's the team or the product, how you're thinking about their retail and wholesale portfolio. A year from now, if we're sitting here, what does the business look like Jay? And how do you think of what the opportunity is? Is there more on margin, on top line? How are you thinking about it? And then on the Famous Footwear side of the business, encouraging to hear about the frankly, the AUR and even the traffic. What's happening on the fashion side of business given the other categories out there? How is that shifting and what you said about athletic? And then I just have one follow-up on the brand portfolio. Thank you. Jay Schmidt: Hi, Dana. So I'll start with Stuart Weitzman. And first, we plan to achieve, obviously, a better 2026 through a combination of gross margin improvement as we get past the inventory cleanup and really SG and A reductions. And as we kind of commented, there are really reductions coming through as we take away the duplicative and elevated costs from the TSA going away. And then savings in distribution, logistics, facility, the retail stores, and back office leverage. So we feel very good about working with them. We enjoy working with the team. It's a natural fit, and we've really been spending you know, really working side by side, as I said in my call. About it. When we look at the fundamentals of the business, the consumer is responding well. The product is well. These are all things to keep building on. The marketing is resonating with consumers. And even we've seen on a comp store sales business in our North America retail stores, some really nice progress just by getting what I would call a global brand assortment going. So we have a lot of opportunity as I look forward into the business, although we're certainly not, you know, fully done with the twenty sixth you know, outlook for this brand. The complete feeling on this is one of of very much positivity. We feel there's more wholesale opportunity as we really work for all of the accounts. A lot of them are our same, customers that we work within our brand portfolio. Feel there's more opportunity and, direct to consumer on digital as we really, try to work through some best practices on that particular, piece. And then finally, we we see an opportunity. The Europe piece of it, feel is is in good shape and really has a lot of, opportunity to grow faster. And then China, we're making a ton of progress working to together, and I really would like to say I I feel very confident in early, early signs from that team. So as you can hear, obviously, I feel more convicted than ever about it. It's just gonna take us you know, getting through this back half and really doing the necessary actions to make this better. Moving over to Famous Footwear, as I stated, we're seeing a lot of success with premium brands coming through our assortments. And and I'm very excited to say that seeing continued strength as brands that you know from us like, our Birkenstock business continues to grow. We've seen nice acceleration in brands like Timberland coming through. And what we're finding in all of this is that our consumer is about as ready to embrace, I would say, newness and these really strong brands with deep meaning to the consumer right away. And, there's very little lag time on that. So that's really been encouraging for the whole team to go faster and further. And then finally, the fashion moments that we talked about in our brand portfolio in terms of tall shaft boots, return to heeled, and other items, are working very well at Famous Footwear, and we plan to build on those aggressively as we move into 2026. So the discussion about really more premium brands and the consumer voting for those has really worked out very nicely, and we plan to build on it. Dana Telsey: Got it. And then I think you'd mentioned in the prepared remarks something about women's underperforming and athletic slightly positive. What are you seeing in women's? Because like you just mentioned, we're seeing and hearing about strength and fashion for women. Jay Schmidt: Yeah. So, clearly, you know, our our key strength in Famous, particularly in the third quarter, driven by athletic. We still have that back-to-school month in that. And for sure, our Jordan business was explosive, in that moment. So that along with many of the you know, key athletic brands we've seen, nice performance in Q3. We do feel an to build back our, our fashion business in fourth and third and fourth quarter. And, with the leadership team in Famous Footwear right now with marketing supporting that, we're seeing some nice proof points. The good news is is that the key brands that we're still working are still working there, and our holiday, marketing, which has really featured a lot of these big items, has connected very nicely with the consumer. And glad to see excuse me, that our that our business really quarter to date is on a flat comp basis. So that's really exciting too. So lots coming through, but it is it's really a lot of the big trends that are resonating are resonating with our consumers and then new brands and premium brands are growing fast. Dana Telsey: Got it. And just lastly, Jack, on the margins, when you think about gross margin, for Famous and Brand Portfolio the SG and A, any markers that would be different going forward than what happened in this third quarter and what does it mean for the balance sheet? Thank you. Jack Calandra: Yeah. Dana, so in terms of in terms of the gross margin, we are expecting improvement in Q4 in the overall consolidated gross margin, as I referenced. And really expecting to see that from both both businesses. So in the case of Famous, while we think the IMUs will largely be similar to the third quarter, we are expecting improvement from shrink, which is something that we've been focused on for a little while in bringing that down as well as the LIFO reserve that I one of those inventory reserves. So we are anticipating in Q4 Famous to do better than the down 130 basis points it did in Q3. And then in brand portfolio, while we expect the tariff impact to be about the same, that 175 basis points. We expect more favorable channel and customer mix that's gonna allow us to to further improve that that down 200 basis points without Stuart Weitzman that we we posted in Q3. Dana Telsey: Thank you. Operator: Our next question is from Ashley Owens with KeyBanc Capital Markets. Please proceed. Ashley Owens: Hi, great. Thanks for taking our questions. Wanted to just start really quickly, on the Stuart Weitzman inventory. I think just doing the math with some of the clarifications you gave in the PowerPoint deck we're sitting at. A little bit north of $75 million on the balance sheet today. Could you just help us dissect how much of that needs to be worked through over the next five months to get to really healthy levels, and then what the promotional or discounting is gonna look like to move through that product while still protecting that brand? Liz Dunn: Thanks. Yeah. As this is Liz. I I'm not sure we're gonna give the full detail, but I would say, like, broadly, if you think about the inventory that came over, it's there's maybe a quarter to a third of it that that we would put in that kinda aged in excess category. And as as you'll see in our financial filings, as the valuation firm has looked looked over the value of the inventory coming through. It's still in that kinda $85 to $90 million that we saw when we acquired it, though that includes, you know, the step up. So that that is where they're pegging it in terms of what they think the the value of that inventory is. Right now. I'll let Jay answer the question about how we're thinking about disposing of it in a, you know, in a way that doesn't damage the brand? Jay Schmidt: Yeah. We think that we really are know, we're working on it from a multiple I would say, action basis. The inventory is global, so that requires different strategies in different places. But again, it is a and we were are taking the hard steps to do it. We think we're more than two-thirds of the way there in terms of really nailing that, but that will be something that you'll see most of that action move through the fourth quarter on Stuart Weitzman, meaning we've we've sold a lot of it. But, again, the shipping will take place in the balance of the year, and we are trying to do a lot of that before as you can imagine, we come into our Caleres facility in terms of you know, integration. Ashley Owens: Okay. Understood. Just a follow-up. Maybe more structurally, as we look beyond some of the moving pieces, over the past two years, just how should we think about the company's normalized earnings power once you're through this transition period with STORE? And then within that, which factors do you see contributing the most to rebuilding that Any directional guardrails you can provide on what a more sustainable profile looks like Thanks. Jay Schmidt: Well, I think our long-term strategy is continuing to focus on our brand portfolio and particularly the lead brands in terms of driving through you know, more profitability and more growth coming through there. We again, are going to fully outline everything in the March piece of it, but obviously, we we're feeling that with the tariffs kind of moving on, we will have better results in 2026. And then for sure, as we kind of outlined, we are working very much on these I would say, the SG and A across the company as we really put these centers of coming through so that we can return to growth in a more way. And those are the key pillars. Dramatically growing our international business. Remember, it's our smallest one, but it offers us the biggest growth there. And then probably the latest one is just how much we take through direct to consumer and that favorable profitability, particularly on our brand side is coming through very nicely. And then with Famous, we're working on a lot of things, but we're really gonna be looking at, you know, lower growth and and really working on just improving the profitability on that segment of our business. As we continue to improve the brand mix and the assortments there. Ashley Owens: Alright. That's super helpful. Thank you. I'll pass it along. Operator: Our next question is from Mitch Kummetz with Seaport Research. Please proceed. Mitch Kummetz: Excuse me. Yes. Thanks for taking my questions. Jay, in your prepared remarks, you talked about taking actions to go into next year as clean as possible. And then you would expect to drive growth next year. Could you elaborate on what you mean by growth? Is that mainly growth for margins, particularly on the gross margin side. So can you impact that a little bit? Are you expecting tariffs to be kind of a net positive year over year next year given some of the challenges in the back half of this year? And also, is there margin opportunity on, you know, being, you know, less promotional next year. Jay Schmidt: Well, I'll let Jack answer some of the details on where that is. But for sure, we are looking forward in a better '26 just to kinda qualify my my remarks, first of all, we spent a lot of time really trying to get Stuart Weitzman to a place where we think we're leaving behind some of the you know, the inventory pressure and other cleanup that we're doing there and moving forward in a more positive way. So that's work that we're doing. But across the portfolio, we are seeing some real lead brand strength as we've demonstrated and we think it's certainly, well, not gonna get everything on gross margin back, we do feel that we're gonna be in a much better place. Sure. We're not guiding 26 right now, but that's what we see as we so far. And then finally, we do have you know, structural SG and A savings coming through that we feel are necessary to run our business more profitably and efficiently. Jack Calandra: So Mitch, I would just say that you know, we've talked about the lag impact of the actions we've taken, on mitigating the tariffs. And we certainly expect that we're going to see improvements in gross margin in 2026 as a result of that. I would say though that, you know, given that the incremental tariffs that had been put in place this year range from a low of 19% incremental to 50% incremental, we, at this point, I would say, haven't offset all of that through the actions we're taking on gross margin alone. That's why we're also looking at other SG and A opportunities so that we can keep the impact of tariffs neutral from an operating margin perspective. Mitch Kummetz: And then just to clarify, Jay, when you say drive growth, in 'twenty six, do you mean on an organic basis? Because obviously, if you're going if if Stewart is going from dilutive to breakeven, obviously, that implies growth on that business. But do you think that organically, you will see growth in 'twenty six? Jay Schmidt: We will know, be certainly looking for organic growth within particularly as we've demonstrated some of our lead brands that we think are continuing to grow that we're investing in. But, again, we're we're, not guiding on 2026, so I think that's probably the right piece to it. But to answer your question directly, yes. Organic growth is something that we are targeting for next year. Mitch Kummetz: And then on store, you mentioned breakeven. Next year. When you think about the longer-term margin profile for that business, do you expect it to be kind of at least in line with the the the grip the the margin on brand portfolio as an enterprise? You think it can be better than that? And is the biggest opportunity going from breakeven to something better mostly on the SG and A side, or is it really kind of equally across the board? Jay Schmidt: I think for sure, we see I would say it's safe to say that we would be targeting where our brand portfolio average comes through. I think that we feel a we could see a pathway to it you know, notwithstanding anything else that would come in the future. But, certainly, it's a place that historically the brand has been. And, we really feel that we will find it that way in in really a new way of working with them. So I think, know, that's why we're we're so committed to, I think, getting all of these would say, the best of the Caleres capability structure into Stuart Weitzman so the team there can really focus and on growth and really continuing to try to make this, business as strong as possible. But I would say that's that's probably fair to say for right now. Mitch Kummetz: Okay. Thank you. Operator: This now concludes our question and answer session. I would like to turn the floor back over to Jay Schmidt for closing remarks. Jay Schmidt: Thank you for your continued interest in Caleres. Before we close, I want to recognize the dedication of our teams across the company have shown tremendous determination and openness to new ways of working as we bring Stuart Weitzman into the fold. We know we will be operating differently in 2026 and going forward. And the excitement and energy around this is palpable. I am deeply grateful for everyone's commitment to making that happen. It has been a difficult year, and we will look forward to a more profitable 2026. Thank you. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry Second Quarter Fiscal Year 2026 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. We have also made available in the Investor Relations section of our website at kornferry.com a copy of the financial presentation that we will be reviewing with you today. Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performance, plans and goals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, investors are cautioned not to place undue reliance on such statements. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, which are beyond the company's control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation and in the periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2025 and in the company's soon to be filed quarterly report for the quarter ended October 31, 2025. Also, some of the comments today may reference non-GAAP financial measures such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measures is contained in the financial presentation and earnings release relating to this call, both of which are posted in the Investor Relations section of the company's website at www.kornferry.com. With that, I'll turn the call over to Mr. Burnison. Please go ahead. Gary Burnison: Okay. Thanks, Regina, and thank you, everybody, for joining us. In the quarter, our performance was outstanding. I'm really proud, proud of our firm, our colleagues and our purpose. We enable people and organizations to be more than. Talent is everything. It's a universal need, and that's our business. We're a household brand. We're seeing by millions of people around the world, and we have incredible permission to make an impact in the world, which is currently defined by digitization and economic fluctuation. Today, organizations require more than static strategies. They need the ability to adapt, align and act. Our firm sits at the intersection of these opportunities, unlocking the potential in people and organizations, synchronizing strategy, operations and talent to accelerate performance, fuel growth and inspire a legacy of change. At the heart of our strategy is client centricity. Here's just a few examples in the quarter where we've integrated multiple solutions to create enduring client partnerships. One of the largest commercial real estate services companies is partnering with us to secure a contract to build and manage multiple AI data centers for a major tech company. we're providing RPO and total rewards to make hundreds of hires per year, a major university in the United States is opening a new hospital, and we're developing a comprehensive talent strategy to bring in hundreds of physicians and other professionals. A global consumer company with over 150,000 employees were assessing and developing leaders to ensure they're equipped to drive enterprise-wide digital and AI transformation. I mean those are just a few examples, and it's clearly now today, the larger, the more recurring relationships we have, really pays off for, not only our clients, but our shareholders. And now as we begin another calendar year, we're going to lean even more heavily into our collective We are Korn Ferry strategy. Our go-to-market efforts, our marketing initiatives and our solution orientation in all of our organization is indexing more heavily into 1 business, not 5 segments. Clearly, the strategy is working, driving resilience and durability in our business. And I'm really confident that we are incredibly well-positioned employees for a tremendous 2026. With that, I'll turn it over to Bob. Bob, go ahead. Robert Rozek: Great. Thanks, Gary. Good afternoon and good morning, depending on where you're at. In the second quarter, our financial and operating results continue to improve. We posted our fourth consecutive quarter of accelerating growth, which serves as a continuing proof that the intentional execution of our strategy to transform Korn Ferry is succeeding. In today's uncertain business environment. There has never been a greater need for talent, and that's exactly where we come in. We've built an organization to fulfill the comprehensive talent needs of our clients. We deliberately expanded our areas of expertise in the human capital solutions where our people, enabled by technology, and our foundational assets are uniquely positioned to help our clients drive their business performance. We continue to evolve the integration of our colleagues and solutions to enhance how we address our clients' challenges in changing needs. Now looking more broadly at the company's financial performance over the quarter, we continue to demonstrate our ability to successfully execute our strategy in a low visibility and uncertain business environment. We have been on a deliberate journey to build a more durable and stable base of fee revenue and profitability, and at the same time, provide additional value and impact for our clients. And now with the go live of our new talent suite technology platform this past November, we are in even better position to leverage our foundational assets to lean into our collective go-to-market efforts as a holistic talent partner, as Gary mentioned, as 1 business. In addition to the detailed results found in our posted earnings presentation, I'm going to go through a few company-wide and solution-specific highlights in the -- for the second quarter. Our business referrals grew to 27.6% of consolidated fee revenue, up approximately 250 basis points, both year-over-year and quarter sequential, demonstrating early signs of progress driven by our We Are Korn Ferry go-to-market evolution. Estimated remaining fees under existing contracts increased to $1.84 billion, and it's up 20% year-over-year, led by strong new business in RPO. Executive Search fee revenue remained strong, growing 10%, it's the sixth consecutive quarter of year-over-year growth. Professional Search and interim fee revenue was up 17% year-over-year with growth in both professional search, plus 7%, and interim, including the Trilogy acquisition at 24%. Our subscription and licensed new business continued on a positive trajectory, growing to 43% of Digital's new business for the quarter. And last, hourly bill rates in consulting and interim remained strong at $460 and $142 an hour, respectively. Now I'm going to turn to overall company results. Consolidated fee revenue grew 7% year-over-year to $722 million. Earnings and profitability also remained strong. Adjusted EBITDA grew $8 million or 7% year-over-year to $125 million. Adjusted EBITDA margin was strong at 17.3% and adjusted diluted earnings per share grew $0.12 or 10% year-over-year to $1.33. Total company new business, excluding RPO, grew 4% year-over-year, led by strength in EMEA, and RPO delivered $253 million of new business in the quarter, was 16% coming from new logos and 84% from renewals. As I mentioned previously, estimated remaining fees under existing contracts at the end of the second quarter were $1.84 billion, of which we estimate approximately 57% or $1 billion will be recognized within the next year, with remaining 43% or close to $800 million estimated to be recognized beyond the next 4 quarters. Turning to our regional results. Fee revenue in the Americas was up 3% year-over-year, led by executive search and RPO. EMEA fee revenue continued to be strong, growing 20% year-over-year, with growth in Executive Search, Professional Search and interim consulting and digital. APAC fee revenue was flat with moderate growth in Exec Search and Pro Search and interim offset by slight declines in RPO consulting and digital. And finally, our capital allocation during the quarter remained balanced. Through the end of the second quarter, we returned almost $70 million to shareholders through combined repurchases and dividends, and we invested $43 million in capital expenditures focused on talent suite, productivity tools and other solution and product enhancements. Now turning to our outlook for the third quarter of fiscal '26. Assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates, and recognizing the year-end holidays, we expect fee revenue in the third quarter of fiscal '26 will range from $680 million to $694 million, our adjusted EBITDA margin to range from approximately 17.2% to 17.4% and our consolidated adjusted diluted earnings per share to range from $1.19 to $1.25. And finally, we expect our GAAP diluted earnings per share in the third quarter to range from $1.15 to $1.21. I'm excited about the next step in our go-to-market evolution. We Are Korn Ferry with a real focus on becoming the holistic talent partner for our clients. At the same time, we remain committed to controlling what we can, leaning into identified growth opportunities and driving operational excellence. We remain well positioned to drive long-term, profitable and sustainable growth by using our foundational assets to deliver expanding and differentiated solutions to our clients. I'm more confident and excited than I have ever been about what this company can become. With that, we would be glad to answer any questions you may have. Operator: [Operator Instructions] Our first question will come from the line of Josh Chan with UBS. Joshua Chan: It seems like the Executive Search business continues to perform well. Could you talk about where you're seeing the sources of strength within North America and how you think about the business in light of slower job market velocity, but you're still posting pretty good results? Gary Burnison: Well, we think of the company as one business, number one, not 5 segments, and that's what the new We Are Korn Ferry strategy is really about. And when you look at the different solutions, for example, Executive Search, you're seeing really significant growth worldwide in just about every market. And I think that is a combination of factors. Number one, a realization on the part of companies that would get you here won't get you there, and that requires different leadership skills today than 5 years ago. You've also got the issue of the retirement of baby boomers, what I've called Peak 65, where, in America, for example, you've got 4 million or so Americans that are retiring over the next several years. You also have a situation where people are looking at their life. And most of the people that are leading C-suites, who're leading C-suites in COVID 5 years ago, and I think there's a lot of people that are striking a different work-life balance. So I think it's all of those factors combined that are leading to the strength in that solution as well as our strategy. And as Bob talked about, this quarter, in terms of business referrals, with inside the firm, I mean it was almost I think it was an all-time high at almost 28%. And I think that shows the strength of combining IP with tremendous people and a worldwide reach. Joshua Chan: Okay. And on that point about the referrals, could you give us a sense on where it has been historically over a long period of time? And then where you think that could go as you focus more on this strategy? Gary Burnison: Well, we would like to see it go to a good 35%. It's been 25%, 26%. I mean, generally, it's been up into the right over time. And we think there's opportunity. I mean, I -- we just finished -- we have 1,800 partners and principles that are responsible for originating business. And we just completed getting together in person 50% of them, 900, and we're going to do the next 900 over the next several months. And I'll tell you that it was energizing. And it's clear to me that we're only -- we're using 10% of our potential. There's no doubt about it. But we have to pivot the organization from segments. We don't have 5 businesses. We have 1 business and 5 solutions. And I think we're going to lean even more heavily into that in 2026. Operator: Our next question will come from the line of Trevor Romeo with William Blair. Trevor Romeo: I kind of, I guess, just wanted to follow up on that last line of questioning but maybe a slightly different way. It did look like I think some of your placement type solutions seem like they improved either sequentially or the growth year-over-year accelerated a bit, thinking Pro Search interim, especially on a sequential basis for Interim, RPO, new business wins, sounds like the cross referrals and the We Are Korn Ferry strategy driving some of that. But I also wanted to ask if -- is some of that you're starting to see any turn in the kind of willingness among the client base to hire more or spend more? Or is it mostly just those cross-sell efforts that are driving some improvement there? Gary Burnison: Well, we think the strategy is clearly working. I mean there's no doubt about it. Just look at the last 8 quarters in what I consider a labor recession. And the guide in the next quarter is implies 3% growth. And if you look at some of the other competitors, and it would be negative 3% or 4%. So I think it's clearly the strategy is absolutely working. And you're right. we have seen both in the Pro Search and the Interim Solutions an uptick sequentially, call it, 7% or 8%. I mean, take the interim solution where we didn't have that solution just 5 years ago. And the last investment that we made there was in the U.K., and that solution and that integration within EMEA has been a home run. I mean it's -- and our market opportunity in EMEA around that solution is just -- it's incredible. So yes, we've definitely seen some green shoots here. The RPO solution, a killer quarter of new business. A good part of that was renewals, but that shows the quality of our IP and the use of AI in that solution. So I'd step back and say, since we last spoke, has the market really changed? It really hasn't changed. And we'll see what the Fed does here over the next couple of days. Trevor Romeo: Okay. So I guess not that much change in the macro. Maybe just for my follow-up on the consulting solution. Just wanted to ask, I guess, when you look at the bill rates up 10% year-over-year, what would you say about the mix of, I guess, services within that and the mix of senior versus junior consultants, whether either of those dynamics is sort of boosting the bill rate growth and just the content for that question. I think 1 of the narratives out there is that AI is going to put a bunch of pressure on consulting businesses from a pricing perspective, and you don't appear to be seeing that. So we just want to get your take on those drivers of the bill rate. Gary Burnison: Well, I think it speaks to the integration of the overall firm and delivering bigger more impactful engagements at scale. And when you look in this last quarter, a big driver there was org strategy. and it's really a recognition. It's not a question of companies just how we're going to use AI and that's going to eliminate 15% of the workforce. That's the wrong approach. I mean it's really around how do you look at your overall skill set and how do you look at your workforce. And so part of the growth there in consulting is our strategy and really taking a more holistic approach, what technology means to your company over the next 3 to 5 years. And I'm not even so sure that bill rate is actually the yardstick that we should be measuring going forward. It's really around the impact that you have. And so Yes, the bill rate has climbed. I mean, over the last several years, that bill rate has climbed from probably the high $200 an hour to where it is today at almost $500 an hour. And you look at the new business of the firm as a whole and you see that in the consulting solution, it's like 40% of the new business are big engagements, over $500,000. I mean it's absolutely been a transformation. And I think looking at that solution quite candidly, we have substantial opportunity in North America. And that's something that we're getting after, and we've been going at it over the last 2 quarters with respect to talent and bringing different talent into that solution in North America. Robert Rozek: Trevor, this is Bob. Just maybe a little bit more color on that. Gary mentioned engage with over 500 or about 40% -- over $500,000 or about 40% of the new business in consulting. And just last quarter, it was 37%. So again, we're just providing further proof points that the strategy is working, and we're definitely selling larger, more transformational engagements. Operator: Our next question will come from the line of George Tong with Goldman Sachs. Unknown Analyst: This is Sami on for George. And it Search, we typically see a step down in 3Q and then a ramp in 4Q. With the current strength in new business, should we expect this year's seasonality to look different? Is the new is new business strong enough to offset the usual softness in the third quarter? Gary Burnison: Our guide doesn't imply that. I really think that clients, the way the holiday season falls, I mean we're I think you're going to lose 2 weeks. And I think that's going to be across the board. It's going to certainly impact the entire business. And so that is factored into our guidance. So I wouldn't -- we haven't forecasted that. Could it happen? Yes, it could happen, but that's not in the forecast. Unknown Analyst: Got it. And just on consulting. So build rates were strong, but margins were flat. Could you just talk about how much runway is left in that mix shift towards higher value engagement? In other words, how much more of a lift can you get on build rates? And is there a higher cost of delivering these larger value engagements that cap your margin upside in consulting? Gary Burnison: No, no. There's substantial opportunity with that solution. If I dial -- this is my 95th quarterly earnings call. And when I dial back the clock, what you would know is that years ago, we were essentially selling vitamins. And today, we're in the health and wellness business. I mean it's really gone from very, very small transactions that were largely around assessment. And it's moved from that to now what Bob just talked about. We're almost 40% of the new business was around larger engagements. So I think there's plenty of opportunity there and upside. And we had just had to balance utilizing all of our IP and bringing in talent to continue to drive that business towards health and wellness. Robert Rozek: Yes. And this is Bob. And the one thing I would add to that is the -- if you think about the current environment, the uncertainties and somewhat chaotic, it's actually a good thing for us because clients are trying to figure out how to operate in a new and different world. And they're turning to us. And that's where you see like our org strategy business, for example, being very strong today. And those are the larger more -- a more transformational engagements. Operator: Our next question will come from the line of Tobey Sommer with Truist. Tobey Sommer: In the Search business, could you maybe describe from a high-level perspective any kind of time savings and efficiencies that you're able to squeeze out using various AI tools throughout the product? And is it in fact shortening the amount of time to fulfill a search? Or are customers kind of filling that savings by requesting more of you, and therefore, the time is equivalent to where it used to be? Gary Burnison: No, it's definitely more efficient today. A small part of that is clearly technology. But I think the bigger driver of it is the way work is getting done today with COVID. I mean just last night, I was on a very, very high profile confidential search, and we were on Zoom. And so I think that COVID has changed everything, how we can send and how we produce and even how we work. Now with the technology, clearly with AI, that's had a bigger, much bigger impact on, say, our RPO business that Bob could talk about. But that's definitely -- that's for sure, had an impact there. We think there is the further opportunity in the Executive Search business. But I think it's going to be somewhat limited. We use our IP in the search solution taking a look at not only the outward leadership style, the traits and drivers and all that. There's definitely some opportunity there. But it's going to be more of a high-touch solution for sure, no doubt about it. Robert Rozek: And Toby, just to maybe elaborate a bit on our appeal. We've actually been using AI within that solution for a number of years now. And I think that's part of what differentiates us in the marketplace in what we've -- the area where it's really become much more predominant is in the, what I would call, the research base, candidate identification, sourcing and so on. But we've been doing it for probably 3 or 4 years now using AI in that process. We actually have a tool. They call it KF Nimble Recruit, which is "recruitless recruiting," but it's really focused on candidate identification and sourcing. Tobey Sommer: Okay. And then if you could elaborate a little bit more the sunsetting of a system [indiscernible] and sort of those accounting elements with now that tax we just launched. So I wasn't exactly sure maybe you could unpack that from a business perspective and an accounting perspective? Gary Burnison: Toby, could you repeat that again? Could you repeat that question? Tobey Sommer: Could you talk about the sunsetting of the system and the accounting impact, and maybe why we're doing it and if it relates to the [indiscernible]? Gary Burnison: Bob, you want to... Robert Rozek: Yes, I can take that. Yes. So Toby, we -- like I said in my remarks, we launched Talent Suite. It was on November 17. And we've talked about this over time, where our foundational assets historically set an older system that wasn't quite as well connected, different repositories for different parts of our data sets and so on. What the talent suite did was a couple of things. It brought everything together in 1 single repository. So it's a single sign on, which makes it easier for somebody using, whether it's our consultants or a client directly using our foundational assets. So you have a single sign on. It gives you the ability to move across the data sets unencumbered, where, in the past, you would log into a repository out, log out, long into a different repository, log out. And then the third thing it does is the structure of our data has all been harmonized, which really gives us the ability to work across our data sets to provide analytics unique and differentiated insights when you think about all of the data sets we have whether it's assessments, pay data, success profiles, behavioral science that sits at the center of everything we do. The talent suite houses all that in a much more effective and efficient way for people to consume it, again, whether it's our consultants or a client directly. And so with the old system that we had, we sunset that with Talent [indiscernible] going live. And last quarter was the largest quarter. And the way that we we did it is we had to make a decision to sunset it, and we did that back in July. And so the way the accounting worked, it required us to just accelerate the remaining undepreciated cost of, we used to call it the Talent Hub, but we accelerated that depreciation, and that's what you saw in the quarter. Tobey Sommer: Okay. Okay. I hope that makes sense. So what are your expectations for the financial impact from lease [indiscernible] suite? Gary Burnison: Well, we think it's going to be incredibly important for the organization, and as I say as 1 business. You've now -- clients have the ability to actually go between rooms and license all of our IP, which is a mess from comp data on 30 million people to org strategy, almost 15,000 success profiles. So I think it's going to be incredibly positive. Now it's going to take us some time for sure. We just launched this. But the reality is we have thousands of clients that are choosing 1 thing off the menu. And there's people that are just ordering dessert and people that are just getting appetizers. And this gives us the ability to go to them and provide the entire menu. And as Bob said, it's the ability to provide really deep analytics across from how somebody is rated to how they're compensated. I mean we have a phenomenal opportunity here around, for example, pay transparency. And in the EU and in the United States even, but in the EU, if you have more than 250 employees in a country, you're going to have to make a lot of disclosures around paid transparency. And we've calculated that total market opportunity to be a couple of billion dollars. And look, if we could get 10%, 20% of that, that's enormous. So we've got a major -- and what talent we does is it enables -- because to be able to do that, you have to have a job architecture. And we do have that as part of our IP. And so there is an opportunity to use the talent suite to combine the job architecture with pay and then going in and doing an analysis of of paying equity and pay transparency. And Toby, maybe just a little bit more context to give you an example that I use quite often. So in the old world, if you went in and took an assessment, you'd have to log into that database, if you will, take the assessment, get the results, you log out, then you have to go over to where our development content sits, and you'd have to log into that, find the content and then develop yourself. Under talents you go in, you just sign in once, you take the assessment, you get your results and Talent Suite delivers the development content that you need, not just delivering it to you, but through the work of our Korn Ferry Institute, actually prioritize in a way where the first thing you do has the greatest impact on company and on your performance, and then second, third, fourth and fifth and so on. And so for us, it's -- again, it's a much more effective and efficient way for people to consume our foundational assets. But the key is all the assets that Gary talked about, being able to bring them all together in a way that's easy, effective and efficient is really what we're excited about. Tobey Sommer: Last question for me. Have you seen any change in [indiscernible] behavior since your only public [indiscernible] and maybe have or haven't do you expect [indiscernible]? Gary Burnison: You kind of cut out there. I heard part of it was around a competitor, but I didn't get the essence of the question. Tobey Sommer: Yes. Have you seen a change in diverse hired [indiscernible]. Gary Burnison: No, no, no. Not at all. I mean that's a -- it's a great brand. And what these -- there's 5 or so principally executive search firms and they all have an opportunity here. They have incredible permission. But no, I haven't seen anything. Operator: Our final question will come from the line of Alex Sinatra with Robert W. Baird. Unknown Analyst: This is Alex Sinatra on for Mark Marcon. I was just wondering, obviously, from a growth perspective, things have been going well. I'm seeing broad-based progress. But I wanted to ask on the digital side, there was a decline a bit. So I was wondering what drove that. And then looking forward, if you could speak on the pace of new sales in that business and what to expect there as well as in your client conversations, like what are your existing customers indicating going forward as well as the new people that you're bringing on? Gary Burnison: Well, I think a couple of things. Number one, we made a purposeful decision several quarters ago. that we had to get the entire firm behind the monetization of our IP, including our Consulting Solution. And so what we've done over several quarters is we've actually reduced the number of sellers in that solution by about 35%, a kind of massive, massive change. And where we're pivoting to is a couple fold. One is around the entire firm being able to talk about how an organization separates great and good using our IP. And the other is now a pivot for that solution to get more enterprise sellers and consultants. And so some quarters ago, we had a workforce and that solution that were deep subject matter experts. And where we're pivoting that is to get a sales force that is more enterprise oriented. And so that's impacted for sure, the top line performance of that solution very, very purposefully. And so over the next several quarters, what you're going to see is us continuing now to add more enterprise solution capability in "digital." And then the other thing is that in this quarter, we had a couple of very big transformational deals that we thought were going to hit in the second quarter. And actually, they got postponed to the quarter that we're in right now, one of which has been secured. And those are multimillion dollar engagements. And on top of that, you've seen us pivot towards more licensing kind of arrangement. So those are the factors in that part of Korn Ferry's business. Unknown Analyst: Great. And then I was just wondering on the new RPO contracts, if you could talk about where those are coming from? And how many were from clients switching maybe from other firms as opposed to companies that are new to the IPO side? And then as well, how many of those were from like cross-sell motions given the new We Are Korn Ferry movement? Gary Burnison: Well, the majority were around renewals, which we think is an unbelievable testimony to the quality of what we're doing. And they were from -- they're very, very much part our house accounts, we call them marquee and diamond clients, and those represent 40% of the overall revenue of the firm. And in fact, those marquee and diamond accounts have outperformed the portfolio. And I think if you look at the the growth in those clients has been something like 10% compared to 3% or 4% growth. So it's been in industrial and health care. Those have been the 2 areas that have probably seen the most uptick in contributing to those RPO wins. So I would say 3/4 of it was renewals of big, big health care and industrial companies and 25% new logos. Robert Rozek: Yes, it's Bob. Just to give you maybe a bit more color on the business referrals. If you go back over time, roughly 50% of the fee revenues in RPO came from a referral from outside of that particular solution. Operator: And it appears there are no further questions, Mr. Burnison. Gary Burnison: Okay. Regina, Listen, thank you, everybody, for listening. It's a holiday season and certainly have a wonderful holiday, and we look forward to speaking to you in the new year. Thanks, everybody. Bye-bye. Operator: Ladies and gentlemen, this conference call will be available for replay for 1 week starting today running through the day December 16, 2025, ending at midnight. You may access the Echo-replay service by dialing (800) 770-2030 and entering the access code 2574781 followed by the pound key. Additionally, the replay will be available for playback at the company's website, www.kornferry.com in the Investor Relations section. This concludes our call today. Thank you all for joining. You may now disconnect.
Operator: Welcome to the Braze's Fiscal Third Quarter 2026 Earnings Conference Call. My name is Leila, and I'll be your operator for today's call. [Operator Instructions] . I'll now turn the call over to Christopher Ferris, Vice President of Braze Investor Relations. Christopher Ferris: Thank you, operator. Good afternoon, and thank you for joining us today to review Brazer's results for the fiscal third quarter 2026. I'm joined by our Co-Founder and Chief Executive Officer, Bill Magnuson, and our Chief Financial Officer, Isabelle Winkles. We announced our results in a press release issued after the market closed today. Please refer to the Investor Relations section of our website at investors.brave.com for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding our financial outlook for the fourth quarter and the fiscal year ended January 31, 2026. The anticipated benefits from and product advancements due to the combination of Braze and ongoing developments in Braze AI technology, our expectations concerning new customer verticals our anticipated customer behaviors, including vendor consolidation and replacement trends and their impact on Brace, our potential market opportunity and our ability to effectively execute on such opportunity, and our long-term financial targets and goals, including our expectations regarding our profitability framework. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from our expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks identified in today's press release and our SEC filings, both available on the Investor Relations section of our website. I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and to aid investors in further understanding the company's fiscal third quarter 2020 performance in addition to the impact these items have on the financial results. Please refer to the reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations section of our website. The non-GAAP financial measures should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now I'd like to turn the call over to Bill. William Magnuson: Thank you, Chris, and good afternoon, everyone. We're pleased to report strong third quarter results, generating $191 million of revenue, up 25.5% year-over-year and 6% from the prior quarter. We also continue to drive efficiency in our business, improving non-GAAP operating margins by over 400 basis points year-over-year and generating $18 million of free cash flow. We have now delivered 4 straight quarters of non-GAAP operating income and 6 straight quarters of non-GAAP net income, demonstrating our commitment to driving higher profitability while thoughtfully reinvesting in our business with the goal to position Braze as the global standard for omnichannel customer engagement. Our momentum was strong in the quarter as we again realized solid bookings across verticals and geographies. Pipeline generation was solid, indicating continued market demand, while customers continue to adopt more channels and AI solutions, driving optimism as we look ahead to fiscal year 2027. We achieved our strongest quarter of customer additions in 3 years, adding 106 sequentially and 317 year-over-year to 2,528 up 14%. Our large customer additions were also very strong, adding 2,500,000 plus ARR customers sequentially and 69% year-over-year to 303, up 29%. Recent new business wins and existing customer expansions include CJ AlvYoung, Eventbrite, Goat, Grubhub Seamless Linkt, Mindbody, nuts.com, Rafiq, RSG Group, GMBH and Vivid seats, along with many others. Competitive takeaways from the legacy Marketing Clouds continue to demonstrate the market's preference for Braze's AI-driven omni-channel customer engagement solution, leveraging first-party data and frontier AI to deliver on modern customer engagement use cases. This quarter, brands across diverse industries and geographies migrated to Braze's from legacy platforms, including a global appliance manufacturer, North American financial services firm, a Latin American retailer, a North American consumer insights platform, a sports league in APAC, a North American restaurant chain and a luxury goods retailer in APAC. These wins validate Base's ability to offer a unified real-time solution that supports ambitious AI-driven customer engagement strategies. Our comprehensiveness and advanced yet intuitive capabilities are also on display when we compete against less sophisticated point solutions, including recent wins with the travel platform in EMEA, a property finance firm in North America, a resale marketplace in Latin America and a financial services firm in APAC, among many others. As we navigate this dynamic technical and competitive environment, Braze remains forward-looking, rapidly introducing new AI-driven capabilities alongside first-party data activation. By applying state-of-the-art reinforcement learning and generative AI across an ever-evolving array of messaging channels and product interfaces, we help our customers leverage their first-party data to deliver more relevant experiences for their consumers and grow their businesses. This power of AI to build personalized cross-channel campaigns was on display during this year's Cyber Week, running from November 25 to December 1 as marketers increasingly leveraged AI to accelerate campaign creation and improve overall performance. Over the Cyber Week period, Braze delivered 102.5 billion messages with global sending throughput peaking at about 28.5 million messages per minute. During the 4-day period running from Black Friday through Cyber Monday, Braze delivered nearly 60 billion messages with 100% uptime, demonstrating the strength, scale and reliability of our platform. Behind the impressive headline numbers is also a story of increasing sophistication as marketers continue to evolve away from single channel campaigns toward more sophisticated programs. leveraging dynamic data to create and strengthen direct relationships with their customers across a variety of channels. In addition, Braze witnessed the growing use of AI to power operational efficiency and personalization at scale, as brands made extensive use of Braze AI functionality to accelerate campaign creation, improve the resonance and relevance of messaging for their customers and elevate their work during a critically busy period. We are pleased to see customers using the full spectrum of Braze AI capabilities including by crafting dynamic campaign content using the brace liquid assistant, accelerating content production using Braze AI-copy and image generation tools, ensuring strong clarity, impact and tone of messaging with Braze AI content quality assurance and delivering smarter product personalization with AI item recommendations. The increasing sophistication of our customer base and the rapid uptake of AI as a competitive lever affirm the strength of our AI road map and the Braze community. Performance during Black Friday and Cyber Monday also reinforced the role of premium messaging channels as key drivers of conversion, retention and high-value engagement. During the Black Friday to Cyber Monday period, Braze orchestrated a 90% increase in SMS and WhatsApp message sends a 55% increase in content cards impressions and a 32% increase in e-mail messages. The impressive volumes during such a crucial marketing period highlights the growing desire of marketers to diversify their strategies and further personalize their connection with their customers because SMS and WhatsApp are sensitive inboxes, brand performance and reputation is directly tied to how effectively they can personalize these experiences. Additionally, these premium messaging channels are also often utilized for mid-funnel use cases, where engagement, conversion and monetization are materially higher. Overall, the increasing mix of channels being used by Braze customers signals that the field of customer engagement is moving up the value curve, supporting the deployment of more complex campaigns and the activation of additional channels and platforms. This pattern is a driver of the vendor consolidation motion that we've highlighted in past earnings. It's a clear signal that Braze is becoming more deeply embedded into our customers' engagement infrastructure, and it highlights the need for further productivity gains and relevance enhancement from Braze AI. Innovation is central to Braze's DNA and its product road map. Since we anticipated the massive opportunity presented by the widespread adoption of mobile technology more than a decade ago, we have relentlessly seized this opportunity by developing leading-edge technology to advance the craft of customer engagement. Through AI, we believe these in Braze should feel like collaborating with specialists who accelerate and elevate your work. delivering the guidance and output from brand strategies, copywriters, developers and data analysts to help marketers win the competition for user attention, advocacy and loyalty. Over time, we aim to help marketers ascend from the drudge work of baby sitting campaigns and to instead operate as strategic conductors, building and delivering one-on-one personalized experiences that are impactful for their consumers and that build brand equity through resonance and reciprocal value creation. At our Forge customer conference in late September, we articulated how rapidly these tools and techniques are evolving. Previously, we've used the listen, understand and act framework to describe the problem space of customer engagement and the flow of our stream processing architecture. Now AI broadens the potential of each of these steps. Listen, becomes context as it is enriched with the insights and the comprehensiveness of an AI-enhanced composable data platform. Understand becomes intelligence as products gain the ability to both reason and act with enhanced autonomy. And action expands to interaction as AI systems increase their expressiveness and consumer behaviors evolve, with the real-time feedback loop guiding subsequent interactions delivered as a continuous experience. Let me take a moment to detail this conceptual evolution and explain how Braze is introducing tools to meet this moment. Modern AI is fed by context and enhanced by reasoning. Within Braze, that context is provided by the Braze data platform and enhanced by our native SDKs, partner integrations, robust APIs, reverse ETL capabilities and the recently available Braze MCP server. The intelligence phase brings the design advantages of composability beyond just data offering a full spectrum of composable intelligence, notably including the agent console, which enhances customer journeys enriches data and accelerates workflows. Agent console allows marketers to create custom agents that can be configured within Braze and deployed in both Canvas, our no-code visual development environment and brace catalogs to process enrich and reason about brand data and customer behavior at scale and speed. We have dozens of customers using the agent console to take an unstructured data, including natural language from customer conversations and respond interactively to maximize the value that they deliver in the most important moments for their consumers. We recently partnered with Aeroflow Health, a leading medical equipment and supplies company to optimize their SMS reordering process for breast pump supplies. After seeing the flurry of Braze AI product announcements at Forge, they rapidly experimented with the Braze AI agent console and Canvas contact steps to enable a sophisticated SMS conversation that understood natural language in real-time and processed orders automatically. The program is moving from testing to production after delivering a large conversion lift that could drive tens of thousands of projected additional annual orders. As marketers continue to experiment and innovate with these new features, the Braze operator also announced at Forge stands ready to speed their education and enhance their productivity. Operator streamlines existing work by accelerating campaign creation, analyzing reports and uncovering data insights automating quality assurance tasks and getting quick answers from documentation and source code through our intelligent assistant. Hundreds of our customers are enabled on operator and experiencing early success. And of course, we introduced the Aeroflow Health, AI decisioning Studio developed from the offer fit acquisition, which deploys AI decisioning agents to continuously experiment and personalize any aspect of customer engagement using insights and contacts from first-party data. Recently, we partnered with a large U.S. e-commerce brand to push their prior personalization strategy to new heights, using Braze AI decisioning Studio with reinforcement learning agents that independently experiment and identify optimal actions, they delivered deeper one-on-one personalization at incredible scale, managing approximately 5.1 Quintillion permutations to select the optimal action for millions of their customers. The results generated a rapid and meaningful uplift in customer engagement including a 12% uplift in app downloads and a 15% increase in conversion to premium memberships when compared to their prior strategy. The collaboration has driven such tremendous value in consumer insights that the customer is rethinking their entire life cycle marketing approach. Transitioning the job of relevance optimization for manual A/B testing to AI-driven one-on-one decisioning, moving beyond merely deploying the best averages and instead relying on modern reinforcement learning to maximize resonance with every individual. Finally, I'd like to highlight our first-of-its-kind SDK support for native apps and chatGPT that we announced in mid-October. Building on our deep experience from growing up in the mobile app ecosystem, this integration for chat PT apps will allow marketers to ensure that sophisticated customer engagement strategies are enabled in their new ChatGPT apps from the earliest phases of development. Brands will be able to continue the conversation with users of their chatGPT native apps on other channels while also using braces in product channels and personalization features to enhance their consumer-facing chat-type app interfaces. What's even more remarkable is the speed with which the braze engineering team was able to release this integration, launching a fully featured SDK, just 2 weeks after the announcement of the ChatGPT app programs. This was enabled by our deep experience building SDKs for native app development and our proprietary architecture, which allows for rapid support of new platforms and channels as technology and consumer behaviors evolve in tandem. Combined with our composable data and intelligence capabilities, we are seeing the best of Braze's foundations combined with the leading edge of AI. I'll conclude by reiterating our commitment to driving long-term growth, efficiency and profitability in our business. Thank you for your interest and support of Braze. And now I'll turn the call over to Isabelle. Isabelle Winkles: Thank you, Bill, and thank you, everyone, for joining us today. As Bill stated, we reported a strong third quarter with revenue increasing 25.5% year-over-year to $191 million driven by a combination of existing customer contract expansions, renewals and new business. Braze AI decisioning studio, formerly known as Offerfit, contributed $4.8 million of revenue in the quarter. This implies an organic revenue growth rate of 22.3% year-over-year, which represents the second sequential quarter of organic revenue growth acceleration. Subscription revenue remains the primary component of our total top line, contributing 95% of our third quarter revenue, while the remaining 5% represents a combination of recurring professional services and onetime configuration and onboarding fees. Total customer count increased 14% year-over-year to 2,528 customers as of October 31, 2025, up 317 from the same period last year and up 106 from the prior quarter. This sequential growth reflects the largest quarter-over-quarter increase in customer count since the third quarter of fiscal year 2023. Our total number of large customers, which we define as those spending at least $500,000 annually grew 29% year-over-year to [ $303 ] and as of October 31, 2025, these customers contributed 63% to our total ARR compared to a 61% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 108% and while dollar-based net retention for our large customers was 110%. Expansion was again broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 45% of our total revenue in the third quarter in line with the second quarter of this year and the prior year quarter. In quarter, organic dollar-based net retention increased for the second straight quarter to over 107% and slightly above our in-quarter organic dollar-based net retention in Q2 of this year. We continue to observe stabilization in this metric as we realize the benefits of our investments to moderate downsell activity. In the third quarter, our total remaining performance obligation was $891 million, up 24% year-over-year and up 3% sequentially. Current RPO was $573 million, up 25% year-over-year and up 3% sequentially. The year-over-year increases were driven by contract renewals and upsells and the signing of new customer contracts. Overall, our dollar-weighted contract length remains at just over 2 years. Non-GAAP gross profit in the quarter was $132 million, representing a non-GAAP gross margin of 69.1% compared to a non-GAAP gross profit of $107 million and non-GAAP gross margin of 70.5% in the third quarter of last year. The decrease in year-over-year gross margin was driven primarily by higher premium messaging volume and hosting costs, partially offset by improved efficiencies and personnel costs. Non-GAAP sales and marketing expenses were $77 million or 40% of revenue compared to $65 million or 43% of revenue in the prior year quarter. The dollar increase reflects our year-over-year investments in headcount costs to support our ongoing growth in global expansion, while the improved efficiency reflects our disciplined approach to investment as we continue to scale and expand the business. Non-GAAP R&D expense was $28 million or 15% of revenue compared to $22 million or 15% of revenue in the prior year quarter. The dollar increase was primarily driven by increased headcount costs to support the expansion of our existing offerings as well as to develop new products and features to drive growth. Our R&D expenditures reflect our intentional yet disciplined technology investment strategy and remain in line with our long-term non-GAAP R&D percent of revenue target of 13% to 15%. Non-GAAP G&A expense was $22 million or 12% of revenue compared to $22 million or 15% of revenue in the prior year quarter. The improved efficiency reflects increasing scaling across public company expenses and the benefit of leveraging strategic locations for headcount expansion. Non-GAAP operating income was $5 million or 2.7% of revenue compared to a non-GAAP operating loss of $2 million or negative 1.4% of revenue in the prior year quarter. Non-GAAP net income attributable to Braze shareholders in the quarter was $7 million or $0.06 per share compared to $2 million or $0.02 per share in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with approximately $387 million in cash, cash equivalents, restricted cash and marketable securities. Cash provided by operations during the quarter was $21 million compared to cash used in operations of $11 million in the prior year quarter, including the cash impact of capitalized costs, free cash flow in the quarter was $18 million compared to a negative free cash flow of $14 million in the prior year quarter. We expect our free cash flow to continue to fluctuate from quarter-to-quarter given the timing of customer and vendor payments. Now turning to guidance. For the fourth quarter of fiscal 2026, we expect revenue to be in the range of $197.5 million to $198.5 million, which represents a year-over-year growth rate of approximately 23% at the midpoint. While we are not providing specific gross margin guidance, as a reminder, we expect higher seasonal activity during Q4 will impact gross margins consistent with historical patterns. Fourth quarter non-GAAP operating income is expected to be in the range of $12 million to $13 million. At the midpoint, this implies a non-GAAP operating margin of approximately 6%. Fourth quarter non-GAAP net income is expected to be $15 million to $16 million and fourth quarter non-GAAP net income per share in the range of $0.13 to $0.14 per share based on approximately 113 million weighted average diluted shares outstanding during the period. For the full fiscal year 2026, we expect total revenue to be in the range of $730.5 million to $731.5 million, which represents a year-over-year growth rate of approximately 23% at the midpoint. Consistent with the commentary we provided on prior earnings calls, we expect Braze AI decisioning Studio to contribute approximately 2 percentage points to year-over-year revenue growth for the full fiscal year. Fiscal year 2026 non-GAAP operating income is expected to be in the range of $26 million to $27 million. At the midpoint, this implies a non-GAAP operating margin of 3.5% roughly a 350 basis point improvement versus fiscal year 2025. Non-GAAP net income for the same period is expected to be in the range of $46 million to $47 million and net income per share is expected to be $0.42 to $0.43 per share based on a full year weighted average diluted share count of approximately 110 million shares. While we will provide more formal guidance for fiscal year 2027 in March of next year, we expect to return to the profitability framework outlined at our last Investor Day, targeting a non-GAAP operating income margin of 8% for fiscal year 2027. It's an exciting time at Braze as our AI-driven solutions fundamentally rewrite the rules of customer engagement. We remain committed to offering industry-leading customer engagement solutions and driving product innovation as we execute on our long-term financial goals. And now we'll open the call for questions. Operator, please begin the Q&A. Operator: [Operator Instructions]. Your first question will come from Ryan MacWilliams with Wells Fargo. Ryan MacWilliams: Bill, glad to hear about the brave health care customer who use Braze agent console to build an AI agent to chat with our customers. It's almost customer service use case from Braze interesting we'll love to hear your view on what are some of the reasons raised Avis might be an easier starting point for organizations when building new AI use cases. William Magnuson: I think it's a great question and a great example to ask it about because that use case was integrated directly into Canvas. And what I didn't share in the prepared remarks is actually that the first prototype version of it was made by that customer while they were at the gate, waiting for their flight to leave from Forge. The agility that you get out of being able to deploy an already like purpose-built agent framework into an engine like Canvas that allows you to leverage all of the interaction support that's already there, the massive amount of first-party data that's at your fingertips, already in that environment. I mentioned Cannabis context, which is a feature that we launched earlier this year in anticipation of continuing to have these units of intelligence, get integrated into more parts of a canvas in order to provide the right logic or more enhanced personalization, things where conditional logic able to become reasoning and therefore, able to respond to the unstructured data or all of the unpredictability of humans as they're interacting in these complex flows. And this is a use case where I think a lot like we've spoken about in the past, this would have become a customer support interaction, but actually because the product is able to intuit what the customer wants through or interpret what the customer wants, through the agent that has been configured to kind of understand that business problem and fed with the right context and first-party data, which, of course, we make extremely easy because of how the agent consoles plug into both Braze catalogs and Braze canvas, you're able to deploy these, deploy them and test them against business as usual. This was a great example where they already had a solution up and running. They incorporate new intelligence into an alternative solution, you run that in a head-to-head, Canvas, of course, already has that -- the automation for the as well as all the built-in reporting to track those conversions to be able to know exactly what uplift you're getting -- and then that, of course, drives the conviction to be able to promote these firm experiments into production. And it's great to see all of that already happening from -- on a rapid time line since the launch of agent console at Forge. Ryan MacWilliams: And then for Isabelle, it seems like a number of your key metrics improved in the quarter, and your 4Q guide seems stronger than historical. I love if you could break down some of the components of the drivers of these improving trends. Isabelle Winkles: Yes. So a lot of these things have been in progress for some time as we think about ongoing productivity enhancements that have occurred within the sales organization, and we've been seeing that over the last several quarters. And then the efforts that we've had to mitigate downsell and dollar term, and that's been really exciting to see that come to fruition. And these things have combined together to enable us to retain more dollars and then go out and continue to sell more effectively and efficiently. So we're really excited about the momentum that we're seeing in the business, and that's playing into our ability to overachieve the numbers that we have guided for, for Q3 and then provide the guide that we did for Q4. Operator: Your next question will come from [ Raimo Lenschow ] with Barclays. Unknown Analyst: Bill, you talked earlier about the the growing momentum, especially on the legacy side. Is there anything in the market specifically that you would attribute that to? So is it like AI adoption and you need a more modern platform -- is it kind of the getting end of life, like from a technical perspective and hence, more stuff is happening? Or what's driving that momentum there? William Magnuson: Yes. I would say as we look forward, one of the things that you latched on to is that I do think this is a moment in history in our category where in the start-up landscape, we're seeing consolidation and capitulation happening with more subscale or point solution or regional players. The enterprise competitive set is distracted and stagnating in many ways and I think we see that the broader ecosystem sees it. And that means that just the awareness of Braze, the differentiation the desire and optimism around investing in a Braze practice, investing in Braze's technology, I think increasingly stands alone amongst that competitive landscape because we combine both the scale of being a public company operating at the level of R&D investment that we are, along with the agility that we're demonstrating through being on the leading edge of new AI innovation and our recently launched ChatGPT native app SDK is another great testament to that, which not only was first SDK out of the gate on that, just 2 weeks after they announced it. But here we are many weeks later and it's still the only one. And so I think when you broadly look across the customer engagement landscape, Braze continues to stand out for our committed investment, our leadership in the space. And we've spoken about a lot of the things in the demand environment that have caused that enterprise replacement cycle to be slow over the last couple of years. Basically, that switching costs are still costs, and it's been hard for a lot of brands to kind of extend their planning horizon out while they've been focused so much on profitability over growth and a lot of the other things that a lot of people are seeing in the broader demand environment, but we're really optimistic about where we're at from a competitive positioning standpoint. I think our customers are seeing that as well. More and more of the conversations that we have that are driving that enterprise replacement cycle are a question of when they're no longer if. And it's still transition for enterprise brands to make, but it's one that I think we're very prepared to continue to invest to accelerate that share gain, and we're excited about what that means for our long-term positioning in the market. Unknown Analyst: Okay. Perfect. And then one for Isabelle the NRR, like we know it's lagging, so it came in the same level as we saw in Q2. Can you kind of speak to kind of -- like how do you think about -- and actually, I remember last quarter, you talked about like intra-quarter was getting better. Whatever the puts and takes there this quarter, I think? Isabelle Winkles: Yes, absolutely. So in my prepared remarks, I actually continued at the same disclosure that we provided last quarter. And so we are providing the in-quarter organic dollar-based net retention and indicated that, that continues to go up. So we talked about in Q1, it was a little bit below 107%. Q2 was a little bit above 10%. And it continues on that trajectory still in the 107% range, but a little bit above the Q2 number. So we're really excited to see the stabilization in that metric over the last 3 quarters. Operator: Your next question will come from Gabriela Borges with Goldman Sachs. Gabriela Borges: For Bill and Isabel. So you gave us the 2 points of contribution from the decision in Studio. I'd like to get your thoughts broadly on how you think AI can impact the growth algorithm of your business. Isabelle Winkles: So when we think about the monetization of AI, and we've talked about this a little bit over the last couple of quarters as AI has just been introduced more generally from a monetization standpoint. We think about it in 2 buckets. So leaving aside decisioning studio, which obviously we're directly monetizing on a use case basis today. And then there's sort of 2 other flavors of AI that live in the tool. One is AI that is generally helping our users, our customers with the overall workflow and things that you invoke kind of once and then allow for kind of a broad scale deployment of a particular canvas or campaign or content that doesn't really weigh on our own cost structure in the same way as things that invoke AI sort of on a repeated basis that are on a one at a time in real time, always on function. And so the things that are just kind of invoked occasionally for kind of large-scale and deployment sort of occasionally, that we would sort of include in the platform and largely not charge for those on an indication basis. The things that are kind of operating one at a time in real time, we anticipate putting those into the credit framework and they're charging customers as they invoke the LLM usage, which, therefore, is going to have some impact on our cost structure over time. And so that's how we plan to incorporate that. We are not there yet. And so that is potential upside as we include that in the credit portfolio. Gabriela Borges: That makes sense. The follow-up is for Bill. So with respect to competition, I'm curious if you see your customers building bespoke agent tech stacks. I'm not talking about live coding, but something more sophisticated that sits next to you or adjacent to braze such that you think, well, really that functionality should be built in Braze over time. I'm curious if you're seeing that as a dynamic in your customer base and B, if you are, what can you do to move some of those projects on to brazen a packaged soft kind of discussion as opposed to having customers build [indiscernible]. William Magnuson: Yes. So high level, the composability in the design of Brave has led our customers to build and develop systems that enrich either data inputs to braze provide maybe more bespoke orchestration signals do deeper content personalization, et cetera, and building those alongside and then integrating them with Braze, we specifically designed all of our API layers to be able to have flexibility with respect to different layers of abstraction, different separation responsibilities designs, which are great for engineering teams that are trying to maintain control or where they have ownership or responsibility for certain signals that are important in the flow of timing or orchestration or personalization or what have you. But so want to give marketers the experimentation and agility that only the Braze platform can really provide through the dashboard. And by bringing those things together, we actually see that some of our most sophisticated customers to play side by side. Now the other thing that's happened alongside that is obviously that the Braze platform continues to build more powerful and generalized solutions to a lot of these problems. And I think item recommendations is a great example of this, where if you go back to Braze 7 years ago. We had robust integrations with either personalization platforms like AWS personalized or we would do direct calls to web services that our customers would set up in order to provide recommendations. As the state-of-the-art and recommendation systems, kept getting better and better, we were able to provide an offering that was both generally powerful so that we could sell it across our diverse customer base, but also would consistently win head-to-heads with the bespoke in-house systems that were built by those engineering teams and of course, have the added benefit of not needing to manage those systems and keep those services up and be able to have them withstand the incredible load that happens when you really run a high-speed Braze campaign. And then, of course, over time, and we've spoken about this on earnings calls in the past as well, we were able to upgrade the underlying technology under those item recommendations. Today, there's different flavors of vitamin recommendations available in Braze. Some of them use transformer architectures as well. Transformers, of course, being the T and GPT, which is a new approach to being able to provide generalized recommendations that again, compare very favorably, almost always beating head-to-head bespoke systems. And when we look at decisioning and when we look at the integration of Agentic decision-making, we see a similar dynamic playing out. We already have examples in the customer base where customers that we're working on various forms of decisioning systems, and they are now deploying Decision Studio Pro in place of that because the total cost of ownership and the flexibility and the power of decisioning Studio Pro is a purpose-built system with customizability and the forward deployed engineering model is able to provide and kind of beat those in-house offerings. Head-to-head both for performance and for total cost of ownership. And then, of course, there's a lot of interplay with the use of agents. And being able to integrate them into different parts of either the data enrichment and data insight generation flow as well as within canvases, and of course, the way that we are designing the agent console, it allows you to bring your own underlying LM into the equation. And going back to Isabelle's commentary about gross margin profiles and the way that we price those we, of course, view that as a very positive setup because it allows for Braze to be able to charge for the high margin, higher sophistication and orchestration side, and then customers are able to govern and manage the cost of their LM indications within their own infrastructure. And so we've done a lot over the years and especially in the intelligence space, which is an area where you tend to see the spoke development in kind of racing out in front as engineering teams jump on to new technologies and they take advantage of they try to build for the bespoke nature of their problem. And then, of course, as we continue to build more generalized, powerful, flexible solutions for our customers and deploy those in other use cases. We see transitions of those workloads to be inside of Braze. And I think that when you look out across a customer base as diverse braces today, we have examples of basically all over that spectrum today. Operator: Your next question will come from Derrick Wood with TD Cowen. James Wood: Great. I guess first question for Bill. Could you drill a bit more on this new integration with Chat GPT and kind of pushing the first-party data into more personalization within Chat apps. I guess how much customer interest is there and driving more engagement there versus traditional channels? And what does this mean for your monetization and value delivery positioning? William Magnuson: Yes. So I'll actually start with the end of that question because the implications and what it means does depend a lot on how these app ecosystems evolve from here. And we really are just in the earliest days of it. And so when you look at the in-chat native app or Agentic experiences and how they'll continue to push forward, I think the future role that Braze plays and also the strategies that brands will deploy, depends a lot on how close or open these platforms end up being with respect to things like identity, authentication, payment or allowing differentiated native UX, you're even already seeing some of the implications of these decisions in who's investing in these early experiences where within the Chatpat ecosystem as an example, Amazon has largely opted out Walmart has opted in, but Walmart is also they're focused on use cases outside of basic staples because they're looking at that as a discovery channel allowing for them to get net new customers, which, of course, is an awesome strategic lever for them when they look at the chatty user base and the different use cases that are being deployed there. But the -- when you look at the evolution of that over time, the important questions are basically going to be like how much of a fortress is the walled garden that the likes of ChatGPT or Gemini or others are going to make? And how are they going to monetize and like how are they basically going to take the user attention that they have within that walled garden and turn that into revenue for their business. Now if they stay open, which is more similar to the web and which the early signs on ChatGPT native apps are pointing to then the in-chat app experience will become an extension of the first-party ecosystem, which is what you were just alluding to. So much like mobile apps have over the last decade, that means that those native app experiences can become a rich source of data on customer interest and intent can become another surface to deliver messaging or customize product experiences to consumers. And you're already seeing that in the way that the ChatGPT apps are being built where if you invoke the Canvas app, as an example, you're able to log into your account and they're able to render custom interfaces and get access to information about the session. If you compare that to say how a brand interacts with someone on Instagram, that is a much tighter closed walled garden and you get almost no data around those interactions can barely even link to a brand's website. And Meta has gone down the path of making sure that they can extract as much advertising revenue out of that interaction as they can. And so that's an example where an ecosystem would stay more closed or more extractive either through ads, payment processing or referral fees and in that, you have this classic aggregator dynamic, and it drastically increases the importance of establishing first-party relationships with new customers. And that, of course, drives investment in product marketing, customer engagement strategies, and when you look across that, and I talked about this in the past, but I think when we analyze how these are going to go, when we look at that path where things end up more closed, you can look at the fact that, for instance, a loyal delta flyer is worth a lot less to them if every flight search begins with an aggregator, the same is true for Taco Bell fan, who starts every meal and a delivery app or every retail purchase that begins to click on a Google search ad. And of course, that same dynamic will apply to a consumer who only engages with your brand through an agent. And in all of those cases, the right answer for brands that want to have a sustainable path to durable business growth is ramping up investment in first-party data, enhancing and evolving their direct-to-consumer products, and deploying sophisticated customer engagement to make sure that they make the most out of that. And so we're still in the early days of this. I think we've seen some promising early signs of cachet embarking on an open ecosystem, which I think is great news for brands that want to build into those experiences. We'll continue to see the evolution of Agentic Commerce. We'll continue to see the evolution of similar App Store ecosystems in Gemini and potentially in other AI chat bots at as they rise. And I think that just like some brands never made it through the transition to mobile and Braze is going to rely heavily on our experience that we have growing up in the mobile app store ecosystem to be able to move fast and be able to guide our customers through this transition. I think it's also true that some brands are not going to survive AI disruption as they just become commodities downstream from a faceless agents' desires, but the companies that thrive through this disruption are going to do it exactly because they maintain a strong connection to their customers. And that's exactly what Braze has built to help them do. And so I think we're well prepared where if this goes down the open path. That's awesome. It's a new app store. We're already ready to go, and these are great new channels to be able to get more first-party data and communicate with those customers. If it goes down to closed path, it is yet more reason for brands to invest in building first-party connections with their customers and Braves will be here to help them do that as well. James Wood: Awesome. Very helpful perspective. Maybe one Isabelle for you. Just the inflection in new customer generation very impressive that followed a strong Q2. Can you just drill into what's helping drive that velocity of new deals? Is it offer fit given in the decisioning product given you new front doors into different accounts? Or are there other factors in play? Anything to highlight here? Isabelle Winkles: Yes. No, not specifically related to OfferFit. Remember, the cycles there are going to be a little longer. But generally, around kind of Braves core, the legacy replacement cycle continues to be in our favor. Our competitive position continues to be the regional investments that we have made and the efforts around verticalization continue to deliver results. So that's all really, really great to see, and then I talked about the mitigation strategies that we've put in place to avoid both downsell and customer churn. And so when you mitigate levels of customer churn, you retain more customers, and you're seeing that in -- as well in the net new customer adds, ad number. So we're really excited about the overall momentum of the business. Operator: [Operator Instructions]. Our next question will come from Taylor McGinnis with UBS. We'll return to Taylor. We will move on to next -- we'll take a question from -- Taylor... Taylor McGinnis: Okay. Perfect. Bill, the Portside was so much better. So just trying to understand in terms of what's driving that, -- so is that just a function of some of the past headwinds starting to ease or 3Q being stronger at the end? Or are you actually seeing a further improvement of demand trends into the first half of 4Q? And then just curious, any reads for you have on 2026 as you've been talking to your customers about their spending plans? Isabelle Winkles: Taylor, I'll take that. So on the revenue guide, we do continue to approach this with a risk-adjusted position. And so what you're seeing is some of what I talked about in the last question that was asked, where we're seeing continued strength across the legacy replacement cycle and then just to strengthen our overall competitive position. and just some of the investments that we've been making in retention, which obviously is immediately beneficial to revenue as well as efforts around our regional focus and footprint and efforts around verticalization. All of this is kind of driving the net benefits in the business. And you're seeing it in strength in metrics such as RPO and CRPO. And so there's kind of strength across the metrics here. You're seeing stabilization in the dollar-based net retention, you're seeing strength in the customer -- net customer adds. And all of that kind of feeds together to enable us to not only overachieve what we had guided for in Q3, but also to raise the expectations here for Q4. Operator: Our next question will come from Arjun Bhatia with William Blair. Arjun Bhatia: Perfect One question on AI decision Studio. Bill, I'm just curious, just in the kind of early reception that you've had from customers? How are they finding the product? What are the kind of use cases you're seeing early traction on? And I assume as we go into fiscal '27, this is going to become a bigger and bigger part of the story. What does the pipeline look like now that you've had some time to integrate it and get it in the hands of customers? And just how should we think about growth here and what can unlock next year? William Magnuson: Yes. So first of all, the integration both on the R&D and the organizational side continues a pace. And a huge thank you to all the incoming OfferFit employees who have already made Braze their new professional home over the last few months. We're seeing tremendous impact from the teams coming together and the integration process, we're looking forward to formally being on the other side of that and do a combined business as usual next year. Commercially, pipeline generation has remained strong, and we've seen a growing number of exciting customer wins, including the case study that I mentioned in my prepared remarks. And we're seeing those wins across verticals and in geos around the world, which has been fantastic to see. The cross-sell thesis, I think, is continuing to bear fruit as even Braze's most sophisticated customers are searching for ways to achieve rand I think decisioning has then also rapidly become a critical part of the overall as AI road map which, of course, is in every single customer conversation. And so while the full deployment of decisioning Studio Pro is -- it's definitely more of an enterprise deal cycle. And it's a new category that requires customer education. And so it's not being included into every deal conversation to deeply qualify and explore the deployment of decisioning studio use cases, but even for those customers that are only evaluating it, it's really fantastic for them to see that there is a progression that they'll be able to move through as they adopt the greatest of the existing Braze customer engagement platform and then know that they can circle back around to those most important points in the customer journey to get maximum performance out of it. And then, of course, through the Braze customers who are already on the leading edge of adoption, they've got strategies. They've been doing sophisticated experiment testing for years. They're already using our more advanced AI capabilities, and they want more -- the answer for that is, of course, deploying decisioning studio right now and targeting it at that their most important use cases. And I think that, that example that I provided in the prepared remarks, is 1 where they pointed that at an important part of the 2 important parts of the customer journey ones where they had done rigorous testing before where they had a strong business as usual. They knew just how important it was to their business, and we pointed the advanced reinforcement learning on the decisioning studio at it and achieved uplift that wasn't even believed by their CEO, the first time it was put in front of them. And that's an incredible thing to see, and it obviously really helps with deal velocity and helps us build those internal proof points as well. And so I think we're really optimistic about it. It's still an enterprise deal cycle. And so it takes time for pipeline to mature, and we need to make sure that we're doing the right levels of education out there. It's a new category. And so I think it's also important from a go-to-market efficiency standpoint that we do a good job of qualifying deals so that we're not doing baseline education everywhere in the market, to some extent, we'll have to follow a similar pattern as we have with customer engagement over our lifetime where the more sophisticated approach to customer engagement as compared to more traditional marketing automation something where skill sets, permeated companies and built into a customer community momentum over time. I think we'll see something similar with decisioning education and knowledge. But of course, we now have a lot more scale. We're going to be able to do it a lot faster than we did when we built the Braze customer engagement platform through our first 14 years. And we're really excited to be bringing very advanced approach that allows us to deliver differentiated performance to customers to market rapidly. Arjun Bhatia: Very helpful. And congrats on the momentum here. Operator: Our next question will come from Brian Peterson with Raymond James. Brian Peterson: So Bill, you had mentioned some verticals that you had some strong wins with. I'm curious, as you think about the pipeline of opportunities -- has that changed at all relative to your current mix? And are there any end markets maybe where you're particularly excited about as we're heading into calendar year '26? William Magnuson: Yes. I think with a broad brush, I don't think we've seen any sort of large rotations in terms of the vertical split of opportunities. But there is an important dynamic that happens as we penetrate deeper into certain verticals, especially those that are more capital-intensive or highly regulated, which, of course, are industry properties that are correlated with a little bit more risk aversion or slower decision-making. And in those -- we often work with first disruptors and then we work with those under threat of disruption and it takes those proof points with the early startups like for instance, with HealthTech or fintech before you can move more meaningfully into the traditional hospital systems and traditional health insurers are moving into the larger banks and insurance companies and credit unions and such around the world. And so I think when you look at some of those categories that we've been investing in, where we've got a great track record with the start-ups, and we're now parlaying that into more -- a deeper penetration into the more traditional enterprise in those spaces. That's probably where I would identify the biggest vertical by vertical shift, but that's not necessarily an exogenous property of those verticals themselves but really more about Braze's journey to penetrate them over time. Operator: Your next question will come from Scott Berg with Needham. Scott Berg: Great quarter. So many of them I just got a select 1 -- let's talk about your 500,000-plus customers. It's the second quarter in a row where you additions really kind of jumped off the page, especially from a historical level. Are you seeing, I don't know, a change in how you're landing with some of these customers? Is this maybe driven more by better kind of expansion activity with them maybe help paint some color in terms of what's going on with those larger customers. Isabelle Winkles: Yes. So nothing changing and sort of certainly the incentive structure for the business. So definitely just our sales team incentivized to kind of land and then we'll go and expand from there. And so we are excited to see that there's continued strong momentum in the upsell from those who were previously at under $500,000 to those upselling to be north of $500,000. And that's obviously healthily outpacing those that are either down selling or churning. So it's just great to see that momentum. There's obviously more for us to be selling. The decisioning studio is now in the mix. The with customers who are buying maybe a little bit closer to the pin to start with on their original entitlements, there's more opportunity for them to kind of expand over time as cross channel becomes more and more important. I think you heard Bill's prepared remarks with regards to what we were seeing, certainly around Black Friday and Cyber Monday, just the volume of messages that are sent across the diverse set of channel continues to increase. And so that is going to result in upsells from our customer base. And so we are really excited to see kind of that momentum across the whole customer base, but then also obviously focused across the 500-plus sellers of buyers. So it's great to see that. Operator: Your next question will come from Brent Huff with Stephens. Brett Huff: I want to drill in a little bit on the momentum that we've seen in the past couple of quarters. both in the metrics and kind of the tone, Bill, I can't remember as a few quarters ago that you mentioned that folks in sort of the more progressive marketing organizations we're a little bit tapping the brakes. They were a little bit more hesitant to buy more aggressively to think about growth and maybe a little bit of retrenchment. I'm wondering I know it's a little bit of an anecdotal question, but do you get the sense that that's changed? And I guess maybe to put a finer point on it, have we started selling to folks that are willing to sort of buy side by side with the legacy platforms in anticipation of switching? I don't know if that's the right sort of flag to look at. William Magnuson: Yes. I think that the dynamic of switching costs being costs, and they're not being excess budget to really finance that is still there. As we've talked about in the past, a lot of that is about just making sure that we're doing a great job of qualifying and timing opportunities and a lot of times, that's also consultative. A lot of these customers who last switched their platform 6, 7 years ago when they first deployed of the legacy Marketing Cloud. It might have even taken them like 2 years. And so in their own head when they first start the conversation, they might also be under the impression that the switching costs are a lot higher than they need to be with a careful plan. And so there's a lot of ways that we address that. But I think that the dynamic is still at play. And one thing I would point to, though, is -- and you saw this in the Black Friday, Cyber Monday stats, that the growth of SMS and WhatsApp year-over-year was over 90%. And what you see there is a willingness to invest in premium channels. Those are usually mid-funnel use cases, places where people are working -- where they've already had some amount of engagement and they're working to get to the conversion point. And you don't see spending on those higher marginal cost channels unless those are working and people are investing for the ROI being able to drive higher conversion rates in those. And so I think it's a good sign. We're also -- we're seeing the resumption of these credits upsells that we've hypothesized in the past where a lot of the buying was very close to the pin for customers where they would project what they were going to use over the next 12 months. And -- sometimes they weren't even buying that. They were just buying enough to get to the next calendar year, or they were buying very tightly with those capacity projections. And what we're starting to see now is customers running out of those credits early and making upsells and increasing the run rate of their consumption to match like what they're actually doing. And so I think a more normal buying pattern, and we're seeing a resumption of that, which is a good sign. And so I think we're seeing a few things here and there of what I would call more normalization. And we're going to continue to build for the opportunity as it's ahead of us. Operator: Your next question will come from Matthew VanVliet with Cantor Fitzgerald. Matthew VanVliet: I guess looking at the AI decisioning studio, Bill, you mentioned that it's still sort of an enterprise sale, and we saw that from the offer fit sort of average deal size. But as you look at the product road map ahead, are you thinking of using some of the other products you've built kind of in that area to move into the mid-market and sort of lower enterprise? Or will there be strategy for the decisioning engine to have kind of a lighter weight, lower cost version to attack that market over the next several quarters. William Magnuson: Yes. So I'd take a step back and look at the broader problem space as AI-driven relevance optimization and so decisioning is a specific part of that. It's a data science machine learning-driven approach. But there's also people that are already using, for instance, the agent console to be able to take in small amounts of the first-party data that's flowing through the canvas with the user and be able to do personalization with it. And I was wondering if there would be an opportunity on this earnings call to share with everyone that we registered vivedecisioning.com last month. And if you visit that, it will afford you directly to the Braze agent console website because we do absolutely think that there's going to be a lot of different starting points for people as they start to deploy AI into what previously were more deterministic or static workflows. A big part of Braze pass was getting people to move from batch and blast to more deterministic personalization. And now the next generation of that is going to be moving from determine a sick personalization into 101 decisioning and into more agentic approaches that are doing individualized personalization. And we were just chatting earlier this week about how the modern equivalent of high first name is actually going to be able to be using the agent console because if you go back to that example from the question that we started with about the agent console in an experiment where the marketer actually built the original agent while waiting at the gate for their flight -- that's a great example of rapid deployment, early experimentation. It achieved some amount of uplift, and that inspires the next generation of building on top of that. And so it's not just about being able to deploy quickly, but also making sure that there's an on-ramp into these more advanced techniques over time. And I think that there's a lot of great uplift to be had for marketers all across the spectrum. Just like 10 years ago, there was a lot of great uplift to be had merely from doing high for it. Operator: Our next question will come from Tyler Radke with Citi. Tyler Radke: Sort of big picture question. Just given the strength you're seeing in the results and acceleration and growth here, do you feel like you are starting to get exposure or access to some of the more dedicated AI budgets as opposed to just being beholden to the Martech budgets, which have continued to be under pressure and how are you thinking about getting further exposure to that as you think about your go-to-market strategy going forward? William Magnuson: Yes. I think the key thing with decisioning is not necessarily accessing AI budgets, but the fact that we're selling performance, we are able to show demonstrable uplift with rigorous rigorous reporting against it in some of the most important use cases that people have in their customer journeys where they understand the value of those transition points and we're able to show that head-to-head or in the example that I provided with the agent console example that I referenced in the prepared remarks, those were 2 important parts in the customer journey where there had already been rigorous testing and the decisioning approach at or the deployment of the agents brought additional uplift into those flows and that generates real money for those customers. And so I think better than accessing experimental AI budgets, we are selling performance. And I think that, that is a really great place to be because by bringing together the composable data and composable intelligence with Braze's comprehensive cross-channel support that really no 1 else can match. -- we've got a -- and we can, by the way, do that at any scale. We can do it in a secure way with a strong total cost of ownership story and be able to deploy with category leaders across every major vertical in the world's top brands all around the world. And so combining together that track record with the leading-edge innovation and then being able to sell demonstrable performance is the right path to unlocking incremental budgets. Operator: Your next question will come from Yun Kim with Loop Capital. Yun Suk Kim: Okay. Great. A lot of news about Agentic Commerce. And obviously, we already have a few questions on it. But what is your thought on expanding your product portfolio beyond first-party data-driven products that you have today, maybe perhaps addressing some of the customer acquisition aspect of marketing and advertising that may leverage some third-party data. We are not getting it is that -- the way that Agentic such that is more or less by passing the customer sign up because the personalization data is actually residing with chatbot vendors. So just wondering how you're thinking about the purchasation data may shift from the retailers to the actual Chatbot vendors? How you're thinking about your product portfolio in terms of sticking with the first-party data? Or are you open to kind of expanding beyond that? William Magnuson: Yes. So first of all, Braze already does have an important role that we play where -- with respect to acquisition and with the special case of acquisition, which are like reactivation of known customers that have just drifted away from the brand. And those are places where people already use Canvas to help coordinate their acquisition strategies. They're also using the automation that we have through Braze data platform and through Canvas in order to drive first-party data into various acquisition use cases. And we've got -- we have important identity resolution partnerships out in the data space as well as with -- as well as with service providers that bring together these third-party data sets along with identity resolution capability and combine that with the composability of the Braze data platform to drive these strategies forward. And so you already have customers that are deploying these types of strategies within Braze. I think in the example that you provided where the agent disintermediates the brand entirely and you just kind of -- you ask it to go transact on your behalf and decision make on your behalf. I've spoken about that at Forge before in a customer conferences. And I think that there's a class of purchasing where we really do think about these things as utilities or commodities in our lives. And we are going to want to not only outsource that to the agent to kind of do those transactions in the first place, but then also not want to have any ongoing relationship with the brand, right? But for the things that we actually care about and are attached to where we build customer loyalty, and we really drive value for those brands over time. I think that even if the initial purchases or even if subsequent purchases are done by agents that they're still a really important goal that the brands need to work toward building a strong direct relationship with all of those customers. And so like the example you provided is conceptually very similar to some of the ones I walked through earlier, like the person who loves your airline, but they always buy the tickets on an online travel agent or they love your food, but they always order it through a delivery app. Those are examples where that customer is worth so much more to you if you can change their buyer behaviors and their buyer patterns, in fact, so much that you as a business might reorganize your business and develop brand-new products whether those are loyalty programs or enhanced capabilities in your bespoke ecosystem or just other incentives that you create for consumers to build those connections with you. And so I think it's in all of the above, right? We will certainly continue to build third-party ecosystem as it becomes more relevant, we will take advantage of the integration points that are enabled by those ecosystems, depending on how open they are developed. And in all of these worlds, the most valuable customer is always going to be the one that chooses to invest time in building a connection with you as a brand. And so we will work with the world's top brands to be able to cement those connections with their customers and build sustainable, durable businesses. Operator: Our final question will come from Patrick Walravens with Citizens. Patrick Walravens: Let me add my congratulations. So Bill, it seems like Offerfit is probably going to work out quite well. How are you feeling about additional M&A? Like when might you be ready? And what might you be interested in looking at? William Magnuson: So I think we're happy with how the integration is going, as I mentioned earlier, and we have an active CorpDev and product strategy function here, which looks at both organic and inorganic expansion opportunities. I'm not going to speculate on specific strategy around it other than to reiterate what we've said in the past, which is that we are very selective in terms of opportunities that we look at. We want to make sure that they drive forward a leading product road map and a leading product vision in our space. We think we still have incredible TAM to continue to access a lot of great adjacencies. And so we will continue to look at opportunities, but I'm not going to speculate on any specifics beyond that. Operator: There are no more questions at this time. I'd now like to turn the call over to Bill for closing remarks. William Magnuson: Thank you, everyone, for joining us today. We're very excited about the momentum in the business. Thankful for all of your support, and we will chat next quarter.
Operator: Good day and thank you for standing by. Welcome to the AeroVironment Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Head of Investor Relations, Denise Pacioni. Please proceed. Denise Pacioni: Thank you, and good afternoon, ladies and gentlemen. Welcome to AeroVironment's Second Quarter Fiscal Year 2026 Earnings Call. My name is Denise Pacioni, Head of Investor Relations for AeroVironment. . Before we begin, please note that certain information presented on this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve many risks and uncertainties that could cause actual results to differ materially from our expectations. Further information on these risks and uncertainties is contained in the company's 10-K and other filings with the SEC, in particular, in the risk factors and forward looking statement portions of such filings. Copies are available from the SEC on the AeroVironment website, www.avinc.com or from our Investor Relations team. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation to the Investors section of our website under Events and Presentations. The content of this conference call contains time-sensitive information that is accurate only as of today, December 9, 2025. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Joining me today from AeroVironment are Chairman, President and Chief Executive Officer, Mr. Wahid Nawabi; and Executive Vice President and Chief Financial Officer, Mr. Kevin McDonnell. We will now begin with remarks from Wahid Nawabi. Wahid? Wahid Nawabi: Thank you, Denise. Welcome, everyone, to our second quarter fiscal year 2026 earnings conference call. I'll begin by summarizing our quarterly performance followed by Kevin, who will review our financial results in greater detail and then discuss guidance for fiscal year 2026. After this, Kevin, Denise and I will take your questions. . I'm pleased to report excellent quarter financial results while setting new records in multiple areas of our business. Despite the challenges posed by the elongated U.S. government shutdown, we delivered excellent financial results and achieved several strategic milestones that we believe position AV for strong, sustained growth well into the future. During the quarter, we introduced several innovative products and secured multiple large long-term contracts, a testament to a recipe for innovation and proof that our strategy is winning. The total ceiling value of new contract awards during Q2 reached $3.5 billion, a historic record achievement by AV. This also resulted in record second quarter bookings of nearly $1.4 billion. These achievements underscore that our strategic investments are delivering results and progressing our business to new heights. We also made significant progress on multiple programs of record that we believe will solidify our leadership in all of the domains in which we participate, air, land, sea, space and cyber. With strong top line growth expected on the horizon, we are executing on our expansion plans to further scale our manufacturing capacity and meet accelerating demand across several of our products and programs. Our proven execution capabilities, combined with the robust pipeline of orders and operational readiness, reinforce our confidence in achieving our industry-leading long-term growth objectives. At the same time, overall, the integration of BlueHalo is exceeding expectations, strengthening our capabilities and positioning AV as the premier next-generation defense tech company. Let me summarize our key messages for the second quarter of fiscal year 2026, which are [indiscernible] towards with a total contract value of $3.5 billion bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record second quarter revenue of nearly $473 million. Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. And fourth, we're raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Beyond these strong results, the defense industry is at an inflection point, NAV is not just prepared to lead. We are ahead of the curve setting the pace for everyone else to follow. Let's not forget, the U.S. Department of War is firmly committed to shifting their procurement practices towards agile, commercially available products and capabilities, favoring companies that invest their own capital, develop disruptive solutions at speed while transitioning them to full rate production and scaling capacity quickly. This validates the business model AV has embraced not just in the past few years, but over multiple decades. AV's business model and strategy have always been to invest in innovative and disruptive solutions ahead of customer requirements, scale their production rapidly delivered decisive advantages that enable our customers to acquire capabilities quickly. Looking ahead, cost-efficient autonomous drones and counter drone systems enabled by AI and machine learning will define the battlefield. Known for uncrude aircraft systems and leading AI integration, we believe AV is uniquely positioned to capitalize on this transformation. AV Halo, our open architecture software platform is designed to unify command and control intelligence analysis, synthetic training and autonomous targeting across all domains, creating advanced communication among critical assets during conflict. By integrating AV Halo into our portfolio and other platforms, we're delivering a powerful hardware-agnostic ecosystem that enhances the speed, autonomy and interoperability of AV's platforms for our customers. Moreover, we expect that AV Halo's ability to enable competing products to operate on a common command and control software system will play in an increasingly crucial role in U.S. defense procurement decisions. Our investment and development in AV Halo is just one example of how AV is ahead of this transformation and is well positioned within the industry. Our level of internal R&D investment and proactive CapEx strategy enable us to accelerate development and scale production ahead of demand. Using internal R&D to advance new products allows our technology to outpace our peers and leads to a faster time to market. We believe this core competency is a key differentiator that allows us to stay ahead of our customers' needs. Unlike traditional contractors that wait for contract vehicles before building prototypes, we innovate, first, bring solutions to market faster. These forward-looking investments are not only fueling the launch of new products, but also translating into significant contract wins, reinforcing our ability to capture emerging opportunities. For example, in our Autonomous Systems segment, our P550 was recently down selected by the U.S. Army's long-range reconnaissance program or LRR estimated to be worth approximately $1 billion. Internal investments made on this group to uncrewed solution allowed us to quickly meet the needs and requirements included in the LRR program, and we're confident that our P550 is the best solution for the U.S. Army. We've also prudently invested in upgrades to our Group III uncrewed aircraft system, JUMP 20 and JUMP20-X, which was recently selected as 1 of 4 options on the U.S. Navy's basic ordering agreement. This significant achievement allows AV to compete for specific U.S. Navy intelligence, surveillance and reconnaissance, or ISR, task orders over the next 5 years in a large and rapidly growing UAS maritime defense market. In addition to these domestic achievements, we're also expanding and experiencing an increase in international demand. Within our Autonomous Systems segment, we were recently awarded an $874 million sole source IDIQ contract from the U.S. Army international sales of our small UAS products to include Raven, Puma AE and Puma LE. This IDIQ contract vehicle also allows for the sale of our JUMP 20 medium UAS and tightened series of counter UAS solutions. Our strategy is driving tangible results, which is evident in the successful product launches this quarter. We recently unveiled several new offerings, including our next generation of Switchblade loading munitions with our Switchblade 600 Block 2, Switchblade 400 and Switchblade 300 Block 20. These products were mostly internally funded and developed quickly, helping to expand the Switchblade product line and create long endurance multi-domain anti Armor solutions, ensuring warfighters maintain tactical overmatch in contested environments. We also debuted our next-generation vapor compact long endurance helicopter or VAPOR CLE. This group 2 VTOL UAV is fully autonomous and can deliver up to 2 hours of flight, which has doubled the endurance of typical group 2 quadrotor UAV platforms. Our newly integrated NVIDIA Orin onboard computer makes the VAPOR CLE fully autonomous and enables automatic target recognition through AV Halo vision computer vision software and AV Halo Wizard artificial intelligence machine learning AI/ML processing suite. On our last earnings call, we discussed the significance of our software solution, AV Halo. Since then, we have announced that AV was awarded the U.S. Army's contract for Human Machine Integrated Formation, or HMIF program. This award accelerates fielding of multi-domain robotic formations using AV's unified interface of command and control, tactical awareness and autonomy solutions at the tactical edge. As part of this win, AV is going to be the lead software and system integrator for robotic systems on the edge of the battlefield. This award also validates the strength of our approach to software solutions, common controllers and user interfaces and underscores the Army's confidence and AV's ability to deliver mission-critical solutions. We also just released 2 new products from the AV Halo suite, including AV Halo Cortex, a next-generation intelligence fusion and analysis environment and AV Halo Mentor, a warfighter readiness suite that leans on virtual and augmented reality weapons training and mission rehearsal. AV Halo will continue to roll out more products and offerings that position AV as the core and leading developer in this space. Furthermore, we recently announced a collaboration with OpenJAUS or OpenJAUS. OpenJAUS is an open architecture for software framework that allows robots, drones, missiles and ground vehicles to speak the same language. This integration extends AV Halo compatibility to seamlessly incorporate robotics, allowing original equipment manufacturers to integrate their platforms faster and more easily. This collaboration strengthens AV's role as a driver and leader of the industry's push towards interruptibility. In addition, AV won several key awards in our Space, Cyber & Directed Energy segment with critical new contracts and laser communications, space-related satellite communications and directed energy. For example, AV received a $240 million contract for our long-haul laser communication terminals, one of the largest who ever be awarded in this category. This disruptive innovation is moving from lab to Orbit, a critical step for AV and the industry. Long-haul laser communications use precision optical links to move enormous amounts of data between satellites faster, more securely and without the vulnerabilities of traditional radio frequency or RF signals. This capability is critical because it creates a resilient high-bandwidth backbone for future space networks, ensuring warfighters and decision-makers get the right information instantly even in contested environments. This win continues to push AV to the center of innovation and space. Additionally, AV secured a new firm fixed price option for 2 BADGER phased array systems under the SCAR or Satellite Communication Augmentation Resource program. This program represents a tremendous growth opportunity for AV as more BADGER systems move into production. Lastly, AV was awarded a contract valued at $499 million by the U.S. Air Force Research Laboratory to develop material technology and deploy protective solutions to the front lines to guard war fighters against exposure to harm for electromagnetic radiation. Work under this large program known as HELMSSMAN, will help the turn against directed energy strikes in the future. We continue to set the standard in advanced protective technologies and directed energy defense, positioning AV as a clear leader in safeguarding war fighters against emerging threats. Further, our disruptive solutions continue to position AV as a leader in next-generation defense. From our family of Switchblade loitering munitions to advance counter UA solutions, we're redefining the battle space. We have unseated incumbents with our locust laser weapon system and secured key wins like Freedom Eagle-1 or FE1, deliver cost-effective kinetic counter UAS solutions for Group 3 and 4 drones and beyond. With our AI and machine learning-driven platforms, we believe AV continues to set the industry standard positioning us to fully capitalize on the generational opportunities ahead. During the quarter, we continued to form additional strategic alliances and collaborations that will help AV expand domestically and internationally. In September, we signed a memorandum of understanding with Taiwan's National Chung-Shan Institute of Science and Technology, or NCS IST to collaborate on autonomous systems and technology to support Taiwan's defense and security needs. We also signed a memorandum of understanding with Korean Air to advance medium and crude aircraft systems to the Republic of South Korea. Both of these agreements underscore our expanding international presence and steadfast commitment to providing flexible mission-ready solutions for our customers. Both agreements are centered around AV's JUMP 20 and JUMP20-X systems. The systems provide the kind of operational versatility that continues to grow in popularity in international markets. We also announced a collaboration with GrandSKY to establish the foundation for a Golden Dome for America Limited Area Defense architecture at Grand Forks Air Forces in North Dakota. This collaboration is significant as it marks the first deployment of AV's critical counter UAS solution set to secure a U.S. Air Force base, creating a model that can be replicated across other critical U.S. national security sites. As the demand for our innovative offerings accelerates, we recognize the critical importance of scaling quickly. Since last year, we have been focused on securing a new facility in Salt Lake City to expand our Switchblade manufacturing further. Plans are progressing on a 100,000 square foot facility that will allow for multiple Switchblade lines and provide additional capacity. This new factory has the potential capacity to produce over $2 billion worth of Switchblades or other AV products per year. We anticipate this factory to be operational about a year from now. Beyond expanding our own footprint, we're also actively strengthening our supply chain to support anticipated demand continuing to stay ahead of the market. As part of our distributed approach to manufacturing for resiliency and risk diversification, we now have manufacturing sites operating across different states, reinforcing our ability to scale rapidly and reliably. In addition to scaling operations, we're transforming the defense technology landscape through our acquisition of BlueHalo. We are already realizing meaningful synergies from the BlueHalo acquisition, which Kevin will discuss in further detail. Together, we're building next-generation platforms that fuse counter UAS Space technologies, directed energy, electronic warfare, cyber and integrated software solutions, creating a sweet capabilities unmatched in the industry. This combination accelerates innovation and continues to position AV as the disruptor driving rapid change in a market hungry for speed, agility and advanced solutions. We are reshaping expectations and setting a new standard for what can be delivered to the U.S. and our Allied forces. Before turning the call over to Kevin, who will provide more financial details on our second quarter results, let me conclude with the following comments. Despite a challenging environment, we delivered a strong quarter. Our continued investment in R&D and capacity expansion is translating into strong growth in key program wins and positioning AV for even more growth in the coming years. We recognize there is a generational shift in the U.S. Department of Defense's procurement strategy and product needs. Our offerings are designed to meet warfighter requirements, and our strategy is fully aligned with these new practices. We're executing on manufacturing expansion and are confident that we can meet increased demand. Integration of BlueHalo is progressing well, and this acquisition is helping to establish AV as a next-generation defense technology company with unmatched capabilities across multiple domains. With that, I would like to now turn the call over to Kevin McDonnell for a review of our second quarter financials. Kevin? Kevin McDonnell: Thank you, Wahid. Today, I'll be reviewing the highlights of our second quarter performance, during which I will occasionally refer to both our press release and earnings presentation available on our website. I will start by commenting on our results for the quarter and then turn to guidance for the remainder of FY '26. While this quarter presented challenges in terms of the U.S. government shutdown and our transition to new operational systems, we are very pleased with the continued business momentum and more importantly, our revenue and adjusted EBITDA outlook for the year remains in the same range despite some of the challenges in Q2. Next, I'd like to draw your attention to Slide 17 of the earnings presentation. which sets forth on definitions for our customer contracting activity. Going forward, each quarter will present a report the total contract awards, bookings, funded backlog and underfunded backlog in the quarter. Now I'll highlight some of that customer contra activity in the quarter. As Wahid mentioned, we earned awards with totaling ceiling of $3.5 billion, and we achieved $1.4 billion of bookings and ended the quarter with $1.1 billion of funded backlog and $1.8 billion of unfunded backlog. We're very pleased at the U.S. Department of War contract activity continued progressing despite the shutdown, and we view this as a testament to the importance of the programs we're involved in. Some of the recent key awards are highlighted on Slide 10 of the earnings presentation. Both segments captured multiple large awards during the quarter. As Wahid mentioned in his remarks, total revenue totaled $472.5 million in the second quarter, which represented a 151% increase over the prior year as reported or a 9% increase on a pro forma basis. Legacy AV organic growth was 21% in the second quarter. Slide 6 and 7 of the earnings presentation show the second quarter and the year-to-date revenue by operating group for each of our 2 segments compared to pro forma FY '25 revenue. The AxS segment recognized $302 million in revenue in the quarter, which represented a 15.7% increase over the FY '25 pro forma revenues. Precision strike and counter UAS products led revenue growth for the segment with nearly 38% increase at -- nearly a 38% increase compared to the pro forma FY '25 second quarter results. Strong Switchblade 600 and Titan sales led to the growth in this Optigroup. On crude systems, including both our small UAS and medium UAS products improved more than 8% from the pro forma results from the same quarter last year. On crude systems without Ukraine revenues grew more than 50% year-over-year, driven by strong JUMP 20 revenue increase. The Space, Cyber & Directed Energy segment recognized $171 million of revenue in the quarter, which was similar to the pro forma results from the same quarter last year. The space and directed energy products grew more than 20% in the quarter versus the prior year with the locus directed energy counter UAS growth being one of the key drivers. As Wahid mentioned earlier, this segment also received several large contracts this past quarter to include a significant contract for our long-haul laser communications and 2 BADGERS for the U.S. Space Force's SCAR program. Cyber Mission Systems showed a decline in revenue largely a result of programs that were discontinued and was negatively impacted by the government shutdown. As mentioned earlier, this segment had a strong quarter with new contracts with nearly $500 million HELMSSMAN award among others. Moving on to gross margins. Slide 13 shows the adjusted product and service gross margin, including reconciliations to GAAP gross margin. Second quarter overall adjusted gross margins were 27% versus 41% in the second quarter of FY '25. As noted, the business landscape of the combined new company has changed significantly with a higher service mix and several products in the early stages of maturation. In the -- the second quarter did present some additional challenges to adjusted gross margin. We went live with our Oracle Fusion ERP system upgrade in the quarter. As a result, we experienced some operational inefficiencies and onetime costs related to the go live. With that said, we've made a major leap forward in our operational systems as we transition to the cloud to support a multibillion-dollar company. In addition, we saw an unfavorable service product mix and unfavorable product mix partially as a result of the government shutdown caused by delays in FMS shipments. In addition, we lost revenues in our Space, Cyber & Directory Energy businesses during the shutdown. However, we believe the adjusted gross margin should improve in Q3 and be in the high 30s by Q4. We are maintaining our full year outlook for adjusted gross margins in the low 30s. Moving on to operating expenses. Adjusted SG&A, which is net of intangible amortization and deal integration costs, was $66.1 million versus $33.2 million in the prior year. The increase is largely a result of a combination with BlueHalo. As a percentage of revenue, adjusted SG&A in the quarter was 14% of revenue versus 17.6% in FY '25. Again, these adjusted SG&A levels represent a shift in the business model and we expect to end the year in the 12% to 13% range as we begin to realize synergies and achieve higher revenue levels. R&D expense for the second quarter was $36 million or 7.6% of revenue compared to $28.7 million or 15.2% of revenue in the prior year. Again, this is a shift in the business model, and we expect R&D as a percentage of revenue to end the year between 6% and 7% of revenue, which represents an increase in R&D dollars over the prior year for the combined company. In terms of adjusted EBITDA, Slide 14 of our earnings presentation shows a reconciliation of GAAP net income to adjusted EBITDA. Adjusted EBITDA for Q2 was $45 million, up from last year's Q2 of $25.9 million as reported, primarily due to the incremental BlueHalo results. EBITDA as a percentage of revenue was 9.5% in the quarter. Despite some of these onetime costs and impacts from the government shutdown, we continue to forecast the full year adjusted EBITDA between 15% and 16% of revenue. Now turning to non-GAAP earnings per share. Slide 12 shows the reconciliation of GAAP and adjusted or non-GAAP diluted EPS. The company posted adjusted earnings per diluted share of $0.44 for the second quarter of fiscal 2026 versus $0.47 per diluted share for the second quarter of fiscal 2025, slightly lower due to the same reasons as stated previously. Moving to the balance sheet. At the close of the second quarter, our total cash and investments amounted to $669 million. As reported last quarter, we now have a completely new balance sheet as a result of the BlueHalo transaction and the convertible debt equity financings completed in Q1. Consequently, many of our balances are not comparable to the prior periods. For instance, our overtime revenue recognition has increased from 41% to 75% year-over-year, driving that unbilled receivables. With that said, unbilled receivables continue to be at a higher level than we are targeting. Turning to backlog. As noted earlier, our funded backlog at the end of the second quarter was $1.1 billion, and unfunded backlog was $2.8 billion. Our visibility to the midpoint of the revenue guidance range is now 93%. I should note that this is consistent with past practice that we include within our visibility revenue from long-term contracts we expect to perform during the fiscal year, but which have not been funded as of this date. Finally, I'd like to provide you with our updated FY '26 guidance. On Slide 8 of the presentation, we provide fiscal 2026 guidance. Fiscal year revenue is expected to be between $1.95 billion and $2 billion. Adjusted EBITDA remains between $300 million and $320 million. And non-GAAP adjusted EPS is now projected to be between $3.40 and $3.55. The midpoint of our revenue guidance range represents nearly a 15% growth over the pro forma FY '25 results. The lower non-GAAP EPS range is a result of a higher full year projected tax rate, largely driven by the Q2 update of the purchase price allocation of the BlueHalo acquisition. With the government shutdown impacting both our fiscal Q2 and Q3, we have seen delays in some of the orders and therefore, shifting the projected revenues to the right. Second half revenue should be split approximately 45% in Q3 and 55% in Q4. The adjusted EBITDA shift will be more pronounced with 70% of the second half EBITDA coming in the fourth quarter. I'd like to close by echoing Wahid's remarks, we are very well aligned with the U.S. Department of Word priorities and those of our allies, and we are excited about our prospects. Despite some of the challenges in Q2, we are confident of meeting our guidance for the year. Now I'd like to turn things back to Wahid. Wahid Nawabi: Thanks, Kevin. Before turning the call over for questions, I'd like to reiterate some of the positive momentum entering the third quarter of fiscal year 2026. First, record second quarter awards with a total contract value of $3.5 billion bolstered bookings to reach an all-time high of nearly $1.4 billion, driven by key program wins that support AV's long-term growth. Second, we also achieved another record second quarter revenue of nearly $473 million. Third, we launched several new innovative products aligned to our customers' highest priorities and continue to execute on expanding our manufacturing capacity to meet accelerated demand. And fourth, with 93% visibility to the midpoint of our guidance range, we are raising the lower end of our fiscal year 2026 revenue guidance and now expect revenues between $1.95 billion and $2 billion. Our strong second quarter results reinforce our confidence in AV's future and our role in shaping the next era of defense with integrated capabilities across multiple domains of modern warfare, advanced technologies and the ability to scale rapidly, we believe we are well positioned to meet the Department of the world's highest priorities and sustained significant growth in a demand-driven market. The Department of War has reiterated sharpened focus on speed, scale and commercially driven procurement strategies, all of which plays directly to AV's strengths. This has been our strategy from the very beginning, investing in innovative solutions ahead of demand, scaling rapidly and driving innovation to deliver decisive advantages for our customers. Our alignment with these priorities, combined with our successful track record and best-in-class production capacity creates a powerful competitive advantage and positions AV as a trusted partner ready to deliver at the pace the mission demands. I want to thank our employees, shareholders and customers for their continued commitment to AV and our mission. We're honored to support the most critical defense missions at this pivotal moment and we're ready to seize the tremendous opportunities ahead. And with that, Kevin, Denise and I will now take your questions. Operator: [Operator Instructions] Our first question comes from Greg Konrad with Jefferies. Greg Konrad: Maybe just one on programs. I think you announced that you got 2 more BADGER units in the quarter. Can you just remind us how you're thinking about the current scheduled SCAR and maybe how that contributes to the expected ramp for that program? Wahid Nawabi: Sure. So Greg, as I mentioned in my remarks, we did secure an additional task order and award from the U.S. space force for additional BADGERS, 2 more additional BADGERS. The whole SCAR program, as we mentioned in our comments before, has been so far in a customer-funded development process. We're shifting now from development activity to delivering products most of which is going to end up eventually going into our firm fixed price contracts. That transition not only ramps up the revenue for the second half of the year, but also improves the margin profile of that business. So we're very much on track with our plans. We're pleased with the performance so far, and we expect the margins as well as the revenue of that business actually improve in the third and fourth quarter of this year and continue to improve beyond this fiscal year. Greg Konrad: And then maybe just one follow-up to that. I mean, I think you've talked about a couple of the headwinds that you saw in the quarter around profitability, including Oracle and the shutdown. If you kind of think about that ramp of profitability and margin, given the 70% in Q4, how are you thinking about that progression? How much is operating leverage versus maybe mix and just the biggest drivers that you see as you head into the second half? Kevin McDonnell: Well, I think mix is going to be a big part of that as Wahid just mentioned about the BADGER program and going into fixed price product revenues, some of our other programs and locus and things like this being product revenues and a ramp-up in delivering across the other business units increasing the proportion of product revenues versus service revenues. We don't see the service revenues growing significantly in the second half, whereas the product revenue is going to drive most of that growth. So that's going to give us better mix. And that's why we're going to be able to achieve the high 30s adjusted gross margins by the fourth quarter. Wahid Nawabi: And Greg, let's also keep in mind that we have secured nearly $3.5 billion worth of almost all sole source IDIQ contracts that allows us now to receive task orders underneath those contracts. Once the funding from the big beautiful bill and the budgets for the Department of War, comes through as a result of the shutdown that has been delayed, those product revenues are going to and task order is going to be received in the next 1 or 2 months. That's what we expect, and we want to convert those to revenues. So the volume goes up mix improves and also the profile of the profitability of some of these products and businesses are going to improve, and that's precisely what we expected at the beginning of the fiscal year. Operator: Our next question is from Ronald Epstein with Bank of America. Louie Dipalma: This is [indiscernible] for Ron today. I was wondering if you could -- in the past, you've given a breakout of buy products in the portfolio. I was wondering if you had any color there or if you could talk a little bit about the relative growth levels by product? Kevin McDonnell: Well, I mean, we try to give as much granularity -- we've improved our granularity this quarter by giving you further breakout of the different major product groupings for each segment. And so I try to give some color behind that. that shows what products are driving the different growth in those different product categories. So they're kind of combinations of products, obviously, but we're trying to provide more color for you on that. Was there something specific you were wondering about? . Unknown Analyst: Just if you could talk about Switchblade growth. I think you mentioned Ukraine, if there's any color you could provide there. Kevin McDonnell: Yes. I mean year-over-year, Switchblade by far is the fastest-growing product in the COES precision strike category. Overall, we saw significant growth, multiple x for the JUMP 20 in Q2 versus the prior year. Operator: Our next question comes from Anthony Valentini with Goldman Sachs. Anthony Valentini: It seems pretty obvious you guys have massive growth opportunities here across the 5 to 10 different products that you guys have been highlighting, maybe like put a finer point on it, is there a way to think through the catalyst path over the next few months as some of the reconciliation funding starts to hit backlog? Like what should people be looking for? Wahid Nawabi: Anthony, yes, of course. I'll be glad to provide some more color there. We certainly have a significant amount of opportunity for growth and value creation here in the next -- not only just a couple of quarters, but next few years, we're positioned really, really well. If you look at the key catalysts for growth, loitering munition, of course, we continue to grow that category of the Switchblade and one-way attack drones that are in that bucket. Our risk counter UAS solutions, the Titan family of products is another contributor of significant growth year-over-year. Our medium UAS product line, which is JUMP 20 and JUMP20-X is another category of strong growth. and contributor to our growth in general as well as profitability. Our P550, we expect significant orders for that in the third and fourth quarter of this year. The U.S. Army is intending to purchase a lot. There's a lot of dollars in the budget for that, and we expect to have a fairly large share of that spend with the U.S. Army. And we're also lining up a bunch of national customers for that product line. The SCAR and BADGER program and product is also transitioning to production, and we're going to deliver more sellers, and we're going to ramp up revenue profile of that revenue was a higher margin as well as the volume is higher, that helps. So in a nutshell, if you look at across our portfolio, we've got growth across almost every one of our key product lines. Some of them are contributing to some smaller extent versus larger ones, but they're all growing quite rapidly. One area that may not grow as much as our cybersecurity business, and that's primarily because of it's a customer-funded engineering services and software solution business that really doesn't ramp up aggressively in terms of growth. But overall, we're very pleased with the performance. We're looking for multiple quarters and years of growth. We're positioned really well with the shift in the U.S. DoD and administration strategies. The kind of business model and products and go-to-market strategy that we have is precisely what the U.S. Department of Board is looking for, and we're positioned incredibly well. There's going to be a lot of money spent. It is really hard to predict exactly how much. There is a lot of demand coming our way, and we're getting ready for it as we speak. Kevin McDonnell: Yes. I mean, we think we're on the precipice of significant growth across all those categories. But as with anything in defense, it's difficult to predict the exact timing of that. But we definitely think we're very close to some breakthroughs on some of these products Wahid mentioned. Anthony Valentini: Okay. Great. That's helpful. I appreciate all that color. One other quick one. I guess I'm just curious, like how do we square that with -- if I'm looking at the backlog in 1Q versus 2Q, it's slightly down. So I just -- can you guys help me understand like why that's the case? And should we see the backlog is like significantly ramping into the back half of the year? Or is it just so unpredictable? It's more that you guys have a feel over the next 12 to 18 months versus the next 6. Kevin McDonnell: Well, I think it's pretty flat from Q1 in terms of the funded backlog. The underfunded backlog grew significantly. But remember, we were in the CR and the shutdown. So while we got many of these contracts through, which was great, a lot of them didn't come with significant funding. And we expect that to be coming as they get back and our funding back to business on funding new contracts within the Department of War. So it's a little bit of an issue with the shutdown happening and delay in some of the actual funding on these contracts. Anthony Valentini: Okay. And Kevin, do you have a number for like what you guys expect Switchblade to be in 2026. I know you guys gave the color on what the production capacity will be out of the Utah facility in the future. But is there a way for us to think about the 2026 forecast? Kevin McDonnell: I don't think -- we're not really giving specific guidance on the different products. But I think we talked about before roughly $500 million of capacity before we increase to the new facilities. So you can build plus or minus that, probably. Operator: Our next question comes from Louie Dipalma with William Blair. Louie Dipalma: Wahid, what was the tone from the Reagan Defense Forum over the weekend. And are you increasingly confident given all of the presentations of AeroVironment's positioning across your current product lines, whether it's your drones, your attack drones, the electronic warfare and space? Wahid Nawabi: Louis, I personally attended the Reagan National Defense Forum this past weekend. The overall sentiment is that we are the role model company that the U.S. Department of War and the current administration wants to see a lot more of. We're setting the pace for everyone else. The procurement strategies are shifting to companies that develop things on their own dime. They're doing it ahead of product program requirements. They're doing it at agile and warp speeds then we're transitioning into production quickly. They're focused -- we're focused on all the right areas with the U.S. Department of Board needs and has major capability gaps. These are critical areas of gap, capability gap it's required for the future defense of U.S. and our allies. We believe we're positioned incredibly well, and I think we're going to see continued demand to come our way because of the fact that we can also produce at scale today. We're one of the very, very few companies in these categories that actually has the capacity today and continue to expand it even further to deliver reliable, battle-proven products to our customers at scale. That is a huge competitive advantage that we have compared to everyone else in the market. And we'll send the pace for everybody. So I think the sentiment is very positive and strong for AV. Louie Dipalma: And on this call, you've discussed many of your product lines, such as the P550, your BADGER with the SCAR program, your JUMP 20s. I was wondering, did your long-haul laser communications program from the undisclosed customer. Was that contract recently upsized from $240 million to $385 million? It shows the larger number in your slide presentation. And I was also wondering, have you started delivering terminals as part of that program? Wahid Nawabi: So Louie, I can only speak to that program at a very high level due to sensitivity of that program and customer. We are incredibly delighted and pleased with the success that we're having in long-haul laser communication terminal. Essentially, we all know from the conflicts of Ukraine that RF communication is very susceptible to jamming. Every satellite that the U.S. has in space essentially is susceptible to that jamming problem. If we cannot control and talk to our satellites, especially in the geosynchronous satellites, we've got a major problem. Those assets are not useful. And we are one of the only companies that we know of that has been awarded a contract to this magnitude up to $240 million to actually provide the laser communication terminals to overhaul and upgrade the U.S. geosynchronous satellite constellation for national security. That is a massive, massive step forward for a company [indiscernible]. And we beat many of the major prime contractors are not competitive. And so there's certainly a lot more upside on that contract because we're just beginning to deliver systems. We haven't delivered much yet. We continue to work with the customer. Our system is performing really well, and it takes a while for that to happen. That's part of the program. So we're very excited, and there are options for them to increase that significantly. Kevin McDonnell: The 2 [ 381 ] includes the options as we put forth our new definitions here, to make sure we're all on the same page. That [ 240 ] was the original committed contract and the [ 380 ] was taking the options. Louie Dipalma: Great. And -- so as part of the original committed contract, does that mean that is it funded already? Wahid Nawabi: No. So Louie, a vast majority of that contract is not funded yet. As Kevin said earlier, one of the reasons why our funded backlog nearly the same as last quarter, and it did not grow as much is because there's 2 things that has happened. One, the government shutdown put employees of the government not coming to the office and being able to actually put contracts and award things at one. But the bigger problem was that because of the continuing resolution in the budget that just passed with a big beautiful bill, those dollars have not made it into the accounts of our customers to be able to then award task orders against those IDIQs. So we expect a significant number of additional funded as quarters in Q3 and Q4, all of which is going to improve our backlog and will allow us to deliver more products and more revenue on third and fourth this year. Additionally, will set us up really well for fiscal year 2017. We're not ready to provide any guidance for that yet. But that is going to be benefiting from the demand that's coming our way in terms of task orders and more funding. Operator: Our next question comes from Ken Herbert with RBC Capital Markets. Unknown Analyst: This is Peter [indiscernible] for Ken Herbert. Could you maybe discuss the margin profile of the CD&E segment? Is there maybe a time when you think that the adjusted EBITDA will be breakeven? Kevin McDonnell: Yes. It will continue to grow throughout the year. I mean, they were probably the most impacted by the government shutdown of any of our businesses. And they also had some delays in some of their receipts for their revenue recognition on their system. So they'll definitely be on track as we move forward throughout the year. Wahid Nawabi: And Peter, also, we strongly believe in that business, it is a very profitable, reliable, consistent business and business model. Both of those 2 businesses in the long run, are going to be profitable like they were in the past. There are going to be just these lumps of fluctuations that happen, but the businesses models are sound. They're very reliable in that regard, and we expect them to actually improve in Q3 and Q4 as we go. Kevin McDonnell: Yes. And their product mix over their service mix. So that is going to drive their EBITDA margins up. Unknown Analyst: And I'm assuming the next piece of my question kind of goes hand in hand. But can you talk about the free cash for maybe the second half of the year? Or do you have a kind of a full year outlook for it as well? Kevin McDonnell: Well, we've always tried to say that we can get our EBITDA cash conversion over 50% is the goal for the year. And I still believe that's achievable goal. Operator: Next question comes from Andrew Madrid with BTIG. Andre Madrid: I wanted to dive a little bit deeper into the almost $900 million Army contract, IDIQ, that you guys got. I think the initial award had said that it was pretty much exclusively small UAS and then you guys announced earlier this week that it also included COAS, namely the Titan. I mean, can you tell us more about what the international opportunity looks like for these COAS platforms? I think this is about one of the first times we've really heard about it. Also, Locus be sold internationally. And then I guess also broadly, just how should we think about the margin distinction between domestic and international COAS sales? Wahid Nawabi: So Andre, yes, the nearly $900 million sole source IDIQ contract, multiyear, of course, from the U.S. Army for our products. now includes Raven, Puma AE, Puma LE, but we could also sell our Titan counter UAS solutions as well as potentially in the future of the low-cost direct energy solutions. This is a significant milestone because the U.S. Army could have purchased these things under the existing contracts that we have, but they chose to actually add an additional contract with an additional $900 million nearly ceiling for it allow us to deliver more products over the next couple of 3 to 4 years to our international customers. So that's a very positive news. Secondly, the margins for international sales historically and in the future, will continue to be slightly more favorable than the domestic markets. Those customers do not buy as much as U.S. DoD and generally, the margins are a little bit better. If we sell FMS, the margins are not a lot better. The best margins are international DCS sales. But FMS has less expenses, too, because we do not have the responsibility for exporting it. The U.S. military does. So we deliver the product to the U.S. military and they deliver that to the customer -- the international customer. The market opportunity internationally is massive for us. Really, we're at the beginning phases of that for our counter UAS for directed energy for our Switchblade for one-way attack and for our core stent that we have in our product portfolio. We're just scratching the surface on those items, and some of them are literally just starting with no international sales. The area we're really strong is our small UAS, but we've got tremendous potential here. I expect the international market over the next several years to grow significantly and be a major contributor. Andre Madrid: Got it. Got it. That's super helpful. And then maybe just to pivot to Switchblade, I think you said that by next year, you could support capacity of $2 billion sales. I think previously, the number that you had disclosed was about $1 billion. I just wanted to see what might be driving that difference. Wahid Nawabi: Sure. So Andre, as we keep building these new factories, we're also improving a lot in terms of automation, and ability for us to produce and ramp up production. So we're -- as you know, we're ramping up production for Switchblade significantly already. We've already tripled -- double and triple the year for the last couple of years. And we're going to continue to improve it even further. The new facility that we have now in Salt Lake City going to come online later next calendar year, towards the end of next calendar year, has the potential to go above $2 billion worth of production with multiple shifts. If we get to that level, it's going to be well over $2 billion factory. And I expect that to even go higher than that because there is so much more potential room for growth in terms of our automation and efficiencies in the production processes. Last thing I want to mention about that is that, that's factory is also very flexible. We can produce any variance of Switchblade, but we could also produce other products such as our one-way attack product solutions and our nonlethal UAS and other platforms that we have such as [indiscernible] 1, et cetera, et cetera. So we're setting the factory to be flexible and agile for a lot of our products, and we can shift production on that factory as we go forward. Operator: Our next question comes from the line of Trevor Walsh with Citizens. Trevor Walsh: Great. Maybe just on AV halo a little bit. Wahid, great to see the new products or the new, I guess, module being added on to that. Can you maybe just take a step back though, around that whole product opportunity. Just given all of the different systems from both AV as well as the other providers in the ecosystem that you're partnering and OEMing with and they're able to kind of link in. How much -- how much of that do this needs to work its way through the system in terms of getting those systems out into the field so that the customer can actually just know what's the right sort of overall software packages to go with those? I guess it's another way of asking kind of you have these wins around A halo now, but is there really a kind of much wider opportunity that's kind of going to, I guess, materialize later. Again, what's the actual hardware piece a little bit more locked down, I guess. Does that make sense? Wahid Nawabi: Yes, of course, Trevor. So let me provide you some color on that. First of all, I'm really excited about the AV Halo suite of software solutions. It's not just one particular product. Think of it as a very robust and broad portfolio of solution sets, a software stack and an ecosystem that provides lots and lots of different capabilities with different modules. Halo Command, AV Halo Cortex, AV halo, pinpoint, et cetera, cetera. we launched 2 new modules, number one, and we're going to continue to launch more new modules to that. And the best way to think about it in a very simplistic way is like the Microsoft Office suite of products, Excel, Word, Outlook, all these different modules are underneath the office suite, right? The same thing applies to AV Halo. AV Halo has several modules. In terms of deployment, we already have thousands, if not tens of thousands of some of their modules already deployed in the field. That is the beauty of our system that is all notable and integrated. And so what we've done is try to actually bring the ecosystem cohesively together and mess it all together into one umbrella software solution. Secondly, it is also at a very open architecture. We can integrate with any other platform, including competitor platforms, and we can also talk to any other systems and other battle management systems. And so our belief is that our solution set is incredibly not well understood yet, and we have a long way to go in terms of the opportunity set here over the next several years. One example of that success story is in my comments about the U.S. Army, who selected us for the human machine integrated formation. HIMF program record. That is a very strategic and critical program. We competed with very large companies and small companies that are trying to copy our model and we won. And U.S. Army selected us. That means that the future battle space on the edge of the battlefield the systems and the controllers that they're going to use to operate these robotic systems, whether on the ground or air on land or see, it's going to be ours. And we are open, interoperable and we will integrate with many other systems that are better. And so we got a lot more coming in this area, and I can't be more excited about it in the future. Kevin McDonnell: And we already support multiple platforms with our AV command. Wahid Nawabi: We support not only our own platform, we support more competitor platforms today than our own actually. And that's the testament that how open we are with our architecture and our platform for our customers. And that's one advantage that we have that most other systems are not that open. Operator: Our next question comes from Jonathan Siegmann with Stifel. Jonathan Siegmann: Appreciate managing the shutdown. I thought that was great. And it's a really interesting time with signal flashing green here with a lot of intent of where we want to spend money, but with the shutdown causing a real wrinkle Historically, your January quarter hasn't been the strongest booking quarter for you guys. I'm just wondering if there's going to be some additional frictions this year you anticipate that we just can't catch up with all this pent-up demand and funded order. Is that a worry for you guys? Wahid Nawabi: Yes. Jonathan, that's a very well-put comment because the reason why we do not want to -- or we hesitated to raise the guidance even more is because there's still some timing risk on when we are going to get some of these task orders. The government came out of the shutdown, but still the budget for the fiscal year is not fully approved. We have funding until January -- end of January. And while we expect some cost quarters to come in exactly when they're going to come in is anybody's guess. And so therefore, we expect -- we are confident that we're going to achieve our guidance that we've just provided. And anything above and beyond that, we're going to update you as we go in the next quarter. Lastly, we did really well. We are on track with our plans on first quarter and second quarter, and we are exactly where we want it to be, despite the fact that the whole industry was dealing with a month of complete government shutdown. And so I think our results are very good, and we're very pleased with our results, and we're looking forward to the second half of the year. we got aggressive goals, but we're very confident that we can achieve that. We've got the capacity, we've got the team, and we've got the demand from the customer and the support from our customers to get it done. Jonathan Siegmann: That's great. And thank you for the details on the product lines, I appreciate it. Operator: Our next question comes from Austin Moeller with Canaccord Genuity. Austin Moeller: Kevin. Just my first question here. Can you discuss how much of the backlog today is related to Ukraine and when that might convert? And similarly, how much of the backlog is from European allies ex Ukraine? Wahid Nawabi: Well, Austin, we do not break down specific backlog by customer regions or by specific products. What I can tell you is the following. We have derisked and pivoted from our 2 years ago Ukraine demand almost entirely. It represents less than 5% of our revenue for the full year. number one. Number two, so far, we're on track with our plans and international demand is still back-end loaded a little bit because of the government shutdown and the contracting process, some of those FMS sales have not made it yet to actual contracts to us. Do we continue to get contracts? Yes. But there's a lot more to come towards the second half as well as the next fiscal year. Overall, our backlog is pretty strong. $1.1 billion worth of funded backlog, we had a $1.4 billion worth of funded bookings. And I mean very strong orders and backlog and visibility numbers given where we are with the quarter. Kevin McDonnell: Yes. We've been saying consistently that Ukraine should be less than 10% of our revenue for the year, and there would be no additional orders in our guidance for Ukraine this year. So if we did see some additional business from Ukraine, that would be positive for us. But we're not counting on any additional new orders for our Ukraine... Wahid Nawabi: On our forecast. Kevin McDonnell: In our forecast. Jonathan Siegmann: Okay. And just a follow-up. I know the Genesis of Red Dragon was to enable international sales by having an open payload bay that was payload agnostic and didn't have ammunition in it. But do you expect that Red Dragon could replace or take additional share from the Switchblade 600 over time with the U.S. military in a long-range anti-armor, anti-Fc installation role? Wahid Nawabi: Austin, no, the short answer for that question is no. We do not expect that to take share away from Switchblade primarily because they're designed for very different mission sets. The missions that loading munitions such as Switchblade 300, 600 and now 400 are very different than the missions of one-way attack drones such as our Red Dragon. And our family of Red Dragon is expanding. We believe both of those 2 product lines are going to grow significantly over the next few years. The demand for those systems are very robust from more than one service and more than one customer in country. And so I think we're going to continue to see significant growth on both categories. they're actually complementary to each other in many ways as to how they engage with different targets and different missions for our customers. Kevin McDonnell: Yes. And our current volumes, we're only going to see growth in all those products. Red Dragon to potentially grow faster, but that doesn't necessarily mean it's taking away share from the other Switchblade products. Operator: Our next question comes from the line of Pete Skibitski with Alembic Global. Peter Skibitski: Just wondered if you could level set us. I'm still a little confused with where we're at with the Army long-range reconnaissance. I know that you guys as well as Edge both got contract in August, and then you announced another award yesterday. Are you guys sole source now on LRR with the P550? Or is there going to be kind of an ongoing competition over the next few years? Wahid Nawabi: More the latter, Pete. So what the Army has done, and this is consistent with many programs within the U.S. Army and even other branches of the U.S. Department of Work Services, is that the traditional construct and concept of a program of record single winner probably is not going to be that popular in that comment. What they're going to do is they're going to pick at least 2 players. And from those 2 players, they want to field some systems and see who performs better. as the performance of that system is better, that vendor or that supplier most likely is going to get the lion's share of the volume of that program or requirement a capability gap. . We believe our solution set is the best performing. We have very strong fee from the customer that the customer is extremely satisfied with our systems. Yes, we announced a couple of quarters and awards, but we expect more. We're actually expanding and ramping up production in anticipation of more P550 orders from the U.S. Army as well as additional international customers. We believe that P550 product is a $1 billion-plus franchise for the company over the next several years. We are such a strong believer in that product. I am personally very, very high on that product. Now in terms of going forward, is it going to be just us? Most likely not. Do we expect to get a very large share of that spend? Yes. We expect to get a large share of it, and that's probably going to be consistent across multiple programs, not just [indiscernible]. Peter Skibitski: Got it. Okay. Very helpful. I appreciate that. And just on the P550 specifically, are you clear to export that internationally already? And if so, how many countries can you export it to? And how do you expect that to grow? Wahid Nawabi: Yes, Pete, that's a great question, and that product line was developed from the ground up. Number one, to be MOSA or Modular Open Systems Approach inoperable and compatible and compliant. A two, it is developed primarily all with our own R&D dollars. So it's a non-ITAR product and its base configuration. There are modules within it that can make it ITAR, but we can -- we believe that we can sell the P550 to almost every customer that we sell are Pumas and Ravens and other products today. So the market for P550 internationally is equally as large, if not larger, than our domestic market. And I believe that we're going to have several customers internationally that's going to come online and place orders for that capability later this fiscal year and even beyond this fiscal year. Operator: Our next question comes from Colin Canfield with Cantor. Colin Canfield: Maybe just figured it all home to cash and profitability. If we can kind of think about the building blocks of EBITDA, I think the 4Q guidance on adjusted EBITDA assumes roughly same ballpark as kind of combined whole company pro forma results as last year. So maybe just kind of walk us through how you think of the progression on SG&A and essentially kind of how we think about that EBITDA step up versus the supply chain kind of dynamics that you're focusing on? And then bridging that over, I think Street is probably close to free cash flow breakeven this year. So is it fair to assume that kind of the timing and the shift that you talk about requires investment? Or is it fair to assume that this kind of quick book and turn or excuse me, shipping kind of picked book and ship business can allow you to hit something like that in terms of free cash flow? Wahid Nawabi: So Colin, let me just add some color to this. We do expect Q4 to be the largest quarter as we provided some color, almost 55% of our second half revenues are in the fourth quarter, number one. So the overall volume in fourth quarter is higher, number one. Number two, the mix keeps getting more favorable in the fourth quarter from Q1 to Q2 to Q3 and Q4. So that's also a positive trend that's affecting Q4. We expect SG&A and R&D spending not to be a lot higher and not to be a lot lower. We're going to continue to maintain those levels, but the mix shift in the volume is going to help make a profitability much more pronounced in the fourth quarter in that regard. Now in terms of the overall outlook, we've provided the full year numbers on profitability, and we're confident that we're going to be able to achieve that. Kevin McDonnell: Yes. And I gave color in my script on SG&A and R&D and margins for the year. So that's really how you get there. It really comes from improved gross margins and some leverage on things like SG&A, partly because we get realized some of the synergies that we've established in the first half but don't really realize for the second half of the year. So -- and in terms of capacity, those numbers really represent where we're at in terms of capacity, where we are increasing incrementally in many places in the second half or prior -- or even today, and that -- those reflected -- are reflected in the numbers. Colin Canfield: Got it. And just to clarify, is it fair to assume that your free cash flow breakeven this year? Kevin McDonnell: Well, we're looking for 50% -- it depends when you define all that, but we're looking at 50% cash conversion to our EBITDA. Wahid Nawabi: For the year. Kevin McDonnell: For the year. Wahid Nawabi: Which is a significant improvement over last year. Kevin McDonnell: Yes, which is a big improvement. So basically, that's EBITDA less our CapEx, less our working capital change from EBITDA. Operator: It comes from Peter Arment with Baird. Peter Arment: Wahid, could you -- maybe we'll just touch upon the cash comment that you guys just talked about it. precision strike kind of product revenues were up 68% for the first 6 months of this year, but unbilled continues to grow. And I thought we were under a new contract or payment schedule. Could you maybe give us a little more color what's going on there? Kevin McDonnell: Yes. I mean as we've talked in many quarters, there's been a whole transition period there. There's been some changes in our contract office, our contracting personnel that have all been positive. And at this point, we feel like we have a clear to continue to start bringing that down the second half of this year. And plus we have this -- we do -- as we mentioned in the script, we are -- the amount of unbilled business is significant, particularly as the service businesses. Wahid Nawabi: And the revenue over time, a portion of our overall revenue is also increasing, primarily because of the blue halo and that also is playing a factor in this equation, Peter. And just one other comment to make on this topic is that we're really more focused on the top line growth and making sure that we capture the opportunities and not lose momentum on the significant upside that we have in our long-term plan. So we're really optimizing to make sure that we deliver for our customers. We deliver capability, develop the products. We're anticipating a lot more task orders in the second half of the year. And so we have to really start building products in advance. We can't wait until the last moment. And while we're taking not all the risks, but we are taking some calculated risks to position ourselves to deliver for our customers because we know that they need these systems very desperately. Peter Arment: Okay. So just to be clear, you expect unbilled to be probably materially lower as we get through the fourth quarter, just given your comments about cash conversion on EBITDA. Kevin McDonnell: Right. It's pretty simple. We have the $300 million to $320 million of EBITDA in range. CapEx should be roughly a little bit less than half of that. So in order to hit 50% cash conversion of EBITDA, the change in working capital has to be minimal. And that's what we're forecasting. Operator: [Operator Instructions] The question comes from Austin Bohlig with Needham. Austin Bohlig: Congrats on the nice order fall through even with the government shutdown. But my question has to deal with kind of the full year guide with this anticipated funding coming from the [ OBD ]. Is it fair to assume that anything that flows through that you're expecting is not yet baked in to your current full year guidance? Wahid Nawabi: No, Austin, we are expecting and we're expecting multiple task orders and orders on the second half that we believe we're going to be able to convert that to revenue. In order for us to overperform, it's going to be more difficult because of the timing, how long it takes to go build those products, get them tested and accepted by the customer and then deliver to our customers. So we're confident about our full year guidance, number one. Number two, we do expect contract awards and task orders in the second half that will convert to revenue, and that that's part of our forecast, and we are confident that we can achieve that. Austin Bohlig: Got you. Got you. And then just kind of some specifics on kind of like where are you hoping that these new contracts come from within your product portfolio? Is this precision strike, UAS, counter UAS? Wahid Nawabi: So Austin, it's a very nice, nice portfolio or basket of contracts and award that we expect. It's basically the critical areas that the U.S. DoD needs them desperately and we've been talking about. So P550, more Switchblade more one-way attack, more counter UAS, more directed energy, more SCAR and BADGERS. And those are the key areas that we expect more of in our second half of the year. there's obviously orders for cyber and other businesses, too, but those 5 or 6 categories make up the lion's share of the expected additional contract awards and task orders for the second half. Operator: Our next question comes from the line of Clarke Jeffries with Piper Sandler. . Unknown Analyst: I wanted to ask, Wahid, how do the recent changes to missile technology control and the treatment of affect the current AeroVironment portfolio and maybe even how your posture might change for the future product portfolio. Did any of those changes have any direct impact on the $870 million IDIQ? It sounds like maybe there was some counter UAS focus to that contract, but curious there. And then any other key policy changes you'd flag as crucial for growing the international business? Wahid Nawabi: Sure. So we expect -- first of all, the comment about the change in policy, absolutely. We believe that the new policy and definition that the U.S. Department of War and government came up with how they categorize drones and how the categories loading munitions and one we attack is very favorable to us because they're trying to lax the definitions as to how it's treated versus a true missile that goes very long, long distances, and it's categorized as a missile. So an arm drone or on FPV is not categorized the same. That is going to help us significantly over the next 2 to 3 years. It's not really immediate, but it is over the next 2, 3 years. Secondly, yes, the sole source nearly $900 million IDIQ is directly related to that because the U.S. DoD and the Department of War expects us to ship a lot of products because of the demand that they see from different allies. Obviously, the U.S. Department of War is in contact with those international customers, and they see the uptick in demand for our solutions. So we do expect that to happen. But most of that is not going to happen overnight. It's still a process that takes some time, and we work it. Overall, we feel very positive about the general demand for our solutions from international markets, including Direct Energy, Counter-UAS, one-way attack, loading munition, P550, JUMP 20. Operator: And this concludes the Q&A session. I will turn it back to Denise for final comments. Denise Pacioni: Thank you once again for joining today's conference call and for your interest in AeroVironment. As a reminder, an archived version of this call, SEC filings and relevant news can be found under the Investors section of our website. We hope you enjoy the rest of your evening and we look forward to speaking with you again following next quarter's results. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. Thank you for your continued patience. Your meeting will begin shortly. Operator: Standby, your meeting is about to begin. Hello, and welcome, everyone, to today's Lands' End, Inc. Third Quarter 2025 Earnings Call. At this time, all participants or any listeners will have the opportunity to ask questions. To register to ask a question at any time, please press 1. Please note this call is being recorded. We are standing by if you should need any assistance. It is now my pleasure to turn the meeting over to Tom Altholz. Please go ahead. Tom Altholz: Good morning, and thank you for joining us this morning for a discussion of our third quarter 2025 results, which we released this morning and can be found on our website landsend.com. I'm Tom Altholz, Lands' End's Senior Director of Financial Planning and Analysis, and I'm pleased to join you today with Andrew McLean, our Chief Executive Officer, and Bernie McCracken, our Chief Financial Officer. After the prepared remarks, we will conduct a question and answer session. This includes forward-looking statements. Such statements involve risks and uncertainties. The company's actual results could differ materially from those discussed on this call. Factors that could contribute to such differences include, but are not limited to, those items noted and included in the company's SEC filings, including our annual report on Form 10-Ks and quarterly reports on Form 10-Q. The forward-looking information that is provided by the company on this call represents the company's outlook as of today, and we do not undertake any obligation to update forward-looking statements made by us. Andrew McLean: Subsequent events and developments may cause the company's outlook to change. During this call, we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our website at landsend.com. With that, I'll turn the call over to Andrew. Andrew McLean: Thank you, Tom. Good morning, and thank you for joining us. At its core, our third quarter performance was a strong demonstration of our strategy and its ability to drive value for all stakeholders. We generated compelling results, including gross margin expansion, stronger customer engagement, and enhanced brand awareness. Critically, we built on and sustained the positive momentum that began during the second quarter. As a customer-obsessed, solutions-oriented, forward-looking business, we are connecting with customers where and how they want to shop, delivering high-quality solutions that fit their lives. We are doing all this in an asset-light, agile way that provides the opportunity for us to continue focusing on driving growth and value creation. For example, a return to EPS profitability and 28% growth in our adjusted EBITDA, coupled with record gross margin and adjusted EBITDA rates since our spin-off, point to a brand delivering on its potential. In addition, growth in our GMV was supplemented by low single-digit gains in our North American businesses with flat revenues overall. Underpinning these wins is an unwavering belief in the customer. Over the last three years, we have intentionally taken steps to expand our traditional base to include new and evolved products, playing to our strengths with core products or developing new and exciting solutions to reach a broader audience. Our brand is more relevant than ever. Our marketing has expanded from functional to fun, our product speaks directly to how the customer wants to feel, and our ambitions have found us increasingly meeting the customer where they are. Starting with our B2B businesses, one of the most exciting developments in our outfitters business was securing a long-term partnership with Delta Airlines, which Delta announced in November. Delta selected Lands' End as the exclusive design and manufacturing partner for its next generation of uniforms, outfitting more than 60,000 employees worldwide, including airport customer service agents, onboard flight attendants, and ground operations teams. Our school uniform business delivered on the promise we've discussed all year, up over 20%, with a broad base of growth from both new and existing schools during the all-important back-to-school season. Turning to B2C, our licensing and third-party marketplace businesses remain major growth drivers. Third-party sales rose 34% year over year, led by Amazon and Macy's, both up approximately 40%. Amazon's Prime Week performance was exceptional, with our top 25 items accounting for more than half of our Amazon Marketplace sales. Our performance in this channel is also proving to be a great conduit to landsend.com. And yet, we recognize that we are still only scratching the surface of this opportunity. Our U.S. Consumer business profitability increased year over year, with outerwear leading the way, supported by strong results in both knitwear and bottoms. As we've discussed before, we're keenly focused on weatherproofing our assortment. Perhaps no category demonstrates that weatherproofing strategy more than outerwear, which is now an always-on category with transitional styles like Sherpa and rainwear extending the season and contributing to our performance. Importantly, we saw the largest new customer increase during a quarter other than peak COVID in Q3 2020. Traffic increases in our U.S. Consumer business were up 25%, driven by digital channels, social, and search, with the most U.S. e-commerce website third-quarter visits ever. A very positive indicator heading into the holiday season. Turning to our holiday strategy, we leveraged learnings from last year and launched our holiday shop in mid-September, well ahead of many brands. The results were strong. Holiday patterns and novelty assortments sold rapidly. Christmas needlepoint stockings were up high double digits year over year, and several prints in sleepwear and knits sold out quickly. Our focus on customization and personalization continues to resonate, reinforcing our positioning as a solutions-oriented brand. As part of our holiday launch, we executed another very successful pop-up shop in New York City in November, called our chaotically customized holiday shop. We were thrilled to see so many customers come out to customize our iconic tote bags and cashmere sweaters. A major success for raising brand awareness and introducing Lands' End to new customers, many of whom are much younger than our typical customer. A pop-up shop not only drove strong in-person sales but was a huge success online, with more than 5,000,000 social media impressions in just five days, and coincided with record-breaking traffic to landsend.com, almost the same level we saw last year on Black Friday. With the introduction of embroidered totes, adding more customization options, canvas tote sales were up triple digits. Europe began to show early signs of improvement. During the first half of the year, we focused our efforts to become more effective sellers and position the brand to build on the success that we are seeing in the U.S. As part of these efforts, we recently announced two exciting collaborations with Harris Tweed and Lulu Guinness. In addition, we expanded our marketplace presence to include Amazon and Debenhams, implementing our successful U.S. philosophy to meet the customer where they are. We achieved record gross margins against the backdrop of uncertainty around tariffs and continue to refine our highly flexible co-source strategy, allowing us to shift production as needed. Our focus around a smaller vendor pool is clearly winning and continues at pace. As I mentioned, we added more customers in the third quarter than at any point outside of the pandemic since our spin-off eleven years ago. Leveraging additional channels as part of our distributed commerce model is yielding results. We opened the TikTok shop and saw our Instagram followers swell toward 0.5 million. These customers are skewing younger, and we are seeing the brand relevance growing significantly with millennials, with new-to-file customers averaging in the 45 to 50-year-old cohort. Taken altogether, our third-quarter results reflect the intentional work we've done to weatherproof our assortment, align our promotional calendar to consumer behavior, and ensure our customers can buy what they want when they want it. I'll now turn it over to Bernie to discuss our third-quarter performance in more detail. Bernie McCracken: Thank you, Andrew. For 2025, total revenue performance was $318,000,000, essentially flat year over year, while GMV increased low single digits. Through licensing, our network of third-party marketplace partners, and our Uniform business, we've built a more resilient model that doesn't rely too heavily on any one business unit, product, or partner. Our U.S. e-commerce business generated $180,000,000, a decrease of approximately 3% compared to 2024. The decrease was largely the result of improvements in promotional productivity and enhanced inventory efficiency, which resulted in over 100 basis points of gross margin expansion compared to the prior year. Our third-party marketplace business grew approximately 34%, with nearly all of our marketplace partners delivering year-over-year growth. We were very pleased with our exceptionally strong performance in Amazon and Macy's. Our strategic investment in third-party marketplaces is accelerating brand reach and reinforcing our digital ecosystem while driving deeper customer engagement on landsend.com and positioning the brand for long-term growth. Sales from Lands' End Outfitters increased approximately 7% from 2024. Sales in our school uniform channel grew over 20%, driven by a strong back-to-school season and continued share gains across the market as we capitalize on industry disruption. We recently reacquired the Delta Airlines Uniform. While Lands' End will produce and supply new inventory going forward, we did not acquire Delta's existing stock. During the transition period, we will distribute a mix of Delta-owned and Lands' End-owned products to Delta employees. Revenue from Delta's legacy inventory will primarily consist of processing fees, whereas Lands' End products will generate full retail. Sales in Europe decreased approximately 20% year over year, primarily due to increased promotional activity and continued macroeconomic pressures. Revenue from our licensing business grew over 30% year over year, reflecting the continued momentum of our licensing program. This growth was fueled by increased brand visibility from existing licensees, further expanding our reach and impact. Gross profit increased by approximately 2% compared to last year. Gross margin in the third quarter was nearly 52%, an approximately 120 basis point improvement from 2024. Margin improvement was supported by continued strength across key categories, at a higher average unit retail, and growth in our licensing business, partially offset by tariffs. These actions reflect disciplined execution by our supply chain team, which effectively minimized the impact of global tariffs. SG&A expenses decreased by $2,000,000 year over year. As a percentage of net revenue, SG&A decreased approximately 60 basis points, primarily driven by operational efficiencies and strong cost controls across the entire business. For the third quarter, we had an adjusted net income of $7,000,000 or $0.21 per share. We delivered adjusted EBITDA of $26,000,000 in the third quarter, representing a year-over-year increase of $6,000,000 or approximately 28%. The increase was primarily due to strong SG&A. Moving to our balance sheet, inventories at the end of the third quarter were $347,000,000, increasing only 3% compared to last year. This increase compared to the prior year was primarily due to tariffs, partially offset by continued diligence in inventory management and tariff mitigation strategy. In terms of our debt, at the end of the third quarter, our term loan balance was $237,000,000, and our ABL had $75,000,000 of borrowings outstanding, flat to last year. Now moving to guidance. For the full year, our guidance includes the impact of tariffs at the current regulatory rates. We have implemented mitigation measures to effectively manage the tariff headwinds at these levels for the remainder of 2025. For the fourth quarter, we expect net revenue to be between $460,000,000 to $490,000,000, while GMV is expected to be mid to high single-digit growth. Adjusted net income of $22,000,000 to $26,000,000 and adjusted diluted earnings per share of $0.71 to $0.84, and our adjusted EBITDA to be in the range of $49,000,000 to $54,000,000. Turning to the full year, we now expect net revenue to be between $1,330,000,000 to $1,360,000,000, while GMV is expected to be low single-digit growth. Adjusted net income of $21,000,000 to $25,000,000 and adjusted diluted earnings per share of $0.68 to $0.81, and our adjusted EBITDA to be in the range of $99,000,000 to $104,000,000. Our guidance for the full year incorporates approximately $28,000,000 in capital expenditures. With that, I'll turn the call back over to Andrew. Andrew McLean: Thanks, Bernie. Turning to our fourth quarter, we were pleased with November, starting with a strong Veterans Day holiday and continuing through the Black Friday-Cyber Monday period. Successes were shared across our channels, with notable achievements including European Black Friday volumes hitting a post-pandemic high and a record-breaking performance from our Amazon Marketplace business. Our deliberate and patient efforts to build our brand showed significant progress. We added more than 150,000 new customers in November and reached 0.5 million followers on Instagram. Our new customers continue to be younger and more diverse, extending our presence with millennials and touching all the way to Gen Z. Underpinning growth are our franchises, while heavier down outerwear led the business, we saw the true emergence of a competitive growth differentiator in personalized embroidery, particularly for totes and Christmas stockings. Here's to the dachshund, as our leading embroidery icon for the season. The collar too for our men's Bedford Quarter Zip, our top-selling item, which also earned a coveted number one bestseller rank for its category on Amazon over the period, introducing our brand to tens of thousands of new customers. As always, I want to thank the entire Lands' End team for their commitment and belief as we manage through a significant period for the company. We're also pleased to announce two key leadership appointments that are strengthening our strategic focus, helping to drive growth. Kim Mas has been promoted to President of U.S. Consumer and retains her role as Chief Creative Officer. John DiFalco has been promoted to President of Lands' End Outfitters, where he will continue to lead our B2B business and drive growth in our enterprise and school uniform channels. Both Kim and John have been instrumental in leading our business, and we congratulate them both on these well-earned promotions. Finally, the Board's process to explore strategic alternatives remains ongoing. We will not be commenting further on it at this time, and we will provide an update once appropriate. With that, we look forward to your questions. Operator: Thank you. Our first question comes from Dana Telsey of Telsey Group. Please go ahead. Your line is open. Dana Telsey: Hi. Good morning, Andrew and Bernie. Nice to hear the update on the business. As you think about the revenue side of the business, the puts and takes of any of the different areas relative to expectations, what did you see in promotional levels? And here going through Black Friday, any particular surprises? And then just the continued strength of the gross margin is impressive. How do you think of the puts and takes on gross margin and any framework for what could be different in '26? Thank you. Andrew McLean: Thank you, Dana. Great set of questions. With revenue, clearly, we were very happy with what we saw in the business in North America. We saw that move to back to growth after a number of years of decline. The disappointment in there was the business in Europe, which we've spoken to in the past. I think looking at it, we've been leaning in, and we continue to see that growth into the fourth quarter. I think from my comments, you would have picked up that we saw some tremendous numbers from our European business in the month of November. So what I would say is the continues to build. We're incredibly excited about it. And if you recall, over the three years we've been together, our gross margins have made a step change during that period. So to now be growing top line, with that gross margin structure in place, really augurs well for the future of the brand. In terms of promo levels, you know, we did not see promo levels step out of line. We actually ran a very successful back-to-school campaign in August, and for many years, we had not really approached back-to-school. But reaching to a newer consumer who is younger has been really powerful for us because she comes in and shops for the kids and then shops for herself. And so we were able to manage promo levels really pretty well and felt good about that, and that's something that again, has continued into the fourth quarter. And actually, if I I'm sort of mixing between third and fourth quarter, we were very, very thoughtful about how we would manage our promo levels, and we were very thoughtful about making sure we don't chase the business and that we get ahead of it and really manage to that gross margin because I think the route to the future of Lands' End lies through continuing to push that gross margin. And the sales will always follow when you do that, and that's a function of having the right product for the right customer in the right channels. In terms of Black Friday surprises in there, I was actually very happy with how we ran Black Friday. I think the biggest surprise got was actually prior to Black Friday when we had tremendous success around Veterans Day. So the season started earlier for us, and we had made comments in the script there that we had started in September, but, we did see good selling in September, but the selling was really very strong, very early in the quarter and then continued right through. And that was a different curve than we've been on. There's a lot I could say about that. Here's what I think about it, and I think that we are seeing so many new consumers to the brand with a different profile and different psychographic than we've necessarily seen in the past. That we're actually seeing our seasonality change. As we reflect that customer, and it probably looks more like something from a younger brand. And, you know, I can talk about that more if you want when we talk later. But we feel good about where we're at. Bernie, is there anything I missed? Bernie McCracken: No. I think you covered it all. As far as the puts and takes on gross margin, I think we're really proud of what we did in the third quarter. With the headwinds of tariffs, we were able to still drive an incremental improvement in gross margin rate. Much of that is being driven by what Andrew just talked about about promotions, and being very deliberate about our promotional calendar and selling more full price at the start of the season and then pushing into promotions later in the season. But it also the tech you know, we worked very hard to mitigate the tariffs to the best of our ability. But then we also really have pushed the investment in our DCs and in our systems. And we are really much more efficient than we were a year ago in putting product through our DCs and being more profitable in the process. Dana Telsey: Thank you. Andrew McLean: Thanks, Dana. You too. Operator: Thank you. We'll now move on to Eric Beder of SCC Research. Your line is now open. Eric Beder: Morning. Let me add my congratulations. We had a lot put into the licensing business. Could you give us kind of an update of where we are in terms of what we're gonna see in 2026 in terms of licensing? Has been anniversaried, kind of where does it become more accretive and apples to apples in terms of buying through here? Bernie McCracken: Yeah. Sure, Eric. I think that to start with, the Shoes and Kids business, we have annualized. And the upside to those businesses is they're getting their feet under them on our website and selling. And so we've seen really nice progression from them in growing that business. And we think that will continue to grow. We announced a couple of quarters ago signing five or six smaller licenses. Those will kick into effect a little bit in the fourth quarter, but more so next year. And then we have a pipeline of additional licenses that we are working to expand to. And then we have a pipeline of additional licenses that we are working to. Okay. So it's fair to say that next year it becomes you're apples to apples, most of the categories, and we start to see the full kind of impact on what licensing can do in terms of revenues and in terms of margins, yes. Andrew McLean: We expect and good morning to you, Eric. I hope you're doing well. We expect to see licensing continue to grow for us. We see this as a growth opportunity. If you look at just choosing kids by way of example, I mean, I believe we're still scratching the surface on that in terms of how far we can push it and new doors that we can go to. And then actually if you pick up on Bernie's comments, what we're doing on the website is phenomenal as well. We're really rebuilding those businesses and actually there's leverage that we get by having higher quality kids and shoes on our website along with other licenses. But I'll just stick to those two because they are anniversarying themselves. We're able to complete baskets and pull customers to the web for other categories. And I go back to the customer that we are attracting to Lands' End, which is a younger, millennial customer who's often got kids. It's like to be able to come in and get their kids dressed and pull that together into one story is really key. So I'll give you an example. You know, when we licensed kids out, we did not we separated kids from our catalogs, and we separated design. We've really taken the view over this back half of the year that they should come back together. So for example, if you watch sleepwear, we now do sleepwear for the family, and we do that tightly in partnership with our licensees. So what we're starting to see is the leverage now that you get from having those licenses so closely intertwined with the core business and tell one story. And I think that's upside that we're really anticipating coming through in full next year. So we see opportunity. Eric Beder: Great. I mean, the international front, you've had these great collaborations, Harris Tweed and Lulu Guinness. And when you look at it, you know, a, what does that imply for The U.S.? And, also, we've talked this conversation about how 15% as a percentage of the international business, that comes to The U.S. in terms of product, how should we be thinking about that opportunity going forward and as kind of the profile in the international completes, potential to do things like that maybe here. Andrew McLean: So we do so it's a great question. Thank you. We do do collaborations in The U.S. So I think Park collaboration has been really key. And if you go look at Park, she's an influencer out of Miami, splits her time in New York and has done work with a number of terrific brands of which Lands' End is one. So I just think that's a natural extension of what we are already doing. With the Harris Tweed and Lulu Guinness collaborations, we wanted them to be halos in Europe and really help build the brand identity there. We have no issue and no reason not to bring those to The U.S. And I think you'll see more of us starting to do that. I think that's a little bit of the tail wagging the dog because what we're actually trying to do and intent on doing with the business in Europe is creating a halo there where it sits in more rarefied air and really pulls through a higher valuation for the brand because we've got this European cachet and this European halo. That's part of the reason that we opened the French language website this year, which has actually been a really nice for us. We didn't talk about it specifically on the call, but we've seen the ability to reach a French customer, adds cache, adds sophistication. And that creates a halo that I think creates valuation for us. So we're not running these in isolation. We're not ignoring, working with influencers or other brands. It's all there, and we're doing it all the time. Eric Beder: Thank you. Last question. Inventories. So inventories went up for the first time in a while. How should we be thinking about inventories going forward? Thank you. Bernie McCracken: Sure, Eric. Actually, we're pretty proud that the inventory is only up 3% because with the overhang or headwinds of tariffs, we've worked very hard to be more efficient to bring product closer to selling and keep our inventories down. So despite the tariffs, we're only up 3% and we really feel good about how hard the teams worked on that. Eric Beder: And should we expect kind of that level, kind of low single digits going forward? Andrew McLean: That's fair. Eric Beder: Okay. Okay, guys. Thank you. And luck for the rest of the holiday season. Andrew McLean: Thanks, Eric. You too. Operator: We'll now move on to Steve Silver of Argus Research. Please go ahead. Your line is now open. Steve Silver: Thank you, operator, and thanks for taking my questions and my congratulations as well. Andrew, a couple of times during the prepared remarks, mentioned the term scratching the surface, I guess, it relates to licensing as well as the momentum you're seeing with the Amazon Marketplace. I'm curious as to your thoughts in terms of how long it takes for that surface to go beyond for deeper penetration to where it really starts driving an inflection point in GMV expansion? Andrew McLean: That's a great question. Good morning. I think that Amazon is a perfect example of scratching the surface where you have to create momentum. I think there's a perception out there that you can take any brand and add it to Amazon and it will drive volume and profitability. The reality is this is, it's a channel that you have to open up. You have to market it in a different way, and you have to spend time, you know, really betting in how your brand performs because you're going to bring a different merchandising profile. You're going to bring a different costing profile. And you're gonna bring a different marketing profile because you're gonna reach different consumers. And so how you sell on Amazon is different than how you would necessarily sell on your own website or in stores or wherever. And I think that that's not done lightly. It requires changes to supply chain. It requires changes to how you think about your marketing. It's more digital. It's more done with Amazon. And it's like and then you have to make decisions on know, what customer you're going to meet there. And I think we've done all that heavy lifting. Really over the last couple of years that set us up for tremendous growth. And we look out there, and I hesitate to give numbers, Steve, but as I think about it, you know, the bigger brands on Amazon in our space tend to have a handful of items. And get to a couple of $100,000,000. And that tends to get you that number one badge. Now we've started to do that I was very proud that, whole week of Black Friday and into Cyber Monday. We had the number one badge for Swen QuarterZip, and that really speaks volumes to us being able to get behind the TikTok trend, realize it's there, and position ourselves to reach a new customer. And we're going to continue to be in and out of that as we look for these trend moments because that will really drive our business model on something like Amazon. And it's no different when you go international. You know, it's like you're really laying in the groundwork to build a brand because you wanna be more than a flash in the pan. And you want to build something that's sustainable and endures for the long term. Now with international we'll look for more opportunities to license because we can leverage other people's skill sets. I think that there's continued opportunity there. If I look at the positioning that we've done, we'll talk about Lulu Guinness and Harris Tweed again. I think that really sets us up to be a brand that's gonna have a draw right across the globe. It's not just about a handful of countries in Europe anymore. Steve Silver: That's helpful. Great. So with the customer base skewing to the low side combined with Lands' End, Inc.'s history of innovation, curious as to whether there's anything category-wise we should be looking for in terms of new patents heading into the 2026 season? Andrew McLean: Well, we are always open to that, and I think that you will continue to see that as we build around our concept of solutions. I have the company very focused on solutions, and those solutions lead to franchises. If I look at elsewhere, you've got franchises like feather-free, you know, we'll continue to evolve those. And I think, you know, some of the work that we've been doing this year, you know, we've produced water-resistant fleece. Have we put a patent on it? Not yet. Will we? Probably. But the reality is that we continue to look for ways to innovate that our customer will notice because it's a solution that really gets them ready for life's journey. And that's something that we're incredibly proud of. And I encourage all our teams at Lands' End to always be innovating. And I think that the customer recognizes it and they lean into it. So it continues to be critical to our future. Steve Silver: Great. Thanks so much and best of luck again through the rest of the holiday season as well. Andrew McLean: Thanks, Steve. Take care. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognyte Software Ltd. Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead. Dean Ridlon: Hello, everyone. I'm Dean Ridlon, Cognyte Software Ltd.'s Head of Investor Relations. Thank you for joining us today. I'm here with Elad Sharon, Cognyte Software Ltd.'s CEO, and David Abadi, Cognyte Software Ltd.'s CFO. Before getting started, I would like to mention that accompanying our call today is a presentation. If you'd like to view these slides in real time during the call, please visit the Investors section of our website at cognyte.com. Click on Upcoming Events, then the webcast link for today's conference call. I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call and, except as required by law, Cognyte Software Ltd. assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these, and other risks and uncertainties could cause Cognyte Software Ltd.'s actual results to differ materially from those indicated in these forward-looking statements, please see our annual report on Form 20-F for the fiscal year ended January 31, 2025, and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures. We believe investors focus on non-GAAP financial measures in comparing results between periods, and among our peer companies, that publish similar non-GAAP measures. Please see today's presentation slides, our earnings release, and the Investors section of our website at cognyte.com for a reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from, as a substitute for, or superior to GAAP financial information but is included because management believes it provides meaningful information about the financial performance of our business, and is useful to investors for informational and comparative purposes. The non-GAAP financial measures that the company uses have limitations and may differ from those used by other companies. Now I'd like to turn the call over to Elad. Elad Sharon: Hello, everyone, and thank you for joining us. Cognyte Software Ltd. delivered another strong quarter in 2026. Revenue grew in the mid-teens, and operating income grew significantly faster. Cash flow from operations was strong, and the team continued to execute well. These results underscore the strength of our value proposition and the healthy demand for AI-powered investigative and decision intelligence solutions. Momentum continues to build. We are raising our full-year guidance and are making strong progress towards achieving our targets for the fiscal year ending January 31, 2028. Let me walk you through the key drivers of the quarter. We executed with clarity on purpose, helping our customers make the world safer and delivered meaningful customer wins in the law enforcement, national security, and military intelligence sectors. In Q3, we secured several major deals and expansions. This included a $5 million follow-on subscription agreement with a tier-one military intelligence organization in EMEA, building on an earlier about $10 million perpetual award from this year. This marks another important win in the military intelligence domain, reinforcing the momentum we have established with defense organizations. We also saw continued momentum with long-standing national intelligence customers, renewing and expanding multimillion-dollar contracts, reflecting the strength of our repeat business and the trust our existing customer base places in us. While government customers typically procure through perpetual licenses, we continue to see strong patterns of recurring demand driven by capacity expansions, new functionality, new use cases, and coverage of additional units within agencies. This repeatability in our perpetual business has the potential to drive revenue durability, provide multi-visibility, and support our long-term growth. The US market continues to present a significant opportunity for us, and we continue to invest accordingly, expanding our partner ecosystem, strengthening our team, and increasing field activities. Our new partnership with LexisNexis Solutions is progressing well with deepening technical alignment, expanding joint engagements, and strengthening our traction in both federal and state and local stakeholders. Over the past quarter, we participated in joint events and delivered solution training to their sales organization. This is one example of the multiple partnerships we are building to broaden our reach and grow our business in this region. We continue to see increased interest from military intelligence organizations, including from several NATO countries, reflecting the growing relevance of our capabilities to multi-domain defense missions. At the same time, momentum across law enforcement and national intelligence markets remains strong. Recent industry events reinforce this trend, with meaningful customer conversations and expanding engagement across all regions. Today's threat environment is more connected, fluid, and complex than ever. Our customers face adversaries that cross borders, mandates, and restrictions while the data needed to understand threats remains augmented in silos. Our customers and we are increasingly seeing threat vectors evolving to hybrid and transnational scenarios. Let me share what this actually looks like in the real world. First, a case involving sophisticated transnational criminal networks. Opioids move across borders. Violent crime rises in metro cities. Unusual cryptocurrency flows are detected by financial intelligence units. On paper, these appear unrelated. Border Police focus on drugs, local police center the violence, and financial intelligence units investigate the illicit finance. Each operates within its own mandate and its own systems. But when you correlate the signals, trafficking routes, communication metadata, financial flows, and travel patterns, it becomes clear these activities are being conducted by the same criminal network. Another example, a case involving hybrid activity driven by state-backed actors. Online personas incite social unrest. Protests turn violent in major cities. A hospital is hit by ransomware. Again, these appear unrelated. The intelligence agency tracks the online activity, public order units deal with the unrest, and a subunit handles the hospital. Each operates within its own mandate and its own systems. But when you correlate the signals, cyber indicators, financial flows, travel patterns, and online behaviors, it becomes clear it is one coordinated campaign. The adversaries see the whole picture. For the agencies, it's a significant challenge. And whether the threat is criminal, financial, terror, or hybrid, the root problem is always the same. The threat is unified, the data is not. This is exactly where Cognyte Software Ltd. creates the most value. We help the good guys close the gap by giving them a clearer picture of the threats they need to predict and prevent. We help agencies eliminate the unknown by revealing the hidden connections adversaries rely on. Our AI-driven multi-domain, multi-source, cross-restrictions decision intelligence platform fuses data across silos, uncovering hidden insights that allow agencies to resolve identities and relationships, detect hybrid behavior and criminal patterns, and enable faster, higher confidence decisions. And while our platform can uncover insights across silos, its value begins inside each individual agency unit and mission. Every day, we power investigative, tactical, and analytical workflows for financial intelligence, border security, organized crime investigations, counter-terror, and more. This strong foundation inside each agency is ultimately what makes wider collaborations possible. I mentioned earlier that threats are unified and data is not. We operate in one of the most complex data environments in the world. Massive volumes, high velocity, fragmented systems, and dozens of structured and unstructured formats. We see data differently, enabling agencies to analyze massive, diverse datasets that no human or point solution could process alone. Our platform ingests, normalizes, enriches, and correlates all of it, creating a coherent, connected operational picture of actionable intelligence. This is why we continue to win. Decision intelligence is becoming the foundation of modern investigations. And our technology leadership in this domain continues to be recognized. This quarter, we again received strong Gartner recognition for predictive analytics and intelligence platforms for improved decision making. All I've just discussed is reflected in our financial results. We delivered another quarter of profitable growth with strong year-over-year gains across revenue and profitability. Our financial leverage remains strong. With 13% top-line growth, we nearly tripled non-GAAP operating income year over year. Given our performance and momentum, we are raising our full-year outlook for the fiscal year ending January 2026. We now expect revenue of approximately $400 million, which represents year-over-year growth of approximately 14%, and adjusted EBITDA of approximately $47 million, which represents overall growth of approximately 60%. As we look ahead, we see a future defined by opportunity. Demand for our capabilities is healthy and continues to grow. Our AI-driven technology gives us a clear edge, and our team is executing with precision and purpose. With the deep trust of our growing global customer base, we're excited about the future and well-positioned for the road ahead. We remain committed to delivering sustained value for our customers, our partners, our employees, and our shareholders. David, over to you. David Abadi: Thank you, Elad, and hello, everyone. We continue to make strong progress and have exceeded our business expectations with the support of healthy demand and good visibility. For the third quarter, revenue was $100.7 million, up 13.2% year over year, driven by ongoing demand for our software solutions. Software revenue was $41.9 million, an increase of $11.9 million or 39.6% year over year. Software revenue is comprised of perpetual licenses, appliances, and some term-based subscription licenses. Software service revenue was $46.9 million, up $1.6 million from last year. Software services revenue comes mainly from support contracts and, to a lesser extent, cloud-based SaaS subscriptions. Our total software revenue for the quarter, which is the sum of software and software services revenue, was approximately $88.7 million, a year-over-year increase of 17.9% and represents 88.1% of total revenue. Professional service revenue in Q3 was $12 million, a decrease of $1.7 million over last year. We are on track to have professional service revenue be about 13% of total revenue on an annual basis. Recurring revenue reached $47.5 million, representing 47.1% of total revenue. It's worth noting that recurring revenue as reported in our GAAP financials is driven primarily by support contracts, and some term-based and SaaS subscription offerings, and enhances our visibility in both the near and long term. As Elad discussed, the majority of our revenue continues to come from the sales of perpetual licenses with recurring behavior. Non-GAAP gross margin for the quarter was 73.1%, expanding by 297 basis points year over year. A meaningful achievement that reflects the continuing revenue growth and efficiencies related to COGS. Throughout the year, gross profit has grown significantly faster than revenue, and this continued in the third quarter. Gross profit was $73.6 million, an increase of 18% year over year. The sustained improvement in our gross profit demonstrates the willingness of our loyal global customers to pay a premium for our differentiated technology. As we go, the meaningful operating leverage we have in our model is delivering steady material year-over-year improvements in profitability. Once again, non-GAAP operating income and adjusted EBITDA both grew significantly faster than revenue. In Q3, we generated $9 million of non-GAAP operating income, nearly triple the $3.4 million generated in Q3 last year. Adjusted EBITDA for the third quarter was $11.9 million, 81.4% higher than the $6.6 million generated last Q3. Put another way, we converted approximately $12 million in incremental revenue into approximately $5.3 million incremental adjusted EBITDA, reflecting the operational leverage we have in our business model. Q3 non-GAAP operating expenses were $64.6 million, aligned with our expectations. The global macroeconomic environment led to a weakening of the US dollar against the Israeli shekel and several other currencies, resulting in evaluation expenses of $1.9 million. Turning to tax, Q3 tax expenses were relatively higher due to increased pretax income, our global tax structure, and regional revenue mix. However, this does not affect our full-year tax outlook or annual guidance. We continue to expect our annual non-GAAP tax expenses to be about $11 million. Non-GAAP net income for the quarter was about $2 million, resulting in non-GAAP EPS of $0.03. GAAP net loss for Q3 was $3.4 million compared to a loss of $2.6 million in Q3 last year. The dialogue this quarter was primarily driven by increased tax expenses and FX impacts, as I discussed earlier. Our Q3 GAAP EPS loss was $0.07. Looking at our results for the first nine months of the year, our revenue was $293.8 million, up 14.7% year over year, and our non-GAAP gross profit grew even faster at 17.2% year over year. This performance highlights the operating leverage we have in our model, which continues to drive meaningful year-over-year improvements in profitability. Our GAAP operating income for the first three quarters of this year was $8.1 million versus an operating loss of $5.8 million during the same period last year. Non-GAAP operating income was $24.6 million, up nearly three times from the $9.7 million generated during the same period last fiscal year. Our adjusted EBITDA for the first nine months of this fiscal year was $33.2 million compared to $19.9 million in the same period last year, representing an increase of 67.2%. Non-GAAP EPS was $0.18 in the first nine months of this fiscal year compared to $0.04 in the same period last year. Turning to our balance sheet, our short and long-term contract liabilities, commonly referred to as deferred revenue, remain robust at about $117.9 million at the end of Q3. During Q3, we had strong cash flow from operations of $25 million and had free cash flow of $23.2 million for the first nine months of fiscal 2026. Net cash flow from operations was $20.4 million and free cash flow of $11.9 million. During Q3, we continued to execute our share repurchase program, which the Board approved in July 2025, repurchasing approximately 152,000 ordinary shares for a total of about $1.3 million. During the quarter, we further strengthened our cash position, which increased to $106.6 million with no debt, reflecting disciplined working capital management. Turning to capital allocation, we maintain sufficient working capital to run the business. Above this operating baseline, we regularly evaluate where we can deploy excess cash, including making targeted acquisitions that strengthen our strategic position and returning capital to shareholders. Now let me walk you through our execution against some of our key performance indicators. RPO, or remaining performance obligations, represent contracted revenue to be recognized in future periods. RPO is expected to continue to fluctuate, as it is influenced by factors such as health cycles, seasonality, deployment timelines, contract plans, and renewal timing. It is worth noting that the cancelable portion of subsequent deals is excluded from RPO. At the end of Q3, total RPO was $576.6 million versus $567.6 million at the same period last year. Total RPO is the sum of deferred revenue of $117.9 million and backlog of $458.7 million. Short-term RPO at the end of Q3 increased to $358.9 million, which we believe provides solid visibility into revenue over the next twelve months. This healthy RPO level validates the strength and resilience of our business. Q3 billings were $107.7 million, an increase of 2.9% versus the same period last year. We remain focused on driving strong results. Given the strong foundation we've built and the momentum of the business, we are raising our outlook for this fiscal year. We now expect revenue of $400 million, plus or minus 1%, which represents approximately 14% year-over-year growth at the midpoint of the range. We expect total software revenue to be approximately 87% of total revenue, aligned with our strategic goals. Annual non-GAAP gross margin to be 72.3%, reflecting an improvement of 130 basis points over the last fiscal year. Adjusted EBITDA of $47 million at the midpoint, representing about 60% year-over-year growth. This increased outlook for revenue, profitability, and our continuing execution is expected to generate non-GAAP diluted EPS of $0.24 at the midpoint of the revenue range. And we remain confident in our ability to generate $45 million of operating cash flow in FY 2026. We are very pleased with our consistent execution and the progress we are making towards achieving our targets for the fiscal year ending January 31, 2028. Revenue of about $500 million, gross margin of approximately 73%, adjusted EBITDA margin of greater than 20%. In closing, Q3 was another quarter of strong performance for Cognyte Software Ltd. We delivered meaningful revenue growth, expanded margins, and generated robust cash flow, all while continuing to invest in innovation. We believe we are delivering against all our growth pillars, increasing wallet share with existing high-value customers, adding new logos, and further expanding our market reach in the US. The combination of installed base expansion, strong contracted backlog, and execution of our growth strategy gives us confidence in our ability to generate sustained, profitable growth. We believe we are well-positioned to deliver on our commitment and create long-term value for shareholders. Thank you for your continued support. We will now open the call for questions. Operator: Thank you. Our first question is from the line of Matthew Kalitri with Needham and Company. Your line is now open. Matthew Kalitri: Great. Hey, guys. This is Matt Colicchio over at Needham. Thanks for taking our questions. When I look at some of the large deal announcements, year to date, you've announced customer wins totaling over $65 million in ACV. Can you help break down how much of this amount is currently RPO and revenue? Elad Sharon: Yes. So, actually, what is in the RPO is the software license part. I'm checking whether you want to understand how we convert it to revenues. What exactly is the question? Matthew Kalitri: I'm just trying to understand, like, when you announced these deals, how it works from signing to deployment and along that, like, how long usually elapses there and also, like, how does that flow through RPO and then start to be recognized in revenue? Just from a timing perspective. Elad Sharon: Okay. So, usually, when we talk about large deals, the sales cycle takes a few quarters, between two, three to five, four quarters. And if it's a very significant deal, it takes a little bit longer. When it comes to the backlog conversion to revenue, it depends on the size of the deal. If it's a relatively small deal and the customer is ready, it could take a few months. If the deal is a larger deal and requires cost preparations and environment integrations, so it may take a few quarters. When a deal is landed, it's immediately on the RPO. If the scheduled timing to convert to revenue is within the next twelve months, it will land also in the CRPO. If we believe the portions of the deal are scheduled beyond twelve months, you'll see that in the RPO, but not in the CRPO. The relevant portion, of course. So that's usually how it works. Matthew Kalitri: Got it. And maybe Okay. And that Oh, sorry. David Abadi: Maybe to add on that, when you have a deal with the only the nonconstant bill element is included in the RPO. Matthew Kalitri: Understood. Okay. Very, very helpful. Thank you. And then what portion of the license deals are being recognized upfront and how does that impact recognition in revenue versus RPO? Elad Sharon: So we have multiple types of revenue recognition. In certain cases, we recognize over a percentage of time, meaning, like, or that we recognize the deal on a percentage of completion. Sorry. Or it could be upon delivery or upon SAT, which is acceptance criteria. It's really dependent on the contract with the customer. If you want to look, you can see that when we share the CRPO, it's based on the planning that when we believe the delivery will take place and they will be able to recognize revenue. So that is taken into consideration in our planning, and this is the reason that we are sharing the CRPO to give you an idea of what will happen in the next twelve months. You can see that we have a lot of wins, and everything is covered on the RPO. And we take that as a total number, and we'll be able to have very strong visibility, and that gives us the ability to plan efficiently. And that also allows us to see that our margin is even improving because we are able to deploy in a more efficient way, and that gives us also some benefits. Matthew Kalitri: Okay. Awesome. Turning to US Federal, what are overall conversations like there? How did they change during the government shutdown we just went through, and have they picked up since it ended? Elad Sharon: Yes. So maybe I'll give an overview of where we are in the US. So agencies in the US face similar problems that other agencies are facing and that we are serving worldwide. So we see that the demand drivers and the needs are very similar to other territories. And for that reason, we also believe that our technology is an excellent fit for the US needs. We discussed in previous calls that we started with certain local. We're able to acquire new customers. We got also follow-on orders and already have a lot of confidence from customers that there is a very good fit. In terms of the federal agencies, first of all, we started later, and then the shutdown came. Of course, the shutdown disrupted the engagements for a certain amount of time. Having said that, it doesn't change the fact that those agencies are facing challenges, new technology, and for that reason, I believe that they'll come back to the table. Some of the federal customers that we are engaging with already came to us after the shutdown relief and asked to resume discussions. I can also tell you in the US that, regardless of the shutdown, we continue to do a lot of efforts in order to expand our market access and brand awareness. We enhanced the sales and marketing activities. We participated in relevant industry conferences that I shared in previous calls. An example is Napier. We're expanding our partner's network. We signed with LexisNexis in Q3. So we have a lot of activities running federal agencies in the US. So if I have to summarize it, I really believe our opportunity is significant, and it's not a matter of if. It's a matter of when, and we'll continue to be very focused on this territory and continue to invest, and I believe the fruits will come. Matthew Kalitri: Okay. Great to hear. And then, last one for me. I believe you'd said in the prepared remarks that you've delivered structured training to LexisNexis. Are they ready to start selling now, or where are you at in that training process? Elad Sharon: Yes. So with LexisNexis, we signed last quarter. The partnership is focused on helping with access expansion to the state and local and federal areas. We conducted trainings to their sales force, and we also had joint meetings and events with the LexisNexis team. We are educating them. Some of their sales force are already ready to go to customers and discuss our offerings. In certain cases, we go together. So the progress is very good, and I believe it will progress very fast. Matthew Kalitri: Awesome to hear. Thanks so much. Operator: Thank you. Our next question comes from the line of Taz Kajolgi with Roth Capital. Your line is now open. Taz Kajolgi: Hey, guys. Thanks for taking my question. I just want to follow-up on the US market. I know this is very early for you guys in terms of entering the US market. But just a little bit of color on how the US market differs from other parts of the world in terms of competitive landscape that you guys see in bake-offs? When you look at US deals in the US market, what does the competitive landscape look like? Who do you guys normally see in those scenarios versus other parts of the world? Elad Sharon: Yeah. So first of all, the challenges are similar. In the US market, we've started with operational units within law enforcement agencies, first state and local, and also federal. And that's the market we are focusing on. And the competitive landscape is a little bit different, but with similar technologies. Actually, operational units are using similar solutions globally. But in the US, we do see LP Harris, for example, and Noctasik as companies that are focused in the US territory. Taz Kajolgi: Got it. Very helpful. Then maybe for David. David, can you comment on the duration, the contract duration this quarter? If I look at the mix of RPO versus CRPO, it looks like the duration probably went down year over year slightly. Maybe just clarify if that was the case and what do you think about the duration contract duration trends going forward? David Abadi: So if you think if you look at the overall RPO, it's very strong. Short term and long term, both of them give us the confidence that we will continue to grow over time. If you look at the CRPO, it grew year over year, I would say, in about 10% year over year growth. And given what we see from a demand perspective and how deals are flowing, we are very comfortable with this RPO. Taz Kajolgi: Got it. Just a few more for me. So, strong numbers from you guys overall this quarter looks very good. But if you look at the professional services line, the PS line, I think it was a little bit lighter versus last quarter. Any comment on if deployments were pushed out or anything to help us understand why that services line seems a little bit lighter than what was last quarter? David Abadi: So, actually, professional services, when we started the year, actually, we mentioned that professional services will be around 13% of total revenue. This is what we saw that... Operator: Ladies and gentlemen, please stand by. Your conference will resume momentarily. Speakers, you may resume your conference. Thank you. David Abadi: So, unfortunately, there was a problem with the line, so I will repeat my answer from the beginning because I don't really know where we stopped. So... Taz Kajolgi: And you mentioned that you gave us a guide of 13% of full-year revenues for the services. Right? So that's where I guess we got cut off. David Abadi: Okay. So I would just remind everyone, like, what I was going to say is the professional services. The professional services, it could be deployment services. It could be some development work, training, or artery selling. And we actually deliver it because that creates a faster adoption by the customers. And also allows us to bring to the table faster the, I would say, the cross-sell and the upsell. So overall, the situation within professional services between quarters is mainly related to revenue recognition criteria. And, actually, I'm very pleased with where we are. And we are aligned with our target to be in 13% of total revenue on the professional services. I think that you also asked about software and software services. So you can see that first overall software revenue, which is the combination of total, of software and software services grew by 18%. If you look at the way that we acquired customers, most of the customers are once we acquired them, they're staying with us for a long period. Usually, they acquired perpetual licenses with support contracts. This is the majority of them. And if you think about it, it's a recurring nature in behavior. So meaning that the customer continues to buy with you on a regular basis. So we do have certain cases that the customer does an upgrade of existing licenses, which was under support and it's moved to be a software. So from our perspective, the right metrics to look at the business is the total software, which combines the software and the software services. And when you look at that, you can see that it's also growing very, very well. Taz Kajolgi: Got it. Very helpful. Last one for me, David. I know you gave us a guide for the full revenue for the year. But if you can give us some more details or some more color on how to think about that mix between software, software service, and PS. Because I know last if I look at Q4 of last year, I think we had a big jump in software revenue. I think Q3 to Q4, there's a big jump. Seasonally. In software revenues. I just want to make sure that we don't end up mismodeling the different line items for revenue. So maybe if you can, some more color or some more clarity on how to think about the mix of the revenue between software, software services, and PS. David Abadi: Oh, so let me start with the general comment. You can see that the software revenue grew this quarter significantly, almost 40% versus the previous period. So we are very pleased with the way that the software revenue grew. As I mentioned, our view is that we need to look at the total software revenue, which should mean a combination of the software and the software services. And to give you some color, I believe that it will be 87% of the total revenues. If you look at our guidance, you can say that out of the 400, 87% will come from the software and the software services. Taz Kajolgi: Got it. Very helpful. Thank you. Operator: Thank you. As a reminder to ask a question at this time, please press 11 on your touch-tone telephone. Our next question comes from the line of Charlie Zhou with Evercore. Your line is now open. Charlie Zhou: Awesome. Thank you very much for taking our question. This is Charlie for Peter at Evercore. Just a quick one for me. This quarter, we obviously saw a very impressive margin outperformance both on gross margin and operating margin. And I know you guys have provided a gross margin target of 73% by FY '28, which you guys have already achieved this quarter. Could you please just help us to maybe break down the primary drivers of the margin outperformance and also, like, how should we think about the gross margin expansion trajectory from here? And, also, any updated color on the adjusted EBITDA margin as well. Thank you. David Abadi: Thank you. So, actually, we are very pleased with our 73% gross margin this quarter. And as you can see, there are different dynamics that are taking place over time. So there is a fluctuation between the quarters. But if you look at the overall, you see that the trend is in the right direction, and we are getting to the 73 already in this quarter. And we guided for this year to be at 72.3%, which is almost 130 basis points higher than last year. What we do see within our mix is that overall, when you look at the software, which is software and software services, we are above 80% of total gross margin. If you look at the professional services, we're also improving the professional services. Actually, Q3 was about 20%. But, again, I don't think that it's stable. I would say that if you think about it on an annual basis, it should be in the mid-teens. What the dynamic behind it is, first, customers are willing to pay premium prices for our solution. We have a very strong solution based on our advanced analytics, which customers are willing to pay premium prices, and we talk about it a lot that we are not fighting or competing with pricing. We are investing a lot in R&D because we believe that once you acquire a customer and you provide the customer with a premium solution and addressing their evolving needs, they will continue to stay with you and be willing to pay the right level of pricing. So it's all about the value, and that drives incremental gross margin. And, also, there are some efficiencies that are taking place with our COGS, mainly related to our capability to improve cost structure if it's the fact that we are applying AI capability within the organization that also drives better profitability. So overall, it's driven by the value we provide to our customers. About adjusted EBITDA, we are guiding for this year to be $47 million. It's almost 60%, I think it talks about the leverage. When you think about us as a company, look at our financials over the last few years, we are on a regular basis delivering leverage in our model. We believe in profitable growth. We structure the business in a way that while we are growing, we drive more profitability, and I'm very pleased that we're able to drive it to the bottom line and to create value for shareholders. This is what we are trying to do. This is what we are delivering, and I believe that we'll continue to do so. Charlie Zhou: Thank you very much. Maybe just to follow-up on the adjusted EBITDA margin. Based on your guidance, you're basically projected to achieve around 12% adjusted EBITDA margin by fiscal 2026. And you guys have provided a greater than 20% target for fiscal 2028. Should we think about the 800 basis points expansion from here as more linear, like, 400 basis points in '27 and maybe 400 basis points in '28? Is that the correct way to think about it? David Abadi: Actually, I think, you know, we shared the target for FY 2028 in April. And we are very pleased with where we are getting. We are progressing towards our targets. Obviously, it would be a gradual improvement over time. We are not in a position now to give the plan for the next year, but it would be over time a gradual improvement. Charlie Zhou: Awesome. Sounds good. Thank you very much. Operator: Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Dean Ridlon for closing remarks. Dean Ridlon: Thank you, Shannon, and thank you, everyone, for joining us on today's call. Please feel free to reach out to me should you have any questions, and we look forward to speaking with you again next quarter. Thank you all. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Good day. And welcome to the Designer Brands Inc. Third Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ashley Furlan. Investor Relations. Please go ahead. Ashley Furlan: Good morning. Earlier today, the company issued a press release comparing results of operations for the thirteen-week period ended November 1, 2025, to the thirteen-week period ended November 2, 2024. Please note that the financial results that we will be referencing during the remainder of today's call exclude certain adjustments recorded under GAAP unless specified otherwise. For a complete reconciliation of GAAP to adjusted earnings, please reference our press release. Additionally, please note that remarks made about the future expectations, plans, and prospects of the company constitute forward-looking statements. Results may differ materially due to the various factors listed in today's press release and the company's public filings with the SEC. Except as may be required by applicable law, the company assumes no obligation to update any forward-looking statements. Joining us today are Doug Howe, Chief Executive Officer, Mark Haley, SVP, Controller, Principal Accounting Officer, and Interim Principal Financial Officer, as well as Matt Crummey, our SVP of Strategy overseeing FP&A and Investor Relations. Now let me turn the call over to Doug. Doug Howe: Good morning, and thank you, everyone, for joining us today. We're looking forward to discussing our third-quarter results with you. I'd like to begin my prepared remarks by saying how encouraged I am to be posting another quarter of sequential improvement, made possible by the hard work, resilience, and commitment of our Designer Brands team. Joining me on the call today is Mark Haley, Senior Vice President Controller, and Principal Accounting Officer who has also assumed the role of Interim Principal Financial Officer. I'd also like to introduce Matt Crummey, our Senior Vice President of Strategy who is now leading FP&A and Investor Relations. As we continue the search for our next CFO, I am confident that Mark and Matt's deep knowledge of our business and strategy will ensure a seamless transition as we execute against our transformation. Building on the improvement from Q2, the third quarter represented another step forward with continued progress across key metrics. We delivered on our strategic priorities throughout the quarter, and I'm pleased to share that this positive momentum has carried through the early part of the fourth quarter. I believe we are positioned well as we close out the year. Our results are an encouraging indicator that we are effectively communicating our value proposition amidst the ongoing uncertainty in the external environment. In Q3, we delivered another quarter of sequential improvement, supported by healthier traffic, higher store conversion, and disciplined expense and inventory management. Our total sales for the quarter were down 3% year over year, with comparable sales down 2.4%. A 260 basis point sequential improvement from second-quarter comparable sales reflecting strengthening consumer demand and improved in-store execution. In addition to driving improved top-line trends, we continue to diligently manage markdowns and operating expenses. As a result, gross profit dollars exceeded last year by $5.8 million, a 210 basis point improvement highlighted by a 100 basis point increase in merchandise margin. We also posted adjusted operating income of $46.5 million for the quarter, which exceeded last year by nearly $3 million despite the prior year period, including a $9 million benefit from the timing of an incentive accrual reversal. As a result, for the quarter, we delivered adjusted EPS of $0.38, up notably from $0.27 last year. Our performance in Q3 drove strong cash flow generation and allowed us to pay down $47 million of debt in the quarter. We will continue to fortify our balance sheet moving forward. With that said, now let's review some highlights from each segment in the third quarter. Starting with our retail businesses. For the third quarter, the U.S. Retail comparable sales decreased 1.5%, with total sales down 1% year over year. An increase from the second quarter when both comps and total sales were down roughly 5%. This continued sequential improvement reflects strong execution driven by improved in-stock levels as well as rising demand across key categories. On recent calls, I've emphasized the importance of our DSW stores' performance, and am pleased with the positive momentum we saw from that channel in Q3. Our Let Us Surprise You brand campaign has performed well, driving strong awareness, generating 2 billion earned media impressions as of October. We are continuing to optimize our marketing and media mix as we move forward with this refreshed platform and imagery. In addition, we're seeing encouraging trends across multiple product categories, indicating that enhancements we are delivering in our broad balanced assortment are resonating with a wide range of consumers. Our top eight brands continue to outperform the balance of the assortment, posting a positive 4% comp for the quarter. Penetration of these brands expanded by 200 basis points year over year to 42% of total sales, underscoring the strength and relevance of our most strategic brand partners. We're also encouraged by the strong performance of our key focus areas within the fashion business. Boots have generated a strong start to the season, delivering an 8% increase in regular price product sales in the quarter, with our inventory well-positioned to capitalize on this trend as the business peaks. Our assortment is clearly resonating. We've seen brown being the hot color this season with high-quality, tall chef boots trending. In fact, according to Surcana, DSW outpaced POS by six points in boot sales for Q3, driven by women's, which were up 2% to the prior year. In our affordable luxury offering, while currently a modest portion of sales, underscoring the opportunity to expand, achieved impressive year-over-year growth in Q3 and regained market share in this segment. Lastly, our athletic category performance continued to improve, delivering a 1% comp in adult athletic, a 300 basis point increase from last quarter, and an 8% comp in kids' athletic, an 800 basis point increase from last quarter, highlighted by the strong back-to-school performance. We believe these positive trends broadly across our business are evidence that our curated and differentiated assortment is an area of strength and a key differentiator we will continue to amplify. Turning to U.S. retail profitability. We saw strong regular price selling throughout the quarter. As a result, markdown rates improved by 140 basis points. All the above plus a strategic pullback on unprofitable digital promotions led to an improvement in adjusted operating income for the U.S. Retail segment of $5.7 million compared to Q3 last year. Our adjusted operating income flow-through improved by 100 basis points. Turning to our Canadian business. Total sales for the quarter were down 8% with comp sales down 6.6%, largely due to unseasonably warm weather that softened demand for seasonal products. While macro pressures remain, our teams are managing the business with agility and discipline. We remain focused on items in our control and delivering value to the customer. Encouragingly, performance in Q4 is rebounding as weather has normalized over the past several weeks. Now to our brand portfolio segment. Total sales for the quarter were down 9%, driven by a decline in our external wholesale business due to temporary sourcing-related delivery delays, which we expect to recover in Q4. Operating income for the quarter increased by $0.5 million year over year despite a lower top line, a result driven by our disciplined expense management and tariff mitigation efforts. We continue to be excited by the growth of the Topo business, which delivered 25% growth over Q3 last year and has more than doubled on a two-year basis. Additionally, Jessica Simpson delivered another strong quarter, with external wholesale sales increasing roughly 8%, a continuation of last quarter's growth. Let's turn to our key priorities for the near term. As a reminder, we remain focused on the two pillars of customer and product within our retail businesses. Within brands, we are working to drive growth by scaling private label, building a more profitable wholesale model, and investing in strategic growth brands. Our customer remains at the center of everything we do, and we remain focused on delivering an expansive assortment of relevant products to exceed expectations across footwear categories. Building on the successful launch of our brand repositioning earlier this year, we're moving into Q4 with a holiday-centric execution of our Let Us Surprise You campaign, a natural opportunity to amplify DSW as a gifting destination. Our campaign features traffic-driving activations and exciting ways for our customers to engage with the brand while emphasizing style, quality, and value. We've been encouraged that the momentum we generated in Q3 has carried into the fourth quarter, and we're optimistic that the trends will carry forward through the balance of the season. Shifting to our product pillar, we remain focused on elevating and refining our assortment while continuing to improve inventory productivity and availability across channels. Sound execution of our inventory management strategies fueled margin expansion and higher in-store conversion rates in Q3 compared to last year. These efforts have placed us in a strong position heading into the holiday season. We continue to diligently refine our assortment, ending the quarter with approximately 30% lower choice counts compared to last year. At the same time, we have maintained a sharp focus on key item in-stock levels, which are up 460 basis points year over year to nearly 80%. This enhanced availability allows us to capture demand in our highest-performing categories while maintaining a leaner, more productive assortment. We also continued to drive efficiency in our digital fulfillment operations. Compared to last year, we fulfilled 15% more of our digital demand directly through our logistics center, enhancing operational efficiency and customer satisfaction. This approach enhances the in-store experience that defines the DSW brand by providing better product availability for in-store consumers, which is contributing to increasing in-store conversion. As noted on our last call, we recently unveiled our reimagined DSW store in Framingham, Massachusetts, which showcases immersive experience-driven elements that fully embody our Let It Surprise You brand positioning. The store was designed to drive retail differentiation through discovery, personalization, and technology-enhanced engagement. Building on the success, we are rolling out this elevated experience to two additional stores, Union Square in New York City, and Easton in Columbus, Ohio, and more importantly, evaluating which innovation pilots can be scaled across the broader fleet. These efforts further reflect our commitment to evolving the DSW brand, deepening customer loyalty, and leveraging our stores as a true point of differentiation in the marketplace. Turning to our brand segment. Our sourcing team continues to do an exceptional job navigating a dynamic global environment, mitigating the impact of tariffs while advancing our strategy to further diversify our supply chain. We remain focused on expanding sourcing capabilities across multiple regions to reduce risk related to overreliance on any single country and strengthen our supply chain resilience. As the tariff landscape remains uncertain, our disciplined approach to diversification helps us to maintain flexibility while supporting supply continuity and protecting margins. Turning to our brands themselves. Topo remains a standout performer, with continued expansion in door count and shelf space along with strong direct-to-consumer growth and product innovation. Other brands, including Keds and Jessica Simpson, also continued to make steady progress, supported by improved storytelling, design focus, and channel discipline. We are advancing efforts to scale our private label business and maintain a balanced wholesale strategy and look forward to sharing more about these initiatives in the near future. Before I conclude, I want to share a few thoughts on the remainder of 2025. The momentum established in the third quarter has continued into the fourth quarter, underscoring the effectiveness of our strategic actions. Mark will share more about our guidance for the full year in a moment. But as we move into the holiday season, I'm proud of the progress we've made in advancing our strategy and encouraged by the consecutive quarters of sequential improvement. While there is still a lot of uncertainty in the external environment, we remain optimistic about our ability to close out the year on a strong note. I continue to be inspired by the dedication and determination of our teams across the organization. Their focus on execution, willingness to adapt, and commitment to our strategy have been instrumental in driving our progress this quarter. With this foundation, I'm confident we are well-equipped to capture the opportunities ahead and build sustainable momentum for the long term. With that, I'll turn it over to Mark. Mark Haley: Thank you, Doug, and good morning, everyone. I'm excited to share our third-quarter results, which were marked by another strong step forward in our transformation, building on the progress we made in the second quarter. We executed well against our strategic priorities and continue to see meaningful improvement across key metrics. Let me provide a bit more detail on our fiscal 2025 third-quarter results. We were pleased to see another quarter of continued sequential improvement with comps down 2.4% and net sales of $752.4 million, a decline of 3.2% year over year. In our U.S. Retail segment, sales declined 0.8% year over year with comp sales down 1.5%. Both metrics reflect another quarter of sequential improvements from Q2, demonstrating the continued increase in customer engagement, strength of our product assortment, and improving sales productivity in our U.S. Retail segment. In our Canada retail segment, sales declined 7.5% in the third quarter compared to last year with comps down 6.6%. As Doug mentioned, this decline was mainly due to warmer weather stifling demand for seasonal products. We have seen this trend beginning to reverse in the fourth quarter. Finally, in our Brand Portfolio segment, total sales were down 8.6% to last year, largely driven by a shift in sales from external wholesale activity from the third quarter to the fourth quarter due to shipment timing. As a result, we expect higher sales year over year from external wholesale in the fourth quarter. Consolidated gross margin was 45.1% in the third quarter, a 210 basis point improvement versus the prior year driven by strategically fewer markdowns in the U.S. Retail segment and an increase in fulfillment of orders through our East Coast logistics center. This resulted in gross margin dollars increasing $5.8 million year over year despite lower sales. For the third quarter, adjusted operating expenses were up $2.5 million compared to last year, representing 39.4% of sales. This reflects deleverage of 160 basis points over last year on lower sales. It's important to note that last year's third quarter benefited from the timing of a $9 million reversal of a bonus accrual. Amid ongoing macro volatility and the associated impact on consumer demand, we've maintained a strong disciplined approach to managing operating expenses, inventory, and capital investments. We now expect total expense savings to reach nearly $30 million for fiscal 2025 compared to 2024. For the third quarter, adjusted operating income was $46.5 million compared to $43.6 million last year. We are encouraged by the year-over-year improvement in operating income driven by disciplined execution by our teams across the business. In 2025, we had $11.4 million of net interest expense compared to $11.6 million last year. Our effective tax rate in the third quarter on our adjusted results was 44% compared to 55% last year. Our third-quarter adjusted net was $19.6 million versus $14.5 million in the prior year. Adjusted diluted earnings per share was $0.38, which was notably above last year's earnings per share of $0.27. Turning to our inventory. We ended the third quarter with total inventories down 2.7% to last year. For year-end, we are continuing to strategically manage inventory levels to align with underlying sales trends. This disciplined approach positions us to respond quickly to demand and should allow us to close the year with a healthy inventory position. During the quarter, we utilized excess cash to further strengthen our balance sheet, paying down debt and ending the quarter with total debt outstanding of $469.8 million. We will continue to reduce debt as we move towards the end of the year. We ended the third quarter with $51.4 million in cash. Our total liquidity as of the end of the third quarter, which includes cash and availability under our ABL revolver, was $218.3 million, providing us with solid financial flexibility as we close out the year. As Doug noted, we have seen our Q3 momentum carry into Q4, and we believe we have enough visibility to share our expectations for the fiscal year. At this point, we expect total net sales for the year to be down in the range of 3% to 5% with adjusted operating income in the range of $50 million to $55 million. Our forecasts are contemplating tax expense for the year in the range of $8 to $10 million. To conclude, I'm pleased with the progress we achieved in the third quarter, delivering a year-over-year improvement in operating income, expanding gross margin, and strengthening our balance sheet. As we close out the year, our improved profitability and solid liquidity position give us confidence in our ability to advance our strategic priorities. With that, we will open the call for questions. Operator? Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Mauricio Serna with UBS. Please go ahead. Mauricio Serna: First, on the commentary about the momentum continuing into the fourth quarter, could you elaborate a little bit more about what your trends are quarter to date? And if I just look at, you know, the guidance for the full year, I think the implied guide for Q4 is roughly minus 5% to up almost 4%. Could you maybe explain, like, a little bit more why you have, like, this wide range for the Q4 sales guidance? Thank you. Doug Howe: Mauricio, this is Doug Howe. Thanks for your question. Yeah. We are encouraged, obviously, as we said in our prepared remarks with regards to the sequential improvement we saw in Q3. And October was actually the strongest month of that period. And that momentum has continued into Q4. I don't want to get into a lot of specifics in the current quarter, but the key categories, the key brands, the classifications that were giving momentum in Q3 have continued, namely the top eight brands, continue to outperform. The boot category, in particular, as I mentioned, was off to a very strong start. Specifically as it relates to regular price selling in Q3. That has definitely continued. The teams have done an amazing job to be able to react to that trend as well. The affordable luxury business, while small in overall volume, is almost double what it was last year. So we're seeing some really nice momentum there as well. And all of that is based into the guidance that we provided for the full year. There's a little bit of noise if you think about the difference between the retail sales and brands. As I mentioned, brands had a bit of a decrease in Q3 based on some temporary timing shifts of delivery. But that will be rebounding, and we're forecasting positive sales there. So that creates a little bit of noise in the Q4 results for total net retail sales. Mauricio Serna: Got it. In terms of, like, gross margin, you know, nice to see the progress. How are you thinking about the gross margin in Q4 and maybe just any high-level commentary of what you're seeing in terms of the promotional environment? Thank you. Doug Howe: Yeah. Thanks for the question. We're continuing to be encouraged by how the teams have managed gross margins, specifically at DSW. As I mentioned, in Q3, we had a 140 basis point improvement in markdown rate. And we see similar favorability in Q4. We're anticipating that as well. The gross margin in Q4, you know, there is a promo environment. But we're not seeing a lot of resistance from our customers as it relates to higher prices. Our ARR was up nicely. Some of the categories that are strongest performing are the higher AUR categories as well. We, as I said, have been mindful of walking away from some unprofitable digital promotions. And we'll continue to do that, seeing a little bit of pressure on digital top line, but significant expansion in operating income in that channel. Mauricio Serna: Great. Thanks a lot, and good luck in the holiday season. Thanks, Doug. Operator: As a reminder, if you would like to ask a question, please press star then 1. This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Doug Howe: Thank you all for joining us today and for your continued support. It's clear that we are encouraged by the sequential improvement that we delivered in Q3 and that we remain confident in our strategy, our team, and the opportunities ahead to build sustainable momentum for the long term. We're focused on execution and a willingness to adapt in order to best serve our customers and drive value for our shareholders. We appreciate your time today, and we look forward to updating you next quarter. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to 2025. Please be advised that this call is being recorded. And the reproduction of this call in whole or in part is not permitted without the express written authorization of Ollie's Bargain Outlet Holdings, Inc. I would now like to introduce our host for today's call, John Rulot, Managing Director of Corporate Communications and Business Development for Ollie's Bargain Outlet Holdings, Inc. John, please go ahead. Thank you, and good morning, everybody. We appreciate your time and participation. John Rulot: Joining me on today's call from Ollie's Bargain Outlet Holdings, Inc. are Eric VanderVlok, President and Chief Executive Officer, and Robert F. Helm, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. We ask that you initially limit yourself to one question to ensure that everyone has the opportunity to participate. If you have additional questions, please reenter the queue. Finally, let me remind you that certain comments made on today's call may constitute forward-looking statements. These are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are described in the company's earnings press release and filings with the SEC, including the annual report on Form 10-Ks and the quarterly reports on Form 10-Q. Forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these statements. On today's call, the company will be referring to certain non-GAAP financial measures. Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in the company's earnings press release. With that all said, it's my pleasure to turn the call over to Eric. Eric VanderVlok: Good morning. Thank you for joining us today. Our team delivered another strong performance in the third quarter. We opened a record number of new stores, continued to accelerate membership growth in our Ollie's Army loyalty program, widened our price gaps to the fancy stores, and delivered industry-leading sales growth all while driving significant improvement on the bottom line. We are primed and ready for the final days of the holiday season. Our expanded assortment of seasonal and gift items, along with our amazing deals of brand-name household products, make us the holiday shopping destination. Our comp trends since early October have been strong, and we feel great about our momentum heading into the final weeks of the holiday season. With the better-than-expected third-quarter results and a very good start to the fourth quarter, we are raising our full-year sales and earnings outlook. Let me provide an update on our strategic growth initiatives and some of the things we are doing from a merchandising, marketing, and supply chain perspective to drive our business. Accelerated unit growth and customer acquisition remain our top priorities. We have a predictable, portable, and profitable store model that is unlike anything else in the market. We have a huge opportunity ahead of us to continue growing. Our long-term target is 1,300 stores, and we are committed to a minimum 10% annual unit growth to get there. We have the talent and have built the infrastructure to exceed our long-term algo and are delivering accelerated unit growth. We opened 32 new stores in the third quarter and 86 for the year, which is 18% growth. This blew away previous Ollie's records and demonstrated our ability to exceed our algo opportunistically. The current environment has been challenging for many retailers, and this, coupled with long-term consolidation of retail, presents a pivotal opportunity for Ollie's to secure attractive second-generation real estate sites. Our entire team deserves a huge shout-out for their achievements this year. Not only did we open a record number of new stores, but all of our stores were also opened before the fourth quarter. We have not made this happen for years. And this allows us to be 100% focused on driving the business in the final months of the year and the critical holiday shopping period. Thank you again, Ollie's dream team of discount retail for making this happen. Opening stores is the first component of our growth strategy. Next, is winning the hearts and minds of new customers. We have some of the most dedicated and passionate customers in the business and are a fiercely committed group. As we continue to open new stores, we are focused on acquiring new customers and turning them into loyal Ollie's Army bargain knots. Our members shop more frequently and spend over 40% more per visit than nonmembers. They are very important to our business. And we have an opportunity to strengthen our connection and drive lifetime customer value. We are very pleased with customer growth in the third quarter. New memberships in our loyalty program increased 30% year over year, while our customer file increased 12%. We have seen new customer acquisitions strengthen since the first half of the year, and engagement with our existing customers remains strong. Both the younger and higher-income groups were the fastest-growing cohorts in the quarter, which we think is in part driven by the continued reallocation of marketing dollars to digital consumers seeking value, and customers trading down. We also continue to enhance the value proposition of our Ollie's Army loyalty program. Last quarter, we talked about the success of the additional Ollie's Army Night and some of the learnings there. The biggest takeaway was the adjustment to the start time of the event. We received positive feedback about the earlier start time and experienced increased foot traffic as a result. The upcoming Ollie's Army Night on Sunday, December 14, will run from 4 to 9 PM compared to 6 to 10 PM last year. If you are not already a member of Ollie's Army, what are you waiting for? We invite you to join and we look forward to seeing all of you this Sunday. On the merchandising front, let me touch on how we are steering our product mix to drive sales productivity and enhance new customer acquisition. Our flexible buying model and treasure hunt shopping experience give us unlimited flexibility in how we assemble our product offering. Our buyers are continuously scouring the marketplace to find the best products at the best prices to put together an ever-changing assortment that combines quality, national brands, and price in a way that can only be found at Ollie's. At the same time, we know that customers are prioritizing their spending around their needs and are looking for value. By focusing on value-driven consumable deals, we achieved mid-single-digit increases in comparable store transactions attracting new customers and increasing engagement. Our deal flow continues to be very strong and driven in part by the challenging retail environment. On top of this, our growing size and scale are starting to give us the opportunity to steer our category mix. A good example of this is the increased investment we made in the seasonal category. As you may have seen in our stores, we dramatically increased the assortment of seasonal decor over the past year. With the most meaningful changes taking place in our fall harvest, Halloween, and Christmas categories. We also grew our holiday gift programs that we initially successfully tested last year. The changes have been well received by our consumers, with seasonal being one of our top-performing categories in the quarter and throughout the year. Marketing continues to be a critical lever in fueling the growth of our business. And over the past year, we have been accelerating a major evolution in how we connect with our customers. As consumer attention shifts continue to shift towards digital platforms, our strategy is shifting as well. By moving from traditional linear and print-heavy approaches to a more dynamic digital-first strategy, we could deliver the right message to the right person in the right place at exactly the right time. A recent comprehensive review of our media mix model indicated a significant opportunity to further reallocate print spend to digital media. Acting on this data, we put a test in place, and our strategic reallocation is already proving out. October was our strongest month of the quarter, at a time when we meaningfully reduced our print campaign. This allowed us to leverage our media spend while driving sales above plan in the quarter. More importantly, this is a pursuit of a smarter, more targeted, more modern marketing ecosystem. To support the growth of our business, we continue to invest in our supply chain. Over the next year, we plan to expand our Texas distribution center by 150,000 square feet and increase our service capacity by approximately 50 stores to 800. Next on the list is the expansion of our Illinois distribution center, which will start late next year. Our supply chain investments have driven throughput, leveraged costs, and expanded our capacity to buy any deal anytime, anywhere as we continue on our path of continuous growth. I would like to thank all of our dedicated and hardworking associates. Deep discount retail is not an easy business, and it requires continuous coordination and relentless execution. We came into this year with a very unique opportunity to accelerate our growth and capture abandoned market share from the store closures and distressed retailers. Our team was ready for the challenge and stepped up all year long. I want to wish everyone happy holidays and hope that all of our team members are able to enjoy time with friends and family. Now let me turn the call over to Rob. Robert F. Helm: Thanks, Eric, and good morning, everyone. We are very pleased with our third-quarter results and the momentum in our business. New store openings, new store performance, sales, and earnings were all ahead of our expectations for the quarter. With the better-than-expected results and a very good start to the fourth quarter, we are raising our full-year sales and earnings outlook. Accelerating new unit growth and expanding the Ollie's Army loyalty program are two big priorities this year. We are delivering on both of these initiatives. We opened 32 new stores in the third quarter, ending the period with a total of 645 stores, an increase of more than 18% year over year. Ollie's Army members increased 12% to 16.6 million members strong, driven by new customer acquisition. With the consumer buying closer to need, prioritizing necessity over discretionary items, this has driven strength in consumer staples. Our flexible buying model has allowed us to feed this trend, which has been very well received by customers. We have also taken advantage of a number of closeout deals that have fueled positive trends in customer acquisition transactions and unit volumes. We intentionally pursued these deals to drive customer growth and engagement, even as they put some pressure on average unit retail and basket size. Now let me run through our P&L numbers. Net sales increased 19% to $614 million driven by new store openings and comparable store sales growth. Comparable store sales increased 3.3%, driven by a mid-single-digit increase in transactions, which was partially offset by a decrease in average ticket price. Our top five performing categories were food, seasonal, hardware, stationery, and lawn and garden. Gross margin decreased 10 basis points to 41.3%. The slight decrease was better than our expectations and was driven by higher supply chain costs, primarily in incremental tariff expenses which were partially offset by higher merchandise margins. SG&A expenses as a percent of net sales decreased 50 basis points to 29.4% with the decrease primarily driven by lower professional fees, stock-based compensation, and leverage from the continued optimization of our marketing ecosystem. Preopening expenses increased 3% to $7 million in the quarter, driven by new store growth, and $1 million of dark rent expense associated with the former Big Lots locations acquired through the bankruptcy auction process. Moving down to the bottom line, adjusted net income and adjusted earnings per share increased 29% to $46 million and $0.75, respectively, for the quarter. Lastly, adjusted EBITDA increased 22% to $73 million and adjusted EBITDA margin increased 30 basis points to 11.9% for the quarter. Turning to the balance sheet. Our total cash and investments increased by 42% to $432 million and we had no meaningful long-term debt at the end of the quarter. Given the nature of our business, the strength of our balance sheet is a strategic asset. Financial stability, the visibility of being a public company, and our size and scale help distinguish us in the closeout and off-price space. As a result, we remain committed to a fortress-type of balance sheet because it helps drive our business. Inventories increased 16% year over year, primarily driven by our accelerating store growth and strong deal flow. Capital expenditures totaled $31 million for the quarter, with the majority of the spending going towards the opening of new stores, the build-out of the bankruptcy-acquired stores, and to a lesser degree, investments in both our supply chain and existing stores. We bought back $12 million worth of our common stock in the quarter and had $293 million remaining under our current share repurchase authorization at the end of the quarter. Lastly, let me run through our outlook for fiscal 2025. We are raising both our sales and earnings outlook for the full year. Our revised outlook flows through the upside in our third-quarter results and mostly keeps our outlook for the fourth quarter in place. It also assumes the current tariffs remain in place for the balance of the year. Our updated guidance figures are contained in the table in our earnings release posted this morning and include: 86 new store openings, net sales of $2.648 to $2.655 billion, comparable store sales growth of 3.2 to 3.5%, gross margin in the range of 40.3%, operating income of $293 to $298 million, and adjusted net income and adjusted earnings per share of $236 to $239 million and $3.81 to $3.87, respectively. These estimates assume depreciation and amortization expenses of $55 million inclusive of $15 million within the cost of goods sold, preopening expenses of $25 million, which is slightly higher than the previous guidance, with our pipeline for the first quarter now set. An annual effective tax rate of approximately 24% which excludes the tax benefits related to stock-based compensation, diluted weighted average shares outstanding of approximately 62 million, and capital expenditures of approximately $88 million. Which includes the build-out of the former Big Lots locations and the initial expenses associated with the expansion of our DC in Texas. Our fourth-quarter comp outlook is now in the range of positive 2% to 3%, we will not be opening any additional stores in fiscal 2025. But our new openings in fiscal 2026 are set and will again be front-end weighted. Given the strength of our pipeline, we expect new store openings in 2026 to remain above our long-term growth algo. And we are targeting 75 new stores next year. In closing, let me thank my fellow team members for their work and dedication this year. We came into the year with a unique opportunity to accelerate our growth and increase our market share. This required a lot of coordination and effort across the organization. And I could not be more proud of how our teams have executed this year. With a strong assortment of both seasonal and everyday items, we feel good about our positioning heading into the holidays and are poised to finish the year strong. Happy holidays to all of our associates and team members around the country. Now let me turn the call back to Eric. Eric VanderVlok: Thanks, Rob. Looking ahead, we feel very good about our positioning. Customers are looking for value, manufacturers need ways to manage their supply chain, and the retail sector is consolidating. Ollie's Bargain Outlet Holdings, Inc. benefits from these powerful secular trends which are reflected in our fundamentals. Our customer base is expanding, our deal flow has never been better, our store growth is accelerating, our price gaps are widening, and our margins are expanding. We are delivering strong and consistent results. We are winning the hearts and minds of customers and most importantly, we are Ollie's Bargain Outlet Holdings, Inc. Operator: We are ready for questions. As a reminder to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Charles P. Grom from Gordon Haskett. Charles P. Grom: Hey, good morning guys. I was hoping you could frame up the state of your consumer in light of your basket commentary. DG also spoke about some ticket compression during times of consumer duress recently and also historically. And then bigger picture, can you talk about your vendor relationships both on the closeout front but more importantly, the steps you are taking to drive deeper CPG relationships? Thanks. Eric VanderVlok: Sure. Thanks, Chuck, and good morning. Yeah. I will start with the second part of your question. In terms of relationships, you know, it has been a difficult environment for many traditional retailers with bankruptcy, store closures, disruptions from tariffs. Customers continue to seek value, and we continue to grow our share of the order book of many vendors, kind of regardless of the space that they are in. In CPG, it has certainly been a big component of that. Our food business is an indication of the strength of not only the customer looking for value in products they need but also a deal flow that has been particularly strong in large part as a result of abandoned product or order book space in CPG order books that used to be sold to some of these companies that are no longer around or have consolidated. So that has been very good for us. It has helped us to open up new relationships as well. You would think at our size and scale that we know everyone, and that is really not true. We still have opportunities to work more directly with various vendors even in the CPG space. And we have been able to open up some new relationships over the past year that have been very meaningful for us. And it is meaning that customer need to buy to get extreme value in products that they need. In terms of the state of the consumer, you know, we are seeing strength in the higher-income consumer above $100,000 in household income. Strength in upper middle, it is $65,000 and above. It is solid lower middle, and we have seen a little bit of I do not know if it is trade out or a little bit of softness in the lower-income consumer, which we could potentially attribute to the government shutdown and some of the disruption that happened as a result of that. But we are seeing on the whole that the strength of the upper middle and upper-income consumer more than offsets a little bit of the weakness with that lower-income consumer, and that low middle has been hanging in there. And as we indicated, we have been able to attract a lot more customers and convert them into the loyalty program as well, and we think in part driven by deal flow in CPG products. Operator: Thanks, sir. Eric VanderVlok: Thanks, Chuck. Operator: Thank you. One moment for our next question. Our next question comes from the line of Matthew Robert Boss from JPMorgan. Matthew Robert Boss: Great. Thanks. So could you elaborate on the components of the third-quarter comp? Particularly the growth in transactions maybe relative to the second quarter versus drivers of the basket decline? And just how this fits into your customer acquisition strategy. And separately, could you speak to the cadence of monthly comps that you saw in the third quarter and just help define the strong start that you cited in the fourth quarter, maybe notably trends that you saw before and after Black Friday weekend? Robert F. Helm: Hey, Matt. I will chime in on the first part, and then Eric will take the second part about the customer acquisition. We are very pleased with our comp in the third quarter. The positive 3.3 is above our guidance of the positive three for the entire quarter. We saw a mid-single-digit positive transaction trend which is actually an acceleration off of Q2 when you normalize it for the incremental Ollie's Army Night event that we added during that quarter. The basket was the piece that was down. That was down low single digits. That was driven by a decline in AUR that was in the high single digits. From a cadence perspective, we were pleased with the flow of the quarter. We saw a little bit of slowdown midway through the quarter, was at a time when unseasonably warm weather and the initial government shutdown took place. So not sure how much is attributable to either component. But we saw momentum return in October when the weather changed. We exited the quarter with very strong momentum. That momentum has carried into November. Quarter-to-date trends are currently running ahead of our guidance. That AUR that was a high single-digit decline is now a positive low single-digit increase to our AUR. So all in all, between the assortment and where we are running from a momentum perspective, we feel very confident to deliver our guidance in the fourth quarter. And deliver the year. Eric VanderVlok: Hi, Matt. I will just add a little bit of color on AUR. You know, we really do not overtly manage AUR at Ollie's. We manage price gaps. If we saw an opportunity in Q3, and it speaks a little bit to Chuck's question about CPG and strength of CPG. We saw an opportunity to invest in price especially in consumables. We also had opportunities to buy some very compelling low AUR deals in craft and seasonal in a couple of other categories. And you know, we took the opportunity to invest in lower AUR deals that we believe customers would respond very favorably to. And they did. And that really drove our traffic over the course of Q3. It also made us a lot of friends. And it helps us to win hearts and minds and helps us to win loyal customers that will be customers for life. So we like this investment in price. We like this investment in low AUR. We are in this for the long haul in terms of customer acquisition and retention. We were very happy with the outcome. Matthew Robert Boss: Great color, and nice to hear on the momentum. Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Steven Emanuel Zaccone from Citi. Steven Emanuel Zaccone: Great. Good morning. Thanks very much for taking my question. Wanted to follow up there. The customer acquisition trends, can you talk about the growth you are seeing with new customers and then overall customer retention? And then as it relates to the Ollie's Army Night in December, how is your planning for that event changed at all based on the learnings from adding an additional night in June this year? Eric VanderVlok: Sure. Thanks, Steve. In terms of customer acquisition, very happy. One of the strongest from an acquisition standpoint we have ever experienced as a company. Retention is also very good. Customer reactivations are also strong. So we are hitting on all cylinders in terms of 18 to 34 years old. Which really blew us away because typically, it is more in the mid-thirties to mid-forties. That was our second strongest cohort from an acquisition standpoint was 35 to 44. And then from an income standpoint, I commented a little bit. When Matt asked his question, but upper middle and higher income were the strongest in terms of acquisition of the army. In terms of Ollie's Army Night, you know, I kind of made the comment on the call about our learning from the summer event. We had such an enthusiastic response from customers about the earlier start time of the event. If you remember, we started the event at 5 PM. So we made an adjustment given the time of the year and the weather in a lot of places to start this event at 4 PM. The event is actually one hour longer, runs until nine. Many of the customers that commented favorably about the earlier start time in June were older customers, you know, the kind of customers like the dinner at 5:30 and watch Jeopardy at seven. That is a shout-out to my 84-year-old dad because that is him, but that is the customer that appreciates the earlier start time. In terms of how we are thinking about it, we are not actually thinking about the outcome any differently. Currently, it is all accounted for in our guidance. And so we are not basing on any significant incremental contribution from the day itself. Steven Emanuel Zaccone: Okay. Thanks for the detail. Best of luck. Operator: Thank you. One moment for our next question. Our next question comes from the line of Bradley Bingham Thomas from KeyBanc Capital Markets. Bradley Bingham Thomas: Good morning, and thank you. You did a nice job here of driving leverage. Even with such a large increase in stores here this quarter. I was hoping you could talk a little bit more about some of the levers that you are pulling in SG&A and perhaps an early look at how to think about that into next year? Thanks. Robert F. Helm: Sure. I will take that question. It is Rob. We have an incredible white space opportunity ahead. We have a predictable, affordable, and profitable model that is unlike anything else in the marketplace. The model itself generates an incredible amount of free cash flow. And it is a unique operating model that can be scaled over time. Our focus is really positioning the business not for next year, but for the next five to ten years. Deliver consistent sales and earnings growth over time. To your point, we are also focused on delivering near-term results. Thinking ahead to 2026, we anticipate benefiting from the full-year annualization of the step change in the new stores that we opened. We would expect to benefit from a favorable real estate environment, setting up another year of strong and elevated growth. Our new store openings being front-loaded for next year is also positive. And we also should have the roll-off of the dark rent that we incurred for the Big Lots locations that we acquired. At the same time, we are going to continue to reinvest in the business. To support growth. And do face some cost pressures like medical, which still remain at elevated levels. But what that means for earnings in 2026 is we will be able to leverage this business, leverage the SG&A. Assuming no radical changes in the environment. And drive double-digit top-line growth with mid-teens bottom-line growth. Bradley Bingham Thomas: Great. Very helpful. Maybe just Eric VanderVlok: maybe I could just comment on the marketing aspect of it because that was a highlight from Q3. You know, as we move forward, I commented in the script a bit that, you know, the business has so much potential digital has the ability to reshape how we reach and engage with our customers. And we have been on a multiyear path now to transform our marketing into being much more digital-first. Applying data analytics to ensure we get the right return out of our marketing spend. Especially the digital space. We did learn that there is a significant opportunity to reallocate print dollars into digital. It was a net save in Q3. On a go-forward basis to deploy your question, Brad, how do we look at this in future years? It is more of a reallocation of print into digital. The reallocation in Q3 specifically was cutting postcards from nonresponders. So those are solo mail delivered postcards, and we virtually saw no impact. October was the best performing month, and that is the month in which we cut the postcard. So longer term, we are looking at continuing that transformation, accelerating the movement out of print and linear media into digital, which should be great for driving top line. We do not look at it as necessarily an SG&A opportunity. Bradley Bingham Thomas: That makes sense. Thanks, Eric. Thanks, Rob. Operator: Our next question comes from the line of Sarah Moore from Piper Sandler. Sarah Moore: Hi. This is Sarah on for Peter. Thanks for taking our question. What kind of opportunities do you see to improve sales productivity? And then how are you thinking about the ability to optimize category mix? And then if you do lean more into consumables, I am wondering what does this imply for the longer-term gross margin? Is 40% still kind of that right target? Eric VanderVlok: Sure. Sarah. I will take the first part of your question. Rob will take the consumable mix impact on gross margin. Closeouts are the lifeblood of our business and we still look at it as the most important way in which we demonstrate and deliver value to our customer. As we continue to grow, though, we are seeing opportunities to leverage our size and scale to more overtly steer our category mix. Whether that is steering our closeout mix into new brands, new vendors, new categories, or emphasizing categories, you know, we are much more in the driver's seat than we have been in the past. Given the sheer amount of product that is being presented to us on an ongoing basis, given our size and scale, the most challenging decisions we have to make is what not to buy. And that is becoming more and more challenging as we continue to move forward. The good example of this in Q3 is that we were able to drive consumer staples, including our food category, to a new level, which, you know, we will get to your question about the impact on gross margin. We are one of the few buyers out there of substance in that business. The closeout excess inventory space for CPG seasonal was the other example. You know, where we steered our category mix to have much more emphasis on seasonal. So we are going to continue steering as we move into future years. And maximizing our sales productivity as we go forward. Robert F. Helm: So let me touch on the gross margin for a moment. Our guidance of 40.3 is above our long-term algo of 40%. We have quite a number of tailwinds within gross margin this year. The first one to speak to is really our size and scale and the closeout environment, which has been quite good. Markdowns and shrink have also been lower. And that has been offset to some degree by higher supply chain costs and tariff expenses. We are not giving guidance for 2026 today, and it is something we will give in a couple of months. But what I would say broadly about gross margin is we manage this business, as Eric said, to price gaps to the fancy stores. Our price gaps have extended at a time that we have also expanded margins. So that feels quite good. But we do have a flexible buying model where if we cannot be the lowest price in the market, and we cannot have that wide of a price gap, we simply will not buy the item and we will move on to the next item. Sarah Moore: Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Lorraine Hutchinson from Bank of America. Mary Swart: Hey. Good morning. This is Mary Swart on for Lorraine. Could you talk a little bit about what you are seeing from your new stores? Are they performing ahead of expectations, particularly those in bankruptcy locations? And then also, you talked a little bit in the past about making changes to more of a soft opening versus a grand opening. Especially for the new stores and bankruptcy locations. Is there any update on how the soft openings are going? And is that a strategy that you expect to continue to employ moving forward? Thank you. Robert F. Helm: Sure. This is Rob. I will take this question. Good morning. New store performance has been extremely strong. We have essentially beat plan across 85% of the stores that we have opened this year. So we are very pleased with that. With respect to the quote-unquote reverse waterfall, that we have had historically, we are now getting our first looks at the comping stores. When we really started that exercise of soft opening versus grand opening with the 99¢ only stores in 2024. So far, what we are seeing in results is that the reverse waterfall has flattened quite a bit. So the second year typically our model was a comp decline. And we are seeing that second year for those 99¢ only stores certainly being much flatter, which bodes for a flatter comp in years three and four as well. Mary Swart: Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Scott Ciccarelli from Truist. Josh Young: This is Josh Young on for Scott. So can you just give us an update on the performance you are seeing from your stores that are in a similar market to the now-closed Big Lots locations? And then as we think about new stores and you have been kind of accelerated the pace of openings here, have there been any operational stresses you have had to work through? Whether that might be supply chain or labor, anything to call out there? Robert F. Helm: Sure. I will take the first part with Big Lots. I think Eric can take the second part with the operations. We are excited about the performance we are seeing where the Big Lots have closed. These stores continue to outperform the rest of the chain. The best performers are roughly the, call it, 290 stores. Within five miles of a Big Lots closure where it has not reopened. Those stores remain to be running low single-digit but low single-digit and mid-single-digit lift versus the rest of the chain. The call it 110 locations where Big Lots closed and then a variety of wholesalers reopened the stores. Roughly seeing the same trends there. Maybe a tick lower, but still better performance than the balance of the chain. Eric VanderVlok: Yeah. Josh, I will take the second part of your question. I think dovetailing onto the first part of your question, and the question asked earlier about soft openings and reverse waterfall, we went into this year not only investing in infrastructure, supply chain infrastructure, project management teams, real estate, store development. The construction teams, the store leadership teams to ensure that we could grow at this accelerated pace. But we also went into this year with this soft open approach which takes some of the stress out of the process. In that the hard opening dates, you center all of your efforts around hitting this one exact date, and it results in a lot of extraordinary what we call it Ollie's muscle through it type moments. Where the teams get pushed to their limit and they become exhausted. We also paced our openings out over the course of the first three quarters so that we were not opening too many stores in any given week. Allowed us to spread our resources out across the fleet. And it allowed us to successfully deliver the 86 stores. We are tired. It was a tremendous effort for the team, so I am not indifferent to what it took to accomplish this. But we went in with a plan. We executed the plan. And it worked out well, successful. We are ready to do it again for 2026. Josh Young: Got it. Thanks, guys. Operator: Thank you. One moment for our next question. Our next question comes from the line of Anthony Chukumba from Loop Capital Markets. Anthony Chukumba: Good morning. Thank you for taking my question. So you talked in your prepared remarks about the fact that you have this increased seasonal merchandise assortment. As well as an expanded holiday gift program. If I remember correctly, last year, a lot of the holiday gifts were essentially closed out from Big Lots. But I am, you know, may I correct me if I am wrong, but a lot with a lot of the seasonal gifts, it is direct sourced from Asia. I guess, first off, let me know if that is correct or not. Then also just sort of the margin implications of direct sourcing of the seasonal holiday gift as opposed to closeout. Thank you. Eric VanderVlok: Yeah, Anthony. The seasonal gifts are a combination of direct source and closeout. To your point, though, they tend to be a little bit more direct source. Depending on the category, especially true of seasonal. We were fortunate this year to have the ability to buy closeouts in seasonal as a result of some of the retail bankruptcies and some of the store closures. So we had more closeouts as a percentage of our seasonal assortment than we typically see. Yes. But a lot of it is direct source, gifts, you are remembering a specific closeout we bought last year that was kind of stocking stuffer-oriented gifts. That is true. There is a combination of produced for us and closeouts. In gifts, you know, tends to be a little bit more produced. What we are seeing with our continued increase in as we have accelerated our growth in our continued increase in size and scale and leverage we were able to buy this product at an even better margin. And it is not a headwind. Anthony Chukumba: Thank you. Eric VanderVlok: Thanks, Anthony. Operator: Our next question comes from the line of Mark David Carden from UBS. Mark David Carden: Good morning. Thanks so much for taking the questions. So building on your marketing spend commentary and the dollar shift from print to digital, you noted you cut on some of the postcards. How are you thinking about the traditional print flyers role going forward in your advertising strategy? And would you expect to make any incremental changes on that front in the coming quarters? Eric VanderVlok: We still do believe in the flyer events. How we deliver the message to the customer is where we will continue to evolve. We primarily use shared mail for the print piece. But that flyer is also distributed in various digital channels. And we get a tremendous amount of engagement from those traditional channels. Around or digital channels around those flyer events. So we are still flyer event-driven. We are less print. Delivered flyer event-driven, will continue to shift dollars away from print into digital to ensure that the message gets out there. To our customers and we continue to drive these events. We will shift at a somewhat accelerated pace given we have a tremendous amount of data, and we have learned a lot. Over the last couple of years. About digital and we will make smart decisions about ensuring that our flyers still get the exposure. But we are using a more form of media that is going to reach more people long term. I call Fred especially for shared mail. It is the kind of the inevitable decline of print media, like, ultimately, it is declining whether we like it or not. So we need to make sure we stay ahead of that. Mark David Carden: Thanks so much. Good luck, guys. Robert F. Helm: Thanks. Thank you. Operator: As a reminder, to ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. Our next question comes from the line of Simeon Gutman from Morgan Stanley. Lauren K. Ng: Hi, this is Lauren Ng on for Simeon. Thanks for taking our question. Can you maybe walk through your expectations for the Q4 comp? You mentioned quarter-to-date trends are currently ahead of the guide. So maybe how should we think about this? In the context of Q4 and maybe what is driving your expectations for this acceleration? And then quickly, just following up on gross margins, are you able to help us size the impact of the tariff-related expenses on the Q3? And it looks like the Q4 gross margin contracts pretty meaningfully year over year. Is this primarily driven by the tariff impacts? Thank you. Robert F. Helm: Well, I will try to address that question, but I think it was six parts. So if I forget part, let me know. From a comp perspective, I just want to clarify. We did not say that comps needed to accelerate to meet the guidance. We said that comps are currently running ahead of our guidance quarter-to-date. What gives us confidence in delivering that for the balance of the quarter is our strength in our transaction trends, which we have seen in the mid-single digits pretty much for all of the year this year. As well as the complexion step change in our AUR, which is now positive low single digits. Versus a negative high single digits in the third quarter. In terms of gross margin for the fourth quarter, we had always planned the gross margin to be in the mid-thirty-nine range. That is kind of how we think about the fourth quarter historically. We do have a number of tailwinds this year in gross margin that I outlined between lower markdown rates, benefits from shrink, our ability to follow other retailers with price gaps and take price on tariff-impacted products. All in all, we feel good in delivering the fourth-quarter gross margin. We were just always going to be conservative so that we position our guidance that we can deliver to our shareholders, but we can also take the necessary actions that we need to manage our business and deliver to our customers. Lauren K. Ng: Okay. Great. Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Edward Joseph Kelly from Wells Fargo. Edward Joseph Kelly: I was curious as to maybe just some early thoughts on the 2026 comp build. And I am kind of thinking about it in the context of the big tailwind, which obviously, you are benefiting from or taking advantage of that for some stores, you know, how does that normalize next year? Then, as we think about the Big Lots store openings from this year, which many of them were Big Lots conversions, do they act like 99¢ only stores? Meaning, you know, flattish or lowish comp in year one, and then when you pull all that together, does that basically kind of mean that, you know, the highest probability outcome or way to start would be your traditional sort of, like, one to 2% comp guide. And then how do you think about, like, opportunity associated with that? Obviously, there is some fiscal stuff coming next year with tax cuts, and I am curious as to how you think that might play out for you. Thanks, guys. Robert F. Helm: Hey, Ed. This is Rob. I will take that question. I was listening to your question, and you answered it for me with a positive one to two. I was giggling a little bit when I was thinking about it. So from a comp guidance perspective for next year, you know, we will likely stay on algo. We like the beauty of the algo. It is how we manage our business. It is how we set our cost structure each year. But it is not lost on us that there are tailwinds. Potential tailwinds to the comp guidance for next year. You know, I think the potential for elevated tax money in the first half of the year is certainly a piece of it. You know, Big Lots market share capture should be the gift that keeps giving. And we would expect for that to be a multiyear share capture. AUR, you know, which was a drag this year. You know, potentially, we do not see those types of drags, you know, from year to year. I think all in all, there are a number of factors to be positive about next year's comp guidance. But like you said in your question, you know, we will reset it to positive one to two and then we will seek to deliver from there. And you know what we say. We do not turn the registers off. Edward Joseph Kelly: Alright. Thanks, guys. Operator: Thank you. One moment for our next question. Our next question comes from the line of Katharine Amanda McShane from Goldman Sachs. Grace Chi: Hi. This is Grace Chi on for Katharine Amanda McShane. For the 2026 pipeline of 75 stores, could you maybe expand more on the drivers behind this and any color on the new store pipeline, like maybe anything you are doing differently? And what are you seeing in the real estate environment and unit growth longer term? Thank you. Eric VanderVlok: Sure. Yeah. We are guiding to 75 stores. You know, opening new stores remains our highest, the best use of capital. And the investments that we made in accelerating growth really paid off. We are pleased with how we executed. You know, getting to the 86 stores this year. And the front loading that we have been able to achieve of getting all the stores open by Q3. Opening on budget, outperforming projections, etcetera. When we look at the environment moving into 2026, enough real estate to fuel growth. The 75 is already set. We have the deals. Most leases signed. There is still vacancy out there. From all of the distressed retailers and bankrupt retailers that have gone out. Including a disproportionate number of Big Lots vacancies. That were not available or were available to purchase but not purchased as part of the bankruptcy auction process that then available for us to pick up, on the open market. So, a disproportionate number, the 75 are Big Lots stores. Which we like a lot because those Big Lots stores, what we call warm boxes, because they have a discount customer who was just shopping in that store literally five minutes ago. We reopened as an Ollie's. We have seen a lot of success over the past year with those stores. So we feel very good about the 75, and we will continue to evaluate based on opportunities we are in the market. And thinking to extend past the 75. We feel like it is the right number at this point. When we balance our accelerated growth with other strategic priorities, that we have in place for 2026. It is a very respectful number at 75. Operator: Thank you. One moment for our next question. Our next question comes from the line of Jeremy Scott Hamblin from Craig Hallum Capital Group. Jeremy Scott Hamblin: Thanks for taking the questions, and congrats on the sustained momentum. I wanted to just come back to the unit openings and get a sense, Rob, for what you are expecting in terms of preopening expense next year given, you know, kind of the impacts of dark rent, this year, and the timing that you are suggesting with, you know, a bit more in the front half of the year than the back half of the year, that is kind of part one. And then two is just in terms of the DC expansions, that you are looking at in looking at the Illinois facility next year, what type of impact do you see on margins if any, related to those efforts? Robert F. Helm: I will take both of those, actually. So from a preopening perspective, you know, I think the easiest way to think about it was we had $5 million of Big Lots dark rent in this year. When we acquired those stores, we were on the clock immediately. And so you know, you subtract that out and then, you know, flex the preopening expense for the number of unit openings between the 86 and the 75. And you should be able to get reasonably close to where we are going to land the 2026 guidance. From a margin perspective on the expansion, you know, back in the day when we were opening distribution centers and we were smaller, with less of a sales base, you know, with a little bit more of an impact on gross margin in terms of drag when we either open a new distribution center or, you know, expand a distribution center. Now that the ship has gotten so big, we would expect a nominal impact and would anticipate that we would be able to fully offset that through our guidance. Jeremy Scott Hamblin: If I could just one follow-up here on tariffs as well. As we look ahead to next year, you know, with the China tariffs being pulled down here by 10 percentage points, would you expect, as we look at kind of holiday season, impacts around gross margins to be a bit lower next year, if nothing else changes on policy front? Eric VanderVlok: I think, Jeremy, just consider you know, we manage our price gaps. We are a fast follower in terms of price. And our whole world is experiencing the same impact of tariffs. You know, 10% less across the entire industry. Other retailers, other importers experience the same. So if they invest in price, adjust their price, lower their price, increase their price, you know, whichever direction the tariffs may move. There is still a little uncertainty around this. At this point as well, then, you know, we are a fast follower. We are adjusting price. Ensuring that we are maintaining our price gaps. So long way of saying that, you know, I would expect if tariffs go down, eventually, markets adjusting price coming down some. We are coming down some to maintain our price gaps. And not expecting it to be some sort of unexpected positive win from a gross margin standpoint. In the same way that it was not a negative for us as tariffs were increased. Jeremy Scott Hamblin: Got it. Thanks for the color. Eric VanderVlok: Yep. Thanks, Jeremy. Operator: That concludes today's call. Thank you for participating. You may all now disconnect.
Harry: Good morning, ladies and gentlemen. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome you to the Ferguson Results Quarter Ended October 31, 2025, Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of prepared remarks, there will be a question and answer session. Please press star followed by the number two. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Ferguson's VP of Investor Relations and Communications. You may begin your conference call. Brian Lantz: Good morning, everyone. And welcome to Ferguson's quarterly earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10-Ks available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today, and we disclaim any obligation to update these statements. In addition, on today's call, we will also discuss certain non-GAAP financial measures. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate, and earnings before interest, taxes, depreciation, and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin. Kevin Murphy: Thank you, Brian. Welcome everyone to Ferguson's quarterly results conference call. On today's call, we'll cover highlights of our quarterly performance. I'll also provide a more detailed view of our performance by end market and customer group. I'll turn the call over to Bill to review financials and our updated guidance before I wrap up with a few final comments. We'll have time to take your questions at the end. During the quarter, once again, our expert associates delivered strong results continuing to execute our growth strategy in a challenging market environment. Sales of $8.2 billion increased 5% over the prior year driven by organic growth of 4% and acquisition growth of 1%. Gross margin of 30.7% increased 60 basis points over the prior year. We remain disciplined on cost and generated $808 million of operating profit, which grew 14% over last year. Diluted earnings per share increased nearly 16% over the prior year to $2.84. We continued to execute our capital priorities, deploying $511 million this quarter. We declared a 7% increase to our quarterly dividend to 89¢ per share. And we acquired Moore Supply Company, HVAC equipment and supplies business in the Chicago Metro Area. We also returned $372 million to shareholders via share repurchases and dividends. Our balance sheet remains strong, with net debt to EBITDA of 1.1 times. While we continue to operate in a challenging environment, we remain confident in our markets over the medium term. And we'll stay focused on leveraging multiyear tailwinds in both residential and nonresidential end markets as we support the complex project needs of the water and air specialized professional. Turning to our performance by end markets in The United States. Net sales grew by 5.3%. Residential end markets representing approximately half of US revenue remain challenged. New residential housing starts and permit activity have been weak, Repair, maintenance, and improvement work has also remained soft. We continue to outperform the markets with residential revenue down 1% in the quarter. Nonresidential end markets performed better than residential. Our scale, expertise, multi-customer group approach, and value-added services drove continued share gains with nonresidential revenue up 12% during the quarter. Strength in large capital project activity has continued, and we've seen solid shipments, with growth in open order volumes and bidding activity. Our intentional balanced approach to end markets continues to position us well. Moving next to revenue performance across our customer groups in The United States. We grew Waterworks revenues by 14% as our highly diversified customer group saw strength in large capital projects public works, general municipal, and meters and metering technology, offsetting weakness in residential. Ferguson Home, which brings together our best-in-class showroom and digital experience, grew 1% in a challenging new construction and remodel market. Our ability to present a unified experience and cater to higher-end projects drove outperformance against the broader market. Residential trade plumbing declined by 4%, due to headwinds in both new and RMI construction. HVAC declined by 6%, against a strong 9% comparable and weaker markets impacted by the industry's transition to new efficiency standards and weak new residential construction activity as well as a pressured consumer. We remain pleased with our execution our counter build-out for the dual trade and M&A opportunities. Commercial mechanical customer group grew 21% on top of a 1% prior year comparable. Driven by large capital projects such as data centers, partially offset by weaker activity in traditional nonresidential projects. For fire and fabrication, facility supply, and industrial customer groups all saw growth during the quarter as we continued to take share and leverage our unique multi-customer group approach. Our customer groups are better together, sharing expertise to provide end-to-end solutions that help simplify complex projects and maximize contractor productivity. Now let me pass the call over to Bill for the financial results in more detail. Bill Brundage: Thank you, Kevin, and good morning, everyone. Net sales of $8.2 billion were 5.1% ahead of last year. Driven by organic revenue growth of 4.2% and acquisition growth of 1%. Partially offset by 0.1% from the adverse impact of foreign exchange rates and from a divestment in Canada. Price inflation was approximately 3%. Modest sequential improvement in finished goods pricing, offset by commodity-related categories being down low single digits. Gross margin of 30.7% increased 60 basis points over last year, driven by our associates' disciplined execution. Operating costs grew slower than revenue, delivering 20 basis points of operating leverage. And operating profit of $808 million was up 14.4% delivering a 9.9% operating margin with 80 basis points of expansion over the prior year. Diluted earnings per share of $2.84 was 15.9% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1 times net debt to EBITDA. Moving to our segment results, net sales in The U.S. grew 5.3%, with organic growth of 4.4% and a further 0.9% contribution from acquisitions. Operating profit of $806 million increased $109 million over the prior year, delivering an operating margin of 10.4%. In Canada, net sales were 2.2% ahead of last year. With organic growth of 0.7% and a 4.6% contribution from acquisitions partially offset by a 1.6% adverse impact from foreign exchange rates as well as 1.5% from a noncore business divestment. Markets have remained subdued in Canada, particularly in residential. Operating profit of $16 million was $7 million below last year. Moving next to our cash flow performance for the quarter. EBITDA of $867 million was $109 million ahead of last year. Working capital investments of $440 million during the quarter was up slightly from $376 million in the prior year. Principally driven by timing. Operating cash flow, was $430 million compared to $345 million in the prior year. We have continued to invest in organic growth through CapEx, investing $118 million in the quarter, resulting in free cash flow of $325 million compared to $274 million in the prior year. Turning to capital allocation. As previously mentioned, we invested $440 million in working capital. And another $118 million in CapEx. To further build on our competitive advantages and drive above-market organic growth. We paid $164 million of dividends during the quarter, and our board declared an $0.89 per share quarterly dividend. Representing a 7% increase on the prior year. And reflecting our confidence in the business. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. As Kevin mentioned, we completed the acquisition of Moore Supply Company during the quarter. A great addition to our HVAC presence in the Chicago area. Our markets remain very highly fragmented, and our acquisition pipeline is healthy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of one to two times net debt to EBITDA. We returned $208 million to shareholders via share repurchases during the quarter. Reducing the share count by nearly 1,000,000. And we have approximately $800 million outstanding under the current share repurchase program. Now turning to our updated calendar 2025 guidance. We are pleased with our continued market outperformance and solid growth in the quarter. We are well positioned to deliver a strong calendar year 2025 performance and remain confident in our markets over the medium term despite near-term uncertainties. We now expect approximately 5% revenue growth for the year. And we expect an operating margin range of between 9.4% to 9.6% up from our prior expectation of between 9.2% to 9.6%. Interest expense is expected to be approximately $190 million for the year. We estimate CapEx of approximately $350 million the upper end of our previous guide. We continue to expect our effective tax rate to land at approximately 26%. We believe we are well positioned as we finish the year head into the new calendar year. Thank you, and I'll now pass back to Kevin. Kevin Murphy: Thank you, Bill. As we conclude our remarks, let me first reiterate our thanks for the hard work and diligence of our expert associates. They continue to execute on our growth strategy, we work to drive construction productivity for our customers. We're particularly pleased with the double-digit nonresidential growth as our teams closely collaborate to simplify projects bring order to chaos, and deliver end-to-end solutions to help maximize customer success. We're poised to deliver a strong calendar 2025 performance and our strong balance sheet enables us to invest in organic growth consolidate our fragmented markets through acquisitions, and return capital to our shareholders. We'll continue to operate at the lower end of our target leverage range maintain flexibility and capitalizes on strategic opportunities as they arise. We remain confident in our markets over the medium term, and expect to continue to outperform our markets as we leverage multiyear structural tailwinds. Our size, scale, and strategy we believe we're well positioned to take advantage of opportunities in the underbuilt and aging US housing market nonresidential large capital projects, and the growing demand for water and air specialized professionals. Thank you for your time today. Bill and I are now happy to take your questions. Operator? I'll hand the call back over to you. Harry: A. If you change your mind, please press star followed by 2 to exit the queue. And finally, I'm preparing to ask your question. Please ensure your device is unmuted locally. And our first question today will be from the line of Matthew Bouley with Barclays. Please go ahead. Your line is open. Matthew Bouley: Good morning, everyone. Thank you for taking the questions. Wanted to start on the data center and large capital projects. I'm wondering if at this point, given all the growth you've seen, you're able to quantify, perhaps what portion of the business, that is for you today, and maybe kinda where that can get to. But also, I'm curious if you can kind of know, give us a little bit of color on the timing of bidding and the momentum and if there's any risk of kind of lumpiness given how those projects work and how you ship to them or if we should kinda think that this is gonna be more of a, I don't know, smoother kinda outlook for that business. Thank you. Bill Brundage: Yeah. Good morning, Matt. Thanks for the question. I'll start this is Bill. I'll start with that one. If you take a step back and look at overall large capital projects for us, we would estimate that that that is somewhere between mid to high single digits as a percentage of our total company revenue at this point. With data centers specifically being a bit over 50% of that a bit over half of that overall large capital project. Revenue. In terms of what we're seeing in the market, the pipeline does continue to grow. So we're seeing additional projects coming into planning. We're then seeing that continue to flow into additional bidding activity. And our open order volume on large capital projects does continue to grow. And you're seeing that, you saw it come through revenue this quarter. Principally in the commercial mechanical business, which was up 21% and then a portion of that waterworks business, which grew 14%. So we are continuing to see that activity grow. Certainly, the gestation period of these projects is much longer than maybe our traditional projects. And so, yes, there could be some lumpiness, in terms of of revenue rate as as we move into the future. But overall, we remain bullish that this is a continued growth area for us, and and will continue to be driving revenue as we as we exit '25 and step into '26. And, Matt, as Bill said, the lumpiness will likely be there in the gestation period for these projects. It's gonna be longer but that's part of the reason why we're reasonably pleased with our progress. As you look at our ability to deliver scale, a multi-customer group approach, a broad base of vendors that can bring product to the site on time and in full. The impact of modular construction on data center work, that's all serving us well in terms of what those share gains look like, especially against the backdrop where traditional nonres is in a pretty challenging spot. Matthew Bouley: Alright. That's perfect. Thanks for that, guys. And then secondly, kind of jumping into the outlook I guess, maybe this is since a bit of an unusual period here where you're guiding to just kind of the sub period. I guess I'm curious if you could kind of give us any color on the November or quarter to date results. But just given this is sort of a smaller and again, unusual guidance outlook here, If you're willing to kind of give any early twenty twenty-six thoughts, you know, across the end markets, kinda carryover inflation, etcetera, to sorta help us point us, directionally a little bit into next year. Thank you. Kevin Murphy: Sure. Yeah. Matt, as as we maybe as as we take a step back, if you recall when we set out our calendar '25 guidance at the end of our fiscal year in July, We had talked about the first half of the calendar year growth being about 5%. And our expectation that we believe that that growth was gonna get a bit more challenging as we work through the calendar year particularly towards the end of the calendar year. As we were expecting additional new res pressure, and HVAC pressure to step up. And that's what we've started to see play through, so very much in line with our expectations. Maybe I'll shift to the calendar quarter as we're gonna try to try to get to the calendar year reporting now. If you look at calendar Q4 to date, so October, November, and basically the first, you know, week, week and a half of December, our total growth is sitting at about 3% for that period. Again, very much in line with our expectations with with that additional pressure on new resi and HVAC. And so, clearly, now with about three weeks to go, I would expect our calendar Q4 growth rates to be somewhere in that that 3% range as we round out the year. And then as we look forward into '26, we will set out our calendar '26 guidance in February. We're back with you in a couple of months as we get onto that calendar year cycle. But but the early part of '26, we wouldn't expect much change from a market perspective or much difference. As we exit the year at about that 3% range and then step into the step into the new year. But, again, we'll set out our views on the market. And our views on our guidance in February. Matthew Bouley: Excellent. Thanks, Bill. Good luck, guys. Harry: Thanks, Matt. Next question today will be from the line of Ryan Merkel with William Blair. Please go ahead. Your line is open. Ryan Merkel: Want to follow-up on the last comment on 4Q. Just a little bit of a slowdown there to growth up 3%. Is there anything that stands out? Or is it just maybe just seasonally, it's just a bit softer at this at this point. Kevin Murphy: Yeah. It it it is that new res pressure continuing to play through, Ryan. If you go back, permits and starts, as everybody's well aware, had continued to weaken through the calendar year. Outside of our waterworks business, there's a little bit of a lag of those slower starts coming through the rest of our customer groups, to then then play through on revenue. I think we're just seeing that playing through on those weaker starts. And then, certainly, there's more HVAC pressure, which we talked about during our last quarterly conference call. Our HVAC business was down about 6% for our first quarter or for the quarter ended October. That growth got a little bit more challenging towards the end of the quarter as the market's in a pretty tough spot. So I think those two those are the two pressure points we would point to. Still, as you look through that, we're very bullish and optimistic on the HVAC market overall over the medium to long term. And and we would believe that residential at some point will will stabilize on on the new resi side. Ryan Merkel: Got it. That makes sense and pretty consistent with what we're hearing. Let me shift to pricing. Looks like it came in a little better than you thought. Maybe talk about that and then talk about how the commodities are trending and if you expect supplier price increases as we head into the New Year? Kevin Murphy: Yes. Overall, the quarter, inflation was about 3%. So to your point, it stepped up from about 2% in the previous quarter to 3% this quarter. Finished goods was up a little bit more than it was in the prior quarter. So I'd still consider that kind of at the high end of that low single digit range. And commodities were down in the low single digit range still. As a basket. If you look at commodities, three three main baskets within that that group, PVC, which is our largest commodity basket, is still in deflation. Down in the double digit range, kind of that low double digit range. Steel, is up. I would call that mild inflation, and then we're still seeing strong inflation on copper tube and fittings. So overall, pretty consistent with what we expected. As we as we round out the first quarter and and enter into the end of the calendar year. And if we look at entering the calendar '26, we would expect modest price increases that are in line with traditional behavior on the finished goods side of the world, and those announcements are coming through right now. Hard to say what's gonna happen with all of the different dynamics that are involved in the market right now, but our expectation is that it'll be a more normalized pricing environment knowing full well that we had six quarters of deflation before we got back to flat and then plus two in the previous quarter. Ryan Merkel: Alright. Good job. I'll pass it on. Thanks. Thanks, Ryan. Thanks, Ryan. Harry: Next question today will be from the line of Dave Manthey with Baird. Please go ahead. Your line is open. Dave Manthey: Yes. Thank you. Good morning, guys. Along the lines of the the pricing discussion here with price looking like it's going to represent a pretty positive factor year over year through the, the coming calendar year against what what appears to be pretty easy deflation affected comps last year. Should we continue to expect incremental margins to run ahead of that sort of targeted 11% to 13% rate given the contribution from positive pricing over the course of the next four quarters? Bill Brundage: Maybe this is Seth. Back, Dave, we're very pleased with the operating margin in improvement that the business has delivered this calendar year. If you go back to calendar '24, we delivered a 9.1% operating margin. We've just given our updated guidance, which is nine four to nine six. So call that a nine five at the midpoint. So we're expecting a very solid progression on operating margins this year of somewhere in that 30 to 50 basis point range. Now I would remind you, we did have a bit of outsized gross margin gain during the during the middle part of this calendar year. Recall, we had a a quarter with 31% and then 31.7% gross margins, and we had flagged that there were some impact of the timing and extent of supplier price increases And then we expected that gross margin to to normalize and and you've seen that play through now in this last quarter. So we wouldn't expect that kind of outsized gain to next year. So probably actually a little bit of a headwind in the middle part of the of the calendar year versus versus the prior year, twenty-six to twenty-five. We'll set out our guidance for overall operating margins next year, and certainly, that will that will be dependent on what the market environment is like. Assuming that we have supportive market and we have decent growth, we would expect some modest progression on operating margins next year. But, again, we'll be back with you in February and give you a more clear view of what we expect at that point. Dave Manthey: Makes sense. Thank you. And second, as it relates to the $2 billion ish in revenues from major projects that you discussed, It seems like you've been having a lot of success there because of the one Ferguson effort. Could you maybe I don't know if you could quantify or or bigger than a bread basket, tell us what percentage of those projects do you get more than one product and customer group via the one Ferguson effort. Versus not. Is that something you could share with us? Kevin Murphy: Yeah, Dave. Thank you. And and certainly, when we talk about large capital projects, we're talking about those projects north of $400 million in overall construction value. And so it's it's a varied group. Certainly, data center gets a lot of the attention today, but it's beyond that to pharma, biotechnology, onshoring, reshoring, manufacturing, and and others. And so the projects do vary. I will say, and people ask us quite a bit about what happens after large capital projects aren't the talk of the day. And the answer to that is really a new way of working for Ferguson. And so we are engaged early on in the construction process, early on with general contractors and owners around what specifications look like, how we can make sure that we have supply chains that stand up to timelines, And so doing that together with the contractors on the job we're engaging most of our nonresidential customer groups on these projects, whether that be industrial, fire and fabrication, waterworks, commercial mechanical, and they vary again depending on the kind of job. But that's the way we intend to work as we move forward. Never abandoning the local relationships that we have with our core contractor base, but also making sure that we can deliver on tight timelines make sure that we got the right product set for the job to deliver. Dave Manthey: That's great, Kevin. Thanks. Harry: Next question will be from the line of Keith Hughes with Truist. Please go ahead. Your line is open. Julian: Hey, good morning. This is Julian on for Keith. Just in terms of HVAC, when do you think comps are going to start to ease from the pre shipments ahead of the standard change from last Kevin Murphy: Yeah. I'd I'd say to again, to build on what Bill has already said, the market's in a tough spot right now. We saw it get a bit worse. As we went through the quarter and exited October. It's a variety of factors, though. You've got a bit of the a two l transition. As you had pull forward. You certainly have equipment price increase playing in now. As the majority of the sell through is in that new equipment standard. And then you've got a pressured consumer that is moving a bit to repair versus replace environment. And then you had some degree of play through on multifamily new construction that is now, you know, passed. And so we're pleased with the overall execution. When does that start to get back to a replace environment? When do we start to see a bit of residential life? That's that's tough to to pinpoint. For us, we're bullish on what that market looks like over time. And we're gonna continue to build out convenient locations across The United States. Continue to build out our OEM brand representation, We're gonna continue to focus on M&A expansion as we capitalize on what we think is a growing trend with that dual trade contractor. Julian: Got it. Thank you. Harry: Next question will be from the line of Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open. Scott Schneeberger: Thanks very much. Good morning. The I want to touch on some SG and A topics. Last fiscal year, you made investments in trainees, HVAC counter expansion, large project teams. Just to could I get an update on on how these investments have been trending what you're looking for maybe going out over the coming year, and, and impacts of these, of these investments to date. Thanks. Bill Brundage: Yes. Scott, thanks for the question. First off, from a trainee perspective, our trainee program something that's been really foundational to the success of this company over decades now. And it's a it's an area that we invest in in good markets and in bad markets. So we continue to add trainees year in, year out to fuel our pipeline of talent. This year, we added roughly 250 to 300 trainees in our in our classes throughout the year, and we would expect to continue that that program and expand that program as we step into calendar '26. In terms of additional investments, Kevin just talked about our HVAC expansion plans and the build out of convenient locations. We have now completed roughly 650 counter conversions So that is both taking HVAC counters and adding plumbing products as well as taking plumbing counters and adding HVAC products. And it's not just the products. It's also the expertise of and our associates that we train to ensure that we have experts serving experts. We believe that is yielding real fruit. So despite a very challenging eight HVAC environment, we believe we are outperforming that HVAC market. And have done so for the last several quarters. And we will continue, as Kevin said, to fuel that growth to to ensure that we expand that HVAC footprint. And and and maybe lastly, we're continuing to invest from a a technology and a digital standpoint. And so we continue to invest in new technology tool, digital tools, principally in the areas of HVAC. And for the repair, replace plumbing contractor. We're very pleased with the progress that we've made with with many of those investments. If you take a step back from an overall SG and A perspective, we've been able to continue to invest in those types of areas to fuel future growth while we've managed the cost base. And we did take some cost actions earlier in this in this calendar year that we talked about a couple of quarters ago. Those cost actions have played through where we've received the benefits of that. And so while even though we're operating in still a a bit of a challenging top line market environment, we're delivering good quality SG and A leverage. While we're continuing to invest in the business for the future. So we feel good about where the cost base sits as we exit calendar '25 and enter calendar '26. And maybe to just build on what Bill was saying. Certainly, the trainee aspect is a long-term investment in the business and making sure that we have a pipeline of talented associates to grow this. Business over time. He spoke about the HVAC business, so I won't be repetitive there. But when you look at what investments we've made in waterworks diversification, and making sure that we have a broad book of business from residential to public works to water wastewater treatment plant to geosynthetics and soil stabilization that is serving us well. And, certainly, we're pleased with a plus 14% growth rate We're pleased with the large capital project space. We talked about a multi-customer group approach and engaging early on in the project. But we're also investing in value-added services like fabrication. Valve actuation and automation, and virtual design. And so that's serving us well, obviously, with plus 21 in the commercial mechanical business. We're pleased. And then lastly, when you talk about Ferguson Home, and bringing together what is a best-in-class digital platform, with a showroom experience and a consultative approach and a builder outside Salesforce that's driving growth with the connected consumer to that builder, designer, and remodeler. And so we think all of those investments are proving to be successful as we move through a it's a challenging environment. Scott Schneeberger: Great. Thanks, guys. And just a follow-up. Spoke a little bit earlier. You you were asked about, supplier pricing going into next year. I'm just curious that from a high level, how are you thinking about managing inventory as you enter 2026? Thanks. Kevin Murphy: Yeah. We think our inventories are in a good spot right now. Teams are doing a really nice job and have done so managing through a unique environment. With price increases coming through the system this year. So I wouldn't expect significant changes to the inventory profile as we exit calendar '25 and enter calendar '26. We think we have the right levels of inventory to take care of our customers and to support continued market outperformance. Scott Schneeberger: Great. Thanks very much. Harry: Thank you. Our final question will come from the line of Nigel Coe with Wolfe Research. Please go ahead. Your line is now open. Nigel Coe: Thanks for the question, guys. Appreciate it. So you gave a bit of color on the calendar fourth quarter. I missed any gross margin commentary. Just wondering if there's any sense on how that's been trending year to date? Bill Brundage: Yeah. I would I would think of it, Nigel, in a pretty similar range. To the quarter that we just reported. And as we had talked about coming out of the summer months that we had expected, to get back more into that normalized range of somewhere between 30-31%, So I think you can you can expect it in that in that range. As we exit the calendar year. Nigel Coe: Great. And then a lot of helpful commentary on the larger project. Sites. In terms of I know this would probably be in quite a range, but any sense on what Stoixson's sort of opportunity would be on a typical large project? Again, I know there's no typical large project but any sense on what the kind of content might be for those? Bill Brundage: Yeah. Well, I'll caveat it with it will vary significantly. Depending on the type of project. But and and as Kevin talked about, when we talk about large capital projects, we're talking about those projects that have construction value north of $400 million. As a general ballpark, you take that construction value and somewhere 2-4% of the construction value would generally make up our product set and our customer group set. But, again, that will vary pretty significantly. And that certainly doesn't include, you know, in the likes of the data center, that wouldn't include the cost of the servers chips and those types of interior pieces of equipment to run the data center. It's more just that construction value. Nigel Coe: Right. Very helpful. Thank you. Harry: Thank you, guys. Have a great This concludes today's Q and A session. I'll now hand over to Kevin Murphy for closing remarks. Kevin Murphy: Thank you, operator. And let's end the call in the way that we began with a strong thank you to our associates for their hard work and diligence in what is clearly a challenging market. As you heard today, we're pleased with the quarter. 5% revenue growth, expansion of growth in operating margin, 16% EPS growth, operating profit growth of 14%, continued investment in the business, and a strong balance sheet. We're pleased with the execution of the teams. And the continued investment in key growth areas that are yielding solid results we're sat here today. We'll continue to focus on driving construction productivity for the water and air specialized professional. We're gonna leverage scale with the best local relationships We're gonna continue investing in value-added services and digital tools. So thank you very much for your time today, Have a happy holidays, and we'll talk to you soon. Thank you. Harry: That concludes Ferguson's results. For the quarter ended 10/31/2025 conference call. I'd like to thank you for your participation. You may now disconnect your lines.
[speaker 0]: Good morning, and welcome to the Campbell's Company First Quarter Fiscal twenty twenty six Earnings Conference Call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call. With an opportunity for questions and answers at the end. If you would like to ask a question, please press 1 on your telephone keypad. I would now like to turn the call over to Rebecca Gardy, Chief Investor Relations Officer at Campbell's. Please go ahead. Good morning, and welcome to The Campbell's Company First [speaker 1]: Quarter Fiscal twenty twenty six Earnings Conference Call. I'm Rebecca Gardy, Campbell's Chief Investor Relations Officer. Joining me today are Mick Beekhuyzen, Chief Executive Officer and our new chief financial officer, Todd Kunfer. Today's remarks have been prerecorded. After the prepared remarks, we will transition to a live webcast Q and A. The presentation, transcript of management's prepared remarks and today's earnings press release are available on our website at the campbellscompany.com in the Investors section. A replay of the webcast will be posted at the same location following the Q and A with a full call transcript, including the Q and A session available within twenty four Slide two outlines today's agenda. Mick will provide insights into our first quarter performance as well as our in market performance by division. Todd will then discuss the financial results of the quarter in more and review our guidance for the full fiscal year 2026. Please note that all references to the first quarter in March performance refer to the thirteen week period ending 11/02/2025 compared to the thirteen week period ending 11/03/2024. In addition, beginning in fiscal twenty six, we are reporting share of our Cape Cod and Kettle brand chips against the total potato chip category, replacing the prior comparison to the kettle cooked potato chip category. Late July will be compared against the total tortilla chip category rather than the natural and organic tortilla chip segment. We believe these updates more accurately reflect our brand's in market performance and underscore their strong positioning within the broader chips category. And finally, beginning in fiscal twenty twenty the snacking and meals and beverages retail business in Latin America is managed under our meals and beverages segment. Through the 2025, the company's Latin America retail business was managed under the snacks segment. Prior period results have been adjusted to reflect this change. On our call today, we will make forward looking statements which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to slide three of our presentation or our SEC filings for a list of factors that could cause our actual results vary materially from those anticipated in the forward looking statements. Because we use non GAAP measures, we have provided a reconciliation of each of these measures to the most directly comparable GAAP measure in the appendix of our presentation. And now it is my pleasure to turn it over to our chief executive officer, Mick Bakehausen. Mick? [speaker 2]: Thanks, Rebecca. Good morning, everyone, and thank you for joining our first quarter fiscal twenty twenty six earnings call. Before we review our results, wanna take a moment to welcome Todd Comfer. Our new CFO. With more than two decades of food industry experience, Todd brings the expertise and perspective we need. Throughout his career, he has demonstrated a proven ability to drive change and deliver superior financial results. I'm confident he'll be a strong business partner and a tremendous asset to our company. Welcome, Todd. Now let's review our first quarter results, which were in line with our expectations as we continued to navigate a dynamic operating environment. Organic net sales were down 1%, driven by a 2% decline in consumption. With the difference mainly due to retailers building inventory in snacks, ahead of upcoming promotional activities. We have an attractive brand portfolio that meets the key attributes consumers are seeking. Whether supporting at home cooking, providing flavor forward options premium experiences, or health and wellness benefits. While our total in market consumption was down 2%, our 16 leadership brands consumption was down 1%. And collectively, they held share for the eighth consecutive quarter. Within meals and beverages, our leadership brands benefited from consumers' ongoing cooking at home behaviors and the growing demand for elevated meal experiences. However, our snacks business remained under pressure as consumers continue to be increasingly intentional with their purchases. Since the start of the fiscal year, we have made significant progress on our cost savings initiatives. Improved overall productivity and implemented selective in market pricing increases. However, these actions were not sufficient to offset cost increases and top line headwinds. Resulting in a decrease in our adjusted EBIT margin and an 11% year over year adjusted EBIT decline. We continue to be laser focused on mitigating cost pressures, while maintaining marketing support for our brands. Finally, as outlined in our press release, we reiterated fiscal twenty twenty six guidance which continues to include the expected tariff impact and the related mitigating actions. Todd will provide more details on our guidance in a moment. As highlighted last quarter, we're strengthening our focus on consumers and their evolving needs. I wanna remind you of the framework we shared last quarter and underscore the strategic lens we apply when shaping how our brands show up. Our brands are uniquely positioned to compete and excel in these growth areas. While we use this framework to guide consumer led innovation, it also guides our brand activations. A great example is our rail sauces campaign. Which focuses on the elevated rails experience. Highlighting the origin of its high quality ingredients supporting the unique nature of the food we make. Additionally, we recognize that continued focus on providing an attractive value proposition is critical to be successful. An example of this during the past quarter, is our multipack Goldfish focus during the back to school period. Where we've seen double digit increases in consumption versus prior year through strong retail execution and promotional support during an important consumer occasion. Meeting the need for a wholesome convenient snack at the right value. By concentrating our efforts and executing with clarity and discipline, our diverse and advantaged portfolio can build deeper consumer connections. Meet their evolving needs, and unlock meaningful sustainable growth. We remain committed to crafting high quality food at the right value as well as investing in omnichannel brand activation and innovation. Turning to slide seven, total company leadership brands saw stable share performance in Q1. With consumption down 1%. As a reminder, our leadership brands represent approximately 90% of our enterprise net sales. The first quarter marks the ninth consecutive quarter that our meals and beverages leadership brands have held or grown share. Consumers' at home cooking behavior was once again a tailwind for several of our brands within the division. Especially our condensed cooking soups, broth, and Italian sauces. Turning to snacks. Consumers are still snacking. But how people are snacking? Is evolving. We are maintaining our solid share position within snacking as consumers choose snacks that meet their needs within premiumization, flavor exploration, and health and wellness. In Q1, four of our eight Snacks Leadership Brands grew or held share. We believe our powerful portfolio of snack brands remains the distinctly advantaged in today's environment. And we are staying close to consumers' evolving needs through our brand activations, innovation and strong omnichannel execution. Let's take a closer look at each division, beginning with meals and beverages on slide eight. Organic net sales decreased 2% for the quarter. Unfavorable volume and mix of 3% reflects the elasticity impact of tariff related pricing actions. Which was partially offset by favorable net price realization. Additionally, although the in market consumption of our leadership brands was flat, our overall consumption within the division was down 1%. Turning to Slide nine. Our total soup portfolio slightly lagged the category on share as cooking varieties within our condensed soup portfolio and broths remained strong while eating soups remained under pressure. In the first quarter, broth consumption grew for the ninth straight quarter, driven by segment momentum that included increased households and buy rates. As well as distribution gains and healthy velocities. Younger generations continue to drive the majority of the momentum. With Swanson posting six consecutive quarters of millennial buy rate gains. Our Pacific brand also performed well. With dollar consumption growth up 25% and volume consumption up 31%. Our condensed soup portfolio grew share for the eighth consecutive quarter, Dollar share gains in condensed were fueled by our focused strategy to drive more occasions for Campbell's cooking soups into the repertoire of consumers' at home cooking behavior. Our condensed cooking momentum led to a continued household penetration gain within the overall condensed portfolio and added over 2,000,000 new buyers including 1,200,000 millennial and Gen X households versus a year ago. Pointing to the strength of our cooking soups across cohorts. In the ready to serve segment, the headwinds we experienced in the past quarters continued in Q1, with dollar share down in the quarter. On the positive side, Pacific and Rails were strong performers, gaining share on both the dollar and volume basis. However, price increases put pressure on our mainstream RTS portfolio consumption resulting in market share declines. In addition, our RTS results reflect the last quarter of impact from the discontinuation of Well YES. We believe that the pricing action is the right approach to be able to support this segment of our portfolio while we're experiencing disproportionate tariff related inflation. However, we are conscious of the importance of providing appropriate value in the market particularly during the critical soup season. Turning to slide 10, From holiday classics like the green bean casserole to new and fresh recipes, side dishes made with Campbell's products were served at Thanksgiving tables across the country. Over half of our condensed soup portfolio is cooking soups. Including soups like Campbell's cheddar cheese soup, used to make America's fastest growing side dish. Preferred by Gen Z. Mac and cheese. Uncle Ned's cooking soups grew dollar share and consumption for growth. for the past five quarters, and we believe there continues to be ample opportunity Driven by recipes for the holidays and everyday occasions. Rails continued its growth in both consumption and overall share. During the quarter, Rails outpaced the Italian sauce category by delivering low single digit dollar consumption growth with growth in both dollar and volume share and remains the number one brand in the category. We continue to be encouraged by the growth potential of this great brand, driven by sustained household penetration gains and high repeat rates as consumers continue to prioritize elevated experiences at home. Earlier this morning, we announced we entered into agreement to acquire a 49% interest in two Laragina entities. The privately held producer of Rao's tomato based pasta sauces. Founded in 1972 with the philosophy of producing the highest quality Italian homemade premium and super premium tomato pasta sauces. La Regina has been a key partner of Rails since 1993. What makes Rao's the best pasta sauce in the world is the ingredients, the recipe and the pair with how it's prepared. Rales sauces are simmered slowly and made in small batches with only the finest ingredients like Italian olive oil, and naturally ripened tomatoes, from Southern Italy. Real sauces have no tomato blends, no paste, no water, no starch, no filler, no collards, and no added sugar. The result is an authentic, nutritious, delicious tomato sauce. Consumers can rely on to serve as a restaurant quality meal at home. With this transaction, we are solidifying our strategic partnership with the Romano family to continue to fuel Rao's momentum. Over the years, La Regina has perfected its proprietary cooking process invested in state of the art capacity, and maintained a commitment to excellence ensuring every jar of Real sauce delivers a premium and unique experience. Campbell's investment in La Regina secures access to unique high quality ingredients. Expands our innovation capabilities, and reinforces our commitment to producing rail sauces with only the finest ingredients. Together with the Romano family, look forward to continuing this journey. We could not be more excited about the momentum and growth trajectory of our Rails brand. Now let's turn to our Snacks business on Slide 12. While snacking occasions are growing, consumer preferences continue to evolve. To health and wellness and the desire for worth it experiences. Many of which are aligned with the consumer growth pillars I discussed earlier. We believe our powerful portfolio of brands remains advantaged in today's environment, as especially in terms of premiumization, and flavor exploration. We are taking steps to further improve the health and wellness benefits of our Snacks Leadership Brands. For example, by providing consumers with avocado oil, in our chips portfolio, we have an exciting innovation pipeline for both the short and long term. Organic net sales declined by 1% driven by volume declines, which were partially offset by positive net price realization reflecting pricing actions taken to address input cost inflation, primarily in cocoa and ags. The headwind from partner and contract brands was about one point to net sales as expected. The difference between the year over year decline in net sales and consumption is driven by shipment timing of holiday related activities. As shown on slide 13, we held or gained share in about half of our portfolio, which solid performance in Peppered Pond Cookies, Snack Factory, and Late July. And are focused on accelerating share recovery in pretzels, and crackers. To support this momentum, we are prioritizing delivering clear consumer value, including leveraging price pack architecture while accelerating our innovation pipeline. We're also strengthening in market omnichannel execution with targeted activation during key drive periods such as the holidays and upcoming sport championships, where snacks play a big role in gatherings. Let's talk more about our Pepperidge Farm fresh bakery and cookies business. Which held share and was relatively flat from a consumption perspective. I will start with the standout performance in cookies, where we outperformed the category and gained share in both dollars and volume through successful innovation launches. Including the fall LTOs like Pepperidge Farmilano Pumpkin Spice, Milano Chai Latte, And Soft Baked Pumpkin Cheesecake. The Double Digit Consumption Growth We Are Driving In Milano continues to contribute materially to overall category growth for the third consecutive quarter. Within our Fresh Bakery business, dollar and volume share were both relatively flat. However, the overall category remained under pressure as consumers are more selective in their purchases of fresh bread. Favoring premium differentiated products. Our latest innovation in farmhouse thin sliced, is outpacing sandwich segment trends. Delivering strong repeat rates reflecting consumer demand for healthy products without compromising on taste. Now let's talk about our salty portfolio. In chips, we held share with relatively flat consumption due largely to sequential improvement in our Late July brand, as we continue to be well positioned with consumers that are looking for better for you offerings. We're also benefiting this quarter from a club promotion that shifted into the first quarter from Q2 last year. I'm Kettle Brandt, held market share, while Cape Cod lost share against the broader potato chips category. In pretzels, we experienced overall share and consumption pressure a strong performance of our Snack Factory franchise was not sufficient to offset the softness in Snyder's Of Hanover. Snack Factory saw share and volume gains for the quarter driven by the innovation of Poppins and Bites. Additionally, as consumers are increasingly seeking flavor experiences, our Pumpkin Spice LTO was a great driver of growth for Snack Factory in the quarter. And we are excited about the white peppermint LTO that's on the shelves now in time for the holiday season. The softness in Snyder's of Hanover was driven by our intentional removal of less effective promotions as well as continued competitive pressure. However, with core expansion at Club, impactful holiday messaging, and an upcoming new visual identity to drive shelf presence we have a lot of conviction in both our pretzel brands. Now let's talk about crackers. In crackers, we are encouraged by Goldfisher's successful back to school campaign. Which beat key competitors in the ten week back to school window. The success of the campaign helped Goldfish finish Q1 as the cracker share leader over the last thirteen weeks. Despite the great back to school campaign, consumption declined in the quarter, which shows we still have more work to do. I am confident that our strategy of incremental marketing support exciting innovation and a strategic approach to value will return this flagship billion dollar brand back to growth. As we enter the holiday season, our snacks portfolio will play an important role in driving moments of connection and celebration. Our Pepperidge Farm cookies, crackers, and bakery items remain a staple of holiday gatherings. Additionally, we are leaning into holiday activations like white cream and peppermint snack factory pretzel crisps, Schneider's of Hanover holiday cabin kits, and brown sugar vanilla tortilla chips from late July. To capture heightened seasonal demand while maintaining a sharp focus on execution and in store displays. Collectively, these actions will position our snacks business to deliver strong engagement throughout the season and support our broader commitment to consistent profitable growth. Before turning it over to Todd, I would like to highlight again how we're delivering today while building for tomorrow. As the operating environment remains dynamic and consumer preferences continue to evolve, strong day to day execution is critical. Our portfolio is well positioned. We remain confident our leadership brands and our ability to serve delicious at home cooking options better for your options, and elevated experiences that delight and excite consumers. We are committed to crafting high quality food at the right value with a continued focus on omnichannel execution, brand activation and innovation. Specifically, in meals and beverages, we remain focused on brands and offerings that will continue to shape at home cooking momentum because we believe it's a trend that's here to stay. While we continue to enhance our snacks portfolio, reigniting Goldfish is a top priority. We continue to focus on productivity and cost savings initiatives across the organization to mitigate elevated inflation and invest in our brands. While we strengthen our overall foundation as we drive change to deliver sustainable profitable growth. With that, me turn it over to Todd. Thank you, Mick, and good morning, everyone. As Mick mentioned, our first quarter performance was in line with our expectations and reflected focused execution amidst a dynamic operating environment. At a high level, organic net sales decreased 1%. Adjusted EBIT decreased 11% to $383,000,000 primarily due to lower adjusted gross profit [speaker 3]: partially offset by lower adjusted administrative, marketing, and selling expenses, while adjusted EPS decreased 13% to $0.77 Now let me provide more details on our financial performance and guidance. Turning to Slide 18, net sales were $2,700,000,000 a decrease of 3%. Organic net sales decreased 1% primarily due to unfavorable volume and mix partially offset by net price realization. On Slide 19, first quarter adjusted gross profit margin 150 basis points to 29.9% driven by cost headwinds of five twenty basis points inclusive of cost inflation and other supply chain costs and the impact of gross tariffs. These costs were partially offset by cost savings and supply chain productivity improvements and favorable net price realization. Gross tariffs had a 200 basis point negative impact on the adjusted gross profit margin in the quarter. In the first quarter, Campbell's made progress towards its fiscal 2028 cost savings target of $375,000,000 by delivering approximately $15,000,000 in new savings. Bringing total cost savings achieved to 160,000,000. The company intends to use these savings as one of several levers to help offset tariff headwinds. As we look at the second quarter, we expect an increase in both promotional activity and marketing investment to further strengthen top line performance. Turning to slide 20, adjusted marketing and selling expenses decreased 2% versus prior year. Primarily due to lower selling expenses, the benefit from cost savings initiatives, and lower incentive compensation, partially offset by higher marketing expenses. Adjusted marketing and selling expenses were 9% of net sales consistent with the prior year. In the second quarter, we expect marketing and selling expenses to be at the upper end of our targeted range of 9% to 10% of net sales. Adjusted administrative expenses decreased 9% mainly driven by the benefit from cost savings initiatives and lower incentive compensation. As shown on Slide 21, first quarter adjusted EBIT decreased 11% primarily due to lower adjusted gross profit partially offset by lower adjusted administrative and lower adjusted marketing and selling expenses. On Slide 22, adjusted EPS decreased 13 to $0.77 driven by lower adjusted EBIT. Lower interest expense provided a 1¢ benefit offset by a 60 basis point increase in the adjusted tax rate which was EPS dilutive of $01 The divestiture of NEWSSA also had a $01 negative impact for the quarter. As a note, the gross impact of tariffs to Q1 adjusted EPS was $0.14 while the net impact of tariffs was $04 to EPS for the quarter. Turning to Slide 23, Meals and Beverages first quarter reported net sales decreased 4%. Excluding the impact of the Noosa divestiture, organic net sales decreased 2% mainly driven by declines in US soup, Canada, SpaghettiOs, Paste Mexican sauces, and V eight beverages, partially offset by gains in reos. An unfavorable volume mix decline of 3% was partially offset by favorable net price realization of 1%. First quarter operating earnings in the division decreased 13% primarily due to lower gross profit and the impact of the Noosa divestiture. Operating margin was lower by 190 basis points primarily due to lower gross profit inclusive of a two eighty basis point gross impact from tariffs and cost inflation and other supply chain costs. This was partially offset by cost savings and supply chain productivity improvements and favorable net price realization. On slide 24, Snacks reported a 2% decrease in net sales which includes the impact of the Pop Secret divestiture. Organic net sales decreased 1% driven primarily by lower net sales in third party partner and contract brands, Snyder's of Hanover pretzels, Fresh Bakery, Goldfish Crackers, And Cape Cod potato chips. Partially offset by gains in Pepperidge Farm cookies. Organic net sales were impacted by unfavorable volume mix decline of 3%, and favorable net price realization of 2%. Snacks first quarter operating earnings decreased 10% while operating margin 100 basis points. The margin contraction reflected cost inflation and other supply chain costs, gross tariff impact and unfavorable volume mix. Which more than offset benefits from cost savings and supply chain productivity and favorable net price realization. Turning to Slide 25. We generated $224,000,000 in operating cash flow in the first quarter. In line with prior year. We continue to prioritize reinvestment back into the business to drive incremental growth with Q1 capital expenditures of $127,000,000 We also remain committed to returning cash to our shareholders. With $120,000,000 in dividends paid and $24,000,000 in anti dilutive share repurchases in the quarter. As of 11/02/2025, the company has approximately $174,000,000 remaining under its anti dilutive share repurchase program. Our net debt to adjusted EBITDA leverage ratio at the end of first quarter was 3.7 times. We remain committed to deleveraging the balance sheet towards our goal of three times leverage. At the end of the first quarter, the company had approximately $168,000,000 in cash and cash equivalents, and approximately $1,400,000,000 available under our revolver revolving credit facility. With respect to the large unit transaction Mick mentioned earlier, we anticipate closing in the 2026. The transaction is expected to be neutral to the reaffirmed guidance for fiscal twenty twenty six adjusted EPS. Further details on the acquisition can be found in the company's Form eight ks filed today with the Securities and Exchange Commission. Based on the company's first quarter performance, we are reaffirming reaffirming our full year fiscal twenty twenty six guidance ranges provided on 09/03/2025. Fiscal twenty twenty six guidance ranges are based on the exclusion of the additional week in fiscal twenty twenty five which represented approximately 2% to net sales 2% to adjusted EBIT, and $06 to adjusted EPS. In fiscal twenty twenty six, we continue to expect a significant impact from tariffs. Gross tariffs are projected to be approximately 4% of cost of product sold approximately 60% related to section two thirty two steel and aluminum tariffs, and the remainder largely from global IEPA tariffs. We continue to expect to mitigate approximately 60% of this impact in fiscal twenty twenty six through a number of actions including continued inventory management, supplier collaboration, alternative sourcing opportunities, productivity and cost savings, and where absolutely necessary, surgical and responsible pricing actions. I will close by saying that just fifty days in, I share a mixed conviction in the strength of our leadership brands, our capabilities, and our people. Maintaining focus on our strategic priorities will be key as we continue to navigate short term macroeconomic challenges while investing to build long term shareholder value. That concludes our prepared remarks. Now let's turn it over to the operator and begin the Q and A session. [speaker 0]: Thank you. Our first question today comes from Tom Palmer from JPMorgan. Please go ahead. Your line is open. [speaker 3]: Good morning, Mick and Todd. Thanks for the question. And, Todd, welcome. I wanted to follow-up on the La Romano announcement. Perhaps we could get some added detail on the reason for the acquisition and the timing and also perhaps some added details on the on the remaining 51%, such as how the purchase price would be determined. Thank you. [speaker 2]: Yeah. Good. Morning, Tom. And so when I look at the lot, Regina, investment, first of all, it obviously supports our conviction around rails. And as we've obviously talked in the past about sausage boss, for Rails, So partnering up with the proprietary producer of the tomato based sauces is absolutely critical from my perspective. Rails has had a long relationship with La Regina, as I described earlier. And since the acquisition, we've also been developing that relationship with the Romano family. This investment is really strengthening that partnership with both Laragina, but also with, as you're pointing out, the Romano family. And I'm really looking forward to bringing that relationship to the next level. On the one hand, it's obviously secure supply and we describe a lot of the uniqueness of the product, and we've talked about that. It's obviously key component of rails and and RAYOS' growth the unique ingredients, but overall also the process with which we're making the sauce and with with which you know, the sauce is cooked. As we described earlier, So you know, making sure that we have supply of the high quality rail sauce is absolutely critical. That that's what this investment helps us with. That's what this supports. It's kind of supports the overall conviction around the growth story. On top of it, also the partnership with the Romano family will allow us to continue to work closely together in areas like innovation. Really, a kind of mutual interest in order to continue to support the growth of this amazing brand, which I personally think has a long way to go. And if you look at we we also described some of the details We were currently acquiring 49% of Ladrigine for $286,000,000 This represents a high single digit EBITDA multiple And as Todd also described in his prepared remarks, we are expect it to be EPS neutral in fiscal 'twenty six. I I personally think this comes at an opportune time where we integrated the Rails acquisition, and we have continued to build this relationship. Back to your question around timing. We've continued to build this relationship. And and as a result, this is a very logical call it, like, addition to building that overall conviction around the rails brand. I don't know, Todd, any additional thoughts around the the option that we have? Yeah. So just [speaker 3]: to be clear on on the timing. So the first payment, we again, we anticipate closing sometime this in the second half of this year, 146,000,000 cash payment. Immediately. One year later, there'll be a second payment of $140,000,000. That gets to the $286,000,000 for the 49% ownership portion. After that first year, we do have a call option. We can purchase the remaining 51%. There will be likely a premium depending on the performance of up to 20% premium on the second half of piece. The valuation approaches around $600,000,000 ultimately if we exercise that option. And the Romano family can put as a put option, four years after after we after we close on the transaction. For us to purchase the remaining. So, again, about a to around a $600,000,000 ultimate valuation. As as Mick pointed out, high single digit multiple Just super excited about this opportunity. It's it's gonna be a great partnership. Gonna improve the margins of the Rayos brand, so it's it's a win win for everybody. [speaker 0]: Great. [speaker 3]: For all the detail. [speaker 0]: Our next question comes from Andrew Lazar from Barclays. Please go ahead. Your line is open. [speaker 2]: I think [speaker 3]: last quarter, Campbell spoke about its intention to stabilize the Snacks segment in the second half of the fiscal year. And it looks like that's you're still expecting that to be the case. I guess based on the data we can all see, [speaker 4]: it doesn't seem that trends improved maybe as much sequentially in the fiscal first quarter as you might have expected. Was hoping you could go through what gives you the conviction in a back half stabilization And how do you think this is impacted, if at all, from a key snack player talking, you know, more about affordability going forward? Thanks so much. [speaker 2]: Yeah. Thank you, Andrew. So maybe stepping back first with regard to the overall categories and and when I look at snacks categories that we participate in, in the aggregate, the dollar consumption trend was sequentially relatively stable. I. E, it didn't deteriorate further in the third quarter for the third quarter in a row. So I do expect as a result that you're basically going into next quarter you're gonna continue to see that category pressure And I don't expect that to immediately change within the next couple of months. However, as we're getting into the second half, arguably, comps should become a little bit easier. And that's should allow categories overall to start to stabilize. That being said, you know, we're obviously, as I described also during my prepared remarks, we've focused on what we control when we clearly see that snacking is evolving and I described it extensively in my prepared remarks, but, like, we are very focused on making sure that we continue to evolve our portfolio with that. When I look specifically at our portfolio performance in Q1, If you look at bakery and cookies, one of the things that worked well is the innovation and particularly the cookie innovation. And that's really is something that we gotta make sure that we keep that momentum going. If I look within salty within chips, some benefit from timing of certain promotional activities. So I I expect that we're going to continue to feel a little bit of pressure on chips, also a relatively competitive call it, like, subcategory within salty. Within pretzels, we have great results around snack factory. They're really encouraging. We gotta make sure that we keep that momentum going. A lot around innovation, but also in market execution. With regard to Snyder's of Hannover, we still got some work to do. And then when I look at crackers, which is the the third major category within our snacks portfolio, it's really coming back to making sure that we reignite Goldfish. Now when I look at Gold Fish in Q1, as we also described, the back to school performance was quite good and encouraging, really also focused back on price pack architecture. I mentioned that in the past and the importance of that during the right moments, making sure we provide the right value to the consumer school period. and that came through with the multipack execution during the back So there's definitely some green shoots throughout that being said. Making sure that, for instance, we are getting Goldfish back to growth is critical for not only the cracker, you know, performance within our cracker category, but also more broadly within our snacks portfolio. So that's something that we are very focused on. When I look at Q1, we made some progress. We got still more work to do. As I pointed out, there are some proof points that we are going to continue to amplify throughout the year. I also think it's going to be really important to make sure that we see some of these proof points come together in Q2 and that will inform us around the [speaker 3]: the second half [speaker 2]: trajectory of our snacks business. [speaker 4]: So, hopefully, that gives you a little bit of context [speaker 2]: around kind of our performance. [speaker 4]: Yep. Thank you so much. [speaker 0]: Our next question comes from David Palmer from ISI. Please go ahead. Your line is open. [speaker 4]: Great. Thank you. Just to follow-up on salty snacks. I know you won't be surprised to hear that people are really thinking about megatrends with regard to salty snacks right now. And, obviously, GLP one usage, people are concerned that that's gonna be ramping into 2026. And then, of course, there's that, you know, issue that some site about COVID era overpricing, you know, just a hangover, particularly within certain income cohorts I'm wondering if you'd feel like these factors are relevant more to some subcategories. I I know, you know, that at salty snacks right now overall is up 1%, in the latest dollar sales that we see ending November 30. So it doesn't look like it's that bad of a category. So it's a little bit confusing to you know, it it sounds worse than it is, so to speak. I'm wondering how you're thinking about those megatrends and how they might interact with certain subsegments and how you're perhaps thinking about that going into twenty six. So thanks. [speaker 2]: Yeah. Yeah. Thanks, David. It's it's something that we are very focused on, and you you heard me talk a little bit about this in the beginning of the prepared remarks as well. And and I I really kind of that focus on the consumer value across those different occasions or those distinct needs as we described it on one of the pages. Is really the way that we are approaching it. First of all, and and this is a has been a focus since I became the CEO is really making sure that we elevate the focus on the consumer needs across the organization. You see that come through in these different megatrends that we've identified around whether it's premiumization, labor exploration, health and wellness, and cooking and comfort for snacking specifically people are still snacking as you're describing, how however snacking is evolving. And we see that really taking place within those three key pillars that are described earlier, whether it is that elevating the experience or people want an exciting experience, which comes back to premiumization or flavor exploration, or the focus on health and wellness. And our brands are call it, premium snacking brands, really have a have a place to win within those different trends. We just need to make sure that when we innovate, we're very conscious of what the consumer is looking for. So that allows us to continue to evolve our portfolio. And at the same time, from a messaging perspective, when we communicate or connect with the consumer, we need to make sure that we bring it back to these core focus areas that we know the consumer is focused on. So we're working through that, and definitely, some areas are working. Others we got some more work to do. The one thing that is an overarching, call it, like, important piece that I you know, pointed out also when I talked about Goldfish is to continue to focus on value. And that you see across the overall consumer spectrum and that's something that goes for both divisions. Thank you. [speaker 0]: Our next question comes from Robert Moskow from TD Cowen. Please go ahead. Your line is open. [speaker 4]: I guess I really have two. [speaker 2]: I wanted to know, Mick, you said two things about the soup business [speaker 4]: You said that it's important for you to raise price to cover [speaker 3]: costs. [speaker 5]: But also you recognize the importance of providing value and that there's been some share losses in eating soup. So, you know, these two things kinda clash with each other. Do you think you'll you'll need to improve affordability of eating soups And how have competitors responded to the price increases? Yep. Yep. [speaker 2]: So definitely something we're very conscious of. Right? And and by the way, Rob, maybe stepping back for a minute. If you look at our total soup portfolio, obviously, the one hand, cooking, Cooking is really working. And you really we're really feeling some of that pressure on the eating side. Within cooking, that's really coming back to broth, on the one hand, We are seeing, by the way, that private label is recovering. And as a result, although I still expect continued one, growth of the category but also growth for us. I do expect that we're going to feel some of that share pressure that we've talked about in the past. To start to materialize as private label continues to recover. Now from a condensed perspective, the condensed portfolio is really split in two, and it's interesting when you peel that back and you really see the growth on the cooking side of condensed, which you're really back to a lot of as ingredients and then some of the the creams, for instance, that are being used in recipes, more eating focused, you know, products within our condensed portfolio, that's where you're feeling some of the pressure in general. Then when I get to RTS or ready to serve soups, which is a broader portfolio for us, right, that includes chunky, it includes HomeStyle, it did include in the past, well, yes, which we've now discontinued. That's where we felt the most pressure, which is on the one hand, because of what I described earlier, little bit of that pressure on eating soups in general, And then in combination with some of the pricing actions that we have taken that listen, we've taken them you know, we talked about it last quarter. We've been really surgical about it. But because of the disproportionate inflation, we did believe it was important to implement some of the pricing elasticities have materialized the way that we expected. We also believe that it's important for, as you're pointing out, the long term value of our brands, although in the short term, and particularly during the beginning of this quarter, it's definitely led to some pressure from a consumption as well as overall share perspective which you saw on one of the slides. Now that being said, we're also very conscious to bring it back to your piece around value is important, and value is important when it really matters. So going into the soup season, we have taken selective incremental actions in order to make sure that we are competitive in the marketplace. And if you look at the l four trend, you actually see that RTS is growing slightly and that share declines are much more subdued. [speaker 1]: Okay. [speaker 5]: In the interest of time, I'll I'll take my second question offline. Thanks. [speaker 2]: Okay. [speaker 0]: Our next question comes from Michael Lavery from Piper Sandler. Please go ahead. Your line is open. [speaker 4]: Thank you. Good morning. Just wondering if you could come back to La Regina for a minute. You mentioned the margin benefit. But I suppose at 49%, would that still come through in operations? Or would that only occur after if if and when you have full consolidation And then in either case, maybe could you just touch a little bit on what, if any, implications the deal has for top line momentum It's always been a a strong brand, but it it it is certainly, you know, as it gets bigger and bigger, grows a little bit more slowly, How do we think about just, you know, what what you can do to keep the the momentum, going on on the on the, you know, the strength of [speaker 6]: the top line as well? [speaker 3]: Maybe I'll start off with the top line. And, Todd, if you can then you know, add a little bit around the consolidation piece and the margin piece. So from an overall growth perspective, [speaker 2]: you did see that we continue to have growth this past quarter We talked about this in the past as call it, mid- to high single digit growth as always been the the focus going into this fiscal year. We had 4% consumption growth this past quarter. A little bit of timing of promotional activity between Q1, Q2 and it's still I'm very comfortable that we're gonna see that mid to high single digit growth trajectory materialize. [speaker 3]: From from a p and l and impact, because of the call option that we have, we will actually consolidate 100% of the P and L on into our business. So we will get the full gross margin impact. It'll be significant for Rails, obviously not terribly significant for the entire company. But we'll have about, we'll have a very favorable impact on the brand. We will then back out 51% of the earnings of La Regina through a minority interest line. And then, obviously, we'll have any additional interest expense coming through as we finance the purchase. As we talked about earlier, for this year, it should be a washed EPS. Over time, obviously, we believe it will be accretive. [speaker 6]: And can I add a quick follow-up? If if that's the case then and you've got greater margin, and flexibility, does that do anything to impact how you might think about funding a and c? [speaker 3]: It it, you know, it gives us it gives know, more to come, Michael. It gives us, obviously, flexibility from from from lots of aspects to invest in the business as you intimate you know, innovation, channel, strategy. Just gives us a lot more flex on the brand. And so, you know, we're we think it's gonna be a great impact for us. [speaker 6]: Okay. Thanks so much. [speaker 0]: Our next question comes from Peter Grom from UBS. Please go ahead. Your line is open. [speaker 4]: Great. Thanks. Good morning, everyone. I hope you're doing well. So Todd, I kind of had a broader I had a broader question for Todd, and and I guess I know it's only been a few weeks, but maybe just some initial perspectives as you step into this role, kind of where you see the biggest opportunities [speaker 6]: for improvement, [speaker 7]: maybe just as where you see them today and whether that be in growth, profitability, cash flow. What kinda stands out to you? [speaker 3]: Yeah. Look. You know, I took I took this position for a couple of reasons. One is I think the brands are just incredible powerful, absolutely have a right to win. You know, slightly declining today, but I'm very confident they're gonna be growing in the future. And I, you know, I wanna be a meaningful part of that. The people here that I met through the interview process [speaker 6]: amazing. [speaker 3]: And as I continue to meet more people through this organization, the people here are just terrific, and that's quite frankly, when you work every day, that's that's 80% of the battle coming in and making sure you're you're working with people that you really appreciate and wanna work with. Look. This is a big business. It's a complex business. I think I can add value in streamlining analysis, making sure we focus on the right things, making sure we have you know, the right people working on the right things, making the right investments, You know, having worked twenty years for a similar sized company, that being Hershey, and then working for two $1,000,000,000 companies over the last eight years gives gives me, I think, a unique perspective on both you know, larger cap food companies and then the advantage advantages of smaller companies who are higher growth and how they think how they act, and how they're more nimble. So, hopefully, I can bring some of that perspective to the company over the next several years. [speaker 7]: Great. Thank you so much. I'll pass it on. [speaker 0]: Our next question comes from Jim Salera from Stephens. Please go ahead. Your line is open. [speaker 7]: Nick, I wanted to maybe circle back on Goldfish because it sounds like [speaker 4]: that's gonna be really the key lever to reigniting the the [speaker 8]: stack segment growth as a whole. Can you just walk us through, has Goldfish lost households or have you seen consumption frequency step back among existing households in you know, maybe you could give us some detail on what the focus of the incremental marketing is gonna be there. [speaker 7]: Yep. [speaker 5]: Yep. Sure. So [speaker 2]: you you're absolutely right. It making sure that we get Goldfish right is really important. Obviously, one of our billion dollar brands across our broader portfolio and making sure that we have that growth back will will help snacks, but, obviously, will help a broader organization. When I look at the Goldfish itself, and I look at kind of these these key focus areas. First of all, maybe specifically to your question, household penetration, relatively stable. It's really buy rate. That we felt a little bit more of the pressure. When I think about what are you as a result gonna do about it. Making sure that we provide oh, one, a clear message with regard and reminder of what Goldfish is and the that Goldfish is here and that goldfish all and and what Goldfish provides At the same time, from an innovation perspective, making sure that we give people also choices within the Goldfish portfolio. And one of the examples of that is, for instance, the goldfish pretzel innovation. That is coming out. So making sure that that we provide kind of the full power of the franchise is really important in order to support that pyrate in combination with reminding people what goldfish stands for. At the same time and so that comes back to innovation, brand, messaging, At the same time, as I described earlier, and I described this also in the past, is price pack architecture, I think, is really important, which brings it back to making sure that we have the right value at the right moment. And that's something that we're very focused on across not only Goldfish but the broader portfolio. But that also is really important for Goldfish itself. And a proof point of that is what you saw with the multipack growth during the back to school period this past quarter. And then the last thing that I'd say is, call it, like the daily blocking and tackling I refer to omnichannel execution. You know, in my prepared remarks as well. I really look at it as making sure we have really good execution in the marketplace is absolutely critical. So it's really those different components that should allow us to get back to growth with Goldfish in a brand that arguably has a right to win in the market. [speaker 8]: Great. Thank you. I'll hop back in the queue. [speaker 0]: Our next question comes from Chris Carey from Wells Fargo. Please go ahead. Your line is open. [speaker 4]: Hi, good morning, everyone. [speaker 8]: Wanted to ask about margins. Yeah. I think I think this is [speaker 9]: a historically low gross margin in the quarter going back some time. And so I wanted to get a sense of, you know, how the quarter, you know, from a gross margin perspective, you know, has come in relative to your to your own expectations. [speaker 8]: And [speaker 9]: you know, what what whether you think that the the rest of the year gross margin relative to current levels, whether on an absolute basis or a year over year basis, you know, see some steady improvement. And I and I ask that in the context of, I think, you know, this is gonna be the peak inflation you know, quarter. You know, relative to what your guidance anyways. And and there there potentially is some some some relief you know, through through the rest of the year. So it's kind of, you know, how it came in relative to expectations and and phasing from here. And then, you know, as you look at the business and you've handled this inflation, you know, cycle, just, you know, any any thoughts on prospects for know, margins over time? Thanks so much. [speaker 3]: Sure. Look. So, obviously, incredible inflation both from just normal inflationary input costs, labor costs, [speaker 8]: plus [speaker 3]: a very large impact from tariffs. In the quarter and throughout the majority of the year. So it came in exactly as we expected it it would be. As we, you know, had in our in our slides over 500 basis points of total you know, cost pressures with, you know, 200 basis points approximately of that being tariffs. Inflation throughout the entire cost system also was a similar amount to tariffs for the quarter. And then we had incremental depreciation, higher logistics costs, a number of other items that put some additional pressure on it. Now the good news is the supply chain team is doing an incredible job and and and was able to offset 70% of of those costs. So, you know, kudos to them. We would be in much worse shape if not for their incredible efforts. This inflation will remain for the vast vast majority of the year. We will there'll be a similar impact in Q2. Just FYI, you know, gross margins, was down 150 basis points in Q1, will be down a similar amount, maybe even a little bit more in Q2. Probably we'll get a little bit better as we get into Q3. And then as we begin to lapse some of the tariff impacts that we started to have in Q4, and and some of the cost improvement opportunities that the supply chain is working on now come to full fruition, we will as second half comes together, we will see improvement throughout the quarter. Particularly in Q4, again, because we will be lapping some of those tariff impacts. Look, we're not happy about where the gross margins are clearly. We know we need to get them well above 30%. You know, over time, and we have a number of cost initiatives in place to ensure that happens. [speaker 7]: Okay. [speaker 9]: Great. Thanks so much. [speaker 0]: We are out of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect.
Operator: Morning all, good afternoon all, and welcome to the Vince Holding Corp. Q3 2025 Earnings Conference Call. My name is Adam, and I will be your operator today. We will now hand the floor to the keynote to begin, so please go ahead when you are ready. Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp. Third Quarter Fiscal 2025 Results Conference Call. Hosting the call today is Brendan Hoffman, Chief Executive, and Yuji Okumura, Chief Financial Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ from those that the company expects. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. Financial results are in conformity with GAAP. In addition, in today's discussion, the company is presenting its results on an adjusted basis. The adjusted results that the company presents today are non-GAAP measures. Discussions of these non-GAAP measures and information on reconciliations with them to their most comparable GAAP measures are included in today's press release and related schedules, which are available in the Investors section of the company's website at investors.fins.com. Now I'll turn the call over to Brendan. Brendan Hoffman: Thank you, Akiko, and good morning, everyone. We are extremely proud of our third quarter performance as we drove healthy sales growth across all channels and exceeded our expectations for both top and bottom line. Our assortments are resonating across both our women's and men's businesses. But most encouraging is the acceptance we have seen to the strategic price increases implemented this quarter as well as in the momentum in our DTC segment given the enhancements we have made to the customer experience. Our women's assortment, which has the highest impact from tariffs, saw prices increase more than our overall average increase of approximately 6%. But units were nearly flat to last year, validating the quality and value of our product in the marketplace. Beyond the pricing actions, our teams have done an exceptional job in continuing to manage the evolving tariff environment. Our goods are flowing smoothly despite significant changes in sourcing, and importantly, we've maintained our quality standards throughout this transition. With respect to customer experience, following the store renovations from earlier this year, we enhanced our ecommerce site in Q3 with a strategic site refresh, increased marketing support, and the launch of drop ship. Our ecommerce site refresh elevated the customer experience with more modern creative elements and enhanced site merchandise. We are now using AI-generated video content to enrich product detail pages and introduce more service elements, like our cashmere care guide. This investment in our digital platform contributed meaningfully to our strong performance, and we're seeing the benefits flow through in both conversion rates and average order values. Our ecommerce site also significantly benefited from the marketing investments we made in mid-funnel marketing this quarter. Through this work, we saw triple-digit growth in site traffic late in the quarter and supported full-price new customer acquisition as well. At the end of the quarter, we went live with a new drop ship strategy we believe will be a significant growth opportunity for us moving forward. In the first month since launch, we have seen a significant increase in volume. The initial launch focused only on shoes, but we have plans to expand to other categories, capitalizing on our partnership with authentic brands and the category expansion opportunities that provides. The drop ship strategy allows us to not only offer more fashion-forward products we might typically feel comfortable procuring directly, but it also enables us to showcase a more diverse assortment to our customer, providing learnings on customer preferences that we may incorporate into our store channel as well. In addition to these initiatives, we opened two new stores this quarter, in Nashville and Sacramento, following our successful store opening in Marleybone, London, earlier this year, which continues to exceed our expectations. Moving to our wholesale business, we delivered solid growth versus last year, some of this reflecting the timing benefits from the Q2 shipment delays that we discussed previously, as well as ongoing performance of key partners. We were excited to recently celebrate our 2025 holiday collection along with our continued partnership with Nordstrom, with an immersive experience in LA with Nordstrom's top clientele, Nordstrom's VP fashion director, and our creative director, Caroline Bellhumer. A great event to kick off the holiday season and highlight our holiday campaign, which celebrates our brand spirit and showcases connections through stories and gift-giving with a 360-degree omnichannel strategy. Thus far, we have seen a very strong start to the holiday quarter, including record sales across the Black Friday and Cyber Monday weekend in our direct-to-consumer segment. Given the strength of Q3 and the momentum we are continuing to drive, I am more confident than ever in the trajectory ahead for Vince Holding Corp. and the prospects we have to leverage our platform further to drive growth. We continue to successfully navigate the tariff challenges while maintaining the quality and brand integrity we are known for. We are beginning to reinvest in the business, particularly in marketing initiatives that we had pulled back on earlier in the year, and we're seeing positive returns on these investments. The underlying fundamentals of our business remain strong. We are operating with disciplined execution while positioning for growth. With that strong foundation and the momentum we're building, I'll now turn it over to Yuji to discuss our financial results in more detail and provide our updated outlook. Yuji Okumura: Thank you, Brendan. And good morning, everyone. As Brendan reviewed, we are very pleased with our third quarter performance as we saw momentum continue across the business, enabling us to begin to reinvest in key areas of the business. Total company net sales for the third quarter increased 6.2% to $85.1 million compared to $80.2 million in 2024. With respect to channel performance, our wholesale channel increased 6.7% and our direct-to-consumer segment increased 5.5%. As Brendan reviewed, part of the growth in wholesale reflects the timing of shipments given the delays we experienced earlier in the year with tariff disruption. Our teams are doing an excellent job in continuing to manage our supply chain, and our goods are flowing smoothly and expect to be back in line to normal course timing by spring. Gross profit in the third quarter was $41.9 million or 49.2% of net sales. This compares to $40.1 million or 50% of net sales in the third quarter of last year. The decrease in gross margin rate was primarily driven by approximately 260 basis points due to the unfavorable impact of higher tariffs, and approximately 100 basis points due to increased freight cost, partially offset by a 140 basis points increase due to the favorable impact of lower product costing and higher pricing, and approximately 110 basis points due to the favorable impact of lower discounting. As Brendan reviewed, we are very encouraged by customers' response to strategic price changes. Our team's ongoing focus on task mitigation efforts. Given timing and mix of sales, we experienced less of a headwind than originally expected from tariffs during the quarter, but expect these costs to ramp into Q4. Selling, general, and administrative expenses in the quarter were $36.5 million or 42.8% of net sales as compared to $34.3 million or 42.8% of net sales for the third quarter of last year. The increase in SG&A dollars was primarily driven by approximately $1.1 million related to compensation and $760,000 of increase in marketing and advertising cost as we reinvested into mid-funnel activities. Operating income for the third quarter was $5.4 million compared to operating income of $5.8 million in the same period last year. Net interest expense for the quarter decreased to $1 million compared to $1.7 million in the prior year. The decrease was primarily due to lower levels of debt under our term loan credit facility. At the end of 2025, our long-term debt balance was $36.1 million, a reduction of $14.5 million compared to $50.6 million in the prior year period. Income tax expense was $2 million compared to zero tax provision in the same period last year. The increase is due to the impact of applying our estimated annual effective tax rate to the year-to-date ordinary pretax income. In the prior comparative period, we had a year-to-date ordinary pretax loss for the interim period, and as such, we did not record any tax expense for the same period last year. As a reminder, following the change in control earlier this calendar year, we have limitations to the use of the NOLs we did not have last year, also impacting the cash tax expense of comparison to previous years. Net income for the third quarter was $2.7 million or income per share of $0.21 compared to net income of $4.3 million or income per share of $0.34 in the third quarter of last year. The year-over-year decline in net income was driven by the increase in tax expense. Adjusted EBITDA was $6.5 million for the third quarter, compared to $7.4 million in the prior year. Moving to the balance sheet. Net inventory was $75.9 million at the end of the third quarter as compared to $63.8 million at the end of the third quarter last year. The year-over-year increase was primarily driven by approximately $4.2 million higher inventory carrying value due to tariffs. Turning to our outlook. As Brendan discussed, we have seen a very strong start to the fourth quarter with a record holiday weekend sales performance in our DTC segment. Our outlook for the period assumes that this momentum continues with the growth in the DTC segment expected to outpace our total net sales growth for the period, which is expected to increase approximately 3% to 7%. This guidance also takes into account potential shifts in timing with respect to wholesale shipments given end-of-the-year seasonality. In addition, we expect adjusted operating income as a percentage of net sales for the quarter to be approximately flat to 2% and for the adjusted EBITDA as a percentage of net sales to be approximately 2% to 4% compared to 6.7% in the prior year period. Our guidance for the quarter takes into account approximately $4 million to $5 million of estimated incremental tariff costs that we continue to expect to partially offset with our mitigation strategy. Given our year-to-date performance and our outlook for the fourth quarter, we expect full-year net sales growth to be approximately 2% to 3%, adjusted operating income as a percentage of net sales to be approximately 2% to 3%, and for adjusted EBITDA as a percentage of net sales to be approximately 4% to 5% compared to the 4.8% in the prior year period, despite incurring approximately $8 million to $9 million of incremental tariff costs compared to last year. This concludes our remarks. And I'll now turn it over to the operator to open the call for questions. Operator: Thank you. A reminder, if you'd like to ask a question on today's call, please press. Our first question comes from Eric Beder at SCC Research. Eric Beder: Good morning. Congratulations on a great Q3. Thanks, Aaron. Thank you. I want to talk a little bit about some of the potential drivers here. So you have just started to roll out some of the licensed products. We've seen handbags and suiting in our store tours. I'm curious, you know, you mentioned it also in your comments. Where do you think that goes? And I know that the tariffs kind of slowed down the rollouts. But what should we be thinking about the potential for that in 2026 and beyond? Brendan Hoffman: Well, I, you know, I think it's I'm even more bullish now after the last month based on my comments on dropships. So what we saw with drop ship with Caleres and Shoes in the last four or five weeks is truly spectacular. And so the opportunity to launch that on ecommerce in the spring on these other categories and then figure out how to better utilize that within the stores in addition to obviously showcasing the product. I think it has a, it can have a real impact on our business more than I was anticipating prior to the drop ship launch. Eric Beder: And when you look at, you know, I know that you've been also looking at putting you put some COH denim into some of the stores. You know, how should we be thinking about that potential opportunity to kind of collaborate with other key fashion brands to kind of help both of you? Brendan Hoffman: Yeah. That's something that we're gonna continue to explore and prioritize. Very happy with the citizens of humanity collab. We're, you know, it also highlights the opportunity we have in denim. Whether we do that in-house, although that's a long, long haul, we'll continue to do partnerships and dealing with citizens and look for other categories that perhaps ABG isn't licensing at this point. And you know, we can bring to kind of round out our assortment. So that was another good, good win for Vince. Eric Beder: Great. And you opened up two new stores in new markets. Can you I know it's very short, you give us a little bit of thought process? And then kind of what should we be thinking about? I know that we pulled back on that a little bit this year just because of things going on this year. But given the results here, what is the store opportunity kind of back on full swing for next year and going forward? Thank you. Brendan Hoffman: Yeah. Thanks. I mean, you know, we're pleased with the way Nashville and Sacramento have been received within the community. You know, it's still early days. Also, we'll be monitoring what it does to our ecommerce business. I think we have 60 stores now between the outlets and full price, and I wouldn't expect that number to move much, maybe a couple more, a couple less depending on opportunities. We continue to be really pleased with our Marleybone store in London. So gonna see if there's opportunities in other parts of Europe. Both to do business where we can be profitable like the Marleybone and also provide some visibility for us in regions where we have a wholesale business. And stores can just reinforce that. So you know, we'll continue to monitor the direct-to-consumer opportunity led by ecommerce. But as I've always said, it's not an either-or with direct-to-consumer and our wholesale business. It's both. It's an and, and I think they just reinforce each other, and we've seen that in Q3 and continue to see that in Q4. Eric Beder: Great. Congrats, and good luck for the rest of the holiday season. Yuji Okumura: Thank you. Operator: The next question comes from Michael Kupinski from Noble Capital Markets. Michael, please go ahead. Your line is open. Michael Kupinski: Thank you. And I'd like to offer my congratulations as well. Sales were obviously much better than what we were looking for. Were there any particular bottlenecks or limitations that could have delivered even better sales? And I'm thinking, you know, any inventory constraints for particular items, for instance. Brendan Hoffman: I mean, you know, there's never a crystal ball, so you always, you know, there's certain things you wish you had a little bit more of. But I think overall, we were in a good inventory position, you know, really working through the first half of the year, disruption from tariffs as we discussed. So as I'm doing my store tours, I'm not getting too much pushback from the stores about where they need more inventory. I think Vince also since I've been here last, is doing a much better job with our logistics and operations, refilling the stores on a timely basis. So I think we have a good handle on that. Again, not to harp on it, but I am so excited about it. This drop ship opportunity, which allows us to take full advantage of Caleres' shoe inventory. I mean, that's a big deal because that's where we did have some holes in our inventory assortment. Because it's a little bit more difficult with our third-party partners to properly procure ahead of time. So this opens up a really big opportunity for us going forward as I've been saying. But overall, the inventories, I think, were in a good position and, you know, help fuel the growth we saw. Michael Kupinski: Thank you for that. And then how much of the strong revenue growth was driven by price versus product volume? I know that you touched on that in your comments, but I was wondering if you could just expand on that. Brendan Hoffman: Yeah. Well, I mean, we were really pleased that the units held steady and actually grew at the higher price point. So, you know, we had anticipated given the price changes that we would see a little bit of erosion in our unit velocity. But, you know, so far, we haven't seen that, you know, and the customer seems to be trading up with us. I don't know if that's because they're trading down from other luxury brands, as those prices skyrocket, but our core customer continues to see us as a value, and, as I said in my comments, women's was where we had to take the largest price changes, and the units held strong. So, you know, it was a win-win, and that's continued into, you know, in Dallas. So we'll continue to monitor that, continue to see if there's even a little bit more opportunity to push up price, you know, where we think the customer will react positively. But definitely a driver was the strength in the units. Michael Kupinski: And then given that wholesale and direct-to-consumer, it looked like, you know, revenues were revenue growth were pretty much similar, but I was wondering if there was any divergence between the two channels in terms of product sales and particularly as you go into the fourth quarter? Brendan Hoffman: No. I mean, we, you know, ecommerce was clearly the big winner and driver when you look across all the channels. But overall, we saw strength at the register with our wholesale partners. You know, we continue to work with Saks Global to make sure that we're able to properly service their business while they go through their transformation, so that creates a little bit of noise. But, you know, overall, as we start December, the product's checking at the register everywhere. Michael Kupinski: Gotcha. My final question is, can you just talk a little bit about trends in freight costs? I know that I was just wondering if you'd negotiate annually and if you could just talk a little bit about what you're seeing there. Yuji Okumura: Yeah. Certainly. So, yeah, we are seeing freight cost increases. That's also partially due to the fact that we are changing sources as well of where we're sourcing our products. So it's really more of a product of depending on the shift in timing, we're airing more stuff or certain pieces are taking longer in terms of distance-wise to get here. So it's not so much of the actual inherent sort of freight contract and the pricing related to that. It's really more along the lines of the timing of when we want to bring in the product, which method we're using to bring in the product. Michael Kupinski: Gotcha. Okay. Thank you. That's all I have. Operator: We have no further questions, so I hand the call back to the management team for any closing comments. Brendan Hoffman: Okay. Well, thank you all again for your participation today, and we look forward to updating you on our year-end results in the spring, and happy holidays to all. Thank you. Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
Operator: Good morning, and welcome to the Academy Sports and Outdoors Third Quarter Fiscal 2025 Results Conference Call. The call is being recorded, and all participants are in a listen-only mode. Following the prepared remarks, there will be a brief question and answer session. Questions will be limited to analysts and investors. Please limit yourself to one question and one follow-up. To ask your question during the call, please press star 1 from your telephone keypad. If you require operator assistance during the call, please press star 0. I will now turn the call over to Dan Aldridge, vice president of investor relations for Academy Sports and Outdoors. Good morning, everyone, and thank you for joining the Academy Sports and Outdoors Third Quarter 2025 Financial Results Call. Dan Aldridge: Participating on today's call are Steve Lawrence, Chief Executive Officer, and Carl Ford, Chief Financial Officer. As a reminder, today's earnings release and the comments made by management during this call include forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our most recent 10-Ks and 10-Q filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's earnings release, which is available at investors.academy.com. This morning, we will review our financial results for 2025, provide an update on strategic initiatives, discuss the outlook for the year, and share our updated guidance for the full year fiscal 2025. After we conclude prepared remarks, there will be time for questions. With that, I'll turn the call over to CEO, Steve Lawrence. Steve? Steve Lawrence: Thanks, Dan, and good morning to everyone on the call. The third quarter played out as we expected. Consumers are shopping episodically and seeking out values as they look to stretch their buying power in the face of rising prices across the retail landscape. As we noted in our last call, we saw customers show up and drive positive comps during the back-to-school selling period, which for Academy stretches from mid-July to mid-August. Once we got past the kickoff of tailgating and hunting season in early September, customers pulled back on spending during the lulls in the calendar and tended to aggregate their purchases during promotional events and natural holidays, such as our seasonal clearance event in September or in early October, where we ran our Academy Deal Days over Prime Week and Columbus Day weekend. We did see comps inflect back to positive during the tail end of the quarter as we started getting cooler temperatures in our legacy markets, which accelerated sales in our cold weather categories. This momentum carried into early November and got us off to a good start for the fourth quarter. We saw softness in the middle of the month as warmer temperatures resumed and sales in seasonal apparel slowed a little. As we expected, customers came out in force during Thanksgiving week looking for deals, and our team was well-prepared with strong promotional pricing that was fueled by the inventory we pulled forward at pre-accelerated tariff pricing in Q2 and Q3. All this resulted in our largest Black Friday weekend ever, which is on top of a record Black Friday event from last year. Carl Ford: That being said, we still have a lot of business ahead of us over the next four weeks. Shifting back to third quarter results, it is clear that our strategies are not only working but continue to accelerate as they take hold. A couple of proof points to support this are, first, we're in our fourth year of new store openings, and we now have 26 new stores from the 2022 through 2024 vintages in our comp base. And by this time next year, we'll have an additional 24. These stores in aggregate comp low single digits in Q1, mid-single digits in Q2, and ran a high single-digit comp in Q3. Second, the foundational work we've done around improving our omnichannel experience continues to pay dividends, with growth in the channel accelerating from plus 10% in Q1 to 18% in Q2 and 22% in Q3. Lastly, investments in delivering more on-trend products from both the Jordan brand and Nike helped drive high single-digit growth in the combined brands and are helping bring in new higher-income customers into Academy. Turning to our third quarter results, as you saw from our earnings release earlier today, sales came in at $1.38 billion, which was up 3% to last year, translating into a negative 0.9% comp. We're encouraged by the strong reaction from our customers during the back-to-school season and for our holiday assortment at the tail end of the quarter, as we saw cooler temperatures across our geography. We were also pleased by the progress we made improving average unit retails to help offset the increased tariff expense we are seeing this year. During the quarter, average unit retail steadily improved and was up mid to high single digits versus last year. This improvement also helped increase our gross margin rate to 35.7%, up 170 basis points from last year. We've been walking a bit of a tightrope this year as we work to steadily raise AURs while also maintaining our value leadership in our space. I can assure you that we're continuously monitoring pricing relative to key competitors and are highly confident that we have the right pricing, architecture, and promotional plan in place to deliver a strong holiday season. Looking at category performance across the business, Sports and Rec was our strongest division, posting a 6% increase driven by solid growth in our baseball, outdoor cooking, fitness equipment, and bicycle businesses. Apparel sales grew 3%, driven by strength in key national brands such as Nike, Jordan, Carhartt, Ariat, and Berlevo, along with solid growth in our private brands such as Magellan and Freely. Our footwear business grew 2%, driven by performance running brands such as Nike, Brooks, ASICS, and New Balance, all of which drove strong comps. Sales in our Outdoor business also grew 2% for the quarter, with strength in fishing, hunting gear, and firearms. We did see some softness in our ammo business as we started to lap the election run-up from last year. Once we got past the election time period in early November, while still running negative, we've seen the ammo sales trend improve. As we continue to grow top-line sales, we also remain focused on growing our market share. As you know, most of the new stores we're opening are in new or underserved markets, and virtually every dollar of sales from these new stores translates into share gains for us. In many cases, these gains come from smaller independents who lack our scale and pricing power, or in some cases from larger players that do not offer the value and diversity of assortment we carry. With a business as complex as ours, we have to track our relative performance across several different data sources. And similar to last quarter, all the metrics we're seeing indicate we continue to grow our share in the third quarter. The first place we focus on is traffic data, which we get through placer.ai. As prices continue to rise across retail, and discretionary budgets get squeezed, we continue to see strong growth in foot traffic and share gains from customers in the top two income quintiles, which are households making more than $100,000 a year. These top quintiles now represent roughly 40% of our sales during the quarter, and we saw traffic from these cohorts grow in the high single digits. We're very happy to see that we continue to drive strong market share growth with this consumer segment, even as we started lapping the double-digit growth we experienced last year in the third quarter. At the same time, we continue to hold share in the middle-income quintile, which includes households making $50,000 to $100,000 a year, which represents roughly 30% of our customers. And finally, we continue to see traffic erosion in the lower-income cohorts that make less than $50,000 a year, but the pace of these declines was less than what we saw in the first half of the year. As this trend has played out over the past year, we have, in effect, started to somewhat derisk our customer base by giving us less exposure to lower-income consumers, who are under the most amount of economic pressure. Another key data source for us is Surcana, which provides market share data on roughly 60 to 70% of the categories we carry. Similar to last quarter, we were pleased to see meaningful share gains across all of our key businesses such as apparel, footwear, sporting goods, outdoor cooking, fishing, and camping. Finally, we use government background checks for firearms purchases or NICS checks data as a proxy for firearms market share. Once again, we saw continued solid growth on this front, despite the softness in the ammo that I started earlier, with firearm share growing for over eighteen consecutive months. As we move forward into Q4, we expect these trends to continue as customers discover the value, convenience, and diversity of our assortment. We attribute a lot of the momentum we're building in the business to the solid progress we continue to make against our long-term objectives and goals. I will now cover a couple of highlights of this from Q3. First, opening new stores remains our number one strategy. And during the quarter, the team successfully opened up 11 new stores. Unlike the first half of the year, most of these new locations are in our core geography where we have high brand awareness and affinity, and are positioned in mid-sized markets with an underserved constituency. Some examples of stores we've opened up during the quarter are Palestine, Texas, Batesville, Mississippi, and Rome, Georgia. While these towns are not household names for many of you, the customer profile in these markets closely aligns with our target consumer. In each of these stores, with the other eight we opened in the quarter, we've been knocking it out of the park since opening and running significantly ahead of plan. The success of these stores highlights the opportunity we have to open stores in our legacy markets and markets that are experiencing high population migration and growth, in addition to the new states and markets where we currently don't have a presence. At this point in time, we have pretty good visibility into our 2026 pipeline of stores. We're excited to announce that we plan to open up an additional 20 to 25 stores next year, with a focus on opening roughly 80% of the new stores in legacy and existing markets and 20% in newer markets. As in the past, we tend to open new markets in the first part of the year, while legacy and existing are more back-half weighted. Our second initiative is to grow our .com business at an accelerated pace. We continue to make progress against this goal in Q3, growing this channel 22% for the quarter, and penetration to total sales grew over 160 basis points to 10.4%. As we mentioned on our previous calls, we believe that our new store growth is one of the things that helps fuel our .com business by acting as local fulfillment hubs for customers who want the convenience of a BOPIS experience. This symbiotic relationship is evidenced by the fact that we're starting to see higher .com penetrations in our new markets, as we lead with a digital-first customer acquisition strategy. An omnichannel shopper is our most productive and profitable customer, and we're laser-focused on getting new customers into our digital ecosystem, engaging with them in ways that support their shopping needs and patterns. In addition to the contribution that new store growth has had on our .com business, we've also made significant investments in both technology and talent over the past twenty-four months, which has led to the growth we experienced over the last three quarters. We believe that we're still in the early innings of many of these initiatives, and that as we continue to invest and focus on delivering a site experience that is easy, engaging, and elegant, we will remain on track to achieving the 15% penetration we outlined in our long-range plan. Our third growth pillar is improving the productivity of our existing stores. We put several initiatives in place this year to help accomplish this. Our first focus on this front is to continue to refine and expand our assortment by adding the most requested and desirable brands that will inspire existing customers to shop more frequently at Academy while also attracting new customers to our brand. We continue to be pleased with the growth we're getting out of our increased investment in partnership with both Nike and the Jordan brand. At this point, we've expanded elements of the Jordan brand out to all stores, such as cleats, socks, slides, and backpacks, and expect to further roll out footwear and apparel in more stores in 2026. We believe that our improved access to basketball game shoes from Jordan and performance running shoes from Nike, such as the Romero, when coupled with the expansion of fashion apparel across both these brands, is helping us attract many of these new $100,000-plus households that I mentioned earlier in my remarks. We've been applying the same approach broadly across the store to ensure that we have a strong presentation of some of the hottest items in transit holiday. The technology team has made some significant inventory investments in key holiday items that feature enhanced technology, including Turtle Box speakers, Meta AI glasses from Ray-Ban and Oakley. We're also leaning into new emerging health and wellness trends such as weighted vest running and walking, portable saunas from Homedics for post-workout recovery, or an expanded assortment of clear proteins from First Form or Isopure for people taking GLP-1 weight loss drugs. Our core customer is the AlwaysGain family, so we haven't forgotten the kids this holiday either. We have the newly released World Cup Triad of Soccer Ball, along with an expanded assortment of some of the hottest youth baseball drip, from brands such as Bruce Bowl, Baseball 101, and Dirty Mid's. The team has also built a strong assortment of sports toys from Nerf Silent Sports. And lastly, sports and Pokemon trading cards always make great stocking stuffers. Our second focus this year was on delivering new technology to stores, with the rollout of RFID scanners and new handheld devices. We continue to see benefits from these initiatives as we improve our inventory accuracy and in-stocks and brands, we can update inventory on a weekly basis. One of the biggest benefits to date has been the impact on our associates' ability to serve the customer and in many cases, save the sale that would have gone somewhere else. The combined utilization of RFID in these handheld devices allows associates to help customers more rapidly find the items and sizes they're shopping for. When the item is not in stock in a specific store, they can save the sale by allowing the associate to immediately order the item for the customer, and it can be delivered to home or picked up in another store, whichever is most convenient for them. We're also seeing productivity gains from our store teams as they can more quickly process .com and BOPIS orders. Our third focus is on driving traffic through expanding our loyalty program and improving the efficiency of our targeted marketing efforts in order to increase the frequency of customer visits and improve conversion rates. Simplistically, we want to streamline the customer shopping experience and make it easy and intuitive. One recent example is where we've automated much of our customer onboarding experience and improved our ability to offer instantaneous real-time benefits from sign-on offers versus in the past, there being a lag between when the customer signed up for loyalty and when they could use their first purchase discount. All this work continues to help drive customer enrollment and engagement in our My Academy Awards program, which we expect to have 13 million members by the end of the year. Driving enrollment in our rewards program remains an important focus for us so we can start a dialogue with them and convert them from occasional shoppers to loyal customers who shop with us two to three times more in a year than an average customer and spend four to five times more on an annual basis. We expect to see this program continue to grow and be a key traffic and conversion driver for us and are excited about our opportunity in 2026 to combine My Academy Awards and our credit card program into one seamless experience for the customer. We'll share more details around this in our next call. Now I'll hand it over to Carl to give you a deeper dive into the financials. Carl Ford: Thanks, Steve. Net sales for the third quarter were approximately $1.4 billion, up 3%, with a comp decrease of 0.9%. As Steve noted, our strategic initiatives are working. New store sales comp continues to grow. Our e-commerce channel had a positive comp of approximately 22%, which is our third quarter of consecutive double-digit comp. Nike and Jordan brand are resonating, and our technology investments like RFID are bearing fruit. Breaking down the comp, transactions were down 4.1% while the ticket was up 3.3%. Sales were just below the midpoint of our fall guidance during the quarter as we navigated a warm October and a challenging consumer environment. And as Steve noted, the trends through November and early December are tracking in line with expectations. As consumers seek out value, the strategy is working, and the underlying business is performing well. If you look at the two-year stack on a comp sales basis, we have improved 370 basis points from Q1 to Q3, which included lapping two Texas teams in the World Series. Gross margin came in at 35.7%, up 170 basis points from last year. The expansion was driven by 130 basis points of merchandise margin inclusive of tariffs, and a 30 basis point improvement in freight as we had a reduction in spend due to lapping port strike issues last year that did not recur this year. Additionally, we saw a 20 basis point improvement in shrink as our inventory management and investments in RFID begin to take hold. SG&A came in at 28.4% of sales for the third quarter, an increase of approximately $28 million or 120 basis points. The increase was driven by our initiatives totaling 160 basis points, comprised of 150 basis points of new store growth and 10 basis points of technology investments. All of the SG&A deleverage relates to our growth initiatives. If you strip out the costs attributable to those initiatives, all other costs would have leveraged by 40 basis points. The acceleration in new store growth from 2022 to 2025 has had an outsized impact on SG&A growth. But as we move into 2026, the number of new stores will be similar to 2025. Looking ahead to the fourth quarter, we expect SG&A to be flat to slightly down as we lap accelerated store openings from the prior year. If you recall, we opened five stores in Q4 2024, and we have opened five stores in Q4 2025. Operating income grew 9.7% to approximately $100 million, and diluted earnings per share grew over 14%, coming in at $1.05. And adjusted earnings per share grew over 16% to $1.14. Our inventory has continued to improve as we move through the year. And on a per-store basis, units were down 0.3% from last year. We have also seen good sell-through in the product. This compares to up 4.6% in Q2. We pulled forward earlier in the year, and we feel good about the composition of our inventory as we finish out the holiday and the fourth quarter. We ended the quarter with approximately $290 million in cash and maintained strong liquidity, with an undrawn $1 billion revolver. Our 8% increase in stores since Q3 of last year is completely funded from cash flow from operations. During the third quarter, free cash flow was negative $9 million as a result of payments attributable to tariffs. In the first February, we pulled forward inventory to minimize duties, and those payables came due in Q3. I'm extremely proud of the team and the way they managed through this unprecedented environment. Turning to capital allocation, we remain committed to balanced and disciplined deployment. During the third quarter, we paid approximately $8.7 million in dividends and invested approximately $54 million in strategic initiatives, including new store openings and omnichannel infrastructure. We did not repurchase any of our shares during the quarter, instead choosing to allocate capital to manage inventory. These decisions have allowed us to appropriately manage our inventory position and risk during this period of heightened uncertainty. Our capital allocation philosophy has not changed. We have over $530 million remaining on our current repurchase authorization and plan to begin repurchases again in the fourth quarter. Moving to guidance, based on the results through the third quarter and the expectations for the remainder of fiscal 2025, we are narrowing both the low end of our comp sales guidance from negative 3% to negative 2% and the high end from plus 1% to flat, with the comp range for the year now being between negative 2% to flat. With a new range of 34.3% to 34.5%. To close, our strategic initiatives are working and continue to accelerate. New stores are now comping high single digits. E-commerce grew double digits for the third quarter in a row. Jordan and Nike grew high single digits and have shown incremental growth each quarter since their launch and expansion. And we continue to see consumers in the upper income cohorts trade into Academy as they seek out value. I'm extremely optimistic about the future of Academy as we continue to grow. I'll now turn the call over to the operator for questions. Operator: Thank you. The company will now open the call for your questions. To ask your question, please press 1. We will pause for a moment to wait for the queue to fill. A session, CEO, Steve Lawrence, will make closing comments. Paul Lejuez: Hey, thanks, guys. Curious if we could start with the average, the ticket increase of 3.3%. If you could talk about AUR versus UPT. The buildup to get to that ticket. And then I'm curious what sort of price increases were taken in the third quarter and relative to the costs that were running through the P&L, I know you brought in some inventory early, so I'm wondering if there was, like, a temporary mismatch between the prices that you took benefiting the gross margin versus how those tariff costs run through the P&L. And what is the dynamic for 4Q and even beyond as we look out to '26? Thanks. Steve Lawrence: Hey, thanks for the question, Paul. Carl and I will probably tag team this from an AUR perspective. Played out as we thought. AURs for the quarter were up mid to high single digits as we progressed through the quarter, which is what we had outlined on our last call. UPT was down mid-single digits. So we did see some trade-off between AUR and unit sales. As we progressed through the quarter in terms of pricing. We've talked about a lot of different ways we've been trying to raise AURs. A lot of that through clearance management, promotion management, and of course, the last resort was we did a little bit of that in the quarter, which resulted in higher margin. We do feel pretty good about where we sit from a pricing architecture perspective at this point in time. Heading into holiday. Carl Ford: So it played out about as we thought in terms of the flow through from a tariff perspective. I'll turn it over to Carl. Carl Ford: Yeah. So within that 170 basis points of gross margin, 120 basis points was growth related to merchandise margin. That's inclusive of the tariff burden. And then we got 30 basis points of freight good news and 20 of shrink. As it relates to the 120 basis points of merchandise margin growth, you're right. We're on weighted average cost. So to the extent that we're moving AURs up in anticipation of tickets positioning, you'll get a little bit of a bump associated with that in the initial quarter. We're beginning to see that as it relates to the fourth quarter, which is kind of the last part of yours. We've got the midpoint of our guidance at flat gross margin. And I think that's appropriate for the environment that we're in. Paul Lejuez: And just a follow-up. What price increases should we expect to see in the fourth quarter relative to the third? And will that be the peak of the price increases? Or did it get even higher as we look out to the first half? Steve Lawrence: Yeah. Our expectation from an AUR perspective is up high single to low double digits for Q4. We'd expect that to kind of plateau at that level and carry into Q1 and Q2 of next year. As we lap the accelerated tariffs in the back half of the year, so we're in at more of a flattish level. But certainly, what we're going to see for Q4, we think, will carry forward into Q1 and Q2. Paul Lejuez: Thank you, guys. Good luck. Operator: Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question. Simeon Gutman: Hi, good morning. This is Pedro on for Simeon. Thanks for taking our question. Nice job with the continued rollout of the Jordan brand. Can you give us some color on what the contribution looks like that you're seeing at the store level in terms of sales, margin, and what the continued rollout looks like next year? And as a follow-up, you've talked in the past about other brand partners, like Levi's, Adidas, Under Armour, you've mentioned. Can you give us an idea of the pipeline in terms of new or expanded collaborations with brand partners? Steve Lawrence: So I'll start with, yeah, we continue to be really pleased with the contribution that Jordan and increased access to a better Nike product has had on our stores. As we cited in the prepared remarks, if you combine those two brands, we don't have a last year for Jordan, right? But if you combine the two brands, they were up high single-digit comps. So that's pretty exciting considering Nike is our biggest brand already. So that's a meaningful contribution. We've rolled out elements to all stores, as we've noted in the prepared remarks. Things like cleats, slides, some sporting goods like basketballs and things like that. We're gonna roll more apparel and footwear out into more doors in spring. So we expect it to be a growth driver for us into next year as well. In terms of new brands, listen, it's not just about apparel and footwear. We're really focused on making sure we have a lot of new exciting things across the whole footprint. So some of the things we called out, when you look at what we've done with brands like Burlevo, we've rolled out other brands more deeply into the store, such as Birkenstock in footwear. We've got some new Hock trading cards that have come in. We've got a lot of new fun innovative brands that we brought in this year. We'll continue to do that. It's not just about apparel and footwear. It's looking for those things across the store. I think we're looking at, you know, not just tried and true brick and mortar brands, but things that are digitally native and looking for ways to partner with them and bring them into retail as well. Simeon Gutman: Great. Thank you, guys. Good luck. Thanks. Operator: Our next question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question. Christopher Horvers: Hi, everyone. This is Jolie on for Chris. Just following up on that Nike Expansion Jordan launch question. Since Academy is still negative, would it be fair to assume that the lift from that combined brand is less than you had originally expected? Considering I believe last quarter was meaningful double digit this quarter more high single digit, or is it more so that the consumer is just worse given broader macro trends and uncertainty? Steve Lawrence: Yeah. I would say it's meeting our expectations and doing better in some categories. So we're very, very pleased with how this is playing out for us. If you go back and look at the quarter, actually, if you take ammo out, we would have run a positive comp. I have a boss who, whenever I've said things like that in the past and I'd say, hey, if you take ammo out, we run a positive comp. He would say, well, yeah, if you take the Eagles out of the Super Bowl last year, the Chiefs would have won five Super Bowls. So we try not to do that too often, but generally, we were pretty pleased with the performance of all the different categories. All categories ran an increase last quarter. Ammo was probably the one drag, and that's really, we believe, a reflection of anniversarying the run-up to the election. Last year, we saw a big surge in demand, and we noted in the prepared comments, once we got past that in November, we saw the ammo business stabilize. So I feel like the initiative is playing out as we thought. We're seeing acceleration in our .com business, acceleration in our new store business. You know, really was. Ammo was the drag. Christopher Horvers: That makes sense. And our follow-up question is on the implied four comp guide. Our math, we're getting about a down 3.5% to an up 3.5%, which is a wide range for the fourth quarter. So we were curious why the range is so wide and what the puts and takes are of hitting the high and low end. Carl Ford: It is a wide range. You know, we're not national. We've got some localized stuff that's going on from a weather perspective. The midpoint of the guidance is flat. And Jolie, your ranges are about right. From a puts and takes standpoint, look. AURs are elevated. Like, that's a load on the consumer. The price of poker has gone up with tariffs. And so what we're seeing is that the AUR is largely offset with unitary degradation, whether in the form of traffic or UPTs. And so the downside implies that that worsens, and the upside is basically just how the consumer responds to that. So that's really the difference between the high and the low is the unitary offset of AURs going up. Christopher Horvers: Great. Thank you. Operator: Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question. Emily Ghosh: This is Emily Ghosh on for Kate. We were wondering how would you characterize the health of the Academy customer and how does the level of trade-in that you saw again from upper-income customers compare to what you saw in the second quarter? Steve Lawrence: Yes. So I think that's an interesting question. I think there's a lot of talk out there amongst different pundits around this K-shaped economy. I believe that that's a real thing. I think that at the high end, we're seeing continued growth with consumers making over $100,000 a year annually. We saw that growth continue into this quarter being in the high single digits. As we noted in the prepared remarks, that's a little lower than we saw in Q2 and Q1 where it was up in the double-digit range. But that being said, we're starting to lap that trend that we started to see happen a year ago. So we're pleased we're continuing to see it build on top of double-digit growth from last year. The middle-income consumer continues to be fairly steady and shopping pretty regularly. And then the lower-income consumer continues to pull back and be very thoughtful about where they're shopping. And so we've seen declines there in the mid-single digits. That being said, that trend also got better where it was in Q2 and Q1. So we're adding more customers in at the top end faster than we're treading at the low end. That being said, like all the shoppers to come shop with us this holiday and we've got great deals and great values to try to attract them. But certainly, the lower-end consumer continues to be under pressures with inflation and what's going on in the economy. Carl Ford: We talked a little bit, Emily, about this on the last call, but if I think about the last year at Academy, I think there's been an exceptional derisking of the consumer portfolio. And by that, I mean, look, we don't want people who make below 50,000 quintiles one and two to stop shopping with us. But I think not just the academy, but overall prices in the marketplace have gone up. And in some cases, they've just, you know, they're not shopping in the category anymore. You think about that being more than offset with households that make over 100,000, if I compare the average customer now versus a year ago, they're significantly healthier. But I think it's because of the trade into Academy in those quintiles four and five. Emily Ghosh: Thank you. Operator: Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question. Adam: Yes. Hey, guys. Good morning. It's Adam on for Ike. Two questions, one, on the really strong e-commerce results. Help us understand if that was in line with your thinking, if better than what you're thinking. And if that's the case, maybe how that could impact sort of your thinking on new stores in those new markets going forward, right? Is it more maybe of fill-in and then use e-com to drive that area, and maybe make it more profitable earlier than expected? And then secondly, also on stores, just with the pivot back to existing markets next year more so than this year. Help us understand maybe, like, the cost of a store in a new market versus an existing market. Steve Lawrence: Yes. This is Steve. We'll probably tag team this one. I would say the .com business being up 22% was above, you know, where we planned it. I think the team's done a really, really good job there. I love to point to one thing that's driving it. I think it's a combination of all the efforts the team has made over the past year in terms of improving navigation and filtering the product site functionality and search, more personalized experiences, expanded assortment options through dropship. It's all that work that's really helped. And as we said, there's definitely a symbiotic relationship between adding a new store into the market and then us seeing a surge in .com demand. We build brand awareness in that new market. So we expect that to continue as we move into new markets. Pivoting to kind of the mix between existing and new markets, we're going to move back next year to about eighty-twenty new and existing. So if you look at it, legacy and existing, I'm sorry, would be about 8%. New will be 20. What we found as we've been going on this journey is that opening up and primarily focused on new markets has been a lot of population growth in our core legacy markets. As a matter of fact, there's a stat we're looking at the other day that I think over a third of all commercial real estate being developed in the US is in Texas right now. And so we've got a lot more opportunity than maybe we initially thought to open up stores in kind of our legacy footprint. We tend to find those stores more in those midsized markets where our Always Game family lives. And they're a little underserved in terms of other retail outlets. And so we think that's a really big opportunity for us. In terms of the economics of the new stores opening up in a new market versus an existing market. Carl Ford: Yeah. I think from a build-out standpoint, we're still at the 4 to $5 million, and that's all in. That's inclusive of net inventory. You know, as I think about the run cost, from a brand awareness standpoint, the brand awareness within our legacy or existing footprint around Academy is exceptionally high. And so I think from a marketing standpoint, we're not gonna have to introduce the brand as much as I think about, you know, some of the new states that we've opened over the last two or three years. I think from a rent perspective, you know, rents are going up in the US as we look at some of these small to midsized marketplaces. Really attractive rents and landlords and municipalities that really want us there. So I think the overall ROIC proposition and payback period would be better as it relates to legacy and existing marketplaces. But with that being said, not gonna stop planting seeds and growing the brand. We're just seeing some really compelling opportunities within our space. And I do wanna just speak directly to cannibalization. We're seeing very low levels of cannibalization when we look at our pro formas at how these stores will operate. You know, we look at drive times to existing stores if it's an hour away. There's gonna be some level of overlap. We model that in the NetROIC and we're actually pretty pleased. I think some of that is because of the population demographics that Steve spoke to. Adam: That's great, guys. I appreciate it. Thank you so much. Steve Lawrence: Thank you. Operator: Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question. Dan Silverstein: Hi. Good morning. This is Dan Silverstein on for Michael. So much for taking our question. Maybe just to start, merchandise margins up 120 basis points in 3Q, inventory units sound like they're in a healthy position. What are the potential pressure points for the fourth quarter gross margin outlook? Steve Lawrence: I think it comes down to just the health of the consumer, right? You know, they're, you know, I think the word everybody's using is choiceful. And so what we've seen is that that is really demonstrated by the customer coming out when promotions are happening and pulling back when they're not aggregating sales around promotions. And that's really what's going to drive it, right? At the end of the day, it's going to be got a lot of thoughtful promotions we've built out there that hopefully will resonate with the consumer. But I think the biggest wildcard will be how they react to those promotions and what's the take rate on those as we progress throughout the holiday. I think we're in a pretty good place from a seasonal perspective. We really don't think there's gonna be a big seasonal liability. Carryover from that perspective. But I think it's more just the customer's appetite to buy and how much they buy a promotion. Dan Silverstein: Very helpful. And then just our follow-up. As your recent vintages of store openings have continued to get more productive, does this help provide a floor for what you think is achievable from a perspective next year? I think you cited, you know, a high single-digit comp for those recent store openings, a very healthy level. So just wondering how that evolves from here. Carl Ford: Yeah. I'm very fired up about how the new stores are performing. I think we have a high degree of precision of how year one will come out, based off of whether there's market awareness. And that 12 to $16 million is playing out kinda like we thought. As it relates to high single-digit comp once they're in the base. And we treat things that once they're on the fourteenth month, they fall into the comp set. Something that I think is really meaningful, there's 26 stores in the third quarter that are in that comp set and it provided about a 50 basis point comp tailwind if you think about it from a waterfall standpoint. We'll have 50 stores this time, this year that are in that comp base. So I think the things that you guys have seen in the marketplace and we've seen in the as it relates to building up that retail pipeline, gonna play out that way here, and I think we'll like the way that that matures long term. Dan Silverstein: Thank you so much. Operator: Our next question comes from the line of Robbie Ohmes with Bank of America. Please proceed with your question. Maddie Check: Hi. This is Maddie Check on for Robbie Ohmes. Thanks for taking our questions. I just wanted to ask how Black Friday promos compared to last year. And what's the risk that you need to be more promotional later in the quarter based on what happens in retail overall? And given Foot Locker's stance to be more aggressive with clearance this holiday in footwear? Steve Lawrence: Yes. I would say promos were roughly in line with where they were last year for Black Friday. Things we've looked at as we've been trying to look at raising AURs is how do we promote, how broad is that promotion, how long do we run it. But if you look at the absolute level of promos for us, and it looks like across the industry, I would say fairly consistent with last year. I think as we go through the holiday, I think the wildcard continues to be, as I said earlier, just what is the customer's take rate on those promos? What we've seen happen a lot this, you know, in Q3 and in Q4 is if we run the same promotion as we did a year ago, same level, etcetera, customers are taking advantage of that. So I think that's going to be a thing that we're going to see continue as we make our way through the rest of the holiday. In terms of Foot Locker promotions, I would tell you our assortment versus theirs. There's not much overlap. They certainly, you know, they carry Jordan a lot of basketball shoes. We tend to be more game shoes. They tend to be more limited edition releases and things like that. So we don't expect that to have a big impact on us. Certainly, that's a more mall-based customer. Most of our stores are off-mall. So I don't think it's going to have a lot of impact on us. Maddie Check: Thank you. Appreciate it. And can you talk about where you're raising price within your assortment versus where you might have seen some unit degradation? Steve Lawrence: Let's say, in general, prices have gone up a little bit almost across the board. Certainly, it's more pronounced in the hardgoods side of the business than the apparel side of the business based on where that sourcing base is. But once again, as we're looking at raising AURs or multiple packages, we're looking at, right? Step one is being better in how we manage clearance. And so taking less good clearance and being more thoughtful about when and how we clear goods. We're looking at promotions. In a lot of cases, maybe shortening the length of promotions or maybe not being as broad including everything within a brand. Maybe it's just key categories. In some cases, it may be reducing the depth of promotions. And so we look at all those things first. And then the last thing we try to look at would be actually physically raising prices, you know, the tickets on goods. Certainly, some of that's happened as the national brands have passed on price increases and raised their MSRP's. We've tried to keep them lockstep with that with our private brands. But I would say it's pretty broad-based. It's not any one area, but it's more pronounced in the hardgoods side of the business. Maddie Check: Understood. Thank you. Operator: Our next question comes from the line of John Heinbockel with Guggenheim. Please proceed with your question. John Heinbockel: I wanted to start with year two and year three comps on the new stores. How much do they tick down from high single digit at all? I don't know if they kinda land mid-single digit. You know? And if I think about the traffic ticket composition of that, how does that look? Right, in those new stores? And then, you know, clearly World Cup will be a positive next year. You know, how significant do you think that is? Obviously, that's something you can lean into, I would imagine, pretty hard. Steve Lawrence: I think we'll tag team this one. I'll take the World Cup piece of it first. Yeah. Listen. I think it's gonna be significant. Right? We have a lot of games and matches that are gonna be played within our footprint between Dallas and Houston. We already have some World Cup jerseys on the floor as well as the soccer ball, the try on the soccer ball at various levels. And the initial reads on both are very, very good. I think we're excited about it. We're not going to give guidance next year, but certainly, we think it could be a tailwind for us through the summer months as the World Cup plays out. But really what we think is that the impact would be more long-lasting than that. You know, the last time the World Cup was in the United States, the real benefit was not the actual bump you got from tourism or selling jerseys. It was participation in soccer after the fact. And we really think that's going to provide a big tailwind for the soccer business for us. Many years to come, not only in 'twenty-six, but 'twenty-seven, and 'twenty-eight. Carl Ford: Yeah. And, John, as it relates to the kind of the year two comp, the only thing that I would call out as being a bit different is that fourteenth month tends to be a negative comp. So there's still some grand opening anniversarying and some marketing hoopla and, you know, the neatness of having a new store in my location, you know, drives a lot of activity. They positive comp in their first quarter, but that first month is a little bit different. And then as it relates to year two and year three, we're seeing pretty good strength across the board associated with that. I think the only thing to call out there would literally be that fourteenth month just tends to be negative. John Heinbockel: Alright. And my follow-up when you look at, you know, population growth in a lot of your markets, Florida looks incredibly underdeveloped. You know, what's your thought when you kinda do your long-term real estate plan on that state? And, you know, is there, you know, is real estate availability cost? Is there anything holding that back or, you know, or just that's kinda how the availability has fallen? Carl Ford: I love the Florida marketplace. I think it plays out exceptionally well associated with our fishing assortment. I think the demographics of the state line up pretty well with getting outside and having fun. The one thing I would call out is the state is proud of the land, and they're proud of the rents that they charge in some of these locations. We're committed to having an ROIC of 20% and a four-year payback. I think we're very selective associated with where we go in. And we love to partner with landlords who wanna make that work our while. But I love the demographics. I love the people that are moving to the state of Florida. I just we gotta make sure it's a win-win opportunity, and we don't degradate the ROIC of the company associated with where we put stores. Steve Lawrence: Just to be clear, we're talking about 80% of the new stores next year kind of in legacy and existing markets. Florida will be an existing market for us. And we think that there's a lot of opportunity, particularly in these middle-sized markets with underserved consumers there. We think that that definitely aligns with who our customer is you're going to continue to see us grow in Florida. John Heinbockel: Thank you. Carl Ford: Thank you. Operator: Our next question comes from the line of Anna Gluskin with B. Riley. Please proceed with your question. Anna Gluskin: Hey, good morning. Thanks for taking my question. I'd like to turn back to the ammunition commentary. You know, I believe that ammo and firearm together are less than 10% of sales. So surprised by the magnitude of impact that, I guess, ammo had on the quarter. So maybe if you could expand on that, maybe there's a seasonal aspect because 3Q captures the hunt season. And then secondly, as we've seen some stabilization in ammo post-election, is it possible at this new stable level but still negative you can drive a positive comp? Thanks. Steve Lawrence: Yes, absolutely. So you're right. We've cited in the past that firearms combined are about 10% of the business. So you can assume ammo is roughly five. It does, at certain time periods, have an outsized impact. What we attribute the sluggishness or slowness we saw in the ammo sales in Q3 was really a reflection on the election runoff from a year ago. If you go back and this is something we see traditionally in front of a lot of different presidential elections, there's a run-up in advance of that as people are trying to better figure out what's happening one way or the other in terms of who's going to get elected. And we saw that right at the October. And so as we came up against that, it certainly put us in a place where we're having a hard time comping those comps. We did see it stabilize as we got past that time period, which leads us to believe it was really the election run-up that was driving that. Yeah, we do believe that, you know, ammo, if it can run even, you know, where it is today in mid-single or actually it's high single digits negative right now. We should be able to post comps if we can keep it at that level. Only when it starts running much more negative than that becomes a bigger headwind. Carl Ford: And I wanna be real specific. Ammo in the third quarter was a negative 130 basis points headwind to comp. So if you bump that up against our negative 90 basis points, we would have been plus 40 without it. And for all the reasons that Steve just said. Anna Gluskin: That's super helpful. Thanks, guys. Thank you. Operator: Our next question comes from the line of Joseph Savella with Truist. Please proceed with your question. Joseph Savella: Hey, guys. Thanks so much for taking my questions. First off, how should we be thinking about the potential growth contribution from Nike and Jordan in '26 versus 2025? I know you'd be lapping a tougher brand-specific comp, but offsetting that you'll have a broader assortment for the full year. Incremental doors, and the World Cup. Steve Lawrence: Yeah. So I would tell you that I think depending upon the quarter we've seen the combined Nike Jordan grow in the high single to low double digits. I think you should expect that, and we expect that to happen again next year. Based off of further rollout of Jordan and More Doors and continued access and rollout of more fashion products within Nike. It's gonna be a growth driver for us somewhat what we saw this year. Joseph Savella: Got it. Thanks. And then also, can you just give any color on the margin benefits you're seeing from the inventory pulled forward prior to tariffs? Steve Lawrence: Yeah. I mean, what I wouldn't say we've seen a huge margin benefit from it. What I would tell you is that it's allowed us to hold pricing on a lot of categories going through holiday. The goal was when we first learned of these accelerated tariffs is we were looking at it saying, okay, there's a lot of inventory on this side of the water. At those pre-accelerated tariff prices. If we can pull those into our warehouses and DCs, that should allow us to be priced at last year's level, a lot of these items going into holiday and we think that would give us an advantage and that's how we planned it out. So we really see it as a huge margin uptick. We saw it more as a way to protect sales and to offer value to the consumer going through holiday. Carl Ford: I just I do wanna echo, it was sweaty knuckles in the first part of the year with that M pull forward. I think our units per store were up 6.5% in the first quarter, like 4.5% in the second quarter. Now they're down 0.3%. We have no regrets associated with that pull forward as we do our pricing scrapes to look at how like-to-like product or similar private brand products are selling. We feel really good about our ability to hold that inventory to lower cost and offer that to our consumers, and that's resonating from a value perspective. Joseph Savella: Got it. Thanks so much. Operator: Our next question comes from the line of Adrian Yee with Barclays. Please proceed with your question. Angus Kelleher: Hi. This is Angus Kelleher on for Adrian Yee. I wanted to ask about the percent of product price increases implemented in fall 2025 and expected price increases for spring 2026. And then just curious since you cited AUR running mid-high single digits and transactions down 4%, where are you seeing the elasticity thresholds by category? Steve Lawrence: So if I understand your question correctly, you're asking around prices and AUR increases. As we said earlier, our AUR increases in Q2 were up mid-single digits. We expected Q3 to be up mid to high single digits. That's exactly what we saw. That's a combination of some price increases as well as promotional rationalization and better clearance management. We expect those to be up, AURs to be up high single low double digits in Q4 hold through Q1 and Q2 of next year. I don't see that necessarily changing. The question we got around elasticity was, you know, what were we seeing from a UPT perspective? We saw UPTs be down about mid-single digits. We saw AURs in the quarter up mid to high single digits. So it's almost a one-to-one offset. It really varies by category. We've got some categories in front end where, you know, I would say that it's been, you know, fairly inelastic. We've taken prices up and there's been no resistance to that. I think if a customer is standing in line and wants a bottle of water, they're going to buy a bottle of water even if it costs $0.10 more. On the flip side, we've seen other categories that are highly elastic based on the pricing increases. So it's not a one-size-fits-all. It really varies by category. Carl Ford: Angus, one thing I would add to that is changing prices is very disruptive on the store floor, and it's very disruptive in a distribution center. And so, how we thought about it is we wanna go ahead and make those price changes and not have that be a perpetual activity. Nobody knows what tariffs are gonna know, what's gonna come out, but we've made those price changes and they're costly to do on the floor. So our goal in all of the actions we've talked about with growing AUR, the last of which is changing tickets. You know, we feel that, if there's no significant changes to the tariff structure, we've set the reset the floor, reset the inventory and the distribution center so we can run a little bit more efficiently next year. Angus Kelleher: That's great color. Thank you. Steve Lawrence: Thank you. Operator: Our next question comes from the line of Justin Kleber with Baird. Please proceed with your question. Zach: Hey, good morning. This is Zach back on for Justin. Thank you for taking our questions. A couple on modeling. Q4 guidance seems to imply SG&A dollars are below Q3. Is unlike the normal sequential trend in your SG&A. So what is driving the lower SG&A figure in Q4? And how sustainable is this dynamic as you think about the shape of dollar growth next year? And then, Carl, you mentioned resuming buybacks in Q4. Guidance implies a good free cash flow quarter. Can you maybe just size how this buyback plan compares to what you did in Q1? Thank you. Carl Ford: Yes. From an SG&A standpoint, at the midpoint, you know, it's basically a 100 basis points of leverage. I don't have an SG&A going down, but it's close. I think some of the things that we're focused on is we've been you were kinda comparing it not to last year, but to the third quarter. There's price changes that are going on. I will tell you, last year in the fourth quarter, we had a sale-leaseback of a property. We always have first right of refusals on our leases and in some cases, landlords are looking to not be landlords and sell to another landlord. So in some cases, we'll step into that. That's a component of it. But I would just say overall, the team's set up to run efficiently. We've gotten rid of taking a bunch of price changes. We're not trying to do those in November and December. So there's some good news there. From a buybacks perspective, while my words said that we weren't gonna get back at it, I do wanna highlight that the guidance that we put out there does not have buybacks embedded in it. As it relates to capital allocation philosophy, first, it's stability, hold cash, have the ABL. Second is to invest in ourselves. And I would include, you know, inventory management in that category. And then third is to give the rest back to shareholders with a nominal dividend and buybacks. I think from an order of magnitude standpoint, not gonna get into the specifics since it's not included in the guidance, but we think our stock is attractively priced and we do cash flow well. Zach: Great. Thanks, Carl. I'll pass it on. Operator: Our next question comes from the line of Eric Cohen with Gordon Haskett. Please proceed with your question. Eric Cohen: Hi, thanks for taking the question. I wanna ask about the income cohort because I calls had said that it was a sort of 30 a third, third, a third breakdown of the high middle low income. And say you said if the high income is now 40%, so what do you think you can do to keep that higher income consumer since it seems to have a comp benefit? Do you think this is just a natural structural change in the customer base, or is this more of just higher income consumers are trading down and the lower income consumers just under pressure? Steve Lawrence: Yes. I think it's a combination of both, Eric. I think that if you look at it, the reason we cited that, that 40%, because that's a pretty meaningful change for us. On the third, a third, third, and we've seen that happen over the past four quarters. So I wanted to call that out. I think what's driving that is two things. Number one, I do think that the higher income consumer is looking for value and I think in some cases, we are the value leader in the space, and they're finding us and discovering us. I think it's second to work we've done around the assortment. You know, if you think about where we are today versus where we were even four or five years ago in terms of layering on better best brands across the category. That could be baseball bats, North $100 or running shoes north of $100. I think we're in a different place today. So I think that the work the merchants have done around building out that better best assortment adding brands like Jordan or Burlevo or Turtlebox or Ray-Ban Meadows, all those things, I think, give that customer a reason to come shop with us and permission to continue to shop with us. And we're not gonna stop assorting those brands. Right? We're gonna continue to look to build those. That doesn't mean we've lost focus on the value end of our assortment either, but we see this as additive. And so I think if we continue to do this work, bringing in new innovative brands, I think we'll keep that customer shopping with us. Continue to grow share there. Eric Cohen: Great. And you called for twenty twenty-five stores next year. I thought the messaging earlier was that store growth should be accelerating sequentially each year. So is this any change in sort of how you're thinking about store growth going forward, or is this 2025 sort of the right run rate in '26 and beyond? Steve Lawrence: Yeah. I think what we're focused on each year is coming up with a list of new stores and locations that we feel really confident about. If you remember, we said about midway through the year that we were kind of pausing new stores and weren't giving a lot of guidance around what we're doing in Q1 because we wanted to see how the tariffs played out. We feel really good about the 20 to 25 stores we've identified for next year. We feel really good about the pipeline we're building. Share more information in our next call around 2026 guidance. And then we're looking to do an analyst day probably somewhere in early April. We'll share more details around what the long-range plan in terms of store growth looks like. Eric Cohen: Sounds good. Appreciate the color. Operator: Thank you. Our final question comes from the line of Christina Fernandez with Telsey Advisory Group. Please proceed with your question. Christina Fernandez: Hi. Good morning. I wanted to ask about the high-income consumer that's coming to Academy. Do you have a sense of where they previously shopped or where those market shares, gains are coming from? And then my second question is around private brands. How are those performing, and do you see are you seeing consumers trade into or trade down to private brands as pricing has increased for national brands? Carl Ford: Yeah. On the income cohort standpoint, you know, I can't speak to specific nameplates that they're coming from. A lot of this information is in our CDP. And in that case, I don't see where they're coming from. Our customer database platform as it relates to Placer, we're big users of placer.ai, I can see, you know, shift. I would say generally speaking, they're seeking value. Look. They can't afford their lifestyle. They're seeing value offered at Academy. And they're intrigued by some new brand launches and new brands that we have. Steve Lawrence: I would say that when they come in, you know, our private brands represent probably our best expression of value to our consumer. We're seeing them trade into those brands. I mean, we talked about the strength we saw in Magellan during the quarter or Freely. I think that's a direct result of this customer coming in maybe shopping for something that they've got in another store and thinking we have a better price on it. Then trading into one of our private brands. That's definitely the behavior we're seeing happen right now. Christina Fernandez: Thank you. Operator: I'd like to turn the floor back to you for closing comments. Steve Lawrence: I was taking it over before you're gonna turn it over to me. So we're proud to close out this year by giving back to communities across our footprint. Throughout this holiday season, we've hosted more than 40 local giveback events, partnered with local organizations, and gifted $120,000 directly to families in need. Inviting our company's commitment to making a positive impact on our communities. I'd also like to express gratitude to our 22,000 plus associates who work tirelessly to provide our customers with an outstanding experience when they shop at Academy. As I mentioned earlier, while we are now past the Thanksgiving kickoff of the season, we still have the lion's share of the holiday business ahead of us. Having been in a lot of stores over the last month, I can honestly tell you that I feel we're in the best position we've been in since I joined the company. Take care of our customers' holiday needs. With a strong inventory position in the most desirable and trend-right gift ideas, our associates are ready to help the customer. And our position as the value leader in the space is clearly resonating with consumers. Before I sign off, we're also excited to announce we'll be hosting an analyst event in New York on April 7. Provide an update on our long-range plan that will be webcast to the public. In addition to Carl and myself, we'll be joined by other members of the executive team so you can hear directly from the people executing all the initiatives you've been hearing about over the past year. Thank you all for joining our call today, and have a very happy holiday season. Operator: The call is now concluded. You may now disconnect. Thank you.
Operator: Good day, everyone, and welcome to AutoZone, Inc.'s 2026 Q1 Earnings Release Conference Call. At this time, all participants are placed on a listen-only mode. We will open the floor for your questions and comments after the presentation. At this time, the company would like to provide its forward-looking statement. Philip Daniele: Before we begin, please note that today's call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-Ks and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release. Operator: Good morning. And thank you for joining us today for AutoZone, Inc.'s 2026 first quarter conference call. Philip Daniele: With me today are Jamere Jackson, Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Jamere Jackson: Regarding the first quarter, I hope you had an opportunity to read our press release and learn about the quarter's results. If not, the press release along with slides complementing our comments today are available on our website at www.autozone.com under the 130,000 AutoZoners across the company for their commitment to delivering on our pledge to always put customers first. Our decision-making process starts with asking the question, what is right for the customer? We strive to deliver on our commitment of providing wow customer service, and it's our AutoZoners across our stores supply chain who deliver on this commitment every day. Driving our results and our continued success. To start this morning, I'll address our sales results and talk about our new store openings for the quarter. I'll discuss both domestic and international results and break our sales results down between traffic and ticket growth comparisons to address what inflation has meant to both our ticket growth and our sales growth. I'll also address regional disparities where they exist. And finally, I'll address our outlook and how we expect the year to unfold. For the quarter, our total sales grew 8.2%, while earnings per share decreased 4.6%. Additionally, I want to point out that this year's gross margin operating profit, and earnings per share were negatively impacted by a noncash $98 million LIFO charge which had a material impact on our margins and EPS. Excluding this LIFO charge, our EPS would have been up 8.9% versus last year's Q1. We also delivered a positive 4.7% total same-store sales on a constant currency basis with domestic same-store sales growth of 4.8%. Our domestic DIY same-store sales growth grew 1.5%, while our domestic commercial sales grew up 14.5% versus last year's Q1 and up sequentially from 12.5% on a sixteen-week basis in the fourth quarter of last year. Our focus is on improving execution, expanding parts availability, and improving the speed of delivery. We are pleased with our results thus far. International same-store sales were up 3.7% on a constant currency basis. Our unadjusted international comp was up 11.2%. This was the first quarter since Q3 '24 where FX rates were favorable to our operating profit and EPS. Jamere will provide more color for you on our foreign currency impact on our financial results for both this past quarter and the upcoming second quarter later on this call. With over 7,700 stores across the three countries, our business is getting more global each day. We finished the quarter with 6,666 US stores, 895 Mexico stores, and 147 Brazil stores. We opened 53 stores globally this past quarter versus 34 in last year's first quarter. This kind of first-quarter growth is at near record for any first-quarter store openings in our history and indicative of our commitment to accelerate our store growth. We are very excited about the pace of these openings and we know that this pace will drive future earnings growth globally. Next, let me address our sales results in a little more detail. Coming into the quarter, we were optimistic that our improved execution would drive sales growth for both retail and commercial. More specifically, we felt the momentum we gained over the last three quarters with our domestic commercial sales would continue this quarter. We are very pleased that our domestic commercial sales accelerated again this quarter to 14.5%. This marked an acceleration from our commercial sales growth on a two-year and a three-year basis. Additionally, the domestic retail comp performed well, up 1.5% but slowed slightly from last quarter's 2.2%. Finally, our international constant currency comp was up 3.7% for the quarter and performed slightly better on a two-year basis than last quarter's result. We are encouraged by our continued improved sales results and the way we finished the quarter gives us confidence in our sales outlook for the remainder of our fiscal year 2026. Next, I'll discuss the quarter's sales cadence. Regarding our 4.8% quarterly domestic sales, same-store sales. The cadence was 5.5% in our first four weeks positive 3.5% in our second four weeks, and positive 5.5 over the last four-week period in the quarter. We attribute the weakness in the middle four-week segment to weather in the month of October was not as favorable as last year. In a select group of markets. Last year, we experienced much colder weather in a subset of markets. And this year that did not repeat. Which resulted in fewer winter-related parts sales than normal. While it got colder in the last four-week segment, it was not until November when we began to get the usual cold winter weather. Also, in a subset of markets in the Southeast, where hurricanes occurred last year, our sales were weaker than last year. Hurricanes drive sales after the storms and during the cleanup period. And without those storms this year our sales in some markets were lower. Let me make a few comments on our domestic DIY business. Regarding our plus 1.5% DIY comp for the quarter, we experienced a positive 2.1% in the first four-week segment, a flat DIY comp in the second segment, and a plus 2.3 comp during the third segment. Our merchandise categories performed as we would have expected, but less favorable weather comparisons in certain regions definitely impacted our results. More specifically, sales in the northern half of the country outperformed our markets in the Southern Half Of The United States. With regard to inflation's impact on DIY sales, we saw like-for-like same SKU inflation up approximately 4.8% for the quarter the same with our DIY average ticket that was up 4.8%. Operator: Based on our inflation expectations, we continue to Jamere Jackson: expect our average ticket to grow sequentially through the third fiscal quarter which ends in May. During the fourth quarter, will begin to lap the increases in inflation we saw in this past year's fourth quarter. We also saw DIY traffic down 3.4% as traffic was roughly two x down roughly two x in the middle four-week segment versus the first four weeks. And the last four weeks due to the weather comparisons and positive impacts from hurricanes in those same markets. We are encouraged by our most recent trends and we expect our DIY business to remain resilient in this environment. Next, I will touch on our domestic commercial business. As I mentioned, our commercial sales were up 14.5% for the quarter. The first four weeks grew 15.2%. The second four-week segment grew 13.8% and the third four-week segment grew 14.6%. As with DIY, our commercial sales were impacted during the middle four-week segment due to the weather comparisons to last year. Our commercial results have been boosted by our improved inventory satellite store investments and availability, significant improvements in our hub and mega hub coverage, and continued strength of our DuraLast brand and execution on our initiatives to improve speed of delivery and customer service. These initiatives are delivering share gains and give us confidence as we move further into FY 2026. Year-over-year inflation on a like-for-like same SKU basis for commercial business was up 6% and grew similarly to our average ticket growth of 6.1%. Lastly, we are very pleased with the growth in our commercial transactions with traffic up 5.9% on a same-store basis we continue to grow market share. Our future sales growth will be driven by share gains, and an expectation that like-for-like retail SKU inflation will continue as we move forward. As I said earlier, we opened a total of 39 net domestic stores and 14 stores in our international markets. And we remain committed to more aggressively opening satellite stores, hub and mega hub stores. Hubs and mega hubs comps results continue to grow faster than the balance of the chain, and we are going to continue to aggressively deploy these assets. For FY '26, we expect to continue to open stores in an accelerated pace and Jamere will share more on our new store development progress in a moment. Overall, we are encouraged with our sales performance this quarter. We believe we are positioned well for growth in FY 2026 and we expect both DIY and commercial sales trends to remain solid. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Now let me take a moment to discuss our international business. Across Mexico and Brazil, we now have 1,044 international stores. As I mentioned, our same-store sales grew 3.7% on a constant currency basis behind a softer macro environment in Mexico. While we are continuing to gain market share, the economy is experiencing slower growth. As the economy improves, we expect our sales to reaccelerate as we continue to invest in our new stores and distribution centers. Today, we have almost 14% of our total store base outside of The US and we expect this number to grow as we accelerate our international store openings. In summary, we have continued to invest capital in opening new stores, driving traffic and sales growth. While there will always be tailwinds and headwinds in any quarter's results, what has been consistent is our focus on delivering sustainable long-term results. We continue to invest in improving product assortments in stores and online improving efficiency in our supply chain which positions us well for future growth. We are investing both CapEx and operating expense to capitalize on these opportunities. This year, we are investing nearly $1.6 billion in CapEx to drive our strategic growth priorities, and we expect to invest a similar amount next year. The majority of our investments will be in accelerated store growth, including hubs and mega hubs, that place more inventory closer to our customers. Are also investing in two new distribution centers one in Mexico and one in Brazil. All while continuing to invest in technology to improve customer service and our AutoZoners' ability to execute on our promise of wow customer service, and delivering trustworthy advice. This is the right time to invest in our business as we believe industry demand will continue to remain strong and we have the ability to grow market share. Now I'll turn the call over to Jamere Jackson. Phil, and good morning, everyone. Jamere Jackson: Our operating results remained strong for the quarter and were highlighted by solid top-line revenue. Total sales were $4.6 billion and up 8.2% versus Q1 of last year. Our domestic same-store sales grew 4.8%, and our international comp was up 3.7% on a constant currency basis. Total company EBIT was down 6.8%, and our EPS was down 4.6%. As Phil stated earlier, excluding our noncash $98 million LIFO charge, EBIT would have grown 4.9% and EPS would have been up 8.9%. Foreign exchange rates positively impacted our results for the quarter. For Mexico, the peso strengthened just over 6% versus the US dollar for the quarter, resulting in a $37 million tailwind to sales. And $11 million tailwind to EBIT and a 44¢ a share benefit to EPS versus the prior year. We continue to be proud of our results as the efforts of our AutoZoners and our stores and distribution centers have enabled us to continue to grow our business. Me take a few moments to elaborate on the specifics of In our p and l for Q1. First, I'll provide a little more color on sales and our growth initiatives, starting with our domestic commercial business for the quarter. Our domestic DIFM sales were $1.3 billion, up 14.5%. For the quarter, our domestic commercial sales represented 32% of our domestic auto part sales, and 28% of our total company sales. Our average weekly sales per program were $17,500, up 10% versus last year. Our commercial acceleration initiatives are continuing to deliver strong results as we grow share by winning new business increasing our share of wallet with existing customers. We have a commercial program in approximately 93% of our domestic stores, which leverages our DIY infrastructure. And we're building our business with national, regional, and local accounts. This quarter, we opened 84 net new programs finishing with 6,182 total programs. We plan to aggressively pursue growing our share of wallet with existing customers and adding new customers. Mega Hub stores remain a key component of our current and future commercial growth. We opened four mega hubs and finished the quarter with a 137 mega hub stores. We expect to open at least 30 mega hub locations over the fiscal year, and our pipeline is exceptionally strong. As a reminder, our mega hubs typically carry over a 100,000 SKUs and drive a tremendous sales lift inside the store box, as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business. These larger stores give our customers access to thousands of additional parts across the market. While I mentioned a moment ago that our average commercial weekly sales per program grew 10%, the 137 mega hubs continue to drive growth at an even faster clip. We continue to target having approximately 300 mega hubs at full build out. Our customers are excited by our commercial offering. As we deploy more parts in local markets closer to the customers while improving our service levels. On the domestic retail side of our business, our DIY comp was up one and a half percent for the quarter, Our DIY share has remained strong behind our growth initiatives. We're well positioned for future growth. Importantly, the market is experiencing a growing and aging car park and a challenging new and used car sales market for our customers which continues to provide a tailwind for our business. These dynamics, ticket growth, growth initiatives, and macro car park tailwinds, we believe, will continue to drive a resilient DIY business environment for the remainder of FY twenty six. Now I'll say a few words regarding our international business. We to be pleased with the progress we're making in our international markets. During the quarter, we opened 12 new stores in Mexico to finish with a hundred and oh, with finished with eight hundred and ninety five stores. And two new stores in Brazil ending with a 149 stores. Our same store sales grew 3.7% on a constant currency basis and a positive 11.2% on an unadjusted basis. While sales growth has slowed over the last few quarters in Mexico, due to slower economic growth in the country, with con continued to grow our share we're well positioned when the economy improves. We remain committed to investing in international expansion, and we're pleased with our results in these markets as we accelerate the store opening pace. As we look ahead, we're bullish on international being an attractive and meaningful contributor to AutoZone's future sales and operating profit growth. Let me spend a few moments on the rest of the p and l and gross margins. For the quarter, our gross margin was 51%, down two zero three basis points versus last year. This quarter, we had a $98 million LIFO charge or 212 basis point unfavorable LIFO comparison to last year. Excluding the LIFO comparison, we had a nine basis point improvement to gross margin driven by margin actions, which offset a significant rate headwind from the shift to a faster growing commercial business. We anticipate continued benefits from merchandise margins next quarter that should help offset the rate headwind from accelerated commercial growth. I mentioned, we had a $98 million LIFO charge in Q1. We're planning a LIFO charge of $60 million for each of the next three quarters as we're continuing to experience higher costs due to tariffs, that impact our LIFO layers. Moving on to operating expenses. Our expenses were up 10.4% versus Q1 last year, as SG and A as a percentage of sales deleveraged 69 basis points. Driven by investments to support our growth initiatives. On a per store basis, our SG and A was up 5.8% compared to last quarter's 4.4% increase. The difference between per store growth and total SG and A growth is the accelerated new store count that we have driven over the last twelve months. We expect to continue to increase our new store opening pace through the end of fiscal twenty twenty eight when we reach a total of 500 stores open annually. In the spirit of transparency and to give investors the opportunity to ingest expectations as we grow store count faster than we have in recent history, we will give more color on SG and A growth and store counts. For Q2, we're assuming 65 to 70 store openings globally, virtually 45 last year. And for the full year, we expect to open 350 to 360 stores versus 304 net new stores open in FY '25. We've been purposefully investing in SG and A in order to capitalize on opportunities grow our business now and in the near future. These investments will also pay dividends in customer experience, speed of delivery, and productivity all of which will help us grow market share. For Q2, we expect SG and A to grow similar to the first quarter as the impact of new stores disproportionately impacts payroll, depreciation, and occupancy costs. Remain committed to being disciplined with our SG and A growth as we accelerate new stores mature, we will manage expenses in line with sales growth over time. Moving to the rest of the p and l, EBIT for the quarter was $784 million, down 6.8% versus the prior year. As I previously mentioned, a noncash LIFO charge reduced our EBIT by $98 million. Adjusting for the unfavorable LIFO comparison, our EBIT would have been up 4.9% versus the prior year. Interest expense for the quarter was a $106 million, down 1.3% from a year ago as our debt outstanding at the end of the quarter was $8.6 billion versus $9 billion a year ago. Planning interest in the $114 million range for the '26 versus a $109 million last year. For the quarter, our tax rate was 21.7%, down from last year's first quarter of 23% driven primarily by higher stock option expense benefit. This quarter's tax rate benefited a 186 basis points from stock options exercised while last year, it benefited 72 basis points. For the '25, we suggest investor investors model us at approximately 22.5%. Moving to net income and EPS. Net income for the quarter was $531 million down 6% versus last year Our diluted share count of 17,100,000.0 was one and a half percent lower than last year's first quarter. The combination of lower net income and lower share count drove earnings per share for the quarter To $31.04, down 4.6% versus last year's Q1. As a reminder, LIFO drove our EPS down $4.39 a share. Now let me talk about our free cash flow. For the quarter, we generated $630 million in free cash flow versus $565 million in Q1 last year. We expect to continue being an incredibly strong cash flow generator going forward and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished at two and a half times EBITDAR. Our inventory per store was up 9.1% versus Q1 last year while total inventory increased 13.9% over the same period last year, driven by new stores, additional inventory investment to support our growth initiatives, and inflation. Net inventory defined as merchandise inventories less accounts payable on a store basis, was a negative a $145,000 versus negative a $166,000 last year and negative a $131,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at a 115.6% versus last year's Q1 of a 119.5%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $431 million of AutoZone, Inc. stock in the quarter. And at quarter end, we had $1.7 billion remaining under our share buyback authorization. Our ongoing strong earnings, balance sheet, and powerful free cash generation allows us to return a significant amount of cash to our shareholders through our buyback program. We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998. While investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. To wrap up, we remain committed to driving long-term shareholder value investing in our growth initiatives, driving robust earnings in cash, and returning excess cash to our shareholders. Our strategy continues to work as we remain focused on gaining market share and improving our competitive positioning in a disciplined way. As we look forward to the rest of FY twenty six, we're bullish on our growth prospects behind a resilient domestic DIY business a faster growing domestic commercial business, and an international business that is continuing to grow share in a meaningful way. We continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders. Before handing the call back to Phil, I wanna remind you that we report revenue comps on accounts currency basis to reflect our operating performance. We generally don't take on transactional risks, so our results primarily reflect the translation impact for reporting purposes. As mentioned earlier, in the quarter, foreign currency resulted in a tailwind to revenue and EPS. If yesterday's spot rates held for Q2, then we expect an approximate $57 million benefit to revenue and $18 million benefit to EBIT and a 77¢ a share benefit Philip Daniele: to EPS. Jamere Jackson: And lastly, in Q2, we expect LIFO to reduce EBIT by approximately $60 million impact our gross margin rate by approximately a 140 basis points and our EPS by approximately $2.7 a share. And now I'll turn it back to Phil. Philip Daniele: Thank you, Jamere. We are excited to start the calendar of 2026. We have a lot to accomplish this fiscal year. We are committed to flawless execution and wisely spending our capital to drive growth and efficiency. We feel we are well positioned to grow sales across our domestic and our international store base with both our retail and our DIY customers. We expect to manage our gross margins effectively and grow our operating expense in line with an accelerated store opening assumption. We continue to put our capital to work where it will have the biggest impact on our sales and long-term profitability. That's our stores, our distribution centers, investing in technology to build a superior customer experience. The top focus areas for 2026 will be growing share in our domestic commercial business, and continuing our momentum in international. We are excited about what we can accomplish in the second quarter. But we understand that we cannot take things for granted. We must remain laser-focused on customer service, flawless execution, and gaining share in every market in which we operate. Fiscal twenty twenty six top operating priorities will continue to be based on improving execution and delivering Wow customer service. We will continue to invest in the following strategic projects. Remaining focused on driving DI, or do it yourself and commercial sales growth which we're which we are doing in a meaningful way. Ramping up our domestic and international store growth, drive our new and mega hub openings, and focus on optimizing our new distribution centers and our supply chain capabilities. We are excited about what we can accomplish in this new year, and our AutoZoners are well prepared to deliver on our commitments. We believe AutoZone, Inc.'s best days are ahead of us. Now we'd like to open up the call for questions. Operator: Certainly. Everyone at this time will be conducting a question and answer If you have any questions or comments, please press 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question and one follow-up, then reenter the queue. Once again, if you have any questions or comments, please press 1 on your phone. Your first question is coming from Brett Jeffries, excuse me, Bret Jordan from Jeffries. Your line is live. Bret Jordan: Hey. Good morning, guys. Philip Daniele: Good morning. Could you talk about the maturation schedule of the new Bret Jordan: stores now that it's become a very you know, I guess, a more significant item, you know, as as far as the ramp and then incremental investment that's required, I think you're talking about a couple of DCs internationally, but as far as domestic store growth, are there more DCs or accelerated hub expansion as you build this new store base? I mean, just sort of trying to think about some SG and A expense at the front, but when do we start getting the return? Jamere Jackson: Yeah. Thanks for your question, Bret. So, you know, typically, our new stores mature on about a four to five-year time frame, if you will. And, you know, we've seen this historically over time. And it's fairly predictable. Our teams do a great job of getting those assets into the market, and then building our business around them. You know, regarding SG and A, we had about two points of the growth in our SG and A that was related to new stores and the acceleration of our commercial programs. And you'll see this ramp you know, continue as we, peak at the 500 stores globally that we're expecting in in FY '28. You know, what has us excited is, you know, in in addition to the new satellite stores that we're building, we're also you know, building out our Mega Hub footprint, which, as we mentioned, is gonna grow to 300 mega hubs. We've got about a 100 of those in the pipeline today. And we feel very good about our execution there. So as we look at, you know, the way our our operating margins will progress know, between now and then, you'll see this roughly two points of of incremental SG and A associated with this, with this ramp, if you will. And then you'll see that sort of lop off, and and we'll return to the kind of operating margins that we that we have in the past. As it relates to investments, you know, obviously, we've been investing in distribution centers. We had a couple of new distribution centers that we put in over the last couple of years or so. Those have come online, and we're getting the productivity out of them. We're also investing in distribution centers in Mexico and and Brazil, and all of this will underpin the growth. So that two points of SG and A that I that I talked about you know, includes all the investments that we need to make you know, across the business. Philip Daniele: Maybe I'll add a little bit. Bret Jordan: To that. We, you know, we've we've talked a lot about Philip Daniele: this project we've had in place for several years now, which is supply chain 2030. Which is really looking at what did our supply chain need to look like to get us to these faster growing store numbers. Most of those investments in The US have already been in place. And stood up. Those two new DCs we opened up last year, There's also some new efficiency strategies built in those distribution centers as well as direct import facilities. In Mexico, we've talked about, we we opened up a new DC, and expanded one, and we're in the process of expanding our Monterey distribution center. To almost double the size. And that'll be open fully operational probably in March. And then we're bringing our distribution from third party to our own supply chain down in Brazil, which should help us for quite some time. So most of The US expansion is done It'll be about improving efficiencies. Mexico will be will be done you know, effectively in March or April. And and that'll take us for quite some time for the next couple years from the supply chain perspective. Bret Jordan: Okay. Great. Thank you. Philip Daniele: Quick question on the on the commercial growth on a two, three-year basis. You sort of parse out what might be national account versus domestic? I mean, obviously, not a lot of new national accounts entering the market. Is this skewed more to up and down the street business? Yeah. We're we're growing on the commercial side of the business, and Jamere Jackson: all of the different segments that we break out. Obviously, to your point, there's not a lot of new national accounts, you know, that you would consider branded national accounts. National accounts. But we're growing share of wallet in all of those segments, national accounts, we call up and down the street customers, which are you know, generally the local mom and pop, shop, as well as what we call verticals and associations. We're we're growing across all of the the four segments. Pretty healthily. Bret Jordan: Thank you. Appreciate it. Thank you. Your next Operator: question is coming from Christopher Horvers from JPMorgan. Your line is live. Hi, guys. It's Bharat Rao on for Christopher Horvers. Thanks for taking the question. Philip Daniele: So on DIY, given the sequential slowdown, you said weather was a headwind in the middle four weeks. Can you help us parse out how much of that was additionally attributable to any government shutdown noise or like any sort of observable deterioration in the underlying trend or demand? Yeah. I I wouldn't say that the demand as necessarily deteriorated. As we mentioned, kind of that weather segment in the middle of the we broke the quarter down into to twelve-week quarter down into four-week segments. The middle section of that segment year over year, you had some changes in weather in more of the northern markets, and you had the impact from the hurricane that benefited us last year that did not reoccur this year. So it was really a wobble in the middle four-week segment. Not related to the customer, per se, more related to the impacts from last year. Both positive weather event due to hurricanes and a cold snap that happened, last year as opposed to something that really deteriorated in this year. And that middle four-week segment, as we mentioned, was was down significantly compared to the first four-week segment and the third four-week segment. Hope that's a little clearer. Got it. That's helpful. Yep. And then a quick one on SG and A. So previously, you talked about Brian Campbell: mid single digit SG and A store growth for the year and came in at the higher end in 1Q despite softer sales. So now that you're accelerating store growth and you said 2Q SG and A will be similarly up to one q, you help us understand, like, how does the curve of that SG and A per store growth look throughout the year? And does that pretty much moderate into next year? Thank you. Jamere Jackson: Yes. As I mentioned, we had about two points of of growth that was related to new stores and and really the opening of new programs. And in our commercial area of the business domestically. And we expect that continue. And and then if you look at, you know, our store opening ramp, know, we're gonna continue to open new stores. It's gonna be back half weighted. As I mentioned, we'll open 350 to 360 stores globally in total. And a and a good chunk of that will be weighted in the back half. So you'll see some acceleration as we as we move through. And, again, this is all you know, predicated on the growth that we're seeing. We're continuing to invest in a disciplined way. In those growth initiatives. And, you know, we quite frankly, we like the earnings and the cash story that this is gonna generate for us as we come out of this. Brian Campbell: Got it. Thank you, guys. Happy holidays. Philip Daniele: Happy holidays. Operator: Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley. Simeon Gutman: Hi. This is Skyler Tennant on behalf of Simeon. Thank you for taking our question. On our first question, we wanted to ask whether the consumer is showing any signs of elasticity to higher prices or whether you're seeing any signs of trade down? Philip Daniele: Yeah. We, we kinda figured this question was probably coming. At the end of the day, I I would kinda characterize it as the the lower end consumer has been under pressure for frankly, quite some time. I'd say more than two years. And what I would say is they've been relatively stable. So there hasn't been, you know, a significant wobble in the in that lower end consumer. The higher end consumer, we think, is still doing okay. And we we think that's been relatively stable, over the last couple of quarters. We don't have a lot of categories where you would see trade down. We have some, you know, good, better, best opportunities in batteries and brakes and wiper blades, things of that nature. But the vast majority of our inventory is generally one part that fits a particular vehicle, and there's not a whole lot of you know, upsell opportunities. Based on, you know, good, better, best opportunities. So we don't see a lot of trade down. There's a little bit, but it's really not been that meaningful. Simeon Gutman: Okay. Thank you. And as a follow-up, how are you thinking about inflation? Has it impacted the entire products catalog? And for items not impacted, are you seeing any signs of demand elasticity there? Philip Daniele: Yeah. The the inflation we think the inflation gonna continue to increase, you know, through what would be our third quarter. On a year over year basis, and then some of the impacts from tariff and cost started in Q4 of last year. So we'll start to lap some of that. I suspect that there'll still be some increases, but they'll probably be a little bit less muted in the lighter part of of what would be our Q4 more like the summertime. But, you know, as far as you know, separating out what has tariff impact and not have had not had tariff impact Most of the product that we sell is essentially break fix or it's required maintenance. And there hasn't been a lot of volatility in those product categories. In this you know, purely discretionary, categories. Which, is a relatively small part of our business, more like 16 to 17% of the of our total market. Those categories were impacted over the last two years and had some pretty significant downfalls. But over the last year or so, they've actually been relatively stable and seen some Over the last year. minor improvement in sales. Simeon Gutman: Great. Thank you. Good luck, and happy holidays. Philip Daniele: Thank you. Happy holidays to you too. Operator: Thank you. Your next question is coming from Michael Lasser from UBS. Your line is live. Michael Lasser: Hi. This is Vane Brock on for Michael Lasser Thank you very much for taking our question. The first question is on the comps. Philip Daniele: We're wondering how likely is it that the same store sales momentum would be sustainable domestically as comparisons become more challenging in the third quarter as well as fourth quarter? And you lap a greater inflation number in 4Q. Yeah. I would I would characterize that we think those numbers are be relatively stable. Again, our comp there was an increase from a if you think about a two-year stack, you know, in the latter part of Q3 and Q4, and it might moderate a little bit. But we're confident behind our that we have in place that we will continue to grow market share. On both the DIY and the commercial business. So they may flatten out a little bit, but at the end of the day, I I think we're gonna gonna continue on this growth trajectory, for both DIY and on the commercial side of the business. Michael Lasser: Gotcha. That that's helpful. And as far as my second question goes, I'm gonna try to approach the SG and A topic a little differently. Since the beginning of fiscal year 2024, SG and A growth has outpaced sales growth. In each quarter and by about two to three percentage points on average. So how should we expect that gap between sales and SG and A growth to unfold going forward, especially as you accelerate unit growth And as part of that, would it be fair to think the model is more reliant on recouping some of the gross margin headwinds you faced in the past couple of years to return to operating margins of 19% plus? Jamere Jackson: Yeah. So, you know, the first thing that I'll say, and, you know, we've reiterated this this point is that, know, we're growing SG and A in a disciplined way as we create a faster growing business. And so what you've seen is that, you know, the investments in in SG and A have been purposeful. We've had accelerated growth in SG and A related to new stores and acceleration of our commercial business. And two things. Number one, you're starting to see the growth shoots associated with that. And we'd like the earnings profile of the new stores, First of all, they're coming out of the chutes. But more importantly, when those stores mature mature in the four to five years. What I'll say about the gap between sales growth and s g and a growth over time is that s g and a will slightly outpace the sales growth as we as we move through. But as we get to the point where these these stores mature, then we'll manage know, SG and A growth in line with sales. But I think the key takeaway is that it's been purposeful. And this is underpinning the the growth that we've talked about. And, and we like the earnings and cash profile on the backside of this. Michael Lasser: Got you. Thank you very much. And the model's reliance on gross margin to to get back to 19% margin profile? Jamere Jackson: Well, I think the reality is if you'd look at the the model today and you're talking about operating profits, if you will, you got two points associated with this accelerated growth that we're talking about. You got about a 140 basis points associated with LIFO. So between those two, you add back, call it three and a half points to you know, a business that that's gonna do 17 and some change on a GAAP base. And you're back at your 20% operating model. If you do that, on top of a much larger store base, again, that's what has excited about the model as we as we move forward. Michael Lasser: Super helpful. Thank you very much. Operator: Thank you. Your next question is coming from Scott Ciccarelli from Truist. Your line is live. Scott Ciccarelli: Hi there. This is, Sherman on for Scott. Thanks for taking my question. LIFO charges were less than expected this quarter and now you've lowered your expectation of the headwind for the next three quarters by around 25%. Just want to know if this is from just greater tariff reductions or maybe more focused mitigation efforts. And then, like, could that taper, like, the upper end of your same SKU expectations? Like, for inflation throughout the year? Thanks. Jamere Jackson: Yeah. So two things on on LIFO. Number one, we have not seen as much, cost impact as we had originally anticipated. I think know, we've talked very openly about the fact that we're running you know, a tried and true playbook One is to the extent that there's an opportunity to negotiate lower cost with vendors, and protect the customer, we've been doing that. There's an opportunity for us to diversify sources, to and maintain the sales, we're doing that. And then the third leg of stool, obviously, has been the raised, retails. So we haven't you know, in running that playbook, we haven't seen as much inflation as we would have anticipated. Think the second dynamic is, you saw the announcements where the IEPA tariffs on China moved from 20% down to 10%. And so that does lower our expectation going forward. But, you know, what we're what we're seeing, and you heard Phil talk about this little bit earlier, is we're still expecting to see higher costs associated with tariffs as we move through. And that is going to have some impact on, on ticket average and and and have some impact on comps going forward. It's just that, you know, what we had anticipated originally. We're seeing better performance from a cost standpoint. And lower, I e, tariffs, from the rollback that was announced in November. Philip Daniele: Yeah. I would I would continue to add that our, you know, our merchants have been working at this tariff mitigation, country of origin, diversification, and multiple supplier diversification. Frankly, since the original tariffs went back went in back in 02/1617, and they've become pretty good at it. You know, having multiple sources for country of origin, as well as multiple suppliers to supply a particular category has been a strategy we've had for quite some time. We've had a strategy for diversifying our sourcing out of China into other countries. For know, years and they've become very adept at it. To Jamere's point, we're running that same playbook. And our our folks have gotten pretty good at doing that as well as continuing to improve our supply chain efficiencies where help which are helping our gross margins. But you know, we they've just done an exceptional job, which you saw in our gross margin. Overcoming the vast majority of the mix shift to a lower margin business that grew faster on the commercial side of the business. So we think that's a that's a really good story for us. Scott Ciccarelli: Was really helpful. Thanks so much, guys. Philip Daniele: Thank you. Operator: Thank you. Your next question is coming from Steven Saccone from Citi. Your line is live. Steven Zaccone: Hi. This is, Ariana on for Steve. Thank you for taking our questions. My first question is, can you give any color on the merch margin performance in the quarter? And like any color on the outlook for this fiscal year? Jamere Jackson: Yeah. We had a very strong quarter from a merch margin standpoint. And what what you see in our underlying, gross margins is, you know, we were up nine basis points excluding LIFO. We've had about a 34 basis points drag just from the mix shift associated with a faster growing commercial business. So all of the merchant actions that were taken inside the company are are working really hard to offset that drag from the drag that's associated with the commercial rate. So, and that's a playbook that we're continuing to run with intensity. And the teams are doing a a pretty good job there. Steven Zaccone: Thank you. And then my follow-up kind of pinged back some of the previous question. So, like, where do you kind of expect these skew to peak in three q as it, like, accelerates sequentially. Jamere Jackson: Yeah. I mean, I I won't be date certain about when it will will peak, but what we can tell you is that, you know, we're gonna continue to to see inflation coming through, you know, our our cost of goods sold. We're seeing it know, both in terms of what we're seeing from vendors, but also from tariffs. And as that rolls through, you know, it is potential to see another point or two over the next couple of quarters, impacted on same SKU and and resulting in that higher average tickets. Steven Zaccone: Got it. Thank you so much. Happy holidays. Philip Daniele: Thank you. Thank you. Operator: Next question is coming from Kate McShane from Goldman Sachs. Your line is live. Mark Jordan: Hey. Good morning. This is Mark Jordan on for Kate McShane. My first question, I think, might be a quick one, but it's just what drove the difference between same SKU inflation in the retail business and the commercial business? Is that just the mix of the parts that are being sold? Philip Daniele: Yes. It's the it's a mix and combination products and parts that get sold between the two. You know, the the commercial side generally, you have a higher hard part mix. And you have generally newer less let me say this the right way, Newer SKUs in their life cycle which generally are a little more expensive because they have more technology associated with them, essentially. Mark Jordan: Okay. Perfect. Thank you very much. And then in terms of product categories, just wondering if there's anything to read through there in terms of the healthier core customer. Which categories were stronger and which were weaker during the quarter? And are you still seeing improvement on the discretionary side? Yeah. I I would say I mean, our our failure categories and our maintenance categories continue to be the best performers. Which I think is indicative of the the health of the automotive industry in in total. Our weaker performers have been over the last couple of years, frankly, the, more purely discretionary items Over the last year or so, those items have kinda flattened out from a a negative comp perspective and continue to and started to slightly grow year over year which we think is a is a pretty good sign. That that that segment of of product has kinda bottomed out will probably continue to grow from this point forward. Operator: And just thinking about the comm Philip Daniele: there, is that mostly being same SKU inflation driven on that side or is units up as well? It on the on the purely discretionary product, it's a little bit of both. Mark Jordan: Perfect. Thank you very much. Jamere Jackson: Thank you. Operator: Thank you. Your next question is coming from Michael Montani from Evercore. Your line is live. Michael Montani: Yes. Hi. Good morning. It's Mike Montano on for Greg Melich. Thanks for taking our question. I just wanted to ask a little bit about the underlying, performance in merch margin, if I could. So that was Philip Daniele: strong in the quarter, Jamere. And wondering how to think about that into next quarter. And then also, if you look at, you know, private label Michael Montani: you know, supply chain optimization, price optimization, like, can you help us just understand a little bit more the drivers that are offsetting that thirty percent forty bps mix headwind that you referenced? Jamere Jackson: Yeah. I mean, you know, we continue to run merch margin playbook as I as I've historically said with intensity. Know, our teams are doing a fantastic job looking for alternate sources looking for new brands to introduce, and quite frank frankly, when they're opportunities, to move more to our to our house brands to help us drive, margin opportunities. And I that's, you know, that's a playbook that we run over time in in teams continue to execute very well on that. You know, we're gonna continue to have a fairly significant headwind from a fast growing commercial business. And we're really pushing hard on merch margins to to mute that or offset that completely. And that's that's what we'll do as we move forward. Michael Montani: Thank you. Operator: Thank you. Your next question is coming from Robbie Ohmes from Bank of America. Your line is live. Robbie Ohmes: Good morning. This is Vikilio on for Robbie Ohmes. Thank you for taking our question. Can you talk about your expectation for early calendar 2026? As we'll likely have the combined impact of a hot summer, cold winter, and maybe some tax refund tailwind from the one big beautiful bill. Thank you. Philip Daniele: Yeah. Great question. You know, if you think cyclically about how our business performs in Q2 and what that means Jamere Jackson: for Philip Daniele: You know, Q3 and Q4. Q2 is always our most volatile quarter. Jamere Jackson: Due to primarily these, you know, these big weather events that move across the country. What we would like to see, and it looks like we might get this year, is we like to see cold weather followed by precipitation in the form snow and ice Those have a tendency to put a lot of strain on the undercar parts of the vehicle. So think suspension, Philip Daniele: brakes, chassis parts, things of that nature, and cold weather puts a lot of pressure on batteries. Jamere Jackson: Which are a pretty big part of our business. So what we'd like to see is a nice cold weather winter, and that'll help sales coming into the the summer and their spring and summer times, which is kinda what we saw this last year. If you remember the comment that we made, our northern stores performed a little bit better than our southern stores. Some of that was due to some weather comparisons, but it's also the knock on effect of a better winter last year that carries on through the spring and the summertime. Which is what we saw in those categories. So that's kinda what we we think will happen. It's hard to predict the weather. I don't think Jamere and I are very good at that. But it looks like the beginning, and it's gonna be cold next, couple of weeks, colder than last year. That's generally good for us. And they're saying it looks like in the later part of the winter, we're gonna get more snowfall in the Northwest and the Midwest. Than we did or Northeast and the Midwest than we did last year. So those should've should set up pretty good for us. Jamere Jackson: Yeah. That's in the summer. Yeah. I mean, the one thing that we always talk about is, you know, remember that because of all the weather cycles, I mean, Philip Daniele: q q two you know, our Q2 in the early part of the year can be pretty volatile. Jamere Jackson: And, you know, we always say that we're a couple of storms away from greatness or a couple of storms away from it being not as good as we anticipated. So, know, there's typically some volatility in the quarter. We're focused on execution, though. I agree with that. To answer your your question, Philip Daniele: on taxes I I don't think we really know the answer to that and how that's going to lay. I will say that generally, our Q2 ends right about the time of tax refund. So there can be some volatility on whether that ends up in you know, how much of it ends up in our in the end of our Q2 and the beginning of our Q3. So there can be some volatility around that time frame. Robbie Ohmes: Thank you. Happy holidays. For us to predict. Operator: Thank you. Our last question is coming from Justin Klabur from Baird. Your line is live. Justin Klabur: Hey. Thanks. Good morning, everyone. Philip Daniele: Wanted to ask the SG and A question just one more time. I apologize. Justin Klabur: I understand the impact from store growth and how that builds from here, but just wanted to clarify that growth on a per store basis Are are you telling us we should expect that Jamere Jackson: 5.9% pace Justin Klabur: in one q to effectively continue, or Philip Daniele: are there certain offsetting levers to bend that growth curve on a per store basis as you start to annualize, you know, some of these investments to improve service and delivery speed? Jamere Jackson: Yeah. I mean, you're gonna be somewhere in that in that same ZIP code on a per store basis. And the other point that I'll make is remember, the back half of the year, we're gonna continue to accelerate the the store growth. So you know, if you're in that ZIP code, you're in you're in the right area. There there are always things that we're working on. I'm SGNA standpoint. But if you're modeling going forward and you're in that ZIP code, you're in the right place. Justin Klabur: Okay. Thanks for that. And then if I could just follow-up on the international outlook. You mentioned softer trends in Mexico, but you know, the two-year stack did improve sequentially. So was that just driven by Brazil? And then, would you expect that two-year stack to remain relatively stable internationally just as we think out over the next few quarters? Thanks so much, guys. Yeah. Philip Daniele: I think you'll you'll see it be fairly consistent, we believe, over the next couple of quarters. Jamere Jackson: And, you know, just speaking at our international business as a whole, we really like the accelerated growth we have there. We think we have opportunities to gain market share in in all of our international markets. Both with a with a growing DIY business as well as a rapidly growing commercial business. And, you know, as those consumers get a little healthier, as the economic continue to hopefully improve, we expect our sales to accelerate in those markets as well. So international markets are fantastic for us. Thank you for the Thank you both. Okay. Before we conclude the call, I'd like to take a moment to reiterate that we believe our industry remains in a strong position and our business model is very solid. We are excited about our growth prospects for the new year but we will take nothing for granted as we understand that our customers have alternatives. We have exciting plans that will help us succeed in the future, but I want to stress that this is a marathon and not a sprint. As we remain focused on delivering flawless execution, and striving to optimize shareholder value for the future, we are confident that AutoZone, Inc. will be successful. Finally, we'd like to wish everyone a happy and healthy holiday season. And thank you for participating on today's call. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Liz Sharp: Good day, everyone. Operator: And welcome to the American Outdoor Brands, Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations, for some information about today's call. Liz Sharp: Thank you, and good afternoon. Our comments today may contain predictions, estimates, and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, could, indicate, suggest, believe, and other similar expressions are intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies, and vision. Our strategic evolution, our market share, and market demand for our products, market and inventory conditions related to our products, and in our industry in general, and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings. You can find those documents as well as a replay of this call on our website at aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. A few important items to note about our comments on today's call. First, we reference certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, emerging growth transition costs, nonrecurring inventory adjustments, technology implementation costs, other costs, and income tax adjustments. The reconciliation of GAAP financial measures to non-GAAP financial measures, whether they are discussed on today's call, can be found in our filings as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Liz Sharp: Joining us on today's call is Brian Murphy, President and CEO, and Andy Fulmer, CFO. And with that, I will turn the call over to Brian. Brian Murphy: Thanks, Liz, and thanks, everyone, for joining us today. Reflecting on the second quarter, I'm very proud of the way our teams continue to deliver in a dynamic environment. Efficiently managing tariffs, customer ordering dynamics, and cost reduction opportunities all while remaining committed to innovation and executing our term strategy. That commitment to innovation paired with disciplined execution of our strategy to enter new outdoor product categories is fueling the strength of our growth brands and the engagement we are seeing from consumers and retail partners. Together, these factors enabled us to deliver second-quarter results that surpassed our expectations even amid a dynamic retail backdrop. Pull-through of our products at several of our largest retailers was notably strong during the second quarter, with total POS up 4% year over year. This marks the second consecutive quarter of favorable POS performance, an encouraging indication that our products remain in demand and are helping to drive engagement at retail. This result is especially meaningful in light of recent reports from placer.ai indicating that foot traffic at most retailers trended down during the period. Before I turn to channel sell-in, I want to take a step back and talk about the evolution that is occurring in our traditional and e-commerce sales channels. In our traditional channel, a growing share of what has historically been classified as brick-and-mortar or in-store sales are now occurring through traditional retailers' online channels. Buy online, pick up in-store, ship to home, and same-day delivery, reflecting an evolutionary shift in how consumers shop. Many of our largest brick-and-mortar partners have invested heavily in omnichannel capabilities, and we are benefiting from that investment. For some of our retailers, online sales now represent up to 20% of their total revenue. Although these transactions reflect digital buying behavior, they are captured in a growing portion of our traditional sales channel results. In short, consumers are still buying online, but the where is shifting. Turning to our e-commerce channel, this channel has been evolving over time as well. Within this channel is our direct-to-consumer business on our own branded websites, as well as our sales to customers who only have an online presence, such as one of the world's largest online retailers. Over the past three and a half years, as our DTC business has grown, as our traditional retailers have expanded their online presence, our exposure to customers with an online-only presence has reduced. In fact, online-only customers represent just 20% to 25% of our total net sales today. So with that evolution in mind, let's turn to selling for the quarter. We benefited from higher demand in our traditional channel, which makes up roughly 65% of our overall business. Sales into the traditional channel were up 2.3%, aligned directionally with our POS results for the quarter, an indication that our brands are performing well across the broader omnichannel landscape. This compares to lower demand in our e-commerce channel, which makes up roughly 35% of our business, where sales declined by 15.9%. While the decline is due largely to lower sales to our largest online-only e-commerce partner, we believe a meaningful portion of the softness is being offset by digital sales flowing through traditional retailers' online platforms, as I discussed earlier. Our second-quarter results also reflected the continued expansion of our product and brand offerings within our existing retail partner network, consistent with our long-term growth strategy. During the quarter, we made meaningful progress with a major mass-market retailer that is now introducing our Caldwell and BOG brands into thousands of their stores for the first time. Given this retailer's significant scale and reach, this new placement, curated specifically for this retailer's audience, provides a substantial increase in visibility for both brands. It also represents a strong example of how our retail partners are increasingly turning to our innovative and popular products to strengthen their assortments and help drive consumer traffic. Turning to innovation, our innovation engine was firing on all cylinders this quarter. New products drove over 31% of net sales, demonstrating the power and consistency of our pipeline. We also locked in several launches for SHOT Show in January, including major expansions to our successful Caldwell Claycaptor and Claymore lines for shotgun enthusiasts. At SHOT, we will unveil the Caldwell Claycopter surface-to-air launcher, a complete reimagining of our handheld disc launcher into a compact, lightweight, wireless ground unit featuring a 50-disc hopper and seamless integration with our new Caldwell Plays app. Multiple units can be tethered together for greater challenge and fun, laying the groundwork for future gamification, much like we did with our Bubba brand. The Caldwell Plays app also makes Caldwell the only brand to bring disc and play shooting together for the first time. Users can pair surface-to-air units with our new wireless electronic clay thrower, the Claymore Connect, coordinating disc and clay launches simultaneously for the most dynamic shotgun training and recreational shooting experience ever. With these new additions to the Caldwell platform, our team has done an incredible job demonstrating that we do not just participate in categories; we reshape them. And we are not the only ones who feel this way. The Caldwell Claycopter was just named as the 2025 innovation of the year by Guns and Ammo Magazine and by the Industry Choice Awards. Over the past five years, our innovation pipeline has generated nearly $100 million in incremental annual new product revenue. Today, I believe that innovation pipeline is the strongest in our company's history, and this is only the beginning. I could not be more excited about SHOT Show in January, where we will introduce another wave of innovation that will fuel our brands into fiscal 2027 and beyond. Now just a quick update on Black Friday. We are very encouraged by our results on Black Friday and Saturday, as well as our overall performance in November. Initial POS results are in and show that each of our leading brands performed well, not just over the holiday weekend, but throughout the month. In our outdoor lifestyle category, POS for November grew approximately 13%, an exceptional result that reflects the continued strength of our growth brands, including BOG, Meat, and Bubba, with both consumers and retailers. As we head into the back half of the year, we are optimistic but remain cautious about the macro environment, particularly surrounding evolving consumer spending patterns and the resulting volatility in retail order patterns that is often the result. Feedback from our retailers indicates that consumer health is somewhat fractured, with higher-income cohorts remaining healthy and lower-income cohorts facing increasing pressure. We have all read this in recent media reports, and we see it reflected in our own sales analysis as well, with higher ASP products outperforming the pack. Accordingly, and not surprisingly, we continue to see demand patterns from our retailers that are highly variable as they seek to address their divergent consumer audience, try to assess the impact of their pricing decisions on demand elasticity, and then work to manage their inventory levels relative to those two factors. These dynamics underscore the importance of having a business model designed for agility and strength. Because we have deliberately built our company on a core foundation of innovation, our brands continue to deliver compelling new products, build consumer loyalty, expand our market presence, and strengthen our relationships with our retail partners. With innovation at the center of our strategy and a proven ability to stay focused on our priorities, we are confident that our agility will enable us to navigate what lies ahead and deliver durable long-term value for our shareholders. And with that, I will turn it over to Andy to walk through the financial results. Andy Fulmer: Thanks, Brian. As Brian mentioned, we are very pleased with our results for the second quarter, with net sales and profitability coming in well ahead of our expectations. Net sales for Q2 were $57.2 million compared to $60.2 million in Q2 last year, a decrease of 5%. In our outdoor lifestyle category, which consists of products relating to hunting, fishing, meat processing, outdoor cooking, and rugged outdoor activities, net sales were $34.6 million, down 5% compared to Q2 last year, mainly driven by a decrease in meat processing equipment, partially offset by increases in our BOG and Gorilla brands. In our shooting sports category, which includes solutions for target shooting, aiming, safe storage, cleaning and maintenance, and personal protection, net sales declined 5.1% compared to last year, driven by decreases in gun cleaning and personal protection products, partially offset by strong sales in our Caldwell brand. The outperformance by Caldwell was the result of expanded distribution of these innovative new products, particularly the Caldwell Claycopter, with an existing mass-market retailer that had not previously carried our Caldwell brand, as Brian mentioned. Turning to our distribution channels, our traditional channel net sales increased by 2.3% in Q2, while our e-commerce net sales decreased 15.9% compared to last year. Consistent with what we indicated in September, we believe our largest e-commerce retailer continued to adjust its purchasing pattern to realign with ongoing tariff impacts. Domestic net sales, which generated approximately 95% of our revenue in the quarter, decreased by $2.4 million or 4.3%, while international net sales decreased by roughly $600,000 compared to Q2 of last year. Gross margin remained strong in Q2, at 45.6%, compared to 48% in Q2 last year. This performance is noteworthy given the actions we took to clear some slow-moving inventory. In fact, without that action, gross margin would have come in approximately 150 basis points higher. Turning to operating expenses, GAAP operating expenses for the quarter were $24 million compared to $25.8 million last year. The decrease was driven by lower variable costs from the decrease in net sales as well as lower intangible amortization. On a non-GAAP basis, operating expenses in Q2 were $21.3 million compared to $22.7 million in Q2 of last year. Non-GAAP operating expenses exclude intangible amortization, stock compensation, and certain nonrecurring expenses as they occur. GAAP EPS for Q2 was $0.16 compared to $0.24 last year. On a non-GAAP basis, EPS was $0.29 for the second quarter, compared to $0.37 last year. Our Q2 figures are based on our fully diluted share count of approximately 12.9 million shares, a number that should remain consistent through year-end outside of any additional share buybacks that may occur. Adjusted EBITDA for the quarter was $6.5 million compared to $7.5 million in Q2 last year, down slightly from the prior year to 11.3% of net sales. Turning now to the balance sheet and cash flow, we continue to maintain a strong balance sheet, ending the quarter with $3.1 million in cash and no debt, after repurchasing $662,000 of our common stock. We have talked in the past about the seasonal nature of our business, where our highest quarterly net sales occur in Q2 and Q3. This pattern typically results in the first half of our fiscal year reflecting operating cash outflow from increases in accounts receivable and inventory, followed by a second half with cash inflow when we collect those receivables and lower our inventory levels. We expect the same seasonal pattern to occur in fiscal 2026. Operating cash outflow was $13 million in Q2, reflecting an increase in accounts receivable of $18.5 million. This increase in AR was driven by the sequential increase in net sales in Q2 versus Q1, as well as by the timing of shipments, which were higher toward the end of the second quarter. We ended the quarter with total inventory of $124 million, down $1.8 million compared to Q1, but up $12.4 million compared to Q2 last year. The year-over-year increase in Q2 was driven entirely by $14 million of incremental tariffs capitalized into inventory. Walking that math, you can see that our base inventory has actually declined by $1.6 million compared with last year. As I will discuss when I get to the outlook section, these higher tariff variances will start to amortize beginning in Q3 and will continue into next fiscal year. We remain committed to reducing our inventory levels over time to improve our working capital position. We have identified specific pockets of slower-moving inventory that we believe we can convert to cash on an opportunistic basis. As I mentioned earlier, we sold a small amount of this inventory in Q2, and we expect to sell more in Q3 and Q4. As a result, we are targeting inventory to be slightly lower in Q3 and then drop to roughly $115 million by the end of the fiscal year. Our balance sheet remains strong and debt-free. We ended the quarter with no balance on our $75 million line of credit, so as of Q2, we have total available capital of $93 million. Turning to capital expenditures, we spent $1 million on CapEx in Q2, mainly for product tooling and patent costs. For full-year fiscal 2026, we expect to spend $4 to $4.5 million, unchanged from last quarter and consistent with our asset-light operating model. Lastly, during the second quarter, our Board of Directors approved a new $10 million share repurchase program effective October 2025 through September 2026. In Q2, we repurchased roughly 74,000 shares of our common stock at an average price of $8.76 per share. Now turning to our outlook, you will recall that in our prior fiscal year, which ended April 30, 2025, we reported that retailers had accelerated approximately $10 million in orders originally slated for our current fiscal year as they sought to get ahead of impending tariffs. That action allowed us to deliver full fiscal 2025 net sales of $222 million, a fantastic result but one that created some challenging comps in the current fiscal year, particularly for the fourth quarter. That said, we are now more than seven months into our fiscal year, and we are pleased with our performance, especially given the macro challenges that have characterized the calendar year to date, including tariffs, cautious retailer buying, and the uncertain consumer environment. We have demonstrated that innovation continues to set us apart with both retailers and consumers and that our relentless focus on execution and agility positions us to capitalize on opportunities as they arise. We believe these strengths will continue to benefit us through the back half of fiscal 2026 and help mitigate the impact of ongoing external pressures. Based on what we know today, we believe the full fiscal year could deliver net sales that are down roughly 13% to 14% year over year from last year's $222 million. That percentage would include the $10 million of orders accelerated into the prior year. Adjusting for those orders, the underlying net sales decline would be roughly just 5%, a performance we would view as extremely positive given the current environment. So let me walk you through a few details on how we are thinking about the third quarter and balance of the year. With regard to net sales, in the third quarter, we expect net sales to decline approximately 8% year over year, reflecting the macro environment and retailer dynamics that Brian referenced earlier. Turning to tariffs, we have now been operating in the new tariff landscape for about nine months. Our teams have done an outstanding job navigating these challenges. We have taken pricing where appropriate, worked closely with our supplier partners to secure cost sharing and identify optimal sourcing locations, and continue to fuel our pipeline with innovative products designed to minimize tariffs on a go-forward basis. We believe these actions taken together will allow us to fully mitigate the financial impact of incremental tariffs starting in fiscal 2027, as we realize the full benefit of pricing actions and cost concessions as well as new product velocity. Turning to gross margin, let me start with a recap of how tariffs impact our P&L. We capitalize tariff costs when we purchase inventory and then amortize those costs over inventory turns. So, typically, as we build seasonal inventory for fall hunting and holiday seasons in the first half of our fiscal year, we then amortize those tariffs in the back half of the year, with the timing based on inventory turns. As we think about the current period, this year's situation is amplified because of the incremental tariffs that began in February. Accordingly, we will begin to see the impact of the amortization of those higher tariffs starting in December, ahead of our ability to realize the full benefit of our pricing actions and cost concessions. As a result, we expect gross margin for both the third quarter and likely for the full fiscal year in the range of 42% to 43%. Turning to operating expenses, we remain disciplined with the cost management we employ in the ordinary course of business, as we look for ways to avoid building in unnecessary costs. It's an approach that helps us maintain a lower level of expense over the long term, allowing us to be agile and asset-light when responding to changes in our environment. That said, we have identified certain potential cost-saving opportunities within the organization, for example, reducing travel expenses, consolidating remote offices, and allowing nonessential contracts to expire without renewal. We should begin to see the impact of these cost-saving initiatives and others in the second half of the year and into fiscal 2027. As such, we expect total OpEx to decline in Q3 and full fiscal 2026. Based on all the factors I discussed and what we know today, we expect adjusted EBITDA for the full fiscal 2026 in the range of 4% to 4.5% of net sales. While it's too early to provide a detailed outlook for fiscal 2027, we expect having the full-year benefit of tariff mitigation actions I mentioned earlier will give us a clear path to improve upon that range next fiscal year and get us back on track towards our long-term model. I believe the changes and progress I have outlined demonstrate our commitment to maintaining the level of profitability reflected in our long-term operating model, which targets an EBITDA contribution of 25% to 30% on net sales above $200 million. We have proven our ability to deliver this level of performance in the past. Therefore, as our brands continue to bring innovative, compelling new products to consumers, we are confident in our ability to translate that consumer loyalty into sustained profitability growth over time. With that, operator, please open the call for questions from our analysts. Operator: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Matthew Koranda: Our first question is from Matt Koranda with ROTH Capital. Please go ahead. Brian Murphy: Hey, good afternoon. So I guess I just wanted to start with the 4% sell-through metric that you shared. How much of your revenue in a given quarter do you have visibility into a POS, and maybe just which brands were tracking ahead of that 4% sell-through metric and which were maybe a little bit below? Brian Murphy: Hey, Matt. It's Brian. So on the visibility question, we actually get to see quite a bit of our sales through POS. So it captures the majority of our largest retailers, and then, of course, we can also see our direct-to-consumer business. So I think we've sized it in the past, Andy, something close to 60% or so, roughly two-thirds of our revenue. And so we get a pretty good look at what's moving through. And then related to your second question, you know, which brands seem to perform better, you know, and were there others that performed not as well? I think it's pretty consistent with what we saw in November. Outdoor lifestyle, in particular, has been doing very, very well. And within shooting sports, I think as a category as a whole, it's been kind of aligning with NICS somewhat, so a little bit more pressure. There is softer demand for those types of products than there was last year, with the exception of Caldwell. Caldwell has just been off the charts, so with all the new products, including the Claycopter. Matthew Koranda: Okay. Alright. That's helpful, Brian. Thanks. And then yes, I was going to ask, you referenced the November performance in the prepared remarks and just now. Up 13%, I guess, in outdoor lifestyle, but then the guide for the quarter looks like it's down 8%. So maybe just help us kind of sketch the disconnect there. Is it shooting sports a little weaker in the quarter? Is there some inventory overhang that still needs to clear out among traditional retailers? Maybe just help us understand the gap there. Brian Murphy: Yeah. Absolutely. So I mean, overall, you know, demand is choppy, but it's not collapsing by any means. And, you know, POS has been very strong, but retailers have been managing to much lower inventory levels. And also, we're seeing them, this is based on our conversations too, placing bets at different times based on their available capital depending on the seasonality, depending on if it's the, at this point, the holidays. And so we're having to react and work with them, plan with them, in regards to how that replenishment will work going forward. It's part of the reason we gave an outlook today is because we have a little bit more visibility after some of those conversations and following Black Friday. We'll learn even more in SHOT Show in January. But it's based on what we know today, yes, POS is incredibly strong. But this is really working through their ordering patterns and how they're choosing to allocate capital. Matthew Koranda: Got it. What can you do to, if anything, I guess, to mitigate the softness from the large customer in the e-commerce channel that seems to be causing some of the revenue headwinds for you guys in the near term? Do we just have to lap the adjustments that they've made to sort of the inventory that they carry? Or are there any levers you have to pull on your end to sort of stabilize that channel a little bit? Brian Murphy: Yeah. I mean, we're again, just taking a step back, you know, we thought it was important this call to just call out this evolution that we see taking place. I think if you listen to some of the other publicly traded traditional retailers like Academy, etcetera, while they're experiencing, you know, lower foot traffic, you are seeing higher sales. And that's attributed to, in most cases, to just growing e-commerce and omnichannel. So I think following COVID, you really saw a hurry-up offense and begin to invest significantly in those on those sides of things. And so we've even internally begun to think, you know, how can we begin to parse this out? Because this really is an e-commerce sale. We just don't have a lot of visibility to it. And we're seeing them take share, frankly, from some of these other very large online-only retailers. So I think over time, to answer your question, you know, how do you begin to kind of reduce some of that volatility? I think that's just sort of a nature, I hate to say this, but nature of that one customer. But the fact that our direct-to-consumer business has grown as much as it has, coupled with our traditional retailers beginning to take a greater share of omnichannel, I think that by the nature of how those percentages will ultimately work out, will reduce that volatility inherently. Outside of that, I think it's, you know, whenever there's a big change in the economy, this one large e-commerce retailer tends to be up and down. It's just been our experience. Brian Murphy: Sales in that Q4 period. So I think you're typically, if you look back historically, we're going to expect that same seasonality in Q3 and Q4 at a high level. I'll just make one comment too just on the tail end of that. I mean, tariffs have been a headwind for everybody. I think for us, you know, the difference is we have a clear path to how we're going to offset those tariffs by FY 2027 going into FY 2027. So when you start to see some of those timing changes flow through, from pricing, supplier negotiations, you know, we've got tariff-efficient product designs. And at the end of the day, you know, still keeping innovation at the center of our story. So new product velocity, it's also a big part of that, and we've demonstrated that in the past. So I don't want that to be lost because the team has done an incredible job getting out ahead of this. There may be some timing differences, like Andy alluded to, but at the end of the day, we feel confident that we're going to be able to offset the tariffs. Okay. Very helpful, guys. I'll leave it there. Thank you. Matthew Koranda: Yes. Thanks, Matt. The next question is from Doug with Water Tower Research. Please go ahead. Doug Lane: Yes, thank you. Good afternoon, everybody. Just staying on tariffs, that's very helpful in laying out the cadence there. But just in stepping back, the implementation of the tariff mitigation is complete. It's just a question of having it come around and working through the P&L. Is that right? Andy Fulmer: That is correct, Doug. So the tariffs started to get capitalized in the inventory way back in March. So the timing for our P&L for amortizing starts to hit in December. Right? Our mitigation efforts with pricing were after that, so there's a little delay on that. We've also gotten cost concessions. Cost concessions work like tariffs, but opposite. So if we get cost concessions in May, we're really not going to see the benefit of those until our fourth quarter and then into next year. So as Brian talked about, when all of this shakes out, all the timing differences shake out, in 2027, we believe that we fully offset all the, with mitigation, we've offset all the tariff impact. The tariffs that exist today. Yeah. Right. Oh, thank you. That's very helpful. Doug Lane: It looks like you, I mean, the numbers beat estimates. Sounds like they beat your internal forecast, and a lot of it came in the last couple of weeks of the quarter. Do you think there was maybe a little borrowing from Q3 here at the end of the quarter? Brian Murphy: Yeah. This is Brian. No. The short answer is no. You know, I've worked at companies before that are trying to pull things into quarters. And you don't want to get on that treadmill. So, no, we just try to run the business the best we can. Not be promotional if we can avoid it. Obviously, that leads to higher margins. But, really, I think it's that new customer that we brought on, the expanded distribution, combined with the online retailer we have discussed, that we started to see a bounce back and begin to replenish some of those orders that we would have expected in prior quarters. Doug Lane: Got it. Okay. That makes sense. And just finally, as I try to understand this disconnect between sales and POS, it's such a wide gap. Is there, I mean, you would think they would track. Do you have any visibility or any guesses on when you think the two numbers will align a little bit more closely than where we are today? Brian Murphy: That's a great question. That's a great question. I think, you know, we spend a lot of time talking about what's happening with the retailer and what are the decisions that they're making. Because, you know, as we said in the prepared remarks, they're trying to navigate, you know, one, a consumer that's under increasing pressure. Specifically within that, this divergence between two different cohorts, you've got the higher-end cohorts, high income, that continue to spend on premium products, which we benefit from, and we see that in our data. And then this lower-income cohort, which is certainly pulling back, and they're spending a lot less. So trying to allocate and make sure they've got the right mix and assortment to appeal to their sort of evolving consumer base. And at the same time, trying to play, you know, a little bit of a staring contest with some of the other retailers on pricing. What should their pricing be? Just because we pass along price doesn't mean they just immediately turn around and pass that on to the consumer. They have their own promotional cycles and seasonality. So it's different by retailer. I realize this is becoming a little bit of a complex answer, but to answer your question, it's really all of those things taken together combined with how they're allocating their capital on what they think is going to win, where they're seeing traction with certain cohorts, and certainly, they have a desire to bring on new products, which we're a key vendor for. So those are getting, they are beginning to converge more and more the longer we go on, especially as tariffs stay where they are. So I see that window narrowing. I don't have a magical date in mind, but I think we're getting closer to it. I really do. Doug Lane: Well, no question. It's been a challenging environment. That's helpful. Thank you. Operator: Again, if you have a question, the next question is from Mark Smith with Lake Street Capital. Please go ahead. Mark Smith: Hi, guys. I wanted to first just talk a little bit about consumer trends, you know, primarily any other insights you can give us around, you know, Black Friday and kind of point of sale trends that you saw there. And also curious if you've seen any bump really from Florida and maybe how much of your products maybe fall under a tax holiday there. Andy Fulmer: Yeah. Mark, this is Andy. So, as we talked in the consumer written remarks, we were really happy with Black Friday. Not only with POS, Black Friday in November, not only with our POS results, but our direct-to-consumer. So, yeah, we're really happy with that. Yeah. And I think we haven't talked about direct-to-consumer much either, but we also saw, that's part of the POS, really, really strong direct-to-consumer business, in particular for Meet Your Maker and Gorilla. And then regarding your question on Florida, that's not something that we looked into. So that, we'll circle back and take a look at that. Mark Smith: Okay. And then the next question is just thinking about new products. You guys talked about, you know, SHOT Show, some new products coming, and you guys really proved you can enter new markets, you know, with Caldwell as we think about shotgun sports here. I'm curious as we think about these new products that you have in the pipeline, should we look at a lot of these coming in kind of backfilling markets where you currently play? Or are there new segments and markets that you expect to enter here over the next twelve months? Brian Murphy: Yeah. Great question. As you're asking that, Andy and Liz were looking at me because I start to smile. As I said in the remarks, like, we truly have the best pipeline I've ever seen. Yeah. So it's, like, super exciting. And if you look in our investor deck, I think we started last this last quarter. We certainly have, we'll have the same slides this time. But we gave a tease to where we're taking some of our growth brands as it relates to innovation. So, a big part of that is really just building upon the ecosystems. And those ecosystems within Caldwell, within Bubba, etcetera, and what we found is as we've expanded some of those new families, like the Claycopter, the Claymore, the Bubba Smart Fish Scale, is they're becoming very sticky with the consumer. And so we want to try to build on that momentum. So what you'll see, especially at SHOT, and we mentioned it in the prepared remarks, is the Claycopter surface-to-air, which is unbelievable. I mean, like, when you see this product, Mark, like, unbelievable. Everything we, everybody we show this to, our retailers, just says this thing shouldn't exist. So to have that type of technology where we're building up the Claycopter line, we're now integrating it with a new app. Wait till you see what that app can do. But you can now tether and daisy chain several, whether it's disc or traditional clay throwers, without the headaches of what the industry's had to deal with. So I think we're truly trying to shape some of these activities, but it's really building on the momentum in this ecosystem and, frankly, gamification. You're going to see a lot more gamification from us spread across several of our brands. And I think that's really the focus in FY '27. As it relates to entirely new products, you know, like what the smart risk was for Bubba or what the Claycopter was for Caldwell last year. We've got several of those in our pipeline. But I think you'll see at least the first part of FY '27 really building out those families and those ecosystems I talked about. Mark Smith: Excellent. Looking forward to seeing it. The last one for me is just any update on M&A. I think last quarter, you talked about maybe fewer kind of high-quality targets out there. Have you seen any changes in kind of the M&A landscape? Brian Murphy: We are. We are seeing a few changes. I would say the ice is beginning to break a little bit. I think if there, you know, why is that? I do think that because tariffs have kind of paused somewhat, you know, we're not seeing as many drastic changes. I think that companies are now able to demonstrate some level of run-rate performance where they can go to market. We're seeing a few instances where, you know, family-owned businesses are at a point where, look, the last five years has dealt the industry a lot of change. And it's been, if you're a family-run business, that can be a challenge if you don't have resources like we do. We're seeing opportunities like that come to market. We also believe that there will be some bigger assets that will be surfacing here in the next six months, possibly some divestitures. And so we're keeping an eye on those and, at the same time, continuing to cultivate our own pipeline. So, if you were to ask my excitement level now versus three months ago, I would say I'm much more excited about the opportunities that are coming up right now. Mark Smith: Excellent. Thank you, guys. Brian Murphy: Yep. Thanks, Mark. Operator: This concludes our question and answer session. I would like to turn the conference back over to Brian Murphy for any closing remarks. Brian Murphy: Thanks, operator. As we head into the holidays, I'd like to give a special thanks to our employees whose loyalty, hard work, and dedication continue to move our company forward on the path towards an exciting long-term future. To those employees and to everyone else who joined us today, we wish you a happy and healthy holiday season. And we look forward to speaking with you again next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to Genasys' Fourth Quarter and Fiscal Full Year-End Results Call. At this time, I would like to hand the call over to Mr. Clay Liolios. Please go ahead, sir. Clay Liolios: Good afternoon, everyone. Thank you for participating in today's conference call to discuss Genasys' fiscal fourth quarter and full year results ended September 30, 2025. My name is Clay Liolios and I'm with the Gateway Group, the company's third-party investor relations firm. Joining us on today's call are Genasys Chief Executive Officer, Richard Danforth; and Interim Chief Financial Officer, Cassandra Monteon. Before we begin, let me remind everyone of the company's safe harbor disclaimer. Certain portions of our comments today will concern future expectations, plans and prospects of the company that constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets and negatives of these words and similar words or expressions. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. Factors that could affect our actual results include, among others, those that are discussed under the heading Risk Factors in our most recently filed reports with the SEC, including our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. In addition, this call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA. The most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the earnings release and other documents posted on the company's website under Investor Relations. Additionally, a replay of the webcast will be available approximately 4 hours after the presentation through the conference call link on the Events and Presentations page of the company's website. With that, I would now like to turn the call over to Genasys CEO, Richard Danforth. Richard? Richard Danforth: Thank you, Clay, and welcome, everyone. We finished fiscal 2025 on a very strong note. For the first time in 7 quarters, we delivered both positive operating income and adjusted EBITDA. Additionally, we saw over 153% year-over-year revenue growth in the fourth quarter, underscored by a 50% gross margin. This success reflects the foundation we've built over the prior quarters, and we are now beginning to realize the benefits of all that work. Additionally, as of September 30, 2025, we had a backlog of more than $60 million. The close of our fiscal year was not only defined by executing on major backlog orders, but by replacing them with new customers and new projects. This quarter marked a turning point for Genasys, allowing us to shift our focus towards the future and position the company for sustained growth. From an operational perspective, we believe we have rightsized, efficient and strategically aligned to execute our existing backlog while simultaneously capturing new business opportunities. These two initiatives are also becoming increasingly synonymous. By this, I mean, as we deliver on these large projects, we earn meaningful credibility in the market, hence growing the pipeline and the brand. For example, over the past several months, we have been approached by multiple countries and government agencies expressing interest in Puerto Rico-like deployments for our technology. This strong inbound demand for similar large-scale projects not only represents a significant growth opportunity for us, but also underscores the quality of our technology and its implementation. This increased credibility is opening new opportunities, growing our pipeline and further establishing us as a leader in protective communications space. Moreover, our Hardware continues to display its utility in various end markets as illustrated by several of our last announcements, including the $1 million nuclear security follow-on order and the $1 million order for wildlife preservation. There are countless applications for our products, and we are committed to driving new business and expanding access to our critical communications technologies. On the Software side, we are seeing meaningful traction of build across both law enforcement and government agencies. Genasys Protect is best-in-class, and we are committed to expanding this technology as demand for advanced safety and communication solutions continues to grow. In a world confronted with frequent emergencies and large-scale disasters, the need for reliable, proven, protective technology has never been greater. Our solutions are recognized as industry-leading in helping agencies keep people safe, deliver clear communications, and manage critical events effectively. And as the government funding begins to ramp back up, we are confident that our software solutions will be a significant beneficiary, given the critical role it plays to ensure safety and operational efficiencies. Furthermore, to strengthen our reach and deepen our relationship with these agencies, we partnered with Julie Parker Communication, a leading expert in public safety communication strategy. This partnership enhances our ability to support agencies, broaden our awareness and position our software within key decision-making circles. We expect continued penetration of the software market, driven by our proprietary technology and growing customer relationships. I would now like to spend some time providing updates on our large projects, starting with Puerto Rico. As a reminder, the Puerto Rico project is a $75 million contract with PREPA and is fully funded by FEMA. The project covers 37 dams across the island, which all report into seven distinct groups. The Puerto Rico EWS project is beginning to hit its stride. In fiscal 2025, we recognized $13.2 million in revenue from this project. Looking at the next several phases, we expect the project to be completed in 2027 with the majority of the work taking place in 2026. We expect to complete group 5 and 6 this month and are actively working on group 3 and have been approved to proceed on group 1. Next, an update on the CROWS initiative. The CROWS-AHD effort, part of the tech refresh program of record, saw our initial funding in fiscal '22 and fiscal '23. The first production funding was included in the 2024 federal budget. And following the successful completion of the design, test and qualification of the LRAD 450XL-RT, the U.S. Army issued an RFQ in July of 2025. In late September, we announced that we won the $9 million order. This marks the first production contract for AHDs under the CROWS program following the qualification of the LRAD-RT model. We expect this contract to generate multiyear revenues while enhancing CROWS operators' ability to communicate with potential threats before employing lethal force. In summary, while fiscal 2025 presented its share of challenges, the fourth quarter marked a strong and encouraging step forward, reinforcing our momentum and setting the stage for an exciting year ahead. The progress we made in these final months position us to enter the new year with confidence and renewed energy. Before speaking on our 2026 outlook, I want to hand the call over to Cassandra to speak in more depth of the financials. Cassandra? Cassandra Hernandez-Monteon: Thank you, Richard, and good afternoon, everyone. We will start with the fiscal fourth quarter and then move into our full year results. In the fourth quarter of fiscal 2025, Genasys generated $17 million in revenue, up 73% sequentially and up 153% year-over-year. It is worth noting this is the largest revenue quarter in Genasys history. Gross profit margins for the quarter was 50.3%. The increase is primarily due to more favorable Hardware mix. We expect margins to normalize around 50% moving forward. Operating expenses for the quarter was $7.3 million in Q4, a 26% or $2.6 million decrease from the fourth quarter of 2024. The decrease in operating expenses are primarily due to a $1.2 million decrease in professional services and a $1 million employee tax credit. On a GAAP basis, operating income was $1.3 million compared to an operating loss of $7.1 million in prior-year period. This is largely due to our increased revenue, of which $7.6 million came from the Puerto Rico project and $2 million from the U.S. Navy. Adjusted EBITDA, which excludes noncash stock comp, was also positive, coming in at $2.4 million compared to an adjusted EBITDA loss of $6 million in the year-ago period. GAAP net loss in the fourth quarter was $1.4 million compared to a GAAP net loss of $11.4 million in the fourth quarter of 2024. The fourth quarter was a turning point for Genasys, we are beginning to see the hard work and efforts of our team materialize into our financial results, and we are excited to continue this positive progress into 2026. Now shifting to the full year results. In fiscal 2025, Genasys generated $40.8 million in revenue, up roughly 70% from 2024. Hardware revenues grew over 91% in fiscal 2024. This included $13.2 million in revenue related to the Puerto Rico project. Excluding Puerto Rico, revenues from our Hardware business also grew at over 12% this year, signaling a strength in our other core offerings. Our products are continually garnering interest from multiple customers across the world, and we expect to continue driving similar growth in our Hardware business into 2026. Total Software revenue in 2025 grew 21% compared to 2024. We believe our Software segments remain a large growth driver for Genasys and as government investments pick back up, we anticipate our Software programs will capture substantial upside. Gross profit margins for the year was 41.6% in fiscal 2025 compared to 42.4% in fiscal 2024. The slight decrease in gross margin was largely due to the percentage of completion accounting methodology applied to the Puerto Rico project in the first 2/3 of the year and was partially offset by a more favorable Hardware mix in the fourth quarter. As mentioned earlier, we do believe gross margin will stabilize at around 50% levels we witnessed in Q4. Operating expenses for the year were down roughly 8% or $3.1 million to $33.8 million in fiscal 2025. Genasys had a reduction of professional services for the year of $1.2 million, a $1 million tax credit and a reduction of travel and marketing expenses for $800,000. On a GAAP basis, operating loss in fiscal 2025 was a negative $16.8 million compared to an operating loss of $26.7 million in fiscal 2024. This improvement was largely due to the growth in both our Hardware and Software revenues and was propelled by cost-cutting initiatives we implemented throughout the year. Adjusted EBITDA, which excludes noncash stock compensation, was negative $12.4 million compared to a negative $22.1 million in fiscal 2024. GAAP net loss for the year was a negative $18.1 million compared to a negative $31.7 million in fiscal 2024. Before handing it back to Richard to speak more on the company's momentum and outlook, I did want to touch base on our balance sheet. As of September 30, 2025, cash, cash equivalents and marketable securities totaled $8 million as of September 30, 2025, compared with $13.1 million as of September 30, 2024. Based on our current cash forecasted receipts and disbursements, the company believes we have sufficient capital to serve the debt. While there is still more work and growth ahead, I am encouraged by the progress that we've made in 2025, and I am confident in our ability to deliver meaningful financial improvements in 2026. Richard, back to you. Richard Danforth: Thank you, Cassandra. The close of fiscal 2025 laid a strong foundation for Genasys, demonstrating our ability to execute on major projects and deliver results. This momentum positions the company to enter 2026 with confidence, setting the stage for growth and new opportunities. We expect to drive significant year-over-year revenue growth in both Hardware and Software businesses. Additionally, we expect to deliver margins of 50% throughout the year. As we all know, the world faces no shortage of natural disasters and emergencies that demand reliable protective communication systems. Our technologies save lives across the globe. Genasys' systems are making a real difference in protecting people during some of their most vulnerable moments. The need for our products is clear, and we will continue to deliver the solutions that agencies and communities depend on to keep their citizens safe. Overall, 2025 was a pivotal year for Genasys, finishing with a significant step in the right direction. Supported by current momentum, a strong backlog and a deep customer adoption, we will enter fiscal 2026 with real excitement and a clear commitment to improving our operational and financial results while delivering meaningful value to our shareholders. Before moving over to Q&A, I would like to take a second to thank all of our employees, partners, customers and shareholders for your support and trust. With that, we'd like to open up the call for Q&A. Operator? Operator: [Operator Instructions] We'll go first to Scott Searle from ROTH Capital. Scott Searle: Cassandra, maybe just to start, I'm not sure if I heard it, but what was Software mix in the quarter? And then, Richard, on the CROWS front, I'm wondering if we saw any contribution in the September quarter and what you're expecting in terms of linearity and follow-ons throughout the course of the year for CROWS. Richard Danforth: I'll answer that question first, Scott. CROWS will be -- likely be a second half revenue generator. So all of it will likely happen in Q3 and maybe a little in Q4, but Q3 is more likely. Cassandra Hernandez-Monteon: And in Q4, our Software revenue was roughly around $2.2 million. It was pretty flat compared to last quarter, but we would expect to see an increase in revenue going forward for Software. Scott Searle: Got you. And Richard, just to follow up on CROWS. I think it's expected to be part of a larger decade-long contract that could be $100 million to $150 million. This is the initial order. Are you seeing visibility to the follow-ons there? And then as it relates to the pipeline, I wonder if you could discuss it a little bit more in detail. Last quarter, there were a couple of larger contracts that you called out specifically related to flooding and tsunami opportunities in international markets. I wonder if you could just provide some color in terms of size, magnitude, timing of some of those opportunities. Richard Danforth: Well, we haven't put size or timing on those opportunities out in the public, Scott, but the -- none of what I mentioned last quarter from these larger opportunities has closed. One has reached a point where we submitted the proposal. One is a proposal to be submitted later this month and the third is further down than that. Relative to the CROWS question, CROWS-AHD is part of a program of record that has a line item in the defense budget. As you're well aware, the FY '25, there was no budget. It was a continuing resolution. So far in fiscal year '26, it remains another continuing resolution. The current one is expected to expire the end of January, as I recall. With that said, Scott, it's -- the visibility into the annual awards is part of that budgeting process. So as they conclude with that, we'll know precisely what will be in there. Scott Searle: Got you. Maybe two quick follow-ups then, Richard. And just in terms of government engagement and opportunities in general, given the shutdown, has momentum returned on that front in terms of other RFPs domestically? Are you seeing some momentum on that front? Or kind of how would you characterize it? And then also on the commercial front, the nuclear opportunity seems like it was a nice win. Are there other commercial or enterprise opportunities that you're starting to see build in the pipeline? Richard Danforth: Yes to everything you said. So from an LRAD hardware perspective, Scott, we had a very good bookings quarter. You mentioned the nuclear opportunities. There's more nuclear opportunities. If we look internationally, substantial increase in opportunities in the APAC region, we expect to close some of those here shortly. In the Middle East, which historically hasn't been a great market for us, our expectations are quite keen on some significant bookings in this fiscal year. And even Europe has shown more promise from an LRAD perspective. So no is the answer to your direct question, I haven't seen a significant decrease. In fact, I've seen an increase in demand for LRADs during these current times. Operator: The next question comes from Jarrod Cohen from JM Cohen & Company. Jarrod Cohen: Yes, I just have a few questions. Well, you mentioned -- I'll start off with different types of projects. Can you give us an idea of what type of projects might be in the pipeline? Beside -- are they like what you've done in Puerto Rico? Or can you just give... Richard Danforth: Very much so, Jarrod. Very much so. Puerto Rico, of course, as you know, is 37 dams or countries that don't actually have dams, but have large numbers of basins that tend to flood. And so it's the same principles of what we're doing in Puerto Rico, just a slightly different application. Jarrod Cohen: Okay. This is more financial related. You talked about -- could you give us an idea of what -- 2026, what you're looking in terms of revenue growth? And/or is it possible that on a total 2026, are you looking for the company to be on an operating basis profitable? Richard Danforth: We expect to be profitable in FY '26, yes. And from a revenue perspective, we don't comment on -- we don't give out forward-looking guidance, but I would point you to $60 million of addressable backlog -- 12-month addressable backlog without condition as we enter this fiscal year. Jarrod Cohen: Okay. So -- but on an operating basis, profitable, but even on a net income basis, even being profitable? Richard Danforth: Yes. Jarrod Cohen: Okay. And my last question, just related to the Software business, you have about over 50 million users or something like that. And the Software business, I know it takes a long time to grow, and it's been up and down over the last few years. And you mentioned this past quarter it was what, you did revenue of about, what, $2.2 million or $2.3 million. When do you think that business could be basically on a breakeven-type basis in terms of cash flow-wise? Richard Danforth: It's not going to be this year, Jarrod. As we exit the following fiscal year, I would think we have a shot to make it there. Our Pipeline has grown by more than 100% from the same period last year. We are prosecuting some large SaaS Software opportunities that we expect to close in this fiscal year. As you're well aware, fiscal '25 was disappointing from a SaaS bookings perspective, principally driven by the lack of funding in the grant process -- the review process for grants, which seems to be moving along now. So our expectations for SaaS bookings and resulting ARR are very high for fiscal '26. Operator: [Operator Instructions] Up next is Ed Woo, Ascendiant Capital. Edward Woo: Congratulations on all the progress. My question is, as you guys get more interest in your products, have you noticed any change in competition? Have you noticed any new entrants are -- you're competing with as you pitch out these projects? Richard Danforth: No, neither in Software or Hardware, Ed, or systems. Edward Woo: All right. Then my next question is, if you guys are kind of like the main player and as building these better reputation, do you see yourself having a better pricing power or being able to price higher? Richard Danforth: Within the government customer base, Ed, you -- although we don't provide any cost and pricing data, we are subject to -- we -- if we -- if our price goes up too much, then we're subject to having to justify the price growth. Now in some cases, we're able to justify it, and we do increase the price to be more reflective of not only the cost but improvements in profitability. But it's not like you can just charge them anything you want. Past practice is the barometer by which they determine whether they think the price is too high or not. Competitive solicitation, no cost and pricing, it's up to us to bid what we want, giving us -- keeping in mind we have to win. Edward Woo: That sounds good. And then my last question is on overall for Puerto Rico. The revenue number of about $75 million is about the same, has your cost or overall profitability on that project is expected to remain the same as well? Richard Danforth: Yes. Operator: The next question is from Stephen Wagner, Integrity Wealth Advisors. Stephen Wagner: Richard and Cassandra, good job. Good to see a lot of the very positive wording in the press release. It's music to our ears to see the profitability in the fourth quarter and particularly some of the positive comments on the debt service. My first question is regarding the debt service. And that is what expectations do investors have that the debt will be greatly reduced or eliminated over the course of this fiscal year that we're in, '26? And then beyond that, the other question that I have is a frustration with the -- it feels like there's been a lack of accolades given Genasys in light of the enormous amount of life that was saved in the historic and devastating L.A. fires. To have 31 people die is -- was a massive win for humanity. And yet it seems like all we've had to endure is negativity. Is there any -- is there any [ impetus? ] Is there any program on the part of the company to highlight how and why Genasys is able to save the lives that they did in L.A.? And a quick follow-on to that is what kind of outreach have you guys had in light of all of this? Because I'm sure other states, municipalities, fire departments, et cetera, counties, they know how well your software performed, and I'm sure they want it. So I'll stop there. Richard Danforth: All right. Well, I may not remember every question, but let me address the last one first. There was a lot of bad press put out regarding the L.A. fires across the board, negative press on Genasys, negative press on the county itself. The negative press on Genasys was walked back. There was third-party independent reviews of what happened out there. And they came to the same conclusion, Steve, that you just brought up. And the people that use the software, the people that are in that industry know quite well how well it performed. And it is leading to not only additional business to existing customers, but to new customers as well. And what was the first question you asked, Steve? Stephen Wagner: The first question was regarding the debt service... Richard Danforth: The debt. Cassandra said, we expect cash flow receipts and disbursements to support paying off the entire debt on time. Is there another question? Operator: And everyone, that does conclude our question-and-answer session. That also concludes our conference for today. We would like to thank you all for your participation. You may now disconnect.
Operator: Good day, and welcome to the Lakeland Fire and Safety Third Quarter 202 Financial Results Conference Call. [Operator Instructions] During today's call, we may make statements relating to our goals and objectives for future operations, financial and business trends, business prospects and management expectations for future performance that constitute forward-looking statements under federal securities laws. Any such forward-looking statements reflect management expectations based upon currently available information and are not guarantees of the future performance and involve certain risks and uncertainties that are more fully described in our SEC filings. Our actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. On this call, we will also discuss financial measures derived from our financial statements that are not determined in accordance with the U.S. GAAP, including adjusted EBITDA, excluding FX and adjusted EBITDA, excluding FX margin, organic sales, adjusted gross profit, adjusted organic gross margin and adjusted operating expenses. A reconciliation of each of the non-GAAP measures discussed in this call to the most directly comparable GAAP measure is presented in our earnings release and/or supplemental slides filed with our earnings release. A press release detailing these results was issued this afternoon and is available in the Investor Relations section of the company website, ir@lakeland.com. At this time, I would like to introduce you to our host for this call, Lakeland Fire in Safety's President, Chief Executive Officer and Executive Chairman; Jim Jenkins; Vice President, Finance, Calven Swinea; Chief Revenue Officer, Barry Phillips; and Chief Commercial Officer, Cameron Stokes. Mr. Jenkins, the floor is yours. James Jenkins: Thank you, operator, and good afternoon, everyone. Thank you for joining us today to discuss the results of our fiscal 2026 3rd quarter ended October 31, 2025. We continued revenue momentum in the third quarter of 2026 despite a challenging tariff and macroeconomic environment as we focused on recent acquisition synergies, increasing our market share within the fragmented $2 billion fire protection sector in the largest global markets and growing our industrial products business. Calven will go over the financials in more detail shortly, so I'll provide you with a brief overview. We achieved net sales of $47.6 million, representing a 4% year-over-year increase, driven by a 31% increase in fire services products. In the U.S., our sales increased 25% year-over-year to $15.2 million. We continue to anticipate growth in our fire services, both organically and through our acquisitions, as well as in our industrial segments in the months and years ahead. Adjusted EBITDA, excluding FX, was $200,000, a decrease of $4.5 million were 95% compared with $4.7 million for the comparable year ago period. Sequentially, our adjusted EBITDA decreased $4.8 million or 96%. Adjusted gross profit as a percentage of net sales in the third quarter was 31.3% versus 41.7% in the comparable year ago period and decreased 612 basis points sequentially from 37.4% in the second quarter. Our adjusted gross margin percentage decreased in the second quarter of fiscal 2026 compared to the same period last year, primarily due to lower acquired company gross margins, increased material and freight costs and tariffs. Margins in the acquired businesses were impacted by increased material costs. This shortfall is meaningful, and it's important to emphasize that the EBITDA impact this quarter was driven by both revenue and gross margin shortfalls. The 2 are inseparable. The revenue misses directly reduced gross profit dollars, removing the operating leverage we depend on to convert volume into earnings. Even if margins had held the lower revenue base would have pressured EBITDA. Conversely, the margin compression amplified the effect. EBITDA underperformance reflects the combined impact of lower volume and reduced margin per dollar of revenue, not margin deterioration alone. SG&A remained disciplined and broadly in line with expectations. The quarter broke on revenue and gross profit dollars, not on expense growth. Several factors contributed to the margin compression. Freight in and tariffs ran above forecast. Through throughput and mix in efficiencies affected COGS, labor and our mix shifted from higher-margin categories. Moving on, the strategic acquisitions of California PPE and Arizona PPE expanded our global fire footprint into the U.S. personal protective equipment, decontamination, repair and rental markets and added approximately $5 million of annual recurring revenue. Arizona PPE is the leading UL-certified independent service provider for performing advanced decontamination, inspection and repairs on fire finance for the Arizona market. California PPE is a leading and rapidly expanding UL-certified ISP in the California firefighting services market, one of the largest fire markets in the United States. From these 2 outstanding companies, we intend to continue growing the North American service segment of the global fire services market by leveraging the combined strengths and experience of Lakeland's LHD service offerings in Asia and Australia with the outstanding teams from Arizona PPE and California PPE to develop a strong North American platform. Lakeland LHD was awarded an approximately USD 5.6 million 3-year contract to provide advanced decontamination, managed care and maintenance services for the Hong Kong fire services departments, firefighter protective gear, one of the largest emergency response organizations in Asia. A contract running through 2028 covers advanced decontamination services as well as comprehensive care and maintenance of an estimated 14,500 firefighter ensembles each year. This award underscores our strong presence in the Asia Pacific market and reinforces the trust placed in our services by one of the region's most respected fire services organizations. Additionally, we completed a $6.1 million sale and partial leaseback of our Decatur, Alabama warehouse property to an unrelated party in connection with capital reallocation initiatives, resulting in a gain of $4.3 million, as well as strengthening the balance sheet and providing financial flexibility for future growth. The third quarter reflected the impact of tariff uncertainty, inflation effects and the associated mitigation strategies we have employed since the election. Beyond tariffs, we also faced raw material inflation and rising supply chain costs that also contributed to the impact on both revenue and gross margin. Revenue softness was visible across our portfolio in the U.S., Canada, Latin America and parts of EMEA. North America faced challenges with revenue down quarter-over-quarter, and Latin America came in below our plan due to macroeconomic conditions impacted by political uncertainty. Our acquired businesses also came in below our plan due to timing, certification delays and material flow issues rather than underlying demand. As we step back, it's important to acknowledge that this softness is not isolated to Lakeland, nearly all of our peers are reporting similar challenges: tariffs, freight, raw material inflation and rising supply chain costs. This is not an excuse, but it is the reality of the environment we are operating in, and it reinforces that the pressure on margins is broad-based, not to us. At the end of Q3, inventory was $87.9 million, down from $90.2 million at the end of Q2 fiscal year 2026. We have recently initiated a series of targeted actions to optimize inventory levels across our entire organization. Looking ahead, we are highly focused on the upcoming tender cycle, which will position us for stronger execution and building momentum heading into calendar year 2026. Renewed tender activity is expected to increase demand for fire services in the U.S. and internationally and contribute to improved performance at Eagle and LHD Germany. We have approximately $178 million of global tender opportunities, including $38 million over $100,000 in value with high probabilities of success. These opportunities are positioning us for expanded operating leverage with expense reductions and expanded margins as tenders deliver margins above normalized profile. We are now starting to see tender wins for calendar 2026 across our entire product portfolio. Taken together, this past quarter was unacceptable. We missed our targets across multiple areas. And as CEO, I take full responsibility for that performance. Our forecasting has not been reliable and the gap between our internal expectations and actual results has grown too large. Because of this, we will be withdrawing formal guidance. Instead, we are shifting to a more disciplined operating model focused on measurable execution, cash generation and transparency. To help lead us forward, we have also realigned our finance team with the appointment of Calven Swinea as interim CFO effective January 1. You'll be hearing from Calven in a moment. At the same time, it is important to recognize that this quarter occurred against a backdrop of unprecedented headwinds across virtually all of our global operations. These challenges affected not just Lakeland but our peers as well, many of whom have publicly acknowledged similar pressures. Despite this environment, our long-term fundamentals remain intact and our strategic condition has not changed. We remain extremely optimistic about the underlying demand signals we are seeing a robust and global fire tender pipeline. The necessary U.S. refinery shutdown cycle ahead. Our disciplined sales process and clear signs of pent-up demand across nearly every region. We expect these headwinds to begin to ease as we move into calendar year 2026, and we continue to believe strongly in the long-term potential of both our fire and industrial strategies. This is not about lowering ambition. It's about rebuilding trust results or projections. We will provide regular updates on key operational milestones, inventory reduction progress, margin improvements and ERP and integration time lines. When our forecasting accuracy, sales cadence and operational visibility improve to an acceptable standard, we will revisit reinstating guidance. For now, our full focus is on running the core business with rigor, improving forecast accuracy and delivering sustainable, predictable performance. With that, I'd like to pass the call to Barry to provide an update on fire services. Barry Phillips: Thank you, Jim. Looking at our fire services. Revenue underperformed primarily because certification cycles and tender time lines extended longer than anticipated across multiple regions. These are timing delays rather than structural demand issues. The opportunities remain in the pipeline, the majority have not been lost. They've simply shifted later than expected. We continue to believe that we have a high probability of success in securing $38 million of these opportunities within our total pipeline of $178 million. Our tender activity remains strong globally, Current delays reflect regulatory timing and administrative bottlenecks. And as Jim mentioned, competitors have cited similar headwinds. The underlying demand environment for fire services and protected gear remains intact. We remain highly confident in our major tenders currently in the late stages. Feedback from end users and procurement teams remain positive. Delays have been driven by certification cycles and administrative timing not competitive losses, and our confidence remains high. Though we are not assigning timing commitments to these opportunities, except to say majority of the $38 million of opportunities we believe will hit in FY '27. Fire service margins remain structurally sound. The temporary compression came from the volume timing and low absorption during the delays. As volume normalizes and tenders convert margins are expected to recover without requiring broad pricing actions. For our sales team, the priority is to build a dependable base of monthly sales that is not dependent on large tenders or seasonal cycles. This means expanding distributor engagement tightening forecast accuracy, strengthening bid coverage across brands and accelerating new product commercialization. Our global fire strategy remains intact heading into next fiscal year. The product portfolio is broader and stronger at any time in the company's history. The Jolly NFPA launch is progressing, LHD Europe is stabilizing and we're positioning the entire fire platform across the upcoming global cycle. I'll now pass the call to Cameron to cover our industrial and chemical critical environment sectors. Cameron Stokes: Thanks, Barry. During the third quarter, industrial demand softened across several industrial channels faster than expected. Distributors reduced inventory, certain customers deferred purchases and competitive pricing tightened in pockets of the market. Our forecasting did not capture these shifts quickly enough, creating the variance between expected and actual performance. We are seeing cyclical adjustments in certain channels, not long-term erosion. Several customer segments and geographies show stabilization signals and we expect run rate predictability to improve as customer inventories normalize. In response, forecasting has been unified into a consistent process across all industrial regions with more rigorous mid-month accuracy checks and tighter reconciliation with distributor data. We've shifted to channel-level segmentation, so forecasting reflects real behavior inside customer groups rather than broad regional assumptions. Looking to our competitors, share movement has been limited and localized. Pricing pressure has increased in spots where certain competitors have short-term tariffs or sourcing advantages. We are addressing this with selective incentives aimed at volume stability while managing overall margin discipline. Our sales strategy requires rebuilding distributor run rates reengaging customers who deferred purchases, tightening CRM and channel discipline and stabilizing the chemical and critical environment segment. These actions create a predictable foundation of volume. When delayed tenders, certifications and turnaround activity return, that volume becomes upside that drops directly to operating leverage. The goal is stable, predictable growth driven by improved forecasting accuracy, stronger distributor engagement, recovery and delayed chemical and critical environment orders, disciplined channel management. We are focused on building consistency rather than volatility. With that, I'd like to pass the call to Calven to cover our financial results. J. Calven Swinea: Thank you, Cameron, and hello, everyone. I'll provide a quick overview of our fiscal 2026 3rd quarter financials before diving into the details. Revenue for the quarter grew $1.8 million year-over-year to $47.6 million, an increase of 4% compared to the third quarter of fiscal 2025. Consolidated gross margin decreased to 29.7% from 40.6% for the third quarter of fiscal 2025 and while our adjusted gross margin decreased to 31.3% as compared to 41.7% in the year-ago period. Adjusted operating expenses increased by $0.4 million from $14.3 million in Q3 of last year to $14.7 million in the third quarter of fiscal 2026 primarily due to inorganic growth. Net loss was $16 million or $1.64 per basic and diluted earnings per share for the third quarter of fiscal 2016 and compared to net income of $100,000 or $0.01 per basic and diluted earnings per share for the third quarter of fiscal 2025. Adjusted EBITDA, excluding FX, was $0.2 million for the quarter, a decrease of $4.5 million or 95% compared with $4.7 million for the third quarter of fiscal year 2025. Adjusted EBITDA, excluding FX margin in the third quarter of fiscal 2026 was 5.5%, a decrease of 988 basis points from 10.3% and in the third quarter of fiscal 2025 and a decrease of 918 basis points from 9.6% in the second quarter of fiscal 2026. Cash and cash equivalents were $17.2 million on October 31, 2025 compared to $17.5 million on January 31, 2025. On a consolidated basis, for the third quarter of fiscal 2026, domestic sales were $19.2 million representing 40% of total revenues, and international sales were $28.4 million, accounting for 60% of total revenues as our recent Veridian acquisition contributed to increased U.S. revenue. This compares with domestic sales of $15.4 million or 34% of the total and international sales of $30.4 million or 66% in the third quarter of fiscal 2025. Looking at our third quarter of fiscal 2026, our quarterly revenue faced challenges globally. Sales from recent acquisitions accounted for $10.1 million, while organic sales were $37.5 million. Sales of the fire services product line increased by $6 million year-over-year, driven by $3.4 million in sales from Veridian as well as organic fire services growth of $3 million. Adjusted gross profit for the third quarter of fiscal 2026 was $14.9 million, a decrease of $4.2 million or 22% compared to $19.1 million for the third quarter of fiscal 2025 due to lower sales, higher product costs and tariffs and impacted U.S. gross profit by $3.2 million versus Q2. Adjusted gross profit as a percentage of net sales decreased to 31.3% and the third quarter of fiscal 2026 from 41.7% for the third quarter of fiscal 2025. On an adjusted basis, operating expenses, excluding foreign exchange, were $14.7 million in the fiscal third quarter, more accurately showcasing the decreases in both our organic and inorganic segments resulting from the new cost reduction initiatives. On a sequential basis, adjusted operating expenses were stable and increasing by $1 million or 1% due to focused cost control measures and the previously mentioned initiatives. Adjusted EBITDA, excluding FX, was $200,000 for the fiscal third quarter, a decrease of $4.5 million or 95% compared with $4.7 million for the third quarter of fiscal 2025 and a decrease of $4.8 million or 98% compared with $5.1 million for the second quarter of fiscal 2026. The significant decrease was a result of lower performance in North and South America. Adjusted EBITDA FX margin was 0.5% for the most recent quarter, a decrease of 988 basis points from 10.3% in the third quarter of fiscal 2025 and a decrease of 918 basis points from 9.6% in the second quarter of fiscal 2026. Revenue for the trailing 12 months ended October 31, 2025 was $193.5 million, an increase of $41.7 million or 27% and versus the Q3 fiscal 2025 trailing 12 months revenue of $151.8 million with our recent fire service acquisition supporting Lakeland's continued revenue growth. Trailing 12 months adjusted EBITDA, excluding the impact of FX, was $9.3 million compared to $11.7 million for the prior quarter's trailing 12 months. The decrease was driven by lower margin revenue mix increased material and freight costs and tariffs. Considering we completed 4 acquisitions in the past 12 months, the full integration and implementation, which requires some time, we believe the resulting synergies and efficiencies will begin to translate into stronger financial performance in the coming quarters. Adjusted gross margin percentage decreased in the third quarter of fiscal 2026 to 31.3% compared to 41.7% in the same period last year due to lower acquired company gross margins. increased material supply chain costs and tariffs. Margins in the acquired businesses were impacted by increased material costs. Adjusted EBITDA, excluding FX, was $0.2 million for the fiscal third quarter a decrease of $4.5 million or 95% compared with $4.7 million in the third quarter of fiscal 2025. The decline was driven primarily by significant revenue shortfalls in Latin America, our highest margin region and lower-than-expected sales in the U.S. fire and industrials. Veridian, LHD and Eagle were also impacted by NFPA certification delays and slower tender conversion globally. These factors more than offset the reductions achieved in operating expenses. We are currently implementing an additional $1.3 million of cost reductions for the fourth quarter. Reviewing our performance for the third quarter, our most recent acquisition of Veridian contributed $3.4 million in revenue during the quarter, and LHD added $6 million across 3 subsidiaries, Germany, Australia and Hong Kong. We expect sales from our fire services to accelerate as we fulfill open orders, capitalize on cross-selling opportunities and execute on our sales and tender pipeline. Looking at our organic business. Our U.S. revenue decreased 3% to $15 million from $15.4 million, driven by declines in our industrial business due to tariff uncertainty. Our European revenue, including Eagle Jolly and our recently acquired LHD business, increased 6% to $15.2 million. We continue to see very good sales opportunities in Europe and are committed to its growth trajectory. Our Latin American operations experienced a $0.8 million decrease in sales from $5 million in the year ago period to $4.2 million in the current quarter, primarily due to ongoing delayed purchase decisions resulting from political uncertainty. In Asia, sales decreased 19% year-over-year from $3.6 million to $2.9 million. Regarding product mix for fiscal year-to-date 2026, our fire services businesses grew to 49% of revenues versus 39% for fiscal year 2025 driven by a full 9 months of region sales and organic gains in the U.S. For our industrial product line, disposables accounted for 26% of the year-to-date revenue, while chemicals accounted for 11%. The remainder of our industrial products, including high performance and high vis accounted for 14% of sales. Now turning to the balance sheet. Lakeland ended the quarter with cash and cash equivalents of approximately $17 million and long-term debt of $37.1 million. This compares to $17.5 million in cash and $16.4 million in long-term debt as of January 31, 2025. As of October 31, 2025, our long-term debt of $37.1 million included borrowings of $33.2 million outstanding under the revolving credit facility with an additional $6.8 million of available credit under the loan agreement. We were in compliance with all our credit facility covenants. In August, we sold our Decatur, Alabama property for $6.1 million less customary commissions and closing fees and applied 100% of the net proceeds to repay our revolving credit facility. Net cash used in operating activities was $17.6 million in the 9 months ended October 31, 2025 compared to $12.5 million in the 9 months ended October 31, 2024. The increase was driven by a decline in profitability previously discussed, ERP implementation costs and an increase in working capital of $7.9 million. Capital expenditures totaled $0.8 million for the 9 months ended October 31, 2025, primarily related to replacement equipment for our manufacturing sites and develop technology projects. We anticipate FY '26 capital expenditures to be approximately $1.2 million. Lastly, given near-term headwinds and in order to prudently manage our cash, the company has made the decision to suspend its quarterly cash dividend on our common stock. We believe reinvesting profits into growth opportunities such as acquisitions, our market expansion is a better return for shareholders in the future. The payment of any future dividends will be at the discretion of the Board and will depend on the company's financial conditions, results of operations, capital requirements and any other factors deemed relevant by the Board. At the end of Q3, inventory was $87.9 million, down from $90.2 million at the end of Q2 fiscal year 2026. We have recently initiated a series of targeted actions to optimize inventory levels across specific categories. Our immediate priorities include U.S. industrial, Jolly, LHD and Veridian, where we see the greatest opportunity to align balances with demand and improve efficiency. Inventory of acquired companies totaled $14.3 million versus $7 million last year. $6 million of the acquired companies increase came from the Veridian acquisition and LHD's inventory increased by $1.3 million versus last year. Year-over-year, we saw an increase in our organic inventory of $7.9 million versus the quarter ended October 31, 2024. Organic finished goods were $38.8 million in the third quarter of fiscal 2016, up $5.6 million year-over-year and down $0.5 million quarter-over-quarter. Organic raw materials were $33 million in the third quarter of fiscal 2026, up $2.1 million year-over-year and down $0.4 million quarter-over-quarter. With that overview, I'd like to turn the call back over to Jim before we begin taking questions. James Jenkins: Thank you, Calven. In conclusion, we continue to demonstrate net sales growth, reflecting the strength of our underlying business. This growth is further supported by a 31% year-over-year increase in our fire services. Our robust pipeline of approximately $178 million, includes approximately $38 million in near-term high-probability opportunities, providing momentum heading into fiscal year '27. We are now starting to see tender wins for calendar Q1 2026 across the entire product portfolio. These opportunities are positioning us for expanded operating leverage with expense reductions and expanded margins as tenders deliver margins above normalized profile. Our near-term strategy is focused on navigating the continued challenges from the evolving macro environment while expanding top line revenue in our fire services and industrial verticals. By maintaining a focus on operating and manufacturing efficiencies, we believe we are well positioned to deliver higher margins and improve free cash flow all against the backdrop of ongoing macro uncertainties. Looking long term, our strategy remains to grow both our fire services and industrial PPE verticals through our strategically located company-owned capital-light model. By maintaining a focus on operating and manufacturing efficiencies, we believe we are positioned to grow faster than the markets we serve. Our acquisition pipeline also remains robust with active discussions underway in line with our overall growth strategy. Although challenges have affected our forecasting ability and we have withdrawn our formal guidance, we expect top line revenue growth in the high single-digit revenue growth across global operations over the next 3 quarters. We are targeting 10% to 12% adjusted EBITDA margins with incremental growth in EBITDA margins over the next 3 quarters. Looking further ahead, we expect 15% to 17% adjusted EBITDA margins over the next 3 years through cost discipline operational consolidation and targeted commercial investments. As we look forward to the future, we are confident that our continued focus on targeted acquisitions will serve as key growth drivers over the next 3 to 4 years. We are actively engaging in discussions aligned with our decontamination rental and services growth strategy. We look forward to sharing upcoming milestones in the weeks and months ahead. With that, we will now open the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Gerry Sweeney with ROTH Capital Partners. Gerard Sweeney: I wanted to talk about the fire service tenders, $38 million high probability. What makes you think they're high probability? And then the follow-on of that was would be that $178 million total, is there an opportunity for that to expand further, especially with some of the NFPA determinations coming out in the next couple -- hopefully, in the next month or 2? James Jenkins: Yes, Gerry. So Yes. So I'm going to -- I'm glad Barry is here. It's one of the reasons why I wanted to have Barry and Cameron here was to talk about some of these opportunities. And Barry, I'll let you sort of answer that because I know there's a number of buckets that those fall into those high probabilities. Barry Phillips: Yes. Thanks, Jim. There are places there's 4 buckets to position ourselves in a high probability position is, are we the incumbent, so do we already have the business with that core relationship with that end department. Next would be is the competitor that's incumbent struggling in some manner. Additionally, we are also looking at where we can come in with multiple brand strategy. And with some of our portfolio that we have overlaps in year, for example, we can have more bids involved in the process. And lastly, if we're positioned well with the department and we're written into the specifications. James Jenkins: So Gerry, that $38 million is where all of those sort of 4 buckets fall for us. So that's why we view them as high probabilities. And then that $178 million, look, we had all the high probabilities, and we'll win some of the others in $178 million. But I think if you talk to any of our competitors, they'll say the same thing. Once these certifications and standards are adopted, sort of the floodgates should open over a period of time. And again, I think what we're trying to caution is it's not going to -- it's going to happen, and it's going to happen during fiscal '27, but it's going to happen over a period of time during that fiscal year. I look at certifications and standards and they appear over a very long period of time, there's a 10-year sort of window for these standards. And kind of like the cicadas, they show up every 17 years, these standards kind of show up. And when they do, there's a bit of a loggerhead here that kind of gets kind of slows it down on the decision-making front. I talked about this in prior calls about the '25 year automobile model versus the '26 and waiting. And this is exactly what's happened I think in the tender cycle that we're seeing is that these tenders, particularly in the U.S. and in areas where NFPA is becoming more rapidly accepted, those tenders have slowed. And so we'll see those pick up as soon as those standards are issued. But recently, we believe the standards were going to come into play in March '25. They were then extended to September of '25 and ultimately extend it to March of '26. We have no reason to believe. And in fact, what we're hearing is that, that will be the date, the '26 should be to date, March '26 should be the date. So that's why we're feeling very bullish about where we're driving our fire opportunities. Gerard Sweeney: Got it. And then on the margin front, if I heard you correctly, Obviously, there's a lot more costs, tariffs, raw materials, logistics, et cetera. But it sounded also -- that sounds as though you could recover those costs to just higher absorption or higher production levels and absorbing some of the overhead? Did I hear that correctly? Or could you walk through that? James Jenkins: That is correct. It's a function of getting ourselves at full capacity at a certain dollar amount where that operating leverage kicks in. So that's a critical component to it. The other is while you're waiting for tenders you're selling goods and gloves and boots and frankly, lower margin products to your captive customers who have those needs, and occasionally replacing turnout gear, but it's not 500 suits or 1,000 suits, it's 50. Cameron Stokes: So yes, it's actually a reflection of product mix. So typically, we'd be having a high range or more than 2/3 of our fire sales would be in custom-made turnout gear and the remainder being the commodity products, now we're in the higher range in the commodities while we're waiting for the turnout of your business to come back into -- with the new standard. James Jenkins: You kind of couple that in a perfect storm with what's transpired in Latin America, where we've had a significant reliance on Argentina, whether that was true or not, it was just the case. And you dropped that high margin and you dropped the high margin, you see some softness in the high-margin areas in Canada, and that generates sort of a perfect storm when you've got the industrials that have a geopolitical component and then we have a tender delay. I'm not suggesting those are excuses. Those are just -- we need to work our way around those excuses or those issues, and we are. And we're driving similar opportunities in industrial, and I can certainly have Cameron address that. Gerard Sweeney: Got you. One more question. Obviously, multiple international acquisitions, global footprint. How important is getting the ERP system up and running to really give you visibility on those mechanics? James Jenkins: The ERP system, so there's a couple of places internationally where the ERP -- the systems you have are pretty solid. China has got a good system for Asia. We've got a nice system in Argentina for Latin America. And so those are -- we look at those as lower priorities. Veridian has a very solid ERP system as well. So the prioritization of this right now is North America, which we're driving towards a June, July rollout for our SAP implementation. And then the next phases are, frankly, to look at some of the acquisitions and folding some of those in. And then it's Vietnam and some other areas. So it's going to take a prolonged period of time but getting the first step in place, which is North America, which is the sort of the brains of the organization, so to speak, the rest of the world is sort of the heart, having the brands of the organization with a solid system in place is going to service us mightily. Would you agree, Cameron? Cameron Stokes: Yes. Yes. Operator: And our next question comes from the line of Mark Smith with Lake Street Capital. Mark Smith: I just wanted to ask about kind of certification delays. Can you give us an update on anything that changed on that since the end of the quarter? James Jenkins: Yes. So the certification -- the delays in certification, we knew that, that certification was coming in March of '26. We also know that all of our products are in the queue for certification with all of our competitors. And I don't believe there's any exceptions at this point, Barry. So I'll ask you -- I mean, to the extent that we don't expect any further delays on that front. Barry Phillips: The one thing that is different in this cycle amongst my crew in this space. So this is actually the combination of 4 standards that were brought together as opposed to having a specific certification standard for firefighting gear. It now was grouped together where it includes firefighting gear, it includes SCA, PASS or Personal Alert Safety Systems as well as tactical peril, all under one standard. So that's forced now all the manufacturers to hustle in and go to the same sort of in agencies to address all these products that now need to be recertified. So there's quite a backlog at the certification agencies, which has been causing some of this delay for all of us. Mark Smith: Okay. And then if you think about kind of mitigate and offer to improve gross profit margin, can you just talk about headwinds and this one maybe you expect to normalize? James Jenkins: Look, I think on the headwind front, sort of the tariffs, I mean, you've got we got to see with the tariffs. We're addressing that as best we can with sort of programs with our suppliers, we're simplifying the product line and sort of shifting production towards the higher-margin categories as those certifications come online, which is a certification component. And the idea here obviously is to do that do an SKU rationalization, which we're in the middle of. We're rationalizing -- I mean we've got in on the past from a legacy perspective. We've had thousands of SKUs that Helena and her team are rationalizing now down to a much more manageable number. And of course, we've got the targeted inventory reductions and we're about 1/3 of the way there towards year-end of about $6 million, and we're hopeful we can get a little bit north of that. So go ahead, Barry. Barry Phillips: Yes. Additionally, we are bringing third-party manufactured products into our own factories, in particular, with our turnover production. Mark Smith: Okay. And then lastly for me, thinking about tariffs, pipeline cost, raw material cost, can you just talk about pricing opportunities? James Jenkins: Are you talking about pricing increases? Mark Smith: Yes. James Jenkins: Okay. So yes, so we have our annual pricing increases that have been -- are being communicated in fire and in industrial. We've got a different -- obviously, there are different businesses. So we're addressing them differently. It's not going to be a one-size-fits-all. We have pivoted a little bit in the tariff range because we have seen competitive pressures on pricing in that regard. We still are sitting on a significant amount of inventory in the CE space, the critical environment space that we're looking to move on that is not is not tariff driven because we've got it in the states now. So we are increasing cases. We're not going to do them across the board. We're going to do them strategically. We've done it in fire, and we're doing it in industrial, and those are driving some additional decisions. Cameron's got an inventory reduction program that he can certainly speak to that is driving decisions because our year-end is February 1, and a lot of our channel partners have new budgets starting January 1. So we're introducing some programs here to help drive some inventory towards the end of this fiscal year. with customers that beginning January 1, we'll have new money to utilize for that. Operator: And our next question comes from the line of Mike Shlisky with DA Davidson. Michael Shlisky: Just to start with, I want to maybe ask for a quick NFPA 101 here. As far as I could tell, you're paying member or paying a paying customer of this organization, people on the board on the committee that approve all these products. And now their action or their lack of action is now causing your business to struggle and other parts of the industry as well. I get that they need time to make sure that firefighter safety is obviously the most important priority. But do you know what they're doing at the NFPA to increase their approval throughput. It just seems like at this point, they're now affecting business activity among their members, and that sounds like a real issue. Barry Phillips: NFPA is a standard writing body. They are not the certification agencies that certify the product. And the NFPA standard writing process, it involves a combination of end users, manufacturers and third-party experts that build up that committee and build up and write the standards that then go through the process and are reviewed on a 5-year cycle. So once the standard is written peer reviewed and approved and in process, then becomes the timing of -- from a manufacturing perspective is building to that standard, submitting to that standard of third-party agency and then basically waiting for the third-party agency to commit the approval or provide whatever actions well, generally UL has now all of our competitors and our products sitting there and they've got limited resources. Michael Shlisky: Okay. So now let's go the next question. They're a public company at this point. And their lack of action is now causing your business to suffer. So have you heard anything from those folks about how fast they're going to increased the throughput of approvals? James Jenkins: They are working with the resources that they have available to them and working through the process. We have -- there are options to go to other certification agencies and we use different certification agencies around the world, but we find the same level of performance to wrap. We are committed to push through as rapidly as possible and we'll continue to do so. It is a third-party agency and it's outside of our control. Michael Shlisky: Okay. Maybe last one on this topic. Who's paying the bill the NPA or Lakeland for the UL and other agency testing? James Jenkins: Each manufacturer pays for their certification activities. Michael Shlisky: Okay. SP1 Thank you for all the information. Moving on, on the Hong Kong deal in Malaysia, do you think those are going to provide an is margin benefit given the size and the footprint you have there? Should we expect to see some really good margins I guess, starting in fiscal '27 from those 2 contracts? James Jenkins: Yes. The Malaysia contract, certainly, that's a high-margin opportunity, long-term opportunity for us. Hong Kong continues to generate really decent margins for us. The tragedy that occurred in Hong Kong, exactly when you operate a business like this, strategies end up generating, frankly, opportunities. And in Hong Kong, our team set hours and hours and hours over time, helping that Hong Kong team as they thought those fires in those 4 buildings and people lost their lives. They're going to need a lot of -- they're going to need a lot of new turnout gear as a result of that. And we've been on the phone periodically with our friends in Hong Kong driving that business. and they're suggesting to us that we'll see a bump in business there probably in the first quarter of fiscal '27. Michael Shlisky: Okay. Great. Sounds good. And then I guess, given this data, there's some -- quite a few contracts in the pipeline on the fire side. But given the status of -- you mentioned there are some customers or some competitors that were struggling, are you concerned at all in the pricing environment for what's being bid on today and some of the other folks out there might get a little bit of rationale if they're in a bit of a pickle financially? James Jenkins: Well, struggling can be at various different batches. Sometimes it's struggling just to perform and support and provide the equipment in a timely manner. One of the things the standard is also providing is there are requirements -- varied requirements in the fabrics that are being used in the products. So it's changing the buildup of those products, which is going to change the price point actually at a higher level in the marketplace because of the needs to incorporate the more advanced fabrics into the year. Operator: Thank you. And with that, there are no further questions, I'd like to turn the call back over to Mr. Jenkins for closing remarks. James Jenkins: Thank you, operator. Thank you all for joining us for today's call, and thank you to our customers and distributor partners worldwide for trusting us with your lives and safety. Lakeland continues to be well positioned for long-term growth. If we were unable to answer any of your questions today, please reach out to our IR firm, MZ Group, who will be more than happy to assist. Operator: Thank you. And with that, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time, and have a wonderful day.