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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.